ZILOG INC - 10-K Annual Report

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 such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

The aggregate market value of Common Stock held by non-affiliates of the Registrant as of June 25, 2004, was approximately $135,416,000 based on the closing sale price for shares of the Registrant’s Common Stock as reported on the NASDAQ National Market. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

At March 1, 2005, 16,249,432 of the Registrant’s Common Stock were outstanding.

The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 26th, 2005 is incorporated by reference in Part III of this Form 10-K to the extent stated herein.

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-K 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. 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. These statements include:

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-K 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.

Our results of operations after May 1, 2002 are not comparable to our results of operations prior to May 1, 2002, due to our adoption of “fresh-start” reporting upon our emergence from bankruptcy as prescribed by the American Institute of Certified Public Accountant’s Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” Differences in our results of operations relate to depreciation of property, plant and equipment, amortization of intangible assets, interest expense and restructuring and reorganization expenses. Additionally, these differences in our balance sheets relate to inventory, in-process research and development, property, plant and equipment, intangible assets, conversion of senior notes to common stock, and minority interest. Certain figures, such as net sales and certain expenses were not affected by our adoption of fresh-start accounting and, accordingly, we believe them to be comparable. To provide a more meaningful analysis, we have combined results of our Predecessor and Successor Company’s operations for fiscal year 2002. Our combined results for 2002 are presented for convenience of annual comparison and are not meant to be a presentation in accordance with generally accepted accounting principles.

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. When these expressions are used in this report in connection with ZiLOG, Inc.’s reorganization under Chapter 11 of the U.S. bankruptcy code, however, they refer only to the parent company, ZiLOG, Inc., and not to any of its subsidiaries. ZiLOG, eZ80, Z8 Encore! and Z80 are registered trademarks of ZiLOG, Inc. and eZ80Acclaim! is a trademark of ZiLOG, Inc.

We are a global supplier of 8-bit micrologic semiconductor devices, which are also referred to as embedded control devices. We design, develop, manufacture and market a broad portfolio of these devices for embedded control and communication applications used in our target markets: consumer electronics, home appliances, security systems, point of sale terminals, personal computer peripherals, personal health and medical products as well as industrial and automotive applications. We introduced our first micrologic device in the mid-1970’s and have since established a globally recognized brand. Many of our micrologic devices are developed in collaboration with our customers.

Our micrologic devices typically combine a microprocessor, memory, and peripheral functions on a single device. Our embedded control devices enable customers in our target markets to control the functions and performance of their products. By embedding their application software on our devices, customers can control a wide variety of products such as consumer appliances, infrared remote controls, security systems and battery chargers.

We sell our devices, either directly or through distributors, to a diverse customer base of Original Equipment Manufacturers (OEMs) in our target end markets. These OEMs include Delphi, Delta, Echostar (Dish Satellite TV brand), Emerson, Hypercom, Philips, Samsung, Thomson Consumer Electronics (GE and RCA brands) and Tyco.

We have introduced our Z8 Encore! and our eZ80 Acclaim! next generation micrologic device families. These devices are designed to incorporate flexible flash memory and to meet our customers’ requirements for products incorporating advanced communications and connectivity features. Flash-based microcontrollers have been identified by Semico Research as the fastest growing segment of the 8-bit market.

The eZ80 Acclaim! won the Electron D’Or award for Processor of the Year in 2003 from Electronique Magazine. In July of 2004, ZiLOG received the Frost & Sullivan Market Penetration Leadership Award. The Frost & Sullivan award is presented to the company that has demonstrated excellence in capturing market share within their industry, including excellence in product innovation, marketing, and sales strategies. The selection criteria include market share gain, increased sales, brand awareness effort, market participant interviews, end-user studies and extensive secondary research. In September, 2004, the Z8Encore! XP 8-bit flash MCU was selected by the publication, Electronic Engineering and Product World (EEPW) of China for its inaugural award for innovation in Embedded Products.

Micrologic devices are processor-based semiconductors that include microprocessors, microcontrollers and digital signal processors that typically process information, output data or control signals according to programmed instructions and various external inputs. Micrologic devices also include integrated peripherals, such as timers, serial communication devices, analog/digital converters, infrared data transmitters, hard disk drive controllers and display drivers that operate in conjunction with these processor-based devices to provide systems support or to control communications, graphics and images, mass storage, voice and other user input systems.

As consumer and industrial product manufacturers seek to enhance the value of their products by increasing functionality, performance and ease of use, they are embedding more advanced control features into their designs. One way for manufacturers to meet these market requirements is to use micrologic devices. Micrologic devices can enable customers to:

Micrologic devices have been incorporated into a wide variety of products in markets including consumer electronics, home appliances, security systems, point of sale terminals, personal computer peripherals as well as industrial and automotive applications.

Microcontrollers typically include a central processing unit, non-volatile program memory, random access memory for data storage and various peripheral capabilities. The microcontroller is offered as a complete solution because it incorporates application-specific software provided by the customer and may include specialized peripheral device controllers and internal or external non-volatile memory components to enable the storage and access of additional program software. Microcontrollers are generally segmented by word length, which is measured in bits ranging from 4-bit through 32-bit architectures. Although 4-bit microcontrollers are relatively inexpensive, they generally lack the minimum performance and features required for product differentiation and are typically used only to produce basic functionality in products. While traditional 16 and 32-bit architectures are typically higher performance, they can be too expensive for many high-volume embedded control applications, typically costing two to four times the cost of an 8-bit microcontroller. Manufacturers will choose the appropriate microcontroller based on cost, performance and functionality. 8-bit microcontrollers are characterized as follows:

We believe that 8-bit microcontrollers are generally perceived as the most cost-effective embedded control solution for high volume requirements. High-volume microcontrollers available today are typically Read Only Memory (“ROM”)or One-Time Programmable (“OTP”), which typically require longer delays and greater costs in order to implement customer application code changes as compared to flash, generally resulting in longer lead times, for delivery of such microcontrollers. In addition to delayed product introduction, these longer lead times can result in potential inventory obsolescence and disruptions to customers’ factory production when changes in the application code are required by the customer. To address some of these issues, some suppliers offer OTP-based microcontrollers that can be configured by the customer in the customer’s manufacturing line, thus minimizing lead-time and inventory risks if the customer’s application code requires changes. Furthermore, flash memory offers the flexibility of in-product re-programmability. While these flash-based microcontrollers were initially expensive relative to ROM and OTP-based microcontrollers, manufacturing technology has evolved over the last several years to the point where the premium for flash microcontrollers over ROM and OTP-based microcontrollers has narrowed.

We have over 30 years of experience in designing, manufacturing management and selling micrologic semiconductor devices. As a pioneer in this industry, we believe that our brand name is respected and well recognized in our markets. We have established strong, long-standing relationships with numerous customers that are leaders in their respective markets. Our extensive experience as a supplier of micrologic devices has allowed us to develop the following key competitive strengths, which we believe differentiate us from many of our competitors:

Our micrologic devices are known worldwide for providing versatile, highly customizable design solutions for use in a variety of consumer products and industrial equipment. We introduced our first Z80 microprocessor in 1974 and subsequently introduced our first Z8 microcontroller, each of which we continue to sell today.

Extensive and Easily Customizable Product Portfolio with Substantial Base of Existing Code

In 2004, we shipped hundreds of different products, including ROM-based and field programmable microcontrollers for such consumer and industrial products as security systems, universal and multi-brand remote controls, infrared keyboards, car alarms and sunroofs. Our devices feature a variety of memory configurations, low voltage and power, small packaging and ease of use that allow electronics manufacturers to differentiate their products, add product functionality and reduce product costs. Our devices are built around a flexible core which facilitates customization. Our products are supported by an extensive set of Windows-based development tools and proven application assistance. Our proprietary library of reusable technology facilitates our ability to rapidly develop new products to meet the needs of our customers. Also, the backwards compatibility of our products allows engineers to re-use code created over the past 30 years.

Through direct sales and distributors, we have developed relationships with customers, including large OEMs and end users. Many are leaders in their respective markets. By collaborating with customers in an interactive product design and development process, we have been able to establish long-standing relationships, which help us solidify our customer base and define our next generation products. In our micrologic devices business line, we have collaborated with such customers as Delphi, Delta, Echostar (Dish Satellite TV brand), Emerson, Hypercom, Philips, Samsung, Thomson Consumer Electronics (GE and RCA brands) and Tyco.

Our objective is to be a key provider of micrologic devices. To implement our business strategy, we intend to:

We are dedicating increased resources to developing new applications and relationships with previous and new customers for our existing and future 8-bit micrologic devices. Our extensive database of code and reusable application software developed over many years of service in these markets facilitates our customers’ ability to design-in our products.

Although we have expanded our addressable portion of the 8-bit market by introducing flash-based devices, we do not address the entire 8-bit market. We have a product roadmap to develop new devices that address

additional portions of the market. The roadmap includes adding devices that provide: a wider range of voltages, additional memory sizes and expanded peripheral functions such as USB and controller area network bus, or CAN bus.

In addition to providing a portfolio of general purpose micrologic devices, we are developing devices that are designed specifically for major vertical markets served by existing or new OEM customers. Our targeted key vertical markets include consumer electronics, home appliances, security systems, point of sale payment systems, personal computer peripherals, personal health and medical products as well as industrial and automotive systems. In each new vertical market we identify as well suited for our micrologic products, we work with leading OEMs to determine the requisite specifications. An example of this vertical strategy is our Z8 Crimzon, which we have created to address the infrared remote control end market. We plan to expand our Crimzon family of products to address additional consumer applications in the future.

