**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 June 27, 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 August 2, 2004, there were 16,811,817 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 in our wafer-fabrication facility from under-utilization of production
capacity; our distributors and customers significantly reducing their existing
inventories before ordering new products; our cessation of production activity
at our Nampa facility, and transfer of such activity to our foundry partner, at
expected costs; ongoing costs to maintain MOD III assets in a saleable state and
anticipated personnel costs in connection with the closure and 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 JUNE 27, 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 six months ended June 30, 2004 and three and
          
    six months ended June 30, 2003 | **          
|                                                                                                                                                                                      |             
|Unaudited Condensed Consolidated Balance Sheets at June 30, 2004 
          
   and December 31, 2003                                                                                 | **          
|                                                                                                                                                                                      |             
|Unaudited Condensed Consolidated Statements of Cash Flows for the
          
    six months ended June 30, 2004, and six months ended June 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. Changes in Securities, Use of Proceeds and Issuer Proceeds of Equity Securities                                                                                               | **          
|                                                                                                                                                                                      |             
|Item 4.   Submission of Matters to a Vote of Security Holders                                                                                                                         | **          
|                                                                                                                                                                                      |             
|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         Six Months Ended
                                                                   June 30,                  June 30,
                                                         ------------------------- -------------------------
                                                             2004         2003         2004         2003
                                                         ------------ ------------ ------------ ------------
Net sales...............................................       $27.9        $25.7        $53.9        $50.9
Cost of sales...........................................        14.2         13.7         26.8         28.6
                                                         ------------ ------------ ------------ ------------
Gross margin............................................        13.7         12.0         27.1         22.3

Operating expenses:
  Research and development..............................         5.3          4.7         10.4          8.6
  Selling, general and administrative...................         7.7          7.1         14.6         13.3
  Special charges and reorganization items..............         7.7          0.5          8.2          1.8
  Amortization of intangible assets.....................         1.1          1.7          2.1          3.4
                                                         ------------ ------------ ------------ ------------
     Total operating expenses...........................        21.8         14.0         35.3         27.1
                                                         ------------ ------------ ------------ ------------
Operating loss..........................................        (8.1)        (2.0)        (8.2)        (4.8)

Other income (expense):
  Interest income.......................................         0.1          --           0.1          0.1
  Interest expense......................................        (0.1)        (0.1)        (0.2)        (0.2)
  Other, net............................................         --           0.2          --           0.2
                                                         ------------ ------------ ------------ ------------
Loss before provision (benefit)for income taxes.........        (8.1)        (1.9)        (8.3)        (4.7)
Provision (benefit) for income taxes....................        (0.9)         0.1         (1.1)         0.2
                                                         ------------ ------------ ------------ ------------
Net loss ...............................................       ($7.2)       ($2.0)       ($7.2)       ($4.9)
                                                         ============ ============ ============ ============
Basic ans diluted net loss per share....................      ($0.44)      ($0.14)      ($0.46)      ($0.34)
                                                         ============ ============ ============ ============
Shares used in computing basic and diluted
   net loss per share...................................        16.6         14.3         15.7         14.3
                                                         ============ ============ ============ ============`

See accompanying notes to unaudited condensed consolidated financial statements.

---

**ZiLOG, INC.

                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in millions)**

`June 30,    Dec. 31,
                                                          2004        2003
                                                       ----------- -----------
                                  ASSETS
Current assets:
  Cash and cash equivalents...........................      $38.5       $22.0
  Accounts receivable, less allowance for doubtful
    accounts of $0.4 at June 30, 2004, $0.3 at
    December 31, 2003.................................       16.0        13.0
  Inventories.........................................       13.7         9.6
  Prepaid expenses and other current assets...........        2.8         3.8
                                                       ----------- -----------
          Total current assets........................       71.0        48.4
                                                       ----------- -----------

MOD III assets held for sale..........................      --           30.0
Net property, plant and equipment.....................       12.0        18.1
Goodwill..............................................       16.9        16.9
Intangible assets, net................................        9.4        11.5
Other assets..........................................        7.7         9.0
                                                       ----------- -----------
                                                           $117.0      $133.9
                                                       =========== ===========
        LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term debt.....................................       $2.4        $5.0
  Accounts payable....................................        8.5         8.6
  Accrued compensation and employee benefits..........        3.5         3.7
  Other accrued liabilities...........................        2.1         2.5
  Accrued special charges.............................        2.3         0.2
  Deferred income on shipments to distributors........        6.8         7.4
                                                       ----------- -----------
          Total current liabilities...................       25.6        27.4
                                                       ----------- -----------

Deferred income taxes.................................        6.6         9.9
Other non-current tax liabilities.....................        5.9         5.9
                                                       ----------- -----------
          Total liabilities...........................       38.1        43.2
                                                       ----------- -----------

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

Stockholders' equity:
  Common Stock........................................        0.2         0.1
  Additional paid-in capital..........................      121.4        96.4
  Deferred stock compensation.........................       (1.5)       (2.0)
  Treasury stock......................................       (2.1)       (1.9)
  Accumulated deficit.................................      (39.1)      (31.9)
                                                       ----------- -----------
          Total stockholders' equity..................       78.9        60.7
                                                       ----------- -----------
Total liabilities, minority interest and
  stockholders' equity................................     $117.0      $133.9
                                                       =========== ===========`

