**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 March 28, 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]

The Company has voluntarily filed all reports required by section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months in accordance
with terms agreed to in its previous indenture and its plan of reorganization.

As of April 30, 2004, there were 16,795,917 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 our closure 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 MARCH 31, 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 months ended March 31 2004 and three months ended March 31, 2003   | **          
|                                                                                                                                                          |             
|Unaudited Condensed Consolidated Balance Sheets at March 31, 2004
          
   and December 31, 2003                                                     | **          
|                                                                                                                                                          |             
|Unaudited Condensed Consolidated Statements of Cash Flows for the
          
    three months ended March 31, 2004, and three months ended March 31, 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 Proceds 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
                                                         ---------------------------
                                                           March 31,     March 31,
                                                             2004          2003
                                                         ------------- -------------
Net sales...............................................        $26.0         $25.2
Cost of sales...........................................         12.6          14.9
                                                         ------------- -------------
Gross margin............................................         13.4          10.3

Operating expenses:
  Research and development..............................          5.1           3.9
  Selling, general and administrative...................          6.8           6.2
  Special charges and reorganization items..............          0.5           1.3
  Amortization of intangible assets.....................          1.1           1.7
                                                         ------------- -------------
     Total operating expenses...........................         13.5          13.1
                                                         ------------- -------------
Operating loss..........................................         (0.1)         (2.8)
                                                         ------------- -------------
Other income (expense):
  Interest income.......................................          0.1           0.1
  Interest expense......................................         (0.1)         (0.1)
  Other, net............................................         (0.1)         --
                                                         ------------- -------------
Loss before provision (benefit)for income taxes.........         (0.2)         (2.8)
Provision (benefit) for income taxes....................         (0.2)          0.1
                                                         ------------- -------------
Net income (loss) attributable to common stockholders...       $ --           ($2.9)
                                                         ============= =============
Basic net income (loss) per share.......................       $ --          ($0.20)
                                                         ============= =============
Diluted net income (loss) per share.....................       $ --          ($0.20)
                                                         ============= =============
Weighted-average shares used in computing basic
   net income (loss) per share..........................         14.7          14.3
                                                         ============= =============
Weighted-average shares used in computing diluted
   net income (loss) per share..........................         15.3          14.3
                                                         ============= =============`

See accompanying notes to condensed consolidated financial statements.

---

**ZiLOG, INC.

                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in millions)**

`Mar. 31,    Dec. 31,
                                                        2004        2003
                                                     ----------- -----------
                                  ASSETS
Current assets:
  Cash and cash equivalents.........................      $40.0       $22.0
  Accounts receivable, less allowance for doubtful
    accounts of $0.3 at March 31, 2004, $0.3 at
    December 31, 2003...............................       16.4        13.0
  Inventories.......................................       11.7         9.6
  Prepaid expenses and other current assets.........        3.1         3.8
                                                     ----------- -----------
          Total current assets......................       71.2        48.4
                                                     ----------- -----------

MOD III assets held for sale........................      --           30.0
Net property, plant and equipment...................       17.7        18.1
Goodwill............................................       16.9        16.9
Intangible assets, net..............................       10.4        11.5
Other assets........................................        8.4         9.0
                                                     ----------- -----------
                                                         $124.6      $133.9
                                                     =========== ===========
        LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS'EQUITY
Current liabilities:
  Short-term debt...................................       $4.4        $5.0
  Accounts payable..................................       10.2         8.6
  Accrued compensation and employee benefits........        3.7         3.7
  Other accrued liabilities.........................        2.2         2.7
  Deferred income on shipments to distributors......        6.4         7.4
                                                     ----------- -----------
          Total current liabilities.................       26.9        27.4
                                                     ----------- -----------

Deferred income taxes...............................        9.2         9.9
Other non-current tax liabilities...................        5.9         5.9
                                                     ----------- -----------
          Total liabilities.........................       42.0        43.2
                                                     ----------- -----------

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

Stockholders' equity:
  Common Stock......................................        0.2         0.1
  Deferred stock compensation.......................       (1.7)       (2.0)
  Additional paid-in capital........................      118.1        96.4
  Treasury stock....................................       (2.1)       (1.9)
  Accumulated deficit...............................      (31.9)      (31.9)
                                                     ----------- -----------
          Total stockholders' equity................       82.6        60.7
                                                     ----------- -----------
Total liabilities and stockholders' equity..........     $124.6      $133.9
                                                     =========== ===========`

See accompanying notes to condensed consolidated financial statements.

---

**ZiLOG, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (in millions)**

`Three Months Ended
                                                               -------------------------
                                                                March 31,    March 31,
                                                                   2004         2003
                                                               ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................       $ --         ($2.9)
Adjustments to reconcile net income (loss) to net cash
     used by operating activities:
     Amortization of fresh-start intangible assets............         1.1          1.7
     Deferred income taxes....................................        (0.7)        (1.3)
     Depreciation and other amortization......................         1.2          1.5
     Impairment of long lived assets..........................        --            0.2
     Stock-based compensation.................................         0.4          0.4
Changes in assets and liabilities:
     Accounts receivable......................................        (3.4)        (1.5)
     Inventories..............................................        (2.2)         0.8
     Prepaid expenses and other current and
       noncurrent assets......................................         1.3          0.4
     Accounts payable.........................................         1.6          1.3
     Income taxes payable.....................................        --            0.9
     Accrued compensation and employee benefits...............        --           (3.9)
     Other accrued  liabilities, deferred income on shipments
       to distributors and accrued special charges............        (1.5)        (1.4)
                                                               ------------ ------------
        Net cash used by operating activities.................        (2.2)        (3.8)
                                                               ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures.......................................        (0.7)        (0.7)
                                                               ------------ ------------
        Cash used by investing activities.....................        (0.7)        (0.7)
                                                               ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from public offering, net of offering expenses....        21.6         --
   Repayments of short-term debt..............................        (0.6)        (1.9)
   Payments for stock redemptions.............................        (0.1)        --
                                                               ------------ ------------
        Cash provided (used) by financing activities..........        20.9         (1.9)
                                                               ------------ ------------
Increase (decrease) in cash and cash equivalents..............        18.0         (6.4)
Cash and cash equivalents at beginning of period..............        22.0         29.4
                                                               ------------ ------------
Cash and cash equivalents at end of period....................       $40.0        $23.0
                                                               ============ ============
Supplemental disclosure of cash flow information:
   Interest paid during the period............................        $0.1         $0.1
   Income taxes paid during the period........................        $0.2         $0.1`