We are focused on providing advanced semiconductor solutions that assist our customers in adding functionality and enhancing the performance of their products. Our efforts in this regard include:

Our manufacturing strategy is to utilize third party wafer foundries to manufacture our devices. We believe outsourcing manufacturing enables us to access advanced process technologies and to reduce our manufacturing costs. This strategy allows us to focus greater resources on product design, systems and software development and customer support. In line with this strategy, in July 2004 we closed our MOD II five-inch wafer manufacturing facility in Nampa, Idaho, and migrated production of these products to the wafer foundry, X-FAB, located in Lubbock, Texas.

We design, develop, and market a broad portfolio of micrologic semiconductor devices for embedded control and communication applications used in consumer electronics, home appliances, security systems, point of sale terminals and personal computer peripherals, as well as industrial and automotive applications. In addition, we market other semiconductor devices such as serial communications controllers, on-screen television

display controllers, violence blocking microcontrollers, modems and infrared data association transceivers, which we call IrDA. We refer to these semiconductor devices as “other devices.” Prior to the closure of our MOD II wafer manufacturing facility, we performed wafer fabrication foundry services for third parties. In 2004, micrologic devices were approximately 72% of net sales, other devices were approximately 25% of net sales and foundry services were approximately 3% of net sales.

All of our micrologic devices include our proprietary microprocessor technology. We have four families of microprocessors. The Z8 and Z80 are our legacy microprocessor architectures. The Z8 Encore! and eZ80 Acclaim! are our next-generation microprocessor architectures. In most of our micrologic devices, a microprocessor is combined with either ROM, OTP or flash memory to make a microcontroller. We introduced our first families of devices for Z8 Encore! and eZ80 Acclaim! in late 2002 and early 2003, respectively, to address the large flash-based market. In 2004, we introduced our latest flash- based microcontroller family based upon the Z8 Encore!, the Z8 Encore! XP. The Z80 is also sold as a stand-alone microprocessor, which does not include integrated memory.

Most of our micrologic devices are general purpose semiconductors. We then offer our customers the ability to integrate peripheral functions (such as network connectivity, timers, serial communication, analog/digital conversion, infrared data transmission and display drivers) on our micrologic devices. These additional functions enhance the capabilities of the customer’s end product, which can lower their overall systems costs. These peripherals incorporate functionality that might otherwise be found in a separate chip on the printed circuit board to which the micrologic device is attached.

We also combine different microprocessors, memories and peripheral functions to create devices specifically tailored to meet the requirements of targeted vertical markets. For example, our Crimzon family of products includes devices tailored for specific consumer applications such as universal remote controls. Crimzon devices can be purchased with an embedded software database that allows the control of a multitude of various brands of consumer electronic products, including TV’s, VCR’s, set-top boxes and DVD players. A summary of our major device offerings is included below.

8-bit Microprocessor Families. Our globally recognized microprocessors include the Z80, the Z8, the Z8 Encore! and the eZ80 Acclaim!. The Z8, Z8 Encore! and the eZ80 Acclaim! are primarily used in microcontrollers only, whereas the eZ80 is used in a microcontroller and as a stand-alone microprocessor.

Memory modules for microcontrollers. Various types of memory may be integrated around the microprocessor core, including ROM, OTP and flash. ROM products are the lowest-cost option for high volume products with stable software, but changes to the customer’s application code are time consuming and costly due to the need to produce a new mask. OTP products allow for custom programming by customers and enhance time to market and flexibility for frequent software updates in the customer’s design process, but the products are not programmable post-production. Flash memory offers the flexibility of in-product re-programmability. A flash based device can be reprogrammed, even after sale to an end customer, to upgrade or add features in the end product. Due to this feature and decreasing flash memory prices, this is an increasingly important segment of the 8-bit market to our customers. It has been identified by Semico Research as the fastest growing segment of the 8-bit market. Consequently, we have focused the majority of our new product development efforts on flash-based 8-bit microcontrollers.

Peripheral Functionality. As described above in connection with our microprocessor cores, we integrate a range of peripheral functions onto the chip. Such peripherals include timers, serial communication devices, analog/interface devices, infrared devices and display drivers.

Our other devices are primarily focused on serial communications for voice and data transmission in the telecommunications market and low speed modems for a broad range of markets including point of sale and set-top box applications. Additionally, other devices include IrDA transceivers for use in PDAs, cell phones and laptop computers. We are not expending significant resources developing technologies related to these other devices. These devices are being incorporated as features in our eZ80 Acclaim! and Z8 Encore! microcontroller families.

Until the closure of our MOD II wafer fabrication facility in July 2004, we provided wafer foundry services to third parties. Since the closure of MOD II, sales of wafer foundry services have been minimal and we no longer provide such services.

Our Developer Studio, which we call ZDS, is a stand-alone software development environment, which provides a comprehensive development solution for embedded designers and incorporates our sophisticated line of development tools. ZDS integrates a language-sensitive editor, project manager, highly optimizing ANSI C-compiler, assembler, linker and symbolic source-level debugger that support our entire portfolio of micrologic devices. ZDS provides an industry standard user interface running on Windows-based operating systems and features an integrated set of windows, document views, menus and toolbars that enable developers to create, test and refine applications in a familiar and productive environment.

ZDS II is the next generation descendent of ZDS that has been enhanced to meet the challenges of our more sophisticated developers. ZDS II supports a scripting engine for more flexible user-configuration and automated regression testing. ZDS II also supports a new communication layer allowing it to interface with third-party emulation products as well as our new ZPAK II high-speed emulation and evaluation hardware interface.

Many independent companies develop and market application development tools and systems that support our product architectures. Although we generate less than 1% of our revenues from the sale of development tools, we believe that familiarity with, and adoption of, development systems offered by ourselves as well as third-party vendors will be an important factor when considering ZiLOG as the vendor of choice by new product developers.

We use a total marketing approach to build relationships with key OEMs, distributors and end users in a broad array of end markets. Our top OEM customers, determined by shipment dollars for 2004, include Delphi, Delta, Echostar (Dish Satellite TV brand), Emerson, Hypercom, Philips, Samsung, Thomson Consumer Electronics (GE and RCA brands) and Tyco.

To market our products, we utilize a well-trained and highly-skilled direct sales and distribution sales force, a customer-centric website, technical documentation that includes product specifications and application notes, development tools and reference designs, sales promotional materials, targeted advertising and public relations activities, and involvement in key trade shows and technical conferences in North America, Europe and Asia. Our direct sales force and our sales representatives cover various geographic locations in the Americas, Europe and Asia.

We work closely with our customers in identifying opportunities for the customer to pursue end product designs using our devices. The customer’s decision to design an end product using our devices is based upon

several technical and financial factors, including microprocessor performance, memory, peripheral options, pre-existing customer relationships, financial stability and pricing. Typically, a customer’s product architects and design engineers will then use our proprietary development tools over a period of many months or longer to design an end product and test the design using our devices before making a decision.

We classify a design win as the point at which the customer has purchased at least $1,000 of product. Once we have achieved a design win we deliver a limited production of the device to our customer. Product prototypes are then created and tested. If the decision is made to produce the product for sale, we will receive a full production order. The entire cycle from design win to full production typically takes between 12 and 18 months, although it may take up to 36 months. After a design win, our sales are generally made pursuant to short-term cancelable purchase orders that can be cancelled upon 30 to 60 days notice. As a result, design wins are not necessarily an accurate or reliable indication of future net sales.

Our direct sales force focuses on the Americas, Europe and Asia. We have sales offices located in the metropolitan areas of Irvine, Philadelphia, San Jose, Seattle, Hong Kong, London, Munich, Seoul, Shanghai, Shenzhen (China), Singapore, Taipei and Toronto. During 2004, we derived approximately 47% of our net sales from direct sales to OEMs, compared to 42% in 2003 and 51% in 2002. During 2004, we engaged 26 independent sales representative firms to further augment our own direct sales force.

We provide direct customer support through our field application engineers, who are located in our sales offices around the world and work directly with local customers in close consultation with our factory-based technical specialists. Field application engineers typically develop technology expertise in a market segment that is most prominent in their geographic areas. These engineers provide significant aid to the customer throughout the design process. Customer support in the Americas is being provided by our North American-based personnel. Our local area sales offices handle customer service functions for Asia and Europe.

In 2000, we announced an exclusive full-service distribution agreement with Pioneer-Standard in North America, and we terminated our existing relationships with our three then-largest distributors in North America: Arrow Electronics, Future Electronics and Unique Technologies. Our distribution agreement with Pioneer permitted either party to terminate without cause upon thirty days’ prior notice. By letter dated September 19, 2002, we notified Pioneer of our intent to terminate the distribution, and the termination became effective as of October 23, 2002. Pioneer-Standard accounted for no net sales in 2004 and 2003, and approximately 12.9% of our net sales during 2002.