See accompanying notes to unaudited condensed consolidated financial stateme

---

**ZiLOG, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (in millions)**

`Six Months Ended
                                                                          June 30,
                                                               -------------------------
                                                                   2004         2003
                                                               ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................       ($7.2)       ($4.9)
Adjustments to reconcile net loss to net cash
     used by operating activities:
     Amortization of fresh-start intangible assets............         2.1          3.4
     Deferred income taxes....................................        (3.3)        (2.5)
     Depreciation and other amortization......................         1.8          2.9
     Impairment of long lived assets..........................         5.4          0.2
     Stock-based compensation.................................         1.0          0.8
Changes in operating assets and liabilities:
     Accounts receivable......................................        (3.0)         --
     Inventories..............................................        (4.1)         1.0
     Prepaid expenses and other current and
       noncurrent assets......................................         2.2          1.8
     Accounts payable.........................................        (0.1)        (1.6)
     Accrued compensation and employee benefits...............        (0.2)        (3.7)
     Deferred income on shipments to distributors.............        (0.6)        (1.0)
     Other accrued liabilities, including accrued
       special charges........................................         1.8          0.4
                                                               ------------ ------------
        Net cash used by operating activities.................        (4.2)        (3.2)
                                                               ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures.......................................        (1.1)        (1.3)
                                                               ------------ ------------
        Cash used by investing activities.....................        (1.1)        (1.3)
                                                               ------------ ------------

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..........................................         0.1          --
   Repayments of short-term debt..............................        (2.6)        (1.9)
   Payments for stock redemptions.............................        (0.1)        (1.6)
                                                               ------------ ------------
        Cash provided (used) by financing activities..........        21.8         (3.5)
                                                               ------------ ------------
Increase (decrease) in cash and cash equivalents..............        16.5         (8.0)
Cash and cash equivalents at beginning of period..............        22.0         29.4
                                                               ------------ ------------
Cash and cash equivalents at end of period....................       $38.5        $21.4
                                                               ============ ============
Supplemental disclosure of cash flow information:
   Interest paid during period................................        $0.1         $0.2
   Income taxes paid during period............................        $1.5         $0.9`

See accompanying notes to unaudited condensed consolidated financial statements.

---

**ZiLOG, INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

NOTE 1.	BASIS OF PRESENTATION

The accompanying interim financial information is unaudited.
In the opinion of ZiLOG, Inc.'s ("ZiLOG" or the "Company")
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of interim results have been included.  The
results for interim periods are not necessarily indicative of results to be
expected for the entire year.  These condensed consolidated financial statements
and notes should be read in conjunction with the Company's annual consolidated
financial statements and notes thereto contained in the Company's 2003 Annual
Report filed on Form 10-K 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 six months ended June 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 the 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 shares at a price $12.50 per share in a public offering of its stock (see
Note 12).

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 $7.7
million reflecting the impairment of long lived assets and costs to cease
operations including employee severance costs (See Note 4).



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 sheet 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
six-month periods ended June 30, 2003 and 2004 were $1.0 million and $1.6 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 $0.2 million during both  of the six-month
periods ended June 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.  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, 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 condensed consolidated balance sheet
are as follows (in millions):

`Current       Brand
                                                 Technology      Name        Total
                                                ------------ ------------ ------------
Gross carrying amount..........................       $17.0         $9.2        $26.2
Accumulated amortization.......................        13.8          3.0         16.8
                                                ------------ ------------ ------------
Carrying amount at June 30, 2004...............        $3.2         $6.2         $9.4
                                                ============ ============ ============`

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

`Current        Brand         Total
            Year          Technology       Name      Amortization
      ----------------- -------------- ------------ --------------
      July-December 2004         $1.4         $0.7           $2.1
            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                $3.2         $6.2           $9.4
                        ============== ============ ==============`

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, accounts payable and short-term
debt, 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 June 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 net accounts receivable due from
GlobespanVirata, Inc. and SMK Corp. at June 30, 2004 of approximately $2.4
million and $2.1 million, respectively.

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       Six Months Ended
                                                          June 30,                  June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Net loss as reported...........................       ($7.2)       ($2.0)       ($7.2)       ($4.9)
Add stock-based employee compensation
    expense included in reported net
    loss, net of tax in 2004...................         0.3          0.4          0.6          0.8
Deduct total stock-based employee
    compensation expense determined
    under fair-value-based method for
    all awards, net of tax in 2004.............        (1.1)        (0.9)        (1.5)        (1.5)
                                                ------------ ------------ ------------ ------------
Net loss - proforma............................       ($8.0)       ($2.5)       ($8.1)       ($5.6)
                                                ============ ============ ============ ============`

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

`Three Months Ended       Six Months Ended
                                                          June 30,                  June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Risk free interest rate........................         3.0%         3.0%         3.0%         3.0%
Estimated life in years........................            5            5            5            5
Dividend yield.................................        --           --           --           --
Volatility.....................................        53.3%        92.5%        53.3%        92.5%`

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       Six Months Ended
                                                          June 30,                   June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Risk free interest rate........................        1.81%         0.0%        1.81%         0.0%
Estimated life in years........................       0.125         --          0.125         --
Dividend yield.................................        --           --           --           --
Volatility.....................................        53.3%         0.0%        53.3%         0.0%`

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

`Three Months Ended       Six Months Ended
                                                          June 30,                  June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Weighted-average value of options granted
   during the period...........................      $10.09        $2.02        $9.89        $4.87
Weighted-average fair value of employee
   stock purchases during the period...........       $6.79        $--          $3.31        $--`

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 recording period expenses of
approximately $0.3 million per quarter for the ongoing costs of maintaining the
remaining assets of MOD III and MOD II in a salable state.   Also,
under the terms of the MOD III, Inc. Series A preferred stock liquidation
preference, all costs incurred by the Company to establish MOD III, Inc. and to
maintain its assets in saleable condition are recoverable by the Company from
any net proceeds received upon the sale of MOD III's assets.