See accompanying notes to 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.

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 have
been retroactively restated to reflect this one-for-two reverse stock split.

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."

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 (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, as prescribed by SOP 90-7, 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.......................         13.1           2.7        15.8
                                                ------------- ------------- -----------
Book value March 31, 2004......................         $3.9          $6.5       $10.4
                                                ============= ============= ===========`



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

`Current        Brand         Total
            Year          Technology       Name      Amortization
      ----------------- -------------- ------------ --------------
      April-December 200         $2.1         $1.0           $3.1
            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                $3.9         $6.5          $10.4
                        ============== ============ ==============`



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,
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 relate to partially developed semiconductor product designs
that had 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. 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 consists of businesses 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 March 31, 2004, there were
three individual customers with net accounts receivable each comprising 10% or
more of total net accounts receivable. SMK Corp., Future Electronics, Inc. and
Thomson Consumer Electronics had net accounts receivable at March 31, 2004 of
approximately $3.0, $1.6, and $2.4 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 pro forma disclosure, the amortization
of the stock-based compensation is allocated over the vesting period on a
straight-line basis.  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
                                                ---------------------------
                                                  Mar. 31,      Mar. 31,
                                                    2004          2003
                                                ------------- -------------
Net income (loss) as reported..................       $ --           ($2.9)
Add stock-based employee compensation
    expense included in reported net
    income (loss), net of tax in 2004..........          0.3           0.4
Deduct total stock-based employee
    compensation expense determined
    under fair-value-based method for
    all awards, net of tax.....................         (1.0)         (3.1)
                                                ------------- -------------
Pro forma net loss.............................        ($0.7)        ($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
                                                ---------------------------
                                                  Mar. 31,      Mar. 31,
                                                    2004          2003
                                                ------------- -------------
Annual average risk free interest rate.........          3.0%          3.0%
Estimated life in years........................            5             5
Dividend yield.................................          0.0%          0.0%
Volatility.....................................         63.5%         89.9%`



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 and the Company is not 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.

The Company expects to continue recording period expenses of approximately
$0.3 million per quarter within special charges for the ongoing costs of
maintaining the assets of MOD III 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 ultimate sale of MOD III 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 our
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):

`Mar. 31,      Dec. 31,
                                                2004          2003
                                            ------------- -------------
     Raw materials.........................         $0.4          $0.6
     Work-in-process.......................          8.5           6.7
     Finished goods........................          2.8           2.3
                                            ------------- -------------
                                                   $11.7          $9.6
                                            ============= =============`



NOTE 4.	SPECIAL CHARGES AND REORGANIZATION ITEMS

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

`Three Months Ended
                                            ---------------------------
                                              Mar. 31,      Mar. 31,
                                                2004          2003
                                            ------------- -------------
Asset impairments:
   Nampa, Idaho assets.....................      $ --             $0.2
Restructuring of operations:
   Employee severance and
     termination benefits..................          0.1           0.6
   MOD III closure costs...................          0.3           0.3
Professional fees for debt
   restructuring...........................          0.1           0.2
                                            ------------- -------------
                                                    $0.5          $1.3
                                            ============= =============`

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

`Severance and   MOD III
                                                               Termination    Closure       Debt
                                                    Total       Benefits       Costs    Restructuring
                                                ------------- ------------- ----------- ------------
    Balance at December 31, 2003...............         $0.1        $ --          $0.1        $ --
    Provisions.................................          0.5           0.1         0.3          0.1
    Cash paid..................................         (0.6)         (0.1)       (0.4)        (0.1)
                                                ------------- ------------- ----------- ------------
    Balance at March 31, 2004..................       $ --          $ --        $ --          $ --
                                                ============= ============= =========== ============`



Restructuring of operations during the three-month period ended March 31,
2004, included severance and termination benefits of approximately $0.1 million
related to the Company's continued efforts to align infrastructure costs to
business-level requirements.  Approximately $0.3 million of special charges for
the period relate to post-closure maintenance costs of the MOD III eight-inch
wafer fabrication facility in Nampa, Idaho.  These costs consist of utilities,
taxes, insurance, and other maintenance costs required to maintain the facility
in a condition required for the sale of the property.  Approximately $0.1
million of special charges during the first quarter of 2004 relate to third-
party professional legal service fees for activities associated with the
Company's May 2002 debt and equity restructuring. The third party professional
fees are expected to be minimal on a go-forward basis.

During the first quarter of 2003, computer equipment with a net book value of
$0.2 million was retired in connection with the consolidation of our information
technology systems.  The equipment was redundant and as such was charged to
special charges.