We then entered into a distributor agreement with Future Electronics, effective October 23, 2002. This agreement provides that Future Electronics will be our exclusive full-service distributor within North America and will also serve as a non-exclusive distributor for the rest of the world. Either party may terminate the agreement upon 30 days’ prior written notice to the other party. Future Electronics is a private Canadian-based company with an extensive and well-integrated international distribution infrastructure. Their ability to cover a broad spectrum of market opportunities, especially in embedded flash-based products, continues to provide significant value and opportunities for our new flash portfolio. Future Electronics’ value-added services to us have not increased our costs, and include a significant number of sales representatives focused on our business, co-operative trade advertising, seminars and workshops to train design engineers about our products, direct mail advertising, collateral materials and web site pages dedicated to our products. For these reasons, among others, we replaced Pioneer-Standard with Future Electronics as our exclusive North American distributor. Net sales through our distribution channel represented 50%, 47% and 44% of our net sales in 2004, 2003 and 2002, respectively. In 2004 and 2003, Future Electronics accounted for approximately 21% and 18% of net sales, respectively.

Our manufacturing strategy is to utilize third-party wafer foundries to manufacture our devices. We believe outsourcing manufacturing enables us to access advanced process technology, reduce our research and development costs and reduce our manufacturing costs. We source our wafer requirements from several outside foundries located in Taiwan and the United States. Our assembly operations are performed by subcontractors located throughout Asia including Indonesia, Thailand and the Philippines, while a significant amount of our wafer probe and final product testing is conducted at our facility in the Philippines.

The SGS International Certification Services AG of Zurich, Switzerland granted an ISO 9001 certification to our Philippines test facility. ISO certifications reflect the stringent quality standards to which all of our products are manufactured. We believe that these certifications enhance the reputation and quality of our products.

Our research and development expenditures have been focused largely on our next generation of flash-based microcontrollers, including our Z8 Encore! and eZ80 Acclaim! families of products. Our focus in the future is to broaden our capabilities by adding new and improved features such as enhanced memory and optimized power consumption and developing products for targeted consumer, automotive and industrial verticals.

Research and development expenditures were $20.9 million, $18.0 million and $17.9 million in 2004, 2003 and 2002, representing 22%, 17% and 13% of net sales, respectively. In 2004, 2003 and 2002, our research and development expenditures were focused largely on new product development of our Z8 Encore! and eZ80 Acclaim! product families within our micrologic devices group and our Crimzon family of remote control products.

The semiconductor industry 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 resources than we do with which to pursue engineering, manufacturing, marketing and distribution of their products. Emerging companies are also expected to increase their participation in the semiconductor market.

We compete with other micrologic device manufacturers who target the same specific market segment. We believe the primary bases for competition in this market include: price, technological sophistication, customer relationships, support tools, familiarity with micrologic architecture, and existing customer investment in system software based on a particular architecture. In many instances our competitors have similar competitive strengths to us, and they have significantly more resources than we do. Many of our competitors are much larger than we are, with broad product offerings in many sectors.

Our current and future products compete with, or may compete with, products offered by Atmel, Cypress Semiconductor, Intel, Microchip, Freescale, National Semiconductor, Renasas, STMicroelectronics and Texas Instruments, among others.

Our total backlog of cancelable customer orders was $13.6 million at December 31, 2004, $10.0 million at December 31, 2003 and $10.6 million at December 31, 2002. Our sales are generally made pursuant to short-term cancelable purchase orders that are cancelable upon 30 to 60 days notice rather than long-term contracts. As a result, our backlog may not be an accurate measure of net sales or operating results for any period. Additionally, during times of economic downturn there tends to be excess capacity in the marketplace, driving shorter lead time expectations, which often results in a higher percentage of book-ship (or turns) business in the quarter.

We currently have approximately 170 foreign and domestic patents which expire between 2005 and 2025.

We employ a combination of patents, copyrights, mask-work rights, trademarks and trade secrets, as well as contractual restrictions, to protect the proprietary aspects of our business and devices. In addition to our own intellectual property, we license technologies and products from others as necessary to provide second sources for standard products or to obtain rights to cores, cells or other technology. We often enter into agreements to incorporate into our designs the intellectual property of third parties. Such agreements may impose certain obligations or limitations on our use or disclosure of such intellectual property or the enforcement of our own intellectual property. We hold numerous U.S. and foreign patents and have additional U.S. and foreign patent applications pending. We also hold numerous mask work registrations, registered copyrights to protect proprietary software employed in our devices, and trademarks. We intend to continue investing in the protection of our intellectual property through the filing of patent applications and, if appropriate, the registration of copyrights, mask-works and trademarks. Nevertheless, we believe that our continued success depends primarily on the technological skills and innovative abilities of our personnel and our ability to rapidly commercialize product developments. Thus, we believe that the loss of any one of our patents or trade secrets would not materially affect our core business.

The extent and value of our intellectual property is necessarily uncertain. While we intend to protect our intellectual property rights vigorously, our efforts 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.

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 have 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.

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. Conversely, we also enforce our intellectual property rights where appropriate, consistent with business considerations.

As of December 31, 2004, we had 509 full time employees, comprised of approximately 258 people in manufacturing-related activities; 128 in engineering; 79 in sales and marketing; and 44 in general and administrative functions.

Our now closed manufacturing facilities required substantial use of various hazardous substances, and, as a result, we are subject to a variety of governmental laws and regulations related to the storage, use, emission, discharge and disposal of such substances, including the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act, the Clean Air Act and the Water Pollution Control Act. Although we cannot provide assurances, based on currently available information and our past experience, we do not believe that compliance with environmental laws will have a material impact on our business.

We filed a pre-packaged Chapter 11 reorganization plan with the United States Bankruptcy Court for the Northern District of California on February 28, 2002. The court confirmed the plan on April 30, 2002, and it became effective on May 13, 2002.

Pursuant to our reorganization plan, we extinguished $325.7 million of liabilities, which included $280.0 million in principal amount of our former 9¹/2% Senior Secured Notes due 2005, $27.2 million in accrued interest due on the notes and $18.5 million of dividends payable on our former series A preferred stock. Each holder of senior notes received, in exchange for its senior notes, its pro rata share of:

Our previously outstanding common stock and preferred stock, and all related options and warrants, were also cancelled pursuant to the terms of the reorganization plan, and all accumulated dividends and any other obligations with respect to such shares were extinguished. Each holder of common stock received a pro rata share of $50,000. Each holder of preferred stock received a pro rata share of $150,000. As a result of this reorganization, we saved more than $26.6 million in annual interest payments on the extinguished senior notes.

We issued our senior secured notes in connection with our going-private transaction in 1998. From 1998 through 2002, our business and financial growth were negatively affected by the extremely difficult business climate in which we operated.

In March 2001, we retained Lazard Frères & Co., LLC as our independent financial advisor to assist us in exploring a number of strategic alternatives. Also in March 2001, Lazard began the process of soliciting bids for the sale of all or parts of our business. While we received a number of proposals, each of these contained significant financing or due diligence contingencies. After consultation with our financial advisor, we determined that these contingencies could seriously jeopardize the likelihood that a strategic transaction could be consummated.

In July 2001, holders of senior notes who collectively held or managed approximately $165.0 million in principal amount of our senior notes formed an informal group to discuss and negotiate the terms of a possible restructuring with us. All members of this group executed confidentiality agreements, and on July 13, 2001, members of our management met with these holders and their counsel to discuss a possible restructuring.

Discussions continued over the course of the summer and fall of 2001. During the course of these discussions, we concluded that the best vehicle to achieve a restructuring of our senior notes was through consummation of a voluntary pre-packaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code. On November 27, 2001, we reached a non-binding agreement regarding the terms of the reorganization plan with this informal group of our note holders.

On January 28, 2002, we commenced solicitation of acceptances of the plan of reorganization from the holders of our senior notes and preferred stock. As permitted by bankruptcy court rules, we did not solicit votes from holders of our old common stock. In connection with this solicitation, we entered into lock-up agreements with members of the informal group. Under the lock-up agreements, the members of the informal group agreed, among other things and subject to certain conditions, to vote to accept the plan of reorganization.

The voting period for the solicitation ended on February 26, 2002. Holders of approximately $221.0 million of our senior notes accepted the plan of reorganization. None of the holders rejected the plan. All of the holders of preferred stock who voted also accepted the plan of reorganization.

On February 28, 2002, MOD III, Inc. and we filed voluntary petitions with the United States Bankruptcy Court for the Northern District of California for reorganization under Chapter 11. The bankruptcy court confirmed the reorganization plan by its order entered on April 30, 2002, and the reorganization plan became effective on May 13, 2002.

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K, and all amendments to those reports are available free of charge on the Company’s website through www.zilog.com, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Information contained on our web site is not part of this annual report on Form 10-K.

Alternatively, you may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549 or access the information on the SEC’s website at http://www.sec.gov. Additional information regarding operation for the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

In addition, you may request a copy of these filings (including exhibits) at no cost by writing us at our principal offices at 532 Race Street, San Jose, CA 95126, attention: Investor Relations, or by calling (408)-558-8500.

Our corporate headquarters are located in a 41,000 square foot facility in San Jose, California, which we have leased through January 31, 2007. We currently own an 118,000 square foot building and 32-acres of land located in Nampa, Idaho, which we call MOD II. In July 2004, MOD II manufacturing operations ceased and in October 2004 we sold the majority of our manufacturing equipment which was located within the MOD II facility. The MOD II land and buildings are currently held for sale.