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):

`June 30,     Dec. 31,
                                                2004         2003
                                            ------------ ------------
     Raw materials.........................        $0.2         $0.6
     Work-in-process.......................         8.2          6.7
     Finished goods........................         5.3          2.3
                                            ------------ ------------
                                                  $13.7         $9.6
                                            ============ ============`

NOTE 4.	SPECIAL CHARGES AND REORGANIZATION ITEMS

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

`Three Months Ended        Six Months Ended
                                                      June 30,                   June 30,
                                            ------------------------- -------------------------
                                                2004         2003         2004         2003
                                            ------------ ------------ ------------ ------------
Asset impairments:
   MOD II assets...........................        $5.4        $--           $5.4        $--
   Other...................................        --           --           --            0.2
Restructuring of operations:
   MOD II employee severance and
     termination benefits..................         1.8         --            1.9          0.6
   MOD II period closure costs.............         0.1         --            0.1         --
   MOD III period maintenance costs .......         0.4          0.4          0.7          0.7
Professional fees for debt
   restructuring...........................        --            0.1          0.1          0.3
                                            ------------ ------------ ------------ ------------
                                                   $7.7         $0.5         $8.2         $1.8
                                            ============ ============ ============ ============`

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

`Severance     MOD III       MOD II
                                                    and         Period       Period        Debt
                                                Termination  Maintenance    Closure    Restructur-
                                                  Benefits      Costs        Costs         ing         Total
                                                ------------ ------------ ------------ ------------ ------------
    Balance at December 31, 2003...............       $ --          $0.1        $ --         $ --          $0.1
    Provisions to special charges..............         1.9          0.7          0.1          0.1          2.8
    Provisions to cost of sales relating to
       MOD II closure..........................         0.4        --           --           --             0.4
    Cash paid..................................        (0.1)        (0.7)        (0.1)        (0.1)        (1.0)
                                                ------------ ------------ ------------ ------------ ------------
    Balance at June 30, 2004...................        $2.2         $0.1        $ --         $ --          $2.3
                                                ============ ============ ============ ============ ============`

On April 16th, 2004, the Company announced that its board of directors
approved the closure of  its MOD II wafer manufacturing facility in Nampa, Idaho
and the related migration of MOD II production activities to a third party
foundry named  X-FAB in Lubbock, Texas.  MOD II ceased production operations on
July 11, 2004.  As a result of this decision and the related actions of
management, the Company incurred the following special charges during the three
and six-month periods ended June 30, 2004: (1) employee severance and
termination benefits for approximately 125 employees totaling approximately $1.8
million, as determined in accordance with the provisions of SFAS No. 112
"Employers' Accounting for Post Employment Benefits"; and  (2) asset
impairment charges of $5.4 million related to the write-down of MOD II long-
lived assets to their fair values in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets".

For the six months ended June 30, 2004, approximately $0.7 million  of
special charges relate to sustaining costs for post-closure maintenance of the
MOD III facility.  These costs 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 for finalization of the Company's debt and equity restructuring
which began in 2002.  Restructuring of operations during the six-month period
ended June 30, 2003, included severance and termination benefits of $0.6 million
related to a reduction-in-force of approximately 56 employees at the Company's
MOD II facility.  In addition, the Company incurred MOD III maintenance costs
and professional service fees relating to its debt restructuring of $0.7 million
and $0.3 million, respectively, for the six-month period ended June 30,
2003.

The Company's estimates 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 the assets that have been
received from third parties.  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 appraised fair values.  If the ultimate net value realized upon
the disposition of MOD II assets is less than the estimated fair value, the
Company's future results of operations could be adversely impacted.

NOTE 5.	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
(OEMs) 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 second
paragraph of Note 13, the Company's 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        Six Months Ended
                                                          June 30,                   June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Net sales by busines line:
   Micrologic Devices:
     8-bit Microcontrollers and
     Microprocessors...........................       $18.9        $14.7        $38.4        $33.1
                                                ------------ ------------ ------------ ------------
   Other Devices:
     Serial Communications Controllers.........        $4.1         $3.1         $8.1         $6.5
     Modems....................................         0.7          0.6          1.3          1.0
     IrDA transceivers.........................         0.3          0.5          1.3          1.1
     Television, PC peripherals and other......         1.2          1.4          1.9          2.9
                                                ------------ ------------ ------------ ------------
       Total other devices.....................        $6.3         $5.6        $12.6        $11.5
                                                ------------ ------------ ------------ ------------
     Base business (excluding foundry).........       $25.2        $20.3        $51.0        $44.6
   Foundry services............................         2.7          5.4          2.9          6.3
                                                ------------ ------------ ------------ ------------
     Net sales.................................       $27.9        $25.7        $53.9        $50.9
                                                ============ ============ ============ ============`