Restructuring of operations during the three-month period ended March 31,
2003 included severance and termination benefits of $0.6 million related to a
reduction-in-force at the Company's Nampa, Idaho manufacturing plant.
Approximately $0.3 million of special charges for the period relate to post-
closure maintenance costs of the MOD III and approximately $0.2 million of
special charges during the first quarter of 2003 relate to third-party
professional service fees for legal and financial advisors associated with the
Company's May 2002 debt and equity restructuring.

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 all products, as well as the coordination of production planning
and shipping to meet worldwide customer commitments.  The 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 called Micrologic Devices and Other Devices.  The
following table represents the net sales by business line for each of the
periods indicated (dollars in millions):

`Three Months Ended
                                                ---------------------------
                                                  March 31,     March 31,
                                                    2004          2003
                                                ------------- -------------
Micrologic Devices:
    Core 8-bit Microcontrollers and             ------------- -------------
    Microprocessors............................        $19.5         $18.4
                                                ------------- -------------
Other Devices:
    Serial Communications Controllers..........         $4.0          $3.4
    Modems.....................................          0.6           0.4
    IrDA transceivers..........................          1.0           0.6
    Television, PC peripherals and other.......          0.7           1.5
                                                ------------- -------------
       Total...................................         $6.3          $5.9
                                                ------------- -------------
Foundry services...............................         $0.2          $0.9
                                                ------------- -------------
Net sales......................................        $26.0         $25.2
                                                ============= =============`

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

`Three Months Ended
                                                ---------------------------
                                                  March 31,     March 31,
                                                    2003          2003
                                                ------------- -------------
Net sales by region:
Americas.......................................        $14.0         $13.8
Asia...........................................          8.0           7.3
Europe.........................................          4.0           4.1
                                                ------------- -------------
   Total.......................................        $26.0         $25.2
                                                ============= =============

Net sales by channel:
OEM............................................        $13.7         $13.1
Distributor....................................         12.3          12.1
                                                ------------- -------------
   Total.......................................        $26.0         $25.2
                                                ============= =============`



Major customers: During the three months ended March 31, 2004 two
customers, Future Electronics, Inc. and SMK Corporation accounted for
approximately 17.4% and 14.2% of net sales, respectively.  During the three
months ended March 31, 2003, two customers, Future Electronics, Inc. and Thomson
Consumer Electronics accounted for approximately 20.1% and 10.4% 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 March 31, 2004, the Company had borrowings outstanding
of $4.4 million at a LIBOR-based rate of 3.7% and, as a result of certain
limitations, only had additional borrowing capacity available of $3.2 million.
The Facility is scheduled to mature on May 13, 2005.  As of March 31, 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.  The covenants were not applicable
during the quarter ended March 31, 2004.

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
in this regard.

NOTE 8.	INCOME TAXES



The Company's income tax benefit for the quarter ended March 31, 2004
reflects an effective tax rate of 125% which is our expected tax rate for the
entire year of 2004 based on our current projections, excluding any financial
impact associated with the closure or disposition of MOD III.  Our 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, as well as amortization of
deferred tax charges.  In addition, we will provide for income tax expense in
foreign jurisdictions where our operations are profitable.

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 currently held for sale. 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 facility.  As discussed in Note 2, following
adoption of FIN 46R, MOD III, Inc. was unconsolidated effective January 1, 2004,
which eliminated the minority interest previously recorded.





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
                                            ---------------------------
                                              March 31,     March 31,
                                                2004          2003
                                            ------------- -------------
Net income (loss)..........................      $ --            ($2.9)
                                            ============= =============
Weighted-average shares outstanding........         14.9          14.9
Less: Weighted-average shares subject
    to repurchase..........................          0.2           0.6
                                            ------------- -------------
Weighted-average shares used in
   computing basic and diluted net
   income (loss) per share.................         14.7          14.3
                                            ------------- -------------
Basic net income (loss) per share..........      $ --           ($0.20)
                                            ============= =============
Add: Weighted-average shares subject
    to repurchase..........................          0.2
    Weighted-average dilutive options......          0.4
                                            -------------
Weighted-average shares used in
   computing dilutive net income
   (loss) per share........................         15.3
                                            -------------
Dilutive net income (loss) per share.......      $ --
                                            =============`

At March 31, 2003, options to purchase approximately 1.1 million shares of
common stock at a weighted average exercise price of $5.61 were excluded from
the determination of diluted net loss per share, as the effect of such shares
were anti-dilutive.  At March 31, 2004, there were 16,543,425 common shares
issued and outstanding and there were 14,890,773 common shares issued and
outstanding at March 31, 2003

NOTE 11.  COMPREHENSIVE INCOME

The Company had no items of other comprehensive income to report in
either of the three-month periods ended March 31, 2004 or March 31, 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 March 31, 2004, 405,164 shares
have been repurchased.

The Company's common stock trades on NASDAQ national stock market, with a
ticker symbol of ZILG. 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 by the Company.

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 18, 2004, the Company sold 2,000,000 common shares at $12.50 per
share, for net proceeds of $21.6 million.



NOTE 13.  SUBSEQUENT EVENTS

Sale of Common Stock

On April 6, 2004, the Company sold 252,100 common shares at $12.50
per share, before underwriting discounts and commissions, pursuant to the
exercise of an over-allotment option granted to the underwriters in connection
with the Company's public offering.  The $2.9 million of net proceeds received
from this sale of common stock will be reflected in the Company's financial
statements for the quarter ending June 30, 2004.