In May of 2004, we entered into a 5-year lease for a 15,500 square foot facility in Meridian, Idaho, which can be extended at our option for an additional 3 years. This facility, which is our Idaho Technology Center, supports our foundry supplier partnerships, product and design engineering, failure analysis and customer manufacturing support activities.

In February of 2004, we entered into a 3-year lease for a 5,900 square foot facility in Shanghai, China, which can be extended for an optional term with 3 months advanced notice. This facility, which is our China Design Center, supports our design engineering and development activities, focused on the expanding Asian market.

In May of 2000 we entered into a 5-year lease for a 10,170 square foot facility in Bangalore, India. In December 2004 we leased an additional 5,760 square feet in this facility for 3 years, which can be extended at our option for an additional two terms of 3 years. This facility, which is our India Design Center, supports our software engineering and tools development activities.

A majority of our product testing, inventory warehousing and logistics resides in a 64,000 square foot facility located in the Philippines. In October 2003, we executed a new lease agreement for the Philippines facility through March 2009. In addition, we have short-term leases for sales offices located in the U.S., Canada, England, Germany, Korea, Malaysia, the People’s Republic of China (including Hong Kong), Singapore and Taiwan. We believe that our properties currently are adequate to meet our needs.

In January 2002, we closed our MOD III facility, which is approximately 158,000 square feet. In connection with our plan of reorganization, we transferred the assets of the MOD III facility to MOD III, Inc. MOD III, Inc. has sold substantially all of its manufacturing assets for $26.0 million and is holding the rest of the facility for sale. The holders of our former senior notes received $20.2 million in net proceeds of this sale, net of $0.9 million of transaction expenses and $4.9 million of reimbursable expenses paid to us and accounted for as a reduction in our special charges. These holders will receive the next $17.0 million of net proceeds (plus dividends accruing on the remaining $17.0 million of preferred stock from September 2004 at a rate of 9.5% per annum) from the sale of the remaining assets, and the proceeds above this amount are split evenly between them and us. Based upon the sale price received for the majority of MOD III, Inc.’s assets, we do not expect to receive any value from our Series B Preferred stock.

On February 17, 2005, we received an unfavorable arbitration judgment related to a contract dispute with one of our former employees totaling approximately $0.2 million. This judgment has been reflected in our financial statements at December 31, 2004, as an increase to accrued liabilities and in general and administrative expenses.

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. We believe 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.

On December 17, 2003, the 2004 Omnibus Stock Incentive Plan (the “2004 Plan”) was adopted by the compensation committee of our board of directors and approved by our stockholders on February 12, 2004. The 2004 Plan became effective on March 10, 2004. The committee may grant incentive stock options (ISO”), non-statutory stock options (“NSO”) or restricted shares to certain employees, officers, directors, advisors and consultants who may purchase up to 1,500,000 shares of our common stock, par value $0.01 per share under the 2004 Plan.

On December 17, 2003, the 2004 Employee Stock Purchase Plan (“2004 ESPP”) was adopted by the compensation committee of our board of directors and approved by our stockholders on February 12, 2004. The 2004 ESPP became effective on May 15, 2004. A total of 1,250,000 shares of common stock have been reserved for issuance under the 2004 ESPP to eligible employees. At December 31, 2004 a total of 52,217 shares of our common stock have been purchased under the 2004 ESPP, leaving a total of 1,197,783 shares available to be purchased.

On February 18, 2004, the Board of Directors approved a reverse stock split in which every two shares of common stock was converted into one share of common stock, effective March 1, 2004. All common shares and per-share figures presented herein have been retroactively restated to reflect this one-for-two reverse stock split. In addition, we reclassified $200,000 from “Common stock” to “Additional paid-in capital” in the Company’s balance sheet at both December 31, 2003 and 2002.

On March 12, 2004, our common stock was listed for trading on the NASDAQ National Market with a ticker symbol of ZILG. On March 18, 2004, and subsequently April 6, 2004 through exercise of over allotment, we raised approximately $24.4 million through the sale of 2,252,100 shares of our common stock at a price of $12.50 per share in a public offering of our stock. Subsequent to our May 2002 financial restructuring and prior to our March 2004 stock offering, our stock was traded on the OTC-Bulletin board.

Our common stock commenced trading on the NASDAQ National Market on March 12, 2004 under the symbol “ZILG.” Previously, our common stock traded on the Over-the-Counter Bulletin Board. The following table sets forth the high and low last trading prices by quarter on the Over-the-Counter Bulletin Board or the NASDAQ National Market (as adjusted to give effect to our reverse stock split), as applicable.

The following is a summary of the shares reserved for issuance pursuant to outstanding options, rights or warrants granted under our equity compensation plans as of December 31, 2004:

See Note 17 of the notes to the consolidated financial statements for a discussion of related party transactions. As of December 31, 2004, we had approximately 8 holders of record of our common stock. We have not paid any dividends and currently intend to retain any future earnings for investment in our business. We may be restricted from paying any cash dividends on our common stock by the terms of the agreement governing our senior secured revolving credit facility, as described under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

You should read the following selected consolidated financial data set forth below in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the notes to those statements appearing elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended December 31, 2004 and 2003, the eight months and four months ended December 31, 2002 and April 30, 2002, respectively, and the consolidated balance sheet data as of December 31, 2004 and 2003 are derived from our respective consolidated financial statements included elsewhere in this Form 10-K which have been audited by KPMG LLP, an independent registered public accounting firm. KPMG LLP’s report on our December 31, 2004 consolidated financial statements contains two explanatory paragraphs. The first paragraph relates to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and the second paragraph refers to the adoption of “fresh-start” reporting in accordance with Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.”

Upon emergence from Chapter 11 proceedings, we adopted fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code,” or SOP 90-7. In connection with the adoption of fresh-start reporting, our reorganization value has been allocated to our assets and liabilities on a basis which is substantially consistent with the purchase method of accounting. Our financial statements for periods subsequent to adoption of fresh-start reporting are not comparable with those prepared before our plan was confirmed because they are, in effect, those of a new entity. Consequently, the consolidated balance sheet data at December 31, 2003, December 31, 2002 and at May 1, 2002 is labeled “Successor Company,” and reflects the effect of our reorganization plan and the associated fresh-start adjustments. Periods presented prior to May 1, 2002 have been designated “Predecessor Company.” Note 3 to our consolidated financial statements, included elsewhere in this Form 10-K, provides a reconciliation of the Predecessor Company’s consolidated balance sheet from April 30, 2002 to that of the Successor Company on May 1, 2002.

Although our plan of reorganization became effective on May 13, 2002, for financial reporting purposes, the effective date of our plan of reorganization is considered to be April 30, 2002.

A black line has been drawn between the accompanying financial statements to distinguish for accounting purposes between the Successor Company and the Predecessor Company.

We have included in-process research and development and goodwill amortization within “research and development” and “special charges and reorganization items,” respectively, of the Predecessor Company statements of operations, whereas these items are each disclosed separately in the Successor Company’s consolidated statement of operations data. The 2002 Consolidated Statement of Operations has been combined as a matter of convenience. The combined results are not meant to be a presentation in accordance with generally accepted accounting principles due to the change in basis resulting from the completion of the reorganization plan and the application of fresh-start accounting during the period.

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 Form 10-K.

The following is management’s discussion and analysis of financial condition and results of operations of the Company and its subsidiaries for the years ended December 31, 2004, 2003 and 2002. This discussion and analysis should be read in conjunction with the section entitled “Selected Consolidated Financial Data” and the consolidated financial statements and notes thereto included elsewhere herein. 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 EBITDA as a measure of liquidity in our filings with the Securities and Exchange Commission, earnings releases and investor conference calls. We believe the disclosure of such information helps investors more meaningfully evaluate the results of our ongoing operations. However, we recommend that investors carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and our quarterly earnings releases, compare GAAP financial information with the pro forma financial results disclosed in our quarterly earnings releases and investor calls, 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 year, which ends on December 31 of each year.

Founded in 1974, we are a global supplier of 8-bit micrologic semiconductor devices. We design, develop and market various families of devices in this market segment. Using proprietary technology that we have developed over our 30-year operating history, we provide semiconductor integrated circuit devices that our customers design into their end products. Our devices often include related application software and typically combine a microprocessor with memory and various peripheral functions on a single device. Our products enable a broad range of consumer and industrial electronics manufacturers to control the functions and performance of their products. For example, some typical applications include devices that control the speed of a motor, infrared remote controls, security systems and battery chargers. In addition to our micrologic devices, we sell other integrated circuit devices that have a wide variety of uses including the processing and transmission of information for communications and consumer electronics products. These devices include serial communication controllers, modems, IrDA transceivers, television display controllers and personal computer peripheral controllers. Historically we have also performed wafer fabrication foundry services for third parties, which were terminated in 2004.

Prior to February 1998, our common stock had been publicly traded on the New York Stock Exchange. On February 27, 1998, we consummated a leveraged merger with an affiliate of Texas Pacific Group. In connection with that transaction we issued $280 million of our former 9¹/2% Senior Secured Notes due 2005 that required us to make semi-annual interest payments of $13.3 million, and we ceased having publicly traded equity securities. From 1998 until 2001, our business focus and research and development efforts moved from the traditional 8 bit microcontroller market to development of a Cartezian family of 32-bit micrologic products targeted for use in the data communication and telecommunications end markets.