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

`Three Months Ended       Six Months Ended
                                                          June 30,                  June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Net sales by region:
Americas.......................................       $14.5        $14.5        $26.9        $28.3
Asia...........................................         9.9          8.5         19.5         15.8
Europe.........................................         3.5          2.7          7.5          6.8
                                                ------------ ------------ ------------ ------------
   Total.......................................       $27.9        $25.7        $53.9        $50.9
                                                ============ ============ ============ ============

Net sales by channel:
OEM............................................       $14.9        $13.0        $28.6        $26.1
Distributor....................................        13.0         12.7         25.3         24.8
                                                ------------ ------------ ------------ ------------
   Total.......................................       $27.9        $25.7        $53.9        $50.9
                                                ============ ============ ============ ============`



Major customers: During the three months ended June 30, 2004, one
distributor, Future Electronics, Inc. (Future), accounted for approximately
18.7% 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 June 30, 2003, two customers, Future and
OEM customer, GlobespanVirata, Inc. (Globespan) accounted for approximately
14.9% and 21.0% of net sales, respectively.During the six months
ended June 30, 2004, two customers, Future and  SMK Corporation, an OEM
customer,  accounted for approximately 18.1% and 12.0% of net sales,
respectively.  During the six months ended June 30, 2003, two customers, Future
and Globespan, accounted for approximately 17.5% and 12.3% of net sales,
respectively.

NOTE 6.    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%.  At June 30, 2004, the Company had borrowings outstanding
of $2.4 million at a LIBOR-based rate of 3.7% and, as a result of certain
limitations, had additional borrowing capacity available of $5.7 million. The
Facility is scheduled to mature on May 13, 2005.  As of June 30, 2004, the
Company had $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 any month end.

NOTE 7.	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 8.	INCOME TAXES



The Company's income tax benefit for the six-month period ended June 30, 2004
reflects an estimated effective tax rate of 13%. Our expected tax rate of 14%
for the fiscal year is based on current projections of operations.  The
Company's  2004 annual tax provision is expected to include, and 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, the tax provision
includes deferred tax charges.   The Company provides for
income tax expense in foreign jurisdictions where its operations generate
profits that are taxable.  The net tax benefit recorded in the period ended June
30, 2004, includes the reduction of deferred tax liabilities associated with the
book-tax carrying value difference of MOD II assets which were reduced when the
Company recorded the impairment associated with the announcement of the closure
of the operations in Nampa, Idaho on April 16, 2004 (see Note 4).

NOTE 9.	MINORITY INTEREST

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 13, the MOD III equipment was sold in July 2004.

NOTE 10.  	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        Six Months Ended
                                                      June 30,                   June 30,
                                            ------------------------- -------------------------
                                                2004         2003         2004         2003
                                            ------------ ------------ ------------ ------------
Net loss...................................       ($7.2)       ($2.0)       ($7.2)       ($4.9)
                                            ============ ============ ============ ============
Weighted-average shares outstanding........        16.8         14.7         15.9         14.8
Less: Weighted-average shares subject
    to repurchase..........................        (0.2)        (0.4)        (0.2)        (0.5)
                                            ------------ ------------ ------------ ------------
Weighted-average shares used in
   computing basic and diluted net
   loss per share..........................        16.6         14.3         15.7         14.3
                                            ------------ ------------ ------------ ------------
Basic and diluted net loss per share.......      ($0.44)      ($0.14)      ($0.46)      ($0.34)
                                            ============ ============ ============ ============`

For the three months ended June 30, 2004 and  June 30, 2003, options to
purchase approximately 1.7 and 1.1 million shares of common stock at a weighted
average exercise price of $7.21 and $5.27, respectively, and for the six months
ended June 30, 2004 and June 30, 2003, options to purchase approximately 1.4
million and 1.1 million shares of common stock at a weighted average exercise
price of $7.21 and $5.27, respectively were excluded from the determination of
diluted net loss per share, as the effect of such shares were anti-dilutive.  At
June 30, 2004, there were 16,809,736 common shares issued and outstanding and
there were 14,580,022 common shares issued and outstanding at June 30, 2003.

NOTE 11.  COMPREHENSIVE INCOME

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

NOTE 12.  STOCK AND 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 June 30, 2004, 405,164 shares had
been repurchased under this program and from employees and former employees
pursuant to repurchase rights.  Additionally, on July 29, 2004 the Company
announced that its board of directors had authorized a 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 (see Note 13).

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.

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 which 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
                                            ------------ ------------ ------------
  Offering Proceeds:
    Number of shares sold..................         2.0          0.3          2.3

    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 13.  SUBSEQUENT EVENTS

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
STMicroelectronics (STM) for an aggregate amount of $26 million.  The sale
closed and was funded on July 16, 2004.  MOD III will pay dividends on and
redeem a portion of the 28,000 Preferred Series A shares outstanding for a net
consideration of approximately $20.5 million after reimbursements totaling
approximately $4.4 million are paid to ZiLOG and transaction costs related to
the sale, including brokerage fees, legal fees and other professional services
costs are paid.  Reimbursements to ZiLOG are to pay certain costs of maintaining
MOD III in a saleable condition on MOD III's behalf.  Such reimbursement to
ZiLOG is expected to be recognized in the third quarter of 2004 and will be
recorded as a credit to special charges on receipt of the reimbursement from MOD
III.

Stock Repurchase Program

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. ZiLOG's
common stock trades on the NASDAQ national market and purchases under the
program may be 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 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
six-month and three-month periods ended June 30, 2004 and June 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 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.  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 expect to 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.