Closure of MOD II Wafer Fabrication Facility

On April 22, 2004, the Company announced that its board of directors
approved the closure of its five-inch wafer manufacturing facility in Nampa,
Idaho. The Company will transfer its legacy products that are currently
manufactured in the Nampa facility to X-Fab, a foundry that operates a six-inch
facility in Lubbock, Texas. Production activity is expected to cease at the
Nampa facility by the end of June 2004.  The results of operations for the
quarter ending June 30, 2004 will reflect the cost of the closure of the facility
and the associated impairment charges for these assets.

In connection with this action, the Company expects to incur total charges of
approximately $14.0 million to $16.0 million, including non-cash charges of $9.0
million to $10.0 million for accelerated depreciation and fixed assets write-
downs, a significant amount of which are expected to be recorded in the second
quarter of 2004.

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OFOPERATIONS

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

Overview

The following is management's discussion and analysis of financial
condition and results of operations of the Company and its subsidiaries for the
three-month periods ended March 31, 2004 and March 31, 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 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, 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 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
usually determined based on an estimate of future discounted cash flows.  Asset
impairments are recorded as a reduction in the asset value in our consolidated
balance sheets and as special charges in our consolidated statements of
operations.

The intangible assets created by the adoption of fresh-start accounting on
our emergence from bankruptcy 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.

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

Following the April 2004 announcement of the closure of our MOD II facility,
we expect to record charges reflecting the impairment of MOD II long-lived
assets in the quarter ending June 30, 2004.

Reporting Segments

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

Results of Operations

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

`Three Months Ended
                                                ---------------------------
                                                  March 31,     March 31,
                                                    2004          2003
                                                ------------- -------------
Net sales by region:
Americas.......................................        $14.0         $13.8
Asia...........................................          8.0           7.3
Europe.........................................          4.0           4.1
                                                ------------- -------------
   Total by region.............................        $26.0         $25.2
                                                ============= =============

Net sales by channel:
OEM............................................        $13.7         $13.1
Distributor....................................         12.3          12.1
                                                ------------- -------------
   Total by channel............................        $26.0         $25.2
                                                ============= =============
Net sales by busines line:
   Micrologic Devices:
     Core 8-bit Microcontrollers and            ------------- -------------
     Microprocessors...........................        $19.5         $18.4
                                                ------------- -------------
   Other Devices:
     Serial Communications Controllers.........         $4.0          $3.4
     Modems....................................          0.6           0.4
     IrDA transceivers.........................          1.0           0.6
     Television, PC peripherals and other......          0.7           1.5
                                                ------------- -------------
       Total other devices.....................         $6.3          $5.9
                                                ------------- -------------
   Foundry services............................         $0.2          $0.9
                                                ------------- -------------
     Total by business line....................        $26.0         $25.2
                                                ============= =============`



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

`As of:
                                            ---------------------------
                                              Mar. 31,      Mar. 31,
                                                2004          2003
                                            ------------- -------------
Days sales outstanding.....................         57            44
Net sales to inventory ratio (annualized)..         8.9          10.3
Weeks of inventory at distributors.........         12            11
Current ratio..............................         2.6           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 influenced largely by the timing of our
customer billings and collections. For instance, at March 31, 2004 our DSO was
57 days which is substantially higher than our historical levels. This reflects
strong customer billings to several large OEM and distribution customers during
the month of March 2004 and a resulting increase in accounts receivable at March
31, 2004. During the first quarter of 2003 our net sales were billed to
customers more linearly throughout the period which contributed to our
relatively low DSO figures at that time.



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 increased
from the fist quarter of 2004 compared to the first quarter of 2003 because we
decreased our inventory levels more rapidly than our net sales.

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 we
maintain 11 to 13 weeks of inventories at our distributors.



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 March 31, 2004 compared to March 31, 2003 primarily due to an
increase in cash from the proceeds of our recent common stock offering.



Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,
2003

Net Sales.  Overall, our net sales of $26.0 million in the three
months ended March 31, 2004 represents an increase of 3% from net sales of $25.2
million in the same period of 2003.

Net sales of our Micrologic devices increased 6% to $19.5 million in the
three months ended March 31, 2004 compared to $18.4 million in the three months
ended March 31, 2003.  This increase reflects an increase in Z8 microcontroller
revenues driven by our Infra Red remote control devices, partially offset by a
decline in sales of our Z80 microprocessor devices.   The improvement in IR
revenues is attributable entirely to higher unit shipments, while both our
general purpose Z80 microprocessor and Z8 microcontroller product families
experienced lower unit shipments in the first quarter of 2004 compared to the
first quarter of 2003.  The decrease in unit shipments of the general purpose
micrologic products reflects overall lower market demand  partially as a result
of our customers moving from these older Z80 and Z8 products to alternative
technologies, primarily microcontrollers with embedded flash technology.  In
November 2002 and February 2003 we released our new Z8 Encore! and eZ80 Acclaim!
products that are focused on the embedded flash market, with a strategy of
recapturing sales to these customers and entering new markets.  Due in part to
the length of the cycle from development to design win to production revenue we
have not had and do not expect to have significant sales of these products until
the late 2004 and early 2005.



Net sales of our other devices, which excludes Foundry sales, for the three
months ended March 31, 2004 increased $0.4 million or 7% to $6.3 million, which
is up from $5.9 million in the same period of 2003.   This 4% increase in net
sales during the first quarter of 2004 compared to the first quarter of 2003
reflects slightly higher unit shipments of Serial Communications Controllers,
Modem, and IRDA devices, offset by unit sales declines of our television and PC
peripheral devices.

Net sales of Foundry Services, for the three months ended March 31, 2004
decreased 78% to $0.2 million, which is down from $0.9 million in the same
period of 2003.  Overall, our Foundry business has been opportunistic and is
solely dependent on the needs of one customer.  This business was minimal in the
first quarter of 2004 and is difficult to estimate on a go forward basis,
although we may receive further last-time purchases in anticipation of  our
April, 2004 announcement of the closure of our five-inch wafer fabrication
facility.  The closure is expected to occur in June, 2004 for production
wafers.