Commencing in 2000, our business and financial growth was negatively affected by the extremely difficult business climate brought on by the severe downturn in the technology and semiconductor industries. As a result of a rapid deterioration in the communications hardware market during the second half of 2000, our Cartezian family of products was never ultimately brought to market.

Like many companies in our industry, during the fourth quarter of 2000 we began to experience declining sales. During the first half of 2001 our previous CEO resigned and our current CEO, Jim Thorburn, was brought in to restructure our operations, financials and product portfolio with the goal of eliminating the debt and positioning the Company for growth through an equity offering. Under the leadership of Jim Thorburn, we implemented a three-phase plan with the objective of establishing and maintaining financial stability, reclaiming the Company’s traditional 8 bit microcontroller markets and customers and, investing in innovative products.

In 2001, we explored a number of strategic alternatives with the assistance of our financial advisor, Lazard Frères & Co., LLC, and an informal group of holders of our senior notes. We concluded that the best vehicle to achieve a restructuring of our senior notes was through consummation of a voluntary pre-packaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code. On January 28, 2002, we commenced solicitation of acceptances of a joint plan of reorganization, which set forth a plan to reorganize our company and our subsidiary, ZiLOG-MOD III, Inc.

On February 28, 2002, we and our subsidiary, ZiLOG-MOD III, Inc., which we call MOD III, Inc., filed voluntary petitions with the United States Bankruptcy Court for the Northern District of California for reorganization under Chapter 11. The bankruptcy court subsequently confirmed MOD III, Inc.’s and our joint reorganization plan by its order entered on April 30, 2002. The joint plan of reorganization became effective on May 13, 2002, but for financial reporting purposes we use May 1, 2002, as the date of emergence from bankruptcy. We refer to the company prior to emergence from bankruptcy as the “Predecessor Company” and to the reorganized company as the “Successor Company.”

Pursuant to the joint reorganization plan, we extinguished $325.7 million of liabilities, which included $280.0 million principal amount of our former 9¹/2% Senior Secured Notes due 2005, $27.2 million in accrued interest due on the notes and $18.5 million of dividends payable on our former series A preferred stock. The former note holders received substantially all of our new common stock and a liquidation preference in the net proceeds on the sale of the assets held by MOD III, Inc. On May 1, 2002, we adopted “fresh-start” reporting proscribed by the American Institute of Certified Public Accountant’s Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” and on that date the Predecessor Company recorded a $205.7 million net gain on discharge of debt.

For additional information regarding our 2002 reorganization and the subsequent implementation of fresh start reporting pursuant to Statement of Position 90-7 refer to the captions below under “2002 Financial Restructuring and Reorganization” and “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

On March 12, 2004, our common stock was listed for trading on the NASDAQ National Market with a ticker symbol of ZILG. On March 18, 2004, and subsequently April 6, 2004 through exercise of the underwriters’ over allotment, we raised approximately $24.4 million through the sale of 2,252,100 shares of our common stock at a price of $12.50 per share in a public offering of our stock. Subsequent to our May 2002 financial restructuring and prior to our March 2004 stock offering, our stock was traded on the OTC-Bulletin board.

On April 16, 2004, we announced the closure of our MOD II five-inch wafer manufacturing facility in Nampa, Idaho. In association with this decision, we recorded net special charges of $6.9 million reflecting the impairment of long lived assets and costs to cease operations, and $1.8 million for employee severance costs. MOD II production ceased on July 9, 2004 whereby the majority of the products previously manufactured in MOD II were transferred to X-FAB, in Lubbock, Texas. We are now operating under our stated strategy as a fabless semiconductor company. In the fourth quarter of 2004, we received net proceeds of $5.9 million and recorded a net gain of $1.7 million from the sale of substantially all of the MOD II wafer manufacturing equipment to STMicroelectronics.

On September 24, 2004, we received $4.8 million after the completion of the sale of substantially all of MOD III’s manufacturing equipment to STMicroelectronics as reimbursement for certain costs of maintaining the assets of MOD III, Inc. in a salable condition (such reimbursement is included within the caption “special charges”).

On April 17, 2003, our Board of Directors approved a stock repurchase program under which we could repurchase up to 500,000 shares of our outstanding common stock.

We generally had the right of first refusal to repurchase shares of common stock issued under our stock plan to certain employees, former employees and contractors which expired on March 12, 2004. We had the right of first refusal which could have been exercised when such shares were offered for sale or upon termination from employment.

As of December 31, 2004, the Company had repurchased 405,164 shares under this program at an aggregate cost of $2.3 million.

On July 29, 2004, our Board of Directors approved the 2004 stock repurchase program pursuant to which we could repurchase up to $5.0 million in market value of our outstanding shares of common stock. Pursuant to the program, during 2004 we purchased 572,100 shares of our common stock at a net aggregate cost of $4.4 million.

On November 17, 2004, the board of directors, in conjunction with Mr. Burger’s resignation, approved the repurchase of 92,735 shares of common stock from Mr. Burger at a fair market purchase price of $6.20 per share in consideration for the repayment of his loans payable to us totaling $0.6 million.

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.

On the completion of our financial debt restructuring and emergence from Chapter 11 proceedings in May 2002, we adopted fresh-start reporting in accordance with SOP 90-7. Accordingly, for financial reporting purposes, we valued our assets and liabilities at fair value. With the assistance of our independent financial advisor, Lazard Frères & Co., LLC, and in reliance upon various valuation methods, and other applicable ratios and economic industry information relevant to our industry and through negotiations with various creditor parties in interest, we estimated our equity value to be $90.0 million as of May 13, 2002. This estimate of equity value was derived from a weighted average of three separate valuations methodologies: the first based on a comparable public company analysis; the second based on precedent transaction analysis; and the third based on a discounted cash flow analysis. For the purposes of the comparable public company analysis, Lazard analyzed the trading multiples of numerous public companies in the semiconductor industry, including Semtech, Globespan and Mitel, amongst others as at May 13, 2002. The comparable public company analysis yielded a valuation range of $70-$87 million; Lazard weighted this analysis 35% in its estimated valuation. The precedent transaction analysis yielded a valuation range of $88-$109 million; Lazard weighted this analysis 30% in its estimated valuation. The discounted cash flow analysis yielded a valuation range of $82-$106 million. In determining the discounted cash flow valuation range, Lazard considered three years of financial projections based on management’s best estimates at the time, with terminal values ranging from six to eight times the final year’s cash flow, and utilizing a discount factor of 28%. Lazard weighted this analysis 35% in its estimated valuation. These valuations were based on the underlying assumptions and limitations set forth in their report. These assumptions include: the successful reorganization of our business and finances in a timely manner; the implementation of our business plan as a reorganized entity; the accuracy of information supplied by management about our cash flow projections; achievement of forecasted projections; market conditions as of December 31, 2001 continuing through an assumed effective date of March 31, 2002; and the plan of reorganization becoming effective in accordance with the estimates and assumptions upon which the valuation was based.

In connection with the overall revaluation of our assets and liabilities under fresh-start reporting, described above, we recorded a net gain of $83.7 million. The increases in the carrying value of our intangible assets were based on three valuation approaches, depending on the specific intangible asset to be valued: the income approach, the cost approach and the market approach. The increases in carrying value of our tangible assets were based on physical inspections and written appraisals that included market data and cost approaches. Results would have varied under different assumptions or conditions.

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, price adjustments taken by distributors but not processed by us 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.

At December 31, 2004, we identified a material weakness over our accounting for distributor reserves (See Item 9A)

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, 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 deteriorates, 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.

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 reserve work-in-process inventories based upon aging and finished goods inventory quantities in excess of our current backlog or expected customer demand. In addition to analyzing the results of our reserve algorithm calculations, we also review known exposures, market conditions and other relevant factors to determine whether our inventory reserves are appropriate based on our best estimates. Reserves for 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.

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:

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 and brand name, as well as excess enterprise value, or goodwill. The existing technology and brand name are being amortized based on a pattern-of-use method in proportion to the discounted cash flows from such assets. The goodwill is not subject to amortization.

We evaluate existing technology and brand name whenever events and circumstances indicate that their fair value may be less than their carrying value. Additionally, goodwill is tested for impairment at least annually and more often if events and circumstances indicate that its fair value may be less than its carrying value. We performed the annual impairment test for goodwill in the third quarter of 2004, and we plan to perform this test 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.

Beginning in May 2002, we have 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.

Our results of operations after May 1, 2002 and our consolidated balance sheets at December 31, 2003, December 31, 2002 and May 1, 2002 are not comparable to our results of operations prior to May 1, 2002 and our consolidated balance sheet at December 31, 2001, due to our adoption of “fresh-start” reporting upon our emergence from bankruptcy. Differences in our results of operations relate to depreciation of property, plant and equipment, amortization of intangible assets, interest expense and restructuring and reorganization expenses. Additionally, these differences in our balance sheets relate to inventory, in-process research and development, property, plant and equipment, intangible assets, conversion of senior notes to common stock, and minority interest. Certain figures, such as net sales and certain expenses were not affected by our adoption of fresh-start accounting and, accordingly, we believe them to be comparable. To provide a more meaningful analysis, in the following discussion we have compared combined results of our Predecessor and Successor Company’s operations for fiscal year 2002 to the Predecessor Company’s results for fiscal year 2001. Our combined results for 2002 are presented for convenience of annual comparison and are not meant to be a presentation in accordance with generally accepted accounting principles.