Following the April 2004 announcement of the closure of our MOD II facility,
we recorded asset impairment charges 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 have
been received from independent third parties.  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.  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.

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

`Three Months Ended       Six Months Ended
                                                          June 30,                  June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Net sales by region:
Americas.......................................       $14.5        $14.5        $26.9        $28.3
Asia...........................................         9.9          8.5         19.5         15.8
Europe.........................................         3.5          2.7          7.5          6.8
                                                ------------ ------------ ------------ ------------
   Total by region.............................       $27.9        $25.7        $53.9        $50.9
                                                ============ ============ ============ ============

Net sales by channel:
OEM............................................       $14.9        $13.0        $28.6        $26.1
Distributor....................................        13.0         12.7         25.3         24.8
                                                ------------ ------------ ------------ ------------
   Total by channel............................       $27.9        $25.7        $53.9        $50.9
                                                ============ ============ ============ ============
Net sales by busines line:
   Micrologic Devices:
     8-bit Microcontrollers and
     Microprocessors...........................       $18.9        $14.7        $38.4        $33.1
                                                ------------ ------------ ------------ ------------
   Other Devices:
     Serial Communications Controllers.........        $4.1         $3.1         $8.1         $6.5
     Modems....................................         0.7          0.6          1.3          1.0
     IrDA transceivers.........................         0.3          0.5          1.3          1.1
     Television, PC peripherals and other......         1.2          1.4          1.9          2.9
                                                ------------ ------------ ------------ ------------
       Total Other Devices.....................        $6.3         $5.6        $12.6        $11.5
                                                ------------ ------------ ------------ ------------
     Base business (excluding foundry).........       $25.2        $20.3        $51.0        $44.6
   Foundry services............................         2.7          5.4          2.9          6.3
                                                ------------ ------------ ------------ ------------
     Total net sales...........................       $27.9        $25.7        $53.9        $50.9
                                                ============ ============ ============ ============`

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

`As of June 30, and for
                                              the three month periods
                                                     then ended
                                            -------------------------
                                                2004         2003
                                            ------------ ------------
Days sales outstanding.....................      52           38
Net sales to inventory ratio (annualized)..     8.1          10.7
Weeks of inventory at distributors.........      11           11
Current ratio..............................     2.8          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:



Days 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. For instance, at June 30, 2004, our DSO was 52 days which is higher
than our 2003 levels.  This increase in DSO reflects higher sales levels in
2004, non linearity in shipments in 2004 versus 2003 and for certain OEM
customers longer  payment cycles. Because the increase in our DSO is primarily
attributable to longer payment cycles from our OEM customers and is not due to
increased credit risk, we do not believe that the increase in our DSO reflects
degradation in the overall collectability of our accounts receivable.  In
addition, our bad debts have historically been minimal.

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 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 second quarter of  2004 as compared to the same period in 2003 as we
increased our inventory levels to build ahead inventory to ensure uninterrupted
supply of product 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. These products
will be manufactured in X-FAB's 6 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 June 30, 2004 compared to June 30, 2003 primarily due to an
increase in cash from the proceeds of our March, 2004 common stock offering.

Three and Six-Month Periods Ended June 30, 2004 and 2003

Net Sales.  Overall, our net sales of $27.9 million for the three-
months ended June 30, 2004, represents an increase of 9% from net sales of $25.7
million of net sales during the same period of 2003.  For the six-months ended
June 30, 2004, net sales were $53.9 million or 6% above net sales during the
same period of 2003.

Net sales of our Micrologic devices increased 28% to $18.9 million in the
three-months ended June 30, 2004 compared to $14.7 million in the three months
ended June 30, 2003.  For the six-months ended June 30, 2004, net sales of our
Micrologic devices were $38.4 million or 16% above net sales during the same
period of 2003.

The increases in 2004 for both the three-month and six-month periods reflect
a marked increase in unit sales of our Infra Red (IR) remote control devices.
The improvement in IR revenues is attributable entirely to much higher unit
shipments to our large OEM customers that make universal remote control
products.  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 $1.4 million for the three
months ended June 30, 2004, as our design wins with customers move to production
and therefore product needs. These orders are expected to result in net sales to
the Company beginning in the third quarter of 2004.

Net sales of our other devices, which excludes Foundry sales, for the three
months ended June 30, 2004 increased 13% to $6.3 million, which is up from $5.6
million in the same period of 2003.   For the six months ended June 30, 2004,
net sales of our other devices were $12.6 million or 10% above net sales during
the same period of 2003.

The increase in net sales during the three-month period and six-month period
of 2004 compared to the same periods of 2003 primarily reflects higher unit
shipments of Serial Communications Controllers through the distribution channel.

Net sales of Foundry Services, for the three-month and six-month periods
ended June 30, 2004 decreased 50% and 54%, 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 wafer fabrication facility in
July, 2004.