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 52% in the three months ended March 31, 2004, up from 41% in the same period
of 2003. During the first quarter of 2003 our gross margin was adversely
impacted by underutilization of our MOD II wafer manufacturing facility,
reflecting lower demand for wafer capacity consistent with our decline in net
sales at that time.  We have continued to rationalize our manufacturing cost
structure in response to these lower demand requirements, which included a
reduction in force in our MOD II facility in February 2003.  These actions,
combined with higher production volume and overhead absorption primarily
contributed to our gross margin improvement in the first quarter of 2004
compared to the same period in 2003.  In April 2004, we announced that our five-
inch wafer manufacturing facility in Nampa, Idaho will be closed after the
second quarter of 2004.  Accordingly, we anticipate that there will be a one-
time gross margin degradation during the second quarter of 2004 as we ramp-down
the factory and incur accelerated depreciation charges.   The majority of
products that are presently manufactured in our five-inch wafer fab will be
transferred to X-Fab's six-inch facility in Lubbock, Texas.  We will continue to
purchase our 0.35 micron wafers from our foundry partners primarily in Taiwan,
including our new embedded flash based Z8 Encore! and eZ80 Acclaim! products.

Research and Development Expenses.  Research and development expenses
were $5.1 million in the three months ended March 31, 2004, reflecting a 31%
increase from the $3.9 million of research and development expenses reported in
the three months ended March 31, 2003.  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 heavily 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.

Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased to $6.8 million in the three months ended
March 31, 2004 from $6.2 million in the three months ended March 31, 2003.  The
increase in our selling, general and administrative spending reflects primarily
higher incentive compensation and commissions commensurate with our increased
number of sales reps and higher sales levels. In the first quarter of 2003 the
Company initiated significant shutdowns to reduce costs driven by lower sales in
the quarter.  Generally, the Company has been focused on reducing the overall
headcount supporting sales, marketing, general and administrative
activities.

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

`Three Months Ended
                                            ---------------------------
                                              Mar. 31,      Mar. 31,
                                                2004          2003
                                            ------------- -------------
Asset impairments:
   Nampa, Idaho assets.....................      $ --             $0.2
Restructuring of operations:
   Employee severance and
     termination benefits..................          0.1           0.6
   MOD III closure costs...................          0.3           0.3
Professional fees for debt
   restructuring...........................          0.1           0.2
                                            ------------- -------------
                                                    $0.5          $1.3
                                            ============= =============`



The following table summarizes activity in accrued special charges (in
millions):

`Severance and   MOD III
                                                               Termination    Closure       Debt
                                                    Total       Benefits       Costs    Restructuring
                                                ------------- ------------- ----------- ------------
    Balance at December 31, 2003...............         $0.1        $ --          $0.1        $ --
    Provisions.................................          0.5           0.1         0.3          0.1
    Cash paid..................................         (0.6)         (0.1)       (0.4)        (0.1)
                                                ------------- ------------- ----------- ------------
    Balance at March 31, 2004..................       $ --          $ --        $ --          $ --
                                                ============= ============= =========== ============`



During the three months ended March 31, 2004, special charges totaled $0.5
million, which was comprised of $0.4 million of restructuring of operations
expenses and professional fees of $0.1 million.  The restructuring of operations
relates to severance and benefit costs of $0.1 in connection with a small
reduction in our marketing workforce and the ongoing costs of approximately $0.3
million per quarter to maintain our MOD III facility which is being held for
sale.

Restructuring of operations during the three-month period ended March 31,
2003 included severance and termination benefits of $0.6 million related to a
reduction-in-force at our Nampa, Idaho manufacturing plant affecting 56
employees who were terminated during the quarter.  Approximately $0.3 million of
special charges for the period relate to post-closure maintenance costs of the
MOD III eight-inch wafer fabrication facility in Idaho consisting of utilities,
taxes, insurance, and other maintenance costs required to maintain the facility
in a condition required for the sale of the property.  Approximately $0.2
million of special charges during the first quarter of 2003 relate to third-
party professional service fees for legal and financial advisors associated with
actions required to be taken as a result of our May 2002 debt and equity
restructuring activities.



On April 22, 2004, we announced that our board of directors has approved the
closure of our five-inch wafer manufacturing facility in Nampa, Idaho. We are in
the process of transferring our legacy products that are currently manufactured
in the Nampa facility to X-Fab, our foundry partner that operates a six-inch
facility in Lubbock, Texas. Production activity is expected to cease at the
Nampa facility by the end of June 2004. In connection with this action, we
expect to incur total charges of approximately $14.0 million to $16.0 million,
including non-cash charges of $9.0 million to $10.0 million for accelerated
depreciation and fixed assets write-downs, a significant amount of which are
expected to be recorded in the second quarter of 2004. On completion of this
action we will have completed our strategy of migration to a fully fabless model
whereby our legacy products will be primarily sourced from X-Fab and our newer
products will be sourced from foundry partners in Asia. We expect that special
charges will increase during the second and third quarters of 2004 as we
recognize the impact of closing our MOD II five-inch wafer facility, including
cash charges for severance benefits and closure costs.