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

Since 2001, we have implemented an overall business restructuring program aimed at refocusing on our core 8-bit micrologic device portfolio and moving to a fabless manufacturing model. In connection with these actions, we have eliminated a significant amount of fixed costs from our business operations. Additionally, pursuant to our plan of reorganization, which became effective on May 13, 2002, we extinguished $280.0 million in principal value of our former 9.5% Senior Secured Notes and eliminated the associated interest that would have been payable thereon.

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

We calculate each of these key metrics based on annual 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. At December 31, 2004, DSO’s were 38 days as compared to 46 at December 31, 2003. The December 31, 2004, DSO’s reflect a higher mix of distribution customers that generally tend to pay faster than larger OEM customers.

Net sales to inventory ratio is a metric we use to analyze how quickly our investment in inventories is recovered by our sales. This metric may not be comparable to those other companies use to analyze inventory and is not the same as a typical inventory turns ratio. Our net sales to inventory ratio decreased to 8 times annual sales in 2004 reflecting additional inventories built in conjunction with the closure of our MOD II manufacturing facility in July, 2004.

Weeks of inventory at distributors measures the level of inventories on hand at our distributors relative to their end sales to their end customers and as such is relative to the levels of sales we record for distribution sales. We do not recognize revenue on shipments to distributors until our distributors resell our products to end users. We generally target 10 to 13 weeks of inventory in the distribution channel to allow these distributors to react to market demand and buffer the cycle time of reordering new product from us and awaiting delivery.

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.

Since 2001, we have refocused our business on our core 8-bit micrologic portfolio of devices, and de-emphasized certain product offerings in our other devices business line. Beginning in 2002 we have introduced new products targeted at the growing 8 bit embedded flash microcontroller market lead by our Z8 Encore! and eZ80Acclaim! families of products. Revenue from product sales to OEM customers is recognized upon title transfer, which generally occurs upon shipment, net of appropriate allowances for returns and warranty costs that are recorded at the time revenue is recognized. The Company recognizes revenue on sales to distributors who have rights of return and price protection on unsold merchandise held by them when products are resold by the distributors to end-users, or as we refer to it, on the sell through method.

Net sales were $95.6 million in 2004 as compared to net sales of $103.6 million in 2003. Excluding foundry services, net sales for our base business was $92.0 million for 2004 as compared to $92.5 million in 2003. Micrologic sales increased modestly in 2004 over 2003 which included an increase in net sales of our new flash-based products from $1.1 million in 2003 to $3.2 million in 2004. We experienced a decline in unit sales during the second half of 2004 as compared to sales in the first half of 2004, primarily due to softening customer demand for our non-flash products and exiting the foundry services business. Our overall net sales in the second half 2004 were $41.7 million, compared to net sales of $53.9 million in the first half of 2004. Additionally, net sales of our embedded flash products continue to be difficult to predict, due in part to the uncertain length of time for our customers to commit their product designs into production and thereby generate net sales of our devices.

Net sales of our other devices totaled $23.7 million in 2004, as compared to $24.5 million or in 2003. Sales of our other devices were down slightly in 2004 reflecting some reductions in modems, IrDA and TV offset by an increase in our serial communications controller products reflecting generally higher prices on this broad based portfolio of communications type products.

Generally, the decrease in net sales in 2004 reflects a reduction in foundry services sales. In July, 2004 we closed our MOD II wafer manufacturing facility and as such no longer offer foundry service products. These

sales were primarily to one customer and were opportunistic in an endeavor to increase utilization of our wafer fabrication facility and lower the overall costs of wafers manufactured. We incurred no R&D in support of these activities and had no direct involvement with the customer in design of these products.

Net sales were $103.6 million in 2003 as compared to net sales of $139.6 million in 2002. This decrease in net sales in 2003 reflects lower unit shipments for both our micrologic and other devices business lines. The net sales decline for our micrologic devices business line in 2003 compared to 2002 reflects overall lower market demand partially as a result of our customers moving from our older Z80 and Z8 device applications to alternative technologies provided by our competitors. These alternative microcontroller products are generally embedded flash based technology products. In November 2002 and February 2003, we released our new Z8 Encore! and eZ80Acclaim! products, respectively, that are focused on this flash-based microcontroller market. Our strategy is to recapture sales to these customers and enter new markets with our new products. As stated, we began to see this in our micrologic sales in 2004.

Net sales of our other devices totaled $24.5 million in 2003 as compared to $41.4 million in 2002. This decrease primarily reflects:

Net sales from our foundry services in 2003 were $11.1 million as compared to $7.9 million in 2002. As stated previously, subsequent to the closure of our MOD II manufacturing facility in Nampa, Idaho in July, 2004, foundry sales have been insignificant.

Our cost of sales primarily represents the cost of producing our products, including wafer fabrication, assembly and test expenditures. Cost of sales fluctuates, depending on materials and services prices from our vendors, manufacturing efficiency and productivity of our test operation, product mix, and product yield performance. Gross margin as a percent of net sales was 45.4% in 2004 as compared to 46.7% in 2003, and 41.8% in 2002. Our gross margin in 2004 includes the impact of lower margins on the new embedded flash products as well as a $2.5 million charge primarily related to excess inventories built in support of the closure of our MOD II manufacturing facility. Details of these items are discussed below:

The improvement in 2003 gross margin percentage of 46.7% as compared to 41.8% in 2002 was primarily due to a $3.9 million fresh-start charge recorded in 2002 to reflect the value in work in process inventories in accordance with SOP 90-7 and improved manufacturing efficiencies in our wafer fab and test operations during 2003.

We have focused on manufacturing cost controls, yield enhancements and price management. We have continued to consolidate and streamline our manufacturing activities closing our 8-inch MOD III wafer facility in January, 2002 and our 5 inch MOD II wafer facility in July, 2004. We are now fully fabless, and outsource all of our wafer manufacturing needs from our foundries in the United States and Taiwan. Additionally, we now have greater flexibility to use lower geometry fab processes from our suppliers to redesign and reduce the physical size of our older non-flash products which should allow us to improve our margins on such products and may even allow us added access to the lower priced Asian markets for these products.

We have continued to multi-source our product assembly activities with several Asian suppliers to enhance our supply source flexibility and obtain favorable vendor pricing.

Research and development expenses were $20.9 million in 2004 as compared to $18.0 million in 2003, and $17.9 million in 2002. Our research and development efforts in all three years were, and continue to be, primarily directed towards development of core micrologic devices and associated design tool development, including our Z8 Encore! and eZ80Acclaim! families of 8-bit embedded-flash micrologic devices and our Crimzon consumer solutions family of products focused on the Universal remote control market.

During 2004, we announced the opening of our China design center in Shanghai to allow us to more closely align to the growing Asian region and the rapidly growing China market. We also expanded our software development group in Bangalore, India to support our growing product portfolio especially for our remote control products. Additionally, we transferred our engineering groups from Nampa, Idaho to a new technology center in Meridian, Idaho. The group supports our design and software development as well as foundry technology development.

In 2002, we announced the termination of our development on the Cartezian family of products for the 32 bit networking market and closed our development center in Austin, Texas.

Selling, general and administrative expenses were $29.6 million in 2004 as compared to $27.6 million in 2003 and $33.4 million in 2002. The higher SG&A expenses in 2004 reflect the higher marketing costs associated with new products and their market introductions, as well as the incremental costs of compliance with Sarbanes-Oxley requirements. The decrease in 2003 was due to lower payroll-related costs as a result of lower headcount, a decline of stock-based compensation expense and reduced sales commissions as a result of the lower sales levels.

The following table details special charge accrual activity and ending accrual balances for the fiscal 2004, 2003 and 2002 years (in millions):

On April 16th, 2004, we announced the closure of our MOD II five-inch wafer manufacturing facility in Nampa, Idaho and the related transfer of MOD II production activities to our foundry partner, X-Fab, in Lubbock, Texas. MOD II ceased production operations on July 9, 2004. As a result, in 2004, we incurred $1.8 million employee termination costs related to the termination of 144 employees, and sustaining costs for post-closure maintenance of the MOD II facility and preparation to sell the equipment. Additionally, MOD III sustaining costs for post-closure maintenance incurred by us in 2004 totaled $1.7 million, which was offset in the consolidated statement of operations by approximately $4.9 million reimbursement for sustaining costs incurred since 2002 from the sale of the MOD III equipment to STMicroelectronics in July, 2004.

As a result of the closure of MOD II, in 2004 we incurred the following special charges:

The costs for MOD II and MOD III consist of utilities, taxes, insurance, and other maintenance costs required to maintain the facilities in a condition required for the sale of the respective properties.

Approximately $0.1 million of special charges during the year relate to third-party professional legal service fees associated with our debt and equity restructuring of May 2002, and $0.3 million severance and termination benefits related to our continued efforts to align infrastructure costs to business-level requirements.

Our estimates used to determine the fair value of MOD II land and buildings that remain held for sale at December 31, 2004, are based on an independent appraisal from a third party. There can be no assurance that the value we will realize from the ultimate sale or disposition of these assets will be equal to the estimated fair values. If the ultimate net value realized upon the disposition of the remaining MOD II assets is less than the carrying value of $3.6 million, our future results of operations could be adversely impacted.