Gross Margin.  Our cost of sales primarily represents
manufacturing costs relating to 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 49% in the three months ended June 30, 2004, up from 47% in the same period
of 2003.  For the six months ended June 30, 2004 our gross margin was 50%
compared to 44% in the same period of 2003.  During the second quarter of 2004,
our gross margin was impacted by one-time charges totaling $0.6 million relating
to closure expenses for our MOD II wafer facility.  These charges were offset by
the favorable impact of incremental royalty revenue of  $0.7 million that was
received during the second quarter of 2004 resulting from a royalty audit. The
improvement in overall grossmargin for both the three and six month periods ended June
30, 2004 compared tothe same periods of 2003 relates primarily to underutilization of
our MOD II wafer manufacturing facility in 2003, reflecting lower demand for wafer capacity
consistent with our lower net sales at that time.  In addition, our gross margin
was improved because MOD II cost absorption was higher in 2004 compared with
2003 due to an inventory build-up of buffer-stock in anticipation of the
transition of production to outside foundries.  The majority of products that
were previously manufactured in our five-inch wafer fab 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 $5.3 million in the three months ended June 30, 2004, reflecting a 13%
increase from the $4.7 million of research and development expenses reported in
the three months ended June 30, 2003.  On a year-to date basis, research and
development expenses increased 21% to $10.4 million.  The increase in research
and development spending in 2004 reflects continued investments in new products,
including out latest line of Flash-based Microcontrollers called
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 increased to $7.7 million in the three months ended June
30, 2004 from $7.1 million in the three months ended June 30, 2003.  On a year-
to date basis, selling, general and administrative expenses increased 10% to
$14.6 million.  The increase in our selling, general and administrative spending
for both the three-month and six-month periods of 2004, compared to 2003
primarily reflects higher incentive compensation and commissions commensurate
with our increased number of sales reps and higher sales levels. In the first
half of 2003 we initiated significant shutdowns to reduce costs driven by lower
sales in the quarter.  Generally, we continue to review overall headcount
supporting sales, marketing, general and administrative activities, but any cost
savings may be offset by higher ongoing consulting, professional and
administrative costs associated with activities stemming from our public
offering of stock  in March, 2004.

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

`Three Months Ended        Six Months Ended
                                                      June 30,                   June 30,
                                            ------------------------- -------------------------
                                                2004         2003         2004         2003
                                            ------------ ------------ ------------ ------------
Asset impairments:
   MOD II assets...........................        $5.4        $--           $5.4        $--
   Other...................................        --           --           --            0.2
Restructuring of operations:
   MOD II employee severance and
     termination benefits..................         1.8         --            1.9          0.6
   MOD II period closure costs.............         0.1         --            0.1         --
   MOD III period maintenance costs .......         0.4          0.4          0.7          0.7
Professional fees for debt
   restructuring...........................        --            0.1          0.1          0.3
                                            ------------ ------------ ------------ ------------
                                                   $7.7         $0.5         $8.2         $1.8
                                            ============ ============ ============ ============`

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

`Severance     MOD III       MOD II
                                                    and         Period       Period        Debt
                                                Termination  Maintenance    Closure    Restructur-
                                                  Benefits      Costs        Costs         ing         Total
                                                ------------ ------------ ------------ ------------ ------------
    Balance at December 31, 2003...............       $ --          $0.1        $ --         $ --          $0.1
    Provisions to special charges..............         1.9          0.7          0.1          0.1          2.8
    Provisions to cost of sales relating to
       MOD II closure..........................         0.4        --           --           --             0.4
    Cash paid..................................        (0.1)        (0.7)        (0.1)        (0.1)        (1.0)
                                                ------------ ------------ ------------ ------------ ------------
    Balance at June 30, 2004...................        $2.2         $0.1        $ --         $ --          $2.3
                                                ============ ============ ============ ============ ============`

Restructuring of operations during the six-month period ended June 30, 2004,
included severance and termination benefits of approximately $1.9 million
primarily related to the Company's reduction-in-force due to the closure of its
MOD II five-inch wafer fabrication facility in Nampa, Idaho on July 11, 2004.
The Company recorded $5.4 million of asset impairments, primarily related to the
write-down of MOD II assets to fair value during the period.  Approximately $0.7
million and $0.1 million of special charges for the period relate to post-
closure maintenance costs of the MOD III eight-inch and MOD II five-inch wafer
fabrication facilities, respectively.  These costs 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 and are expensed to
special charges as incurred.  Approximately $0.1 million of special charges
during the period relate to third-party professional legal service fees for
activities associated with finalizing the Company's May 2002 debt and equity
restructuring.   We anticipate that there will be additional MOD II period
expenses for ongoing closure, decommissioning and maintenance costs of
approximately $3.1 million during the third and fourth quarters of 2004.  Any
gain received upon the sale of MOD II assets will be credited to special
charges.  Upon completion of the migration of MOD II production to outside
foundries, will have finalized our strategy of becoming fully fabless and our
legacy products will be primarily sourced from X-FAB and our newer products will
be sourced from foundries in Asia.

Restructuring of operations during the six-month period ended June 30, 2003,
included severance and termination benefits of $0.6 million related to a
reduction-in-force at the Company's MOD II manufacturing plant which eliminated
approximately 56 positions.  Approximately $0.7 million of special charges for
the six-month period ended June 30, 2003 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 $0.3 million of special charges during the first six months of
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. Asset impairment charges during the three and six
months ended June 30, 2003 relate to redundant computer equipment with a net
book value of $0.2 million that was retired in connection with the consolidation
of our information technology data center.