Stock-Based Compensation.  During both of the three-month
periods ended March 31, 2004, we recognized $0.4 million of stock-based
compensation in connection with the award of restricted stock and stock options
to certain executives, employees and consultants.  These non-cash charges are
primarily included in our selling, general and administrative expenses.  Our
right to repurchase shares of restricted stock for $0.01 per share generally
lapses 25% on the award date and 25% on each of the first three anniversaries
following the award date.  Compensation expense for employee stock awards was
measured on the award date and will be recognized over each of the next three
years as these restrictions lapse.  Charges for stock awards to consultants is
measured as the awards vest and will be recognized over the periods that the
restrictions lapse.  Based primarily on the employee stock and option awards we
made during May 2002, we anticipate that we will recognize stock compensation
charges of $1.1 million, $0.6 million and $0.1 million for the years ending
December 31, 2004 through 2006, respectively

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.......................         13.1           2.7        15.8
                                                ------------- ------------- -----------
Book value March 31, 2004......................         $3.9          $6.5       $10.4
                                                ============= ============= ===========`

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

`Current        Brand         Total
            Year          Technology       Name      Amortization
      ----------------- -------------- ------------ --------------
      April-December 200         $2.1         $1.0           $3.1
            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                $3.9         $6.5          $10.4
                        ============== ============ ==============`

Interest Expense.  In the first quarters 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 quarter ended
March 31, 2004 reflects an effective tax rate of 125%, which is our expected tax
rate for the entire year of 2004 based on our projections, excluding any
financial impacts associated with the closure or disposition of either MOD II or
MOD III.  Our 2004 annual 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.

Our provision for income taxes during the period ended March 31,
2004 reflects 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 March 31, 2004, was 3.7%.  As of March 31, 2004, we had
outstanding borrowings of $4.4 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 March 31, 2004 our availability for additional
borrowings under the facility totaled $3.2 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 March 31, 2004, we had cash and cash equivalents of $40.0 million,
compared to $22.0 million at December 31, 2003.  Cash used by operating
activities was $2.2 million for the three months ended March 31, 2004, compared
to $3.8 million of cash used by operating activities in the first quarter of
2003.

During the three-month period ended March 31, 2004, cash used by operating
activities of $2.2 million primarily reflects increases in accounts receivable
and inventories of $3.4 million and $2.2 million, respectively, and a $1.5
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 $2.6 million, a $1.6 million increase in
accounts payable and a $1.3 million decrease in prepaid expenses and other
assets. Non-cash charges include a decrease of deferred income taxes of $0.7
million, and an increase of $1.1 million for amortization of Fresh Start
intangible assets, $1.2 million in depreciation and other amortization charges
and stock-based compensation expense of $0.4 million.

During the three-month period ended March 31, 2003, cash used by operating
activities of $3.8 million primarily reflects our net loss of $2.9 million
offset by non-cash charges of $2.5 million. Non-cash charges include a decrease
of deferred income taxes of $1.3 million, and an increase of $1.7 million for
amortization of Fresh Start intangible assets, $1.5 million in depreciation and
other amortization charges, impairment of long lived assets of $0.2 million and
stock-based compensation expense of $0.4 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 $0.7 million in each of the three-month
periods ended March 31, 2004 and 2003. 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 three-month period ended March
31, 2004 of $20.9 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 $0.6 million 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
$2.9 million net proceeds from this over-allotment stock sale will be reflected
in our financial statements for the second quarter of 2004.

Cash used by financing activities was $1.9 million for the three-month period
ended March 31, 2003, which reflected the repayment of borrowings under our
revolving line of credit.

The EBITDA figures 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 figures 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
                                                ---------------------------
                                                  March 31,     March 31,
                                                    2004          2003
                                                ------------- -------------
Reconciliation of net income (loss) to EBITDA:
   Net income (loss)...........................       $ --           ($2.9)
   Depreciation and amortization...............          2.3           3.2
   Interest expense, net.......................         --            --
   Income taxes................................         (0.2)          0.1
                                                ------------- -------------
EBITDA.........................................         $2.1          $0.4
                                                ============= =============

Reconciliation of EBITDA to net cash used by
operating activities cash flow:
   EBITDA......................................         $2.1          $0.4
   Benefit (provision)for income taxes.........          0.2          (0.1)
   Deferred income taxes.......................         (0.7)         (1.3)
   Asset impairments...........................         --             0.2
   Stock-based compensation....................          0.4           0.4

   Change in operating assets and               ------------- -------------
      liabilities..............................         (4.2)         (3.4)
                                                ------------- -------------
Net cash used by operating activities..........        ($2.2)        ($3.8)
                                                ============= =============`



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 is expected to result in the elimination of
approximately 150 positions.  We anticipate the cash costs of this action will
be approximately $4.0 million to $7.0 million for incentive bonuses, severance
benefits and other cash costs to be paid primarily during the second and third
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, 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 and our existing cash
reserves.

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,
the four-month period ended April 30, 2002, and for the year ended December 31,
2001. 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
                                                ============= ============= =========== ============ ============`

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 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 $0.3 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 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 of MOD II and outsourcing
of production to X-Fab, including:

- The cost of closing MOD II could be more expensive than anticipated;
- The closing 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 less
than two years ago. Our Chapter 11 case 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.