Special charges in 2003 totaled $3.8 million and the primary components of these special charges were $1.5 million of employee severance and termination benefits related to the termination of 86 employees, $1.3 million of MOD III closure costs and professional fees of $0.6 million in connection with ongoing bankruptcy related court matters and our Securities and Exchange Commission S-1 registration statement for the registration of certain common stock required by our May 2002 reorganization plan, which became effective in July 2003. The employee severance and termination benefits primarily relate to the elimination of certain manufacturing positions at our MOD II wafer fabrication facility and our Manila, Philippines test facility that took place in February and September 2003, respectively. The $1.3 million of MOD III closure costs were ongoing costs for the maintenance of the idled MOD III eight-inch wafer manufacturing facility in Nampa, Idaho. We also had long-lived asset impairments of $0.2 million and an equity investment impairment of $0.2 million.

Special charges for 2002 included $1.7 million in charges in connection with the closure of our Austin, Texas design center, as we abandoned furniture, fixtures and equipment with this associated book value. Also in connection with this action, the streamlining of our sales force, and reduction in headcount in Nampa, Idaho and the Philippines we paid severance and termination benefits of approximately $2.5 million. Approximately $0.8 million of computer aided design software was impaired in 2002 as a result of our decision to cancel

development of the Cartezian family of 32-bit microprocessors. Additionally, we incurred $3.2 million of special charges during 2002 in connection with the closure of our MOD III eight-inch wafer fabrication facility in Idaho and $0.5 million of lease termination costs related to the closure and relocation of certain sales offices. These costs include relocation of production to alternative manufacturing sites and the cost of closing the facilities. Our recapitalization and associated Chapter 11 reorganization activities resulted in charges of $5.0 million in 2002 including legal, accounting and other professional advice and service fees. In addition, $0.2 million of unamortized goodwill relating to our 2000 acquisition of PLC Corporation was deemed to be of no future value and was written off during 2002.

During 2004, 2003 and 2002, we recognized $ 2.0 million, $1.5 million and $3.0 million of stock-based compensation expense, respectively, primarily in connection with the award of restricted stock and stock options to certain executives, employees and consultants at exercise prices below their deemed fair market value for accounting purposes on the dates of award. This non-cash stock-based compensation expense is primarily included in our selling, general and administrative expenses. Compensation expense for employee stock awards was measured on the award date and will be recognized over each of the next two years as these awards vest. Based on the employee restricted stock and option awards we made during May 2002, and cancellation of restricted stock and issuance of in the money options to Mr. Thorburn in 2004, we anticipate that we will recognize stock compensation charges of $0.5 million and $0.1 million for the years ending December 31, 2005 and 2006, respectively.

Additionally, compliance with SFAS NO. 123 R requirements in 2005 will require us to record stock based compensation expense greater than current levels. (See recent accounting pronouncements)

During 2002, we recorded an $18.7 million charge for in-process research and development relating to our fair value allocation computed by an independent appraiser. Our in-process research and development charge in 2002 relates to partially developed semiconductor product designs that had not reached technological feasibility and had no alternative future use on the date they were valued for fresh-start reporting.

As of May 1, 2002, there were four projects that satisfied the criteria listed above. These in-process research and development projects relate to next-generation products in our Z8 Encore! and eZ80Acclaim! micrologic device families, as well as a new infrared remote control device and a new IrDA transceiver targeted at the cellular telephone market. The value of the projects identified to be in progress was determined by estimating the future cash flows from the projects once commercially feasible, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value.

The percentage of completion for each project was determined based on research and development expenses incurred as of May 1, 2002 for each project as a percentage of total research and development expenses to bring the project to technological feasibility. The discount rate used was 35% for each of the projects. As noted above, the initial product offerings in our new Z8 Encore! and eZ80Acclaim! flash-memory enabled micrologic product lines were launched in November 2002 and February 2003, respectively. The nature of efforts required to develop the in-process technology into commercially viable products primarily related to completion of design, prototyping and testing to ensure the products could be produced cost effectively and to meet customer design specifications, including functions, features and performance requirements. The cost of completing development of the eZ80Acclaim! and Z8 Encore! projects were approximately $1.8 million and $2.3 million, respectively. The IrDA transceiver project was completed in 2002 at a cost of approximately $0.4 million and the programmable universal infrared remote control project was still in progress at the time of valuation.

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). In connection with our 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 3 to 7 years for current technology and ten years for brand name. We evaluate existing technology and brand name whenever events and circumstances indicate that their fair value may be less than their carrying value. Additionally, goodwill is tested for impairment at least annually and more often if events and circumstances indicate that its fair value may be less than its carrying value. We performed the annual impairment test for goodwill in the third quarter of 2004 and 2003, and no impairment charge was recorded as no impairment of the carrying value was indicated. We plan to perform this test in the third quarter of each year unless the existence of triggering events indicates that an earlier review should be performed.

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

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

Other income (expense) was $0.0 million in 2004 as compared to $0.5 million in income in 2003 and $0.6 million in income in 2002. Other income expense includes income or loss on the sale of securities, currency translation gains and losses and other miscellaneous items.

During 2002, our other income and expense was primarily comprised of $205.7 million of net gain on discharge of debt and $83.7 million of fresh-start adjustments. During 2003, other income and expense was not significant.

Pursuant to the 2002 financial restructuring and reorganization, we filed voluntary petitions with the United States Bankruptcy Court for the Northern District of California for reorganization under Chapter 11. The bankruptcy court subsequently confirmed the reorganization plan, which became effective on May 13, 2002. We

refer to the company prior to emergence from bankruptcy as the “Predecessor Company” and to the reorganized company as the “Successor Company.” Pursuant to our reorganization plan, we extinguished $325.7 million of liabilities, which included $280.0 million principal amount of our former 9¹/2% Senior Secured Notes due 2005, $27.2 million in accrued interest due on the notes and $18.5 million of dividends payable on our former series A preferred stock. These debts were offset by the $30.0 million of minority interest in MOD III, Inc. assets, acquired by the former bondholders, and $90.0 million of reorganization equity value. As a consequence of these events, the Predecessor Company recorded a $205.7 million net gain on discharge of debt.

On May 1, 2002, we adopted “fresh-start” accounting principles prescribed by the American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” or SOP 90-7. As a result, we recorded a gain of $83.7 million in the Predecessor Company’s financial statements, consisting of the effect of fresh-start adjustments.

Interest expense was $0.2 million in 2004 as compared to $0.4 million in 2003 and $5.5 million in 2002. During 2002, our interest expense was primarily accrued in connection with our $280 million 9¹/2% Senior Secured Notes, which notes and related accrued interest were extinguished in connection with our reorganization effective May 13, 2002. During 2004, and 2003, our interest expense was associated with our revolving line of credit. There was no debt outstanding under this facility at December 31, 2004.

Our provision for income taxes during 2004, 2003 and 2002 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. In connection with the May 2002 reorganization plan, the subsequent cancellation of debt and issuance of new common shares to primarily new stockholders, we generated significant income for book and tax purposes. This taxable income was offset by the use of all available net operating losses, both current and carryforward, with any remaining taxable income offset by reducing the tax attributes of certain of our non-current assets. Subsequent to the financial restructuring in May 2002, we completed in 2003, a tax reorganization of our world wide legal entities. In accordance with fresh start reporting, future reductions in our valuation allowance will be recorded as a reduction to fresh-start goodwill. In addition, net deferred tax assets will only be recognized to the extent of deferred tax liabilities until such time as deferred tax assets become probable of realization.

The following table presents unaudited quarterly financial information for each of the quarters in the eight-quarter period ended December 31, 2004. The Company’s year-end is December 31, with interim results based on fiscal quarters of thirteen weeks of duration ending on the last Sunday of each quarter. However, for financial reporting purposes interim fiscal periods are labeled as ending on calendar-month end.

Our net sales generally increased on a sequential basis in 2003. Sales declined in the third and fourth quarters of 2004 reflecting an overall decline in business activities and the end of our foundry business after closing our MOD II wafer facility in July, 2004.

Overall, our gross margin as a percentage of net sales improved on a sequential quarterly basis from the first quarter of 2003 through the first quarter of 2004. Gross margin as a percentage of sales has declined on a quarterly basis beginning in the second quarter of 2004 reflecting the closure of our MOD II wafer facility. In the fourth quarter of 2004, we recorded a $1.9 million charge associated excess inventory stemming primarily from the bridge inventory builds prior to closing MOD II as well as lower margins on our embedded flash sales as we begin to increase our sales of these new products at volumes that do not currently give us optimum wafer pricing from suppliers.

Our research and development expenses have generally increased sequentially since the first quarter of 2003 reflecting the product development efforts on our new embedded flash-based microcontroller devices. Additionally, we have added a development design center in Shanghai, China for support of the growing Asian market and we have expanded our Bangalore, India software development center for the expanding needs of our growing remote control product portfolio. Additionally, in June 2004, we opened a new technology development center in Meridian, Idaho to support our design capabilities and our wafer fabrication sourcing strategies.

Our selling, general and administrative expenses were generally higher during the quarterly periods of 2004 as compared with 2003 levels. This increase reflects higher legal and administrative costs in the second quarter of 2004 associated with implementation and administration of employee stock plans subsequent to our public offering of stock. Costs were generally higher in all quarters of 2004 reflecting also the costs of compliance with Sarbanes-Oxley.