Stock-Based Compensation.  During the three-month periods ended
June 30, 2004 and 2003, we recognized $0.6 million and $0.4 million of stock-
based compensation, respectively.  And for the six-month periods ended June 30,
2004 and 2003, we recognized $1.0 million and $0.8 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.  During the second
quarter of 2004 we canceled a restricted stock award to our CEO and replaced it
with stock options that resulted in a non-cash compensation charge of
approximately $0.2 million.  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 consultants is 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.......................        13.8          3.0         16.8
                                                ------------ ------------ ------------
Carrying amount at June 30, 2004...............        $3.2         $6.2         $9.4
                                                ============ ============ ============`

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

`Current        Brand         Total
            Year          Technology       Name      Amortization
      ----------------- -------------- ------------ --------------
      July-December 2004         $1.4         $0.7           $2.1
            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                $3.2         $6.2           $9.4
                        ============== ============ ==============`

Interest Expense.  During the first six 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.   The Company's income tax benefit for the three-months
and six-months ended June 30, 2004 reflects an effective tax rate of 11% and
13%, respectively.  Our expected tax rate is 14% for the entire year of 2004
based on our projections, excluding the financial impacts associated with any
taxable gains or that could be recognized upon the disposition of any assets of
either MOD II or MOD III.  Our 2004 annual income tax provision is expected to
include taxable income in the U.S. resulting from items that are expensed for
book purposes but are nondeductible for tax purposes, as well as amortization of
deferred tax charges.  The book charges which are non-deductible for tax
primarily include amortization of intangible assets, depreciation of pre-May
2002 property, plant and equipment, and stock-based compensation. In addition,
we will provide for income tax expense in foreign jurisdictions where our
operations are profitable and taxable.

Our provision for income taxes during the three-month and six-month periods
ended June 30, 2003 reflected the estimated income tax rate for the year,
including foreign income taxes for the jurisdictions in which our business was
profitable as well as foreign withholding taxes and state minimum taxes.

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 June 30, 2004, was 3.7%.  As of June 30, 2004, we had
outstanding borrowings of $2.4 million and 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 June 30, 2004 our availability for additional
borrowings under the facility totaled $5.7 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 June 30, 2004, we had cash and cash equivalents of $38.5 million, compared
to $22.0 million at December 31, 2003.  Cash used by operating activities
was $4.2 million for the six months ended June 30, 2004, compared to $3.2
million of cash used by operating activities in the six months ended June 30,
2003.

During the six-month period ended June 30, 2004, cash used by operating
activities of $4.2 million primarily reflects our net loss of $7.2 million and
increases in accounts receivable and inventories of $3.0 million and $4.1
million, respectively, as well as a $1.2 million decrease in other accrued
liabilities, deferred income in shipments to distributors and accrued special
charges.  These uses of cash were offset partially by non-cash charges of $7.0
million, a $0.1 million decrease in accounts payable and a $2.2 million decrease
in prepaid expenses and other assets. Non-cash charges include a decrease of
deferred income taxes of $3.3 million, and an increase of $2.1 million for
amortization of Fresh Start intangible assets, $1.8 million in depreciation and
other amortization charges impairment of long-lived assets of $5.4 million and
stock-based compensation expense of $1.0 million.

During the six-month period ended June 30, 2003, cash used by operating
activities of $3.2 million primarily reflects our net loss of $4.9 million
partially offset by decreases in inventories and prepaid expenses and other
current and non-current assets of $1.0 million and $1.8 million, respectively,
and a $1.6 million decrease in accounts payable, a $3.7 million decrease in
accrued compensation and employee benefits, and a $0.6 million decrease in other
accrued liabilities, deferred income in shipments to distributors and accrued
special charges.  These uses of cash were offset partially by non-cash charges
of $4.8 million. Non-cash charges include a decrease of deferred income taxes of
$2.5 million, and an increase of $3.4 million for amortization of Fresh Start
intangible assets, $2.9 million in depreciation and other amortization charges,
impairment of long lived assets of $0.2 million and stock-based compensation
expense of $0.8 million. The primary use of cash for operating activities 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 prior quarter accrued special charges of $0.5
million; and
- payment of vacation accruals reflecting shut-downs and mandatory time-off
taken by employees during the quarter totaling $0.7 million.

Cash used by investing activities was $1.1 million and $1.3 million in the
six-month periods ended June 30, 2004 and 2003, respectively. Cash used for
investing activities in both of these periods reflects capital expenditures for
building improvements, software and equipment.

Cash provided by financing activities for the six-month period ended June 30,
2004 of $21.8 million primarily reflects the net proceeds of $21.6 million from
the Company's public offering of 2.0 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 $2.6million of borrowings under our revolving line of
credit and $0.1 million for the repurchase of restricted common stock from a
former employee.  In April 2004, our underwriters purchased 251,100 shares of
common stock relating to their over-allotment option.  The $2.8 million net
proceeds from our over-allotment stock sale was recorded net of offering
expenses.

Cash used by financing activities was $3.5 million for the six-month period
ended June 30, 2003, which reflected the repayment of borrowings under our
revolving line of credit of $1.9 million and $1.1 million for the repurchase of
restricted common sock from current and former employees, and $0.5 million for
the repurchase of common stock outstanding.

On July 29, 2004, we announced that our board of directors has authorized a
stock repurchase program pursuant to which we may repurchase up to $5.0 million
in market value of our outstanding shares of common stock.  Purchases under the
program may be 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.  Purchases of common stock under this program, if any, may impact
our cash used by financing activities in future periods.