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



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



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

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



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



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

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



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



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

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



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

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



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



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



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



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



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



Our ten largest customers, not including our distributors, accounted for
approximately 38% of our net sales for 2003, approximately 37% of our net sales
for 2002 and approximately 33% of our net sales for 2001. Concentration of net
sales to particular customers may change from period to period, but we expect
that sales to a limited number of customers will continue to account for a
significant percentage of our revenues in any particular period for the
foreseeable future. We have very few long-term contracts with our customers,
and, like us, our customers typically compete in cyclical industries. We
routinely purchase inventory based on customers' estimates of demand for their
products, which is difficult to predict. Thus, our customers may decide not to
purchase our products at all, to purchase fewer products than they did in the
past, or to alter their purchasing patterns on short notice, particularly
because substantially all of our sales are made on a purchase order or sales
order acknowledgment basis, which permits our customers to cancel, change or
delay product purchase commitments upon 30 days notice for standard products and
60 days notice for custom products without paying a cancellation or rescheduling
charge. Customers may still cancel or reschedule within these time periods,
however they routinely incur a cancellation or rescheduling charge. This
cancellation risk is increased because our customers can purchase some similar
products from our competitors. The loss of one or more major customers or any
reduction, delay or cancellation of orders by any of these customers or our
failure to market successfully to new customers could result in a significant
reduction in net sales during one or more periods, excess inventory or write-
downs of inventory.



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



Approximately 60% of our sales for the fist quarter of 2004, approximately
66% of our net sales for 2003, and approximately 56% for 2002 were made to
foreign customers, and we expect that international sales will continue to
represent a significant portion of our net sales in the future. We maintain
significant operations or rely on a number of contract manufacturers in the
Philippines, Indonesia, Taiwan, Thailand, India and other locations in Asia. We
cannot assure you that we will be successful in overcoming the risks that relate
to or arise from operating in international markets. Risks inherent in doing
business on an international level include:

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



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



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



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



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



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



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



In January 2002, we entered into an employment agreement with James M.
Thorburn, our Chairman and Chief Executive Officer, pursuant to which we were
required to make awards of 88,232 shares of restricted common stock on each of
May 13, 2002, 2003, 2004 and 2005. We committed to loan Mr. Thorburn the funds
to pay the income taxes due with respect to his restricted stock awards, as we
have done with other employees that previously received awards of restricted
stock. In July 2002, however, Congress enacted the Sarbanes-Oxley Act of 2002,
which prohibits such loans. As a result of this development, we converted Mr.
Thorburn's May 13, 2003 restricted stock grant to stock options in April 2003.
The restricted stock award of May 13, 2003 was cancelled and replaced with
options to purchase 114,709 shares of common stock at an exercise price of
$2.00. We still have an obligation to award Mr. Thorburn restricted stock on May
13, 2004 and May 13, 2005 to the extent he remains employed with us on those
dates. Our current policy is that we not enter into or extend employment
agreements with executives. Mr. Thorburn's employment agreement is scheduled to
expire in May 2004 after which date he would have an at-will employment
relationship with us. If we are unable to retain Mr. Thorburn as our Chief
Executive Officer after his agreement expires, our business may be harmed.



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



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



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



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



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



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



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



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



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



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

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



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



As a result of technological changes, from time to time our customers change
the design of their products so as not to include our products, which may have a
negative impact on our net sales. For example, in 1999 and 2000, a number of our
customers changed the designs of computer mouse pointing devices that they
manufactured, and as a result, these devices no longer contain our products.
Because we do not have long-term supply contracts with most of our customers,
changes in the designs of their products can have sudden and significant impacts
on our sales. For example, net sales of our computer mouse pointing devices and
other computer peripheral products decreased substantially from approximately
$15.4 million in 2000 to approximately $4.9 million in 2001, approximately $2.4
million in 2002, and approximately $0.7 million for 2003 and approximately
$33,000 for the three months ended March 31, 2004. These reduced sales due to
design changes have harmed us in the past, and additional design changes could
result in lower revenues in the future.



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



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

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



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

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



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



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





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



We rely on independent third-party foundry manufacturers to fabricate an
increasing percentage of our products, and we currently expect that virtually
all of our products will be fabricated at third-party foundry manufacturers
after we close MOD II in June 2004. Industry-wide shortages (especially
our newer products) in foundry capacity could harm our financial results.
For example, a significant amount of our sales are of products which cannot be
manufactured at our Nampa, Idaho wafer fabrication facility. In addition, we
recently announced the closure of our Nampa wafer facility which will make us
more vulnerable to shortages of wafer supply or price increases by our foundry
suppliers. If we are unable to obtain the requisite foundry capacity to
manufacture our complex, new products, or if we have to pay higher than
anticipated prices to foundries in periods of tight capacity, we may not be able
to meet our customers' demand for our products. Any delay in initiating
production at third-party foundries, any inability to have new products
manufactured at such foundries or any failure to meet our customers' demands
could damage our relationships with our customers and may decrease our sales.



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

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



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



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



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



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



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



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



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



Acts of war or terrorism could harm our business.



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



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



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



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



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



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



We have a $15.0 million senior secured revolving credit facility, under which
$4.4 million in borrowings were outstanding as of March 31, 2004 and
approximately $3.2 million was available for additional borrowing based on our
current borrowing base. Borrowings under this credit facility are secured by
substantially all of our assets. The terms of our credit facility contain
restrictive covenants, which may impair our ability to take corporate actions
that we believe to be in the best interests of our stockholders, including
restricting the ability to:



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

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



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



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



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



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



- providing for a classified board of directors with staggered terms;
- limiting the persons who may call special meetings of stockholders; and
- prohibiting stockholders from taking action by written consent.



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



Our directors, named executive officers and two large stockholders, who
beneficially own approximately 27% of our common stock in the aggregate, may
have interests that conflict with the interests of our other stockholders.



Our directors and named executive officers, together with two large
stockholders, UBS Willow Management, L.L.C. and funds managed by Capital
Research and Management Company, beneficially owned approximately 27% of our
outstanding common stock, in the aggregate, as of April 15, 2004. As a result of
their ownership and positions, our directors and named executive officers,
together with UBS Willow Management and Capital Research and Management Company,
collectively are able to significantly influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control. If the ownership
of our common stock continues to be highly concentrated, it may prevent you and
other stockholders from influencing significant corporate decisions. The
investment objectives of these stockholders may differ from those of our other
stockholders, including our future public stockholders.



Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily
to our short-term investment portfolio and borrowings under our revolving credit
facility.  We do not use derivative financial investments in our investment
portfolio.  Our primary investment objectives are to preserve capital and
maintain liquidity.  These objectives are met by investing in high-quality
credit issuances and limiting the amount of credit exposure to any one company.
Our policy is to mitigate default risk by investing in only the highest quality
securities and monitoring the credit ratings of such investments.  As of March
31, 2004, our cash equivalents were invested in bank time deposits and money
market funds.  We have no significant cash flow exposure due to rate changes for
our cash equivalents as these instruments have very short maturities.

The table below presents principal amounts and related average rates by year
of maturity for our cash equivalents and debt obligations as of March 31, 2004
(dollars in millions):

`Carrying
                                                             Value      Fair Value
                                                         ------------- -------------
Cash Equivalents:
  Fixed rate ...........................................        $35.9         $35.9
  Average interest rate ................................         0.75%        --

Short Term Debt:
  Variable-rate debt....................................         $4.4          $4.4
  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

As of March 31, 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

During our first fiscal quarter, we enhanced the entity-level reporting
features in our general ledger system.   Although the changes we made to our
general ledger system involved shifting of certain responsibilities and changing
certain accounting processes 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

`(a) Total        (b)        (c) Total Number of      (d)Maximum Number (or
               Number       Average       Shares (or Units)     Approximate Dollar Value)
             of Shares     Price Paid   Purchased as Part of  of Shares (or Units) that May
             (or Units)    Per Share     Publicly Announced     Yet Be Purchased Under the
  Period     Purchased     (or Units)     Plans or Programs         Plans or Programs
----------- ------------ -------------------------------------------------------------------
 February
1, 2004 to
 February
 29, 2004        22,500          $6.04           N/A                       N/A
            ------------ -------------------------------------------------------------------
   Total         22,500          $6.04           N/A                       N/A
            ============ ===================================================================`



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.

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



On February 12, 2004, at a special meeting, the Company's stockholders
approved the following:

Proposal 1:  Increase in Size of the Board of Directors and Removal of
Certain Restrictions on the Membership of the Board of Directors



- Authorized an increase in the maximum authorized size of the Board of
Directors to nine members; and
- Authorized eliminating certain restrictions relating to membership of our
Board of Directors and our Nominating Committee.

21,611,430 votes were cast for the foregoing proposal (74.28% of the
outstanding shares), 31,716 votes were cast against such proposal, and 5,221
shares abstained or were withheld from voting on such proposal.  An affirmative
vote of a majority of the outstanding shares was required to approve this
proposal.  Each of the foregoing was accomplished via amendment of our
Certificate of Incorporation.

Proposal 2:  2004 Omnibus Stock Incentive Plan

- Approved the adoption of the Company's 2004 Omnibus Stock Incentive
Plan.

21,182,740 votes were cast for the foregoing proposal (72.81% of the
outstanding shares), 445,356 votes were cast against such proposal, and 20,271
shares abstained or were withheld from voting on such proposal.  An affirmative
vote of two-thirds of the outstanding shares was required to approve this
proposal.  The Company has reserved 1,500,000 shares of common stock for
issuance under the 2004 Omnibus Plan.

Proposal 3:  2004 Employee Stock Purchase Plan

- Approved the adoption of the Company's 2004 Employee Stock Purchase
Plan.

21,261,590 votes were cast for the foregoing proposal (73.08% of the
outstanding shares), 370,306 votes were cast against such proposal, and 16,471
shares abstained or were withheld from voting on such proposal.  An affirmative
vote of two-thirds of the outstanding shares was required to approve this
proposal.  The total of 1,250,000 shares of the Company's common stock has been
reserved for purchase by eligible employees under the 2004 ESPP, subject to
certain adjustments.

Proposal 4:  Stock Split

- Granted authority to the Board of Directors to affect a reverse stock split
of either a three for two, two for one, five for two or three for one
ratio.



18,872,691 votes were cast for the foregoing proposal (64.87% of the
outstanding shares), 7,819,983 votes were cast against such proposal, and 10,721
shares abstained or were withheld from voting on such proposal.  An affirmative
vote of a majority of the outstanding shares was required to approve this
proposal.  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.

Proposal 5: Increase in Number of Authorized Shares

- Authorized capital stock increased to 60,000,000 shares.

26,286,408 votes were cast for the foregoing proposal (90.35% of the
outstanding shares), 341,466 votes were cast against such proposal, and 75,521
shares abstained or were withheld from voting on such proposal.  An affirmative
vote of a majority of the outstanding shares was required to approve this
proposal.  The foregoing was accomplished via amendment of our Certificate of
Incorporation.

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 May 12, 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 May 12, 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 May 12, 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 February 5, 2004, ZiLOG, Inc. furnished a Current Report on Form 8-K
announcing its financial results for the fiscal quarter and full-year ended
March 31, 2003.

- On February 19, 2004, ZiLOG Inc. filed a Current Report on Form 8-K
announcing that the Board of directors of Zilog approved a 2 for 1 reverse stock
split.

- On March 12, 2004, ZiLOG, Inc. furnished a Current Report on Form 8-K
announcing that it had priced a public offering of its common stock.

- On March 18, 2004, ZiLOG Inc. furnished a Current Report on Form 8-K
announcing that it closed a public offering of its common stock.

---

**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: May 12, 2004