EBITDA as presented below reflect a non-GAAP measure of our liquidity.
EBITDA reflects our net income 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 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        Six Months Ended
                                                          June 30,                   June 30,
                                                ------------------------- -------------------------
                                                    2004         2003         2004         2003
                                                ------------ ------------ ------------ ------------
Reconciliation of net income (loss) to EBITDA:
   Net loss....................................       ($7.2)       ($2.0)       ($7.2)       ($4.9)
   Depreciation and amortization...............         1.6          3.1          3.9          6.3
   Interest expense, net.......................         --           0.1          0.1          0.1
   Income taxe expense (benefit)...............        (0.9)         0.1         (1.1)         0.2
                                                ------------ ------------ ------------ ------------
EBITDA.........................................       ($6.5)        $1.3        ($4.3)        $1.7
                                                ============ ============ ============ ============

Reconciliation of EBITDA to net cash used by
operating activities cash flow:
   EBITDA......................................       ($6.5)        $1.3        ($4.3)        $1.7
   Interest expense, net.......................         --          (0.1)        (0.1)        (0.1)
   Benefit (provision)for income taxes.........         0.9         (0.1)         1.1         (0.2)
   Deferred income taxes.......................        (2.5)        (1.3)        (3.3)        (2.5)
   Asset impairments...........................         5.4          --           5.4          0.2
   Stock-based compensation....................         0.6          0.4          1.0          0.8
   Changes in operating assets and
      liabilities..............................         0.1          0.4         (4.0)        (3.1)
                                                ------------ ------------ ------------ ------------
Net cash provided (used) by operating
   activities..................................       ($2.0)        $0.6        ($4.2)       ($3.2)
                                                ============ ============ ============ ============`

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 $3.2
million for incentive bonuses, severance benefits and other cash costs to
be paid primarily during the third and fourth quarters of 2004.  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 fiscal 2004 capital expenditures will total approximately $2.0
million to $2.5 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.

Management has not determined how much, if any, common stock will be
purchased under our $5.0 million stock repurchase program.  Any such purchases
will impact our cash used by financing activities in future periods.



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 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, $1.2 million and $6.9 million 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
                                                ============ ============ ============ ============ ============`

During the second quarter of 2004, we placed purchase orders with our new
foundry vendor, X-Fab, which total $1.3 million of outstanding purchase
commitments as of June 30, 2004.  We also entered into a new building lease for
a design center in Meridian, Idaho which has future minimum lease payments
totaling $0.7 million over a 62 month period.



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 our previously de-emphasized
products.  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.  We expect to continue incurring
period expenses of approximately $0.1 million to $0.2 million per quarter within
special charges for the ongoing costs of maintaining the assets of MOD III in a
salable state and such costs may become recoverable from any proceeds received
upon the ultimate sale of MOD III assets.

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, our Board of Directors approved a plan to close our MOD II wafer
production facility by June 30, 2004 and migrate the majority of this production
into X-FAB's six-inch wafer manufacturing facility in Lubbock, Texas.  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;
- 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; 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. 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 the second half of 2004. 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 on the
basis of 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.
- 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 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- providing for a classified board of directors with staggered
terms;
- limiting the persons who may call special meetings of
stockholders; and

`Carrying
                                                            Value      Fair Value
                                                         ------------ ------------
Cash Equivalents:
  Fixed rate ...........................................       $35.6        $35.6
  Average interest rate ................................        0.67%        --

Short Term Debt:
  Variable-rate debt....................................        $2.4         $2.4
  Interest rate.........................................         3.7%        --`

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 June 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.  Changes in Securities, Use of Proceeds and Issuer Proceeds of Equity
Securities

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. ZiLOG's
common stock trades on the Nasdaq National Market and purchases under the
program may be 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 4.  Submission of Matters to a Vote of Security
Holders.

On May 26, 2004, at the Company's annual meeting of stockholders, the
following proposals were approved:

Proposal 1:  Election of Directors

* Elected Michael D. Burger and Federico Faggin to serve as Group II
directors until our 2007 annual meeting of stockholders.

* Approved the appointment of Ms. Robin A. Abrams and Mr. David G. Elkins as
Group I directors to serve the remainder of a 3-year term expiring at our 2006
annual meeting of stockholders.

14,794,543 votes were cast for the election of Michael D. Burger (88% of the
outstanding shares), and 915,180 votes were withheld; 14,739,493 votes were cast
for the election of Federico Faggin (88% of the outstanding shares), and 970,230
votes were withheld; 14,473,300 votes were cast for the approval of the
appointment of Robin A. Abrams (86% of the outstanding shares) and 1,236,423
votes were withheld; and 15,135,250 votes were cast for the approval of the
appointment of David G. Elkins (90% of the outstanding shares) and 574,473 votes
were withheld.  Election to, or approval of appointment to, our board of
directors requires an affirmative vote of a plurality of the votes present in
person or represented by proxy and entitled to vote.

Proposal 2:  Ratification of Independent Auditors

* Ratified the selection of KPMG LLP as our independent auditors for our
fiscal year ending December 31, 2004.

15,628,208 votes were cast for the foregoing proposal (93% of the outstanding
shares), 75,115 votes were cast against the foregoing proposal, and 6,400 shares
abstained.  Approval of the foregoing proposal required an affirmative vote of a
majority of the outstanding shares.

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.

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 August 11, 2004.

31.2       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 August 11, 2004.

32         Certifications of Chief Executive Officer and Chief Financial Officer pursuant
           to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002, dated August 11, 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.`

b)   Reports on Form 8-K:





- On April 6, 2004, ZiLOG Inc. filed a Current Report on Form 8-K announcing that
it closed a sale of common stock in connection with an exercise of an over-allotment
option granted to its underwriters in connection with its public offering.

---

**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: August11, 2004