Our special charges for the eight quarterly periods ended December 31, 2004 are summarized below:

As previously discussed, we have refocused our business around our 8 bit microcontroller product strategy and moving to a fabless model for manufacturing. The special charges over these periods have generally been aligned around this strategy. Additionally, we have continued to resize our support organizations to a lower sales base in an effort to scale down these organizations and focus the activities around these strategies.

We have a three-year $15.0 million senior secured revolving credit facility with a commercial lender which expires May 13, 2005. Under this facility, the 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 December 31, 2004 was 4.6%. As of December 31, 2004, we had no outstanding borrowings under the facility and had issued 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. As of December 31, 2004, we had borrowing availability of approximately $4.7 million. If we decide to pay the necessary fee to qualify certain foreign accounts receivable in our borrowing base, we could borrow up to an additional $2.0 million under our revolving credit facility as of December 31, 2004. We are subject to certain financial covenants under this facility, including tangible net asset balance and fixed charge coverage ratios, only if the total of our cash, cash equivalents and availability on the revolving credit facility are less than $7.5 million at any month end.

At December 31, 2004, we had cash and cash equivalents of $37.7 million, compared to $22.0 million at December 31, 2003. Cash and cash equivalents consists primarily of cash in bank accounts and money market accounts.

Cash used by operating activities of $0.5 million in 2004 primarily reflects our net loss of $18.5 million offset by net non-cash charges of $3.2 and certain net asset and liability changes totaling $14.8 million. Non-cash

charges include reductions related to deferred income tax assets and liabilities of $9.9 million, a net gain on the sales of MOD II assets of $1.7 million offset by $4.2 million for amortization of fresh start intangible assets, $3.0 million in depreciation and other amortization charges, $5.6 million of asset impairments and loss on disposal of assets, and stock-based compensation expense of $2.0 million. Reductions in accounts receivable of $3.0 million, prepaid expenses of $2.8 million, goodwill adjustments of $8.3 million, an increase in accounts payable of $3.7 million and accrued and other liabilities of $0.9 million provided cash from operating activities in 2004 and were offset by a use of cash for the increase of inventories of $2.5 million and reduction in deferred income on shipments to distributors of $1.4 million.

During 2003, cash used by operating activities of $2.4 million primarily reflects our net loss of $5.9 million offset by non-cash charges of $14.2 million. Non-cash charges include $6.8 million for amortization of fresh start intangible assets, $5.5 million in depreciation and other amortization charges, $0.4 million of asset impairments, and stock-based compensation expense of $1.5 million. The primary use of cash for operating activities was a result of changes in working capital driven by:

Cash provided by operating activities of $7.0 million in 2002 primarily reflects adjustments to the net loss of the Successor Company of $26.0 million and the net income of the Predecessor Company for the four month period ended April 30, 2002 of $275.9 million by items originating from our financial restructuring and reorganization activities. The Successor Company net loss of $26.0 million was adjusted for an in-process research and development charge of $18.7 million and a fresh-start inventory charge of $3.9 million. The Predecessor Company net income of $275.9 million was adjusted by reductions for a net gain on discharge of debt of $205.7 million and positive fresh-start adjustments of $83.7 million. Cash flow for the year ended December 31, 2002 was further adjusted for depreciation and amortization of $14.8 million. During 2002, our significant use of operating cash included cash payments for special charges of $20.3 million.

Cash provided by investing activities in 2004 of $1.5 million, reflects the sale of our wafer manufacturing equipment and related assets of our MOD II facility in Nampa, Idaho, to STMicroelectronics, Inc. for an aggregate net consideration of $5.9 million offset by capital expenditures of $4.4 million as compared to uses for capital expenditures of $1.9 million in 2003 and $2.3 million 2002. In 2004 capital expenditures reflect software purchases for our expanding research and development group including design circuit software support. In 2002 and 2003, capital expenditures related primarily to furniture and fixtures for our San Jose headquarters and replacements of manufacturing equipment. We moved to our existing San Jose headquarters in January, 2002.

Cash provided by financing activities was $14.7 million in 2004 as compared to cash used of $3.1 million in 2003 and $6.0 million in 2002. Cash provided by financing activities in 2004 reflects the consummation of our public offering of common stock, including the exercise of the over-allotment option whereby we received $24.4 million in cash as the net proceeds from the sale. Cash was used for the repayment of short term debt of $5.0 million in 2004, $1.9 million in 2003 and $5.9 million in 2002. Net cash used for repurchases of common stock net of sales of common stock, other than the 2004 offering, were $4.7 million in 2004 as compared to $1.2 million in 2003 and $0.1 million in 2002.

The EBITDA figures presented below reflect a non-GAAP measure of our liquidity. EBITDA reflects our net income adjusted for certain 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 equity adjustments and non-cash charges such as depreciation, amortization, in-process research and development, and stock-based compensation expense. It also excludes cash and non-cash charges associated with reorganization items and special charges, which represent operational restructuring charges, including asset write-offs, employee termination costs, and lease termination costs. 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:

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):

Our expected cash needs for 2005 primarily represents working capital and capital expenditures.

We expect 2005 capital expenditures will be approximately $2.0 million to $2.5 million, primarily for test equipment, and internal use software. Decisions related to how much cash is used for investing are influenced by the expected amount of cash to be provided by operations. We currently anticipate that available cash and cash to be provided by or used by operating activities will be adequate to satisfy our cash requirements for at least the next twelve months.

Total operating lease expense, including month-to-month rentals, was approximately $2.6 million in 2004 as compared to $2.7 million in 2003 and $2.9 million 2002. We did not have any capital leases as of December 31, 2004, 2003 or 2002.

We lease certain of our facilities and equipment under non-cancelable operating leases, which expire in 2005 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 table below.

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, 2004 (in millions):

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. At December 31, 2004 we had 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.

We believe that inflation and/or deflation had a minimal impact on our overall operations during the periods presented in this report.

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. In 2004, our quarterly trend was significantly impacted by the closure of our fab and the subsequent decline in foundry service sales as well as general slowing economics in the second half of 2004 versus in 2003.

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.

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. We adopted FIN 46R on January 1, 2004, which resulted in the de-consolidation of our subsidiary, ZiLOG MOD III, Inc.

Effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003, Emerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” addresses the accounting, by a vendor, for contractual arrangements in which multiple revenue-generating activities will be performed by the vendor. In some situations, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of fair values to account separately for the different deliverables (that is, there are separate units of accounting). In other situations, some or all of the different deliverables are interrelated closely or there is not sufficient evidence of fair value to account separately for the different deliverables. EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. The impact from adoption of EITF Issue 00-21 did not have a material impact on our consolidated financial statements.

SFAS No. 146 revises the accounting for specified employee and contract terminations that are part of restructuring activities. Companies will be able to record a liability for a cost associated with an exit or disposal activity only when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and therefore, does not meet the requirement for recognizing a liability and related expense. This statement only applies to termination benefits offered for a specific termination event or a specified period. It will not affect accounting for the costs to terminate a capital lease. We adopted this statement for exit or disposal activities initiated on or after May 1, 2002.

In April 2003, the FASB issued FAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133, “Accounting for Derivative Instruments and Hedging Activities.” FAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. In general, FAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. As we do not currently have any derivative financial instruments, the adoption of FAS 149 did not have an impact on our consolidated financial statements.

In May 2003, the FASB issued FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As we do not have any financial instruments within the scope of FAS 150, the adoption of FAS 150 did not have any impact on our consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS 151 is an amendment to ARB 43, Chapter 4, “Inventory Pricing”. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material or spoilage. The provisions of SFAS 151 become effective on a prospective basis for fiscal years beginning after June 15, 2005 with early application permitted. We have not determined what, if any, impact the adoption of SFAS 151 will have on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123, SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. The requirements of SFAS No. 123R are effective for fiscal periods beginning after June 15, 2005. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123R or only to interim periods in the year of adoption. We are currently evaluating these transition methods and the potential impact on our consolidated financial statements.

In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-1, “Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The AJCA introduces a special 9% tax deduction on qualified production activities. FSP 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. We have not yet determined the impact, if any, of adopting FSP 109-1, but we do not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued FSP No.109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP109-2 provides accounting and disclosure guidance for the repatriation provision. Although FSP 109-2 is effective immediately, the Company does not expect to be able to complete its evaluation of the repatriation provision until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury Department began to issue the first of a series of clarifying guidance documents related to this provision. We have not yet determined the impact of adopting FSP 109-2, if any, on its consolidated financial statements and related disclosures.

In March 2005, the FASB issued FSP No. FIN 46(R)-5, “Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003).” FSP FIN 46(R)-5 addresses whether a reporting enterprise should consider whether it holds an implicit interest in a variable interest entity or potential variable interest entity when specific conditions exist. The provisions of FSP FIN 46(R)-5 are applicable for reporting periods beginning after March 3, 2005 (ZiLOG’s fiscal quarter ending June 30, 2005). We have not yet determined the impact of adopting FSP FIN 46(R)-5, if any, on its consolidated financial statements and related disclosures.

Prior to February 1998, our common stock had been publicly traded on the New York Stock Exchange under the symbol “ZLG.” On February 27, 1998, we consummated a merger with an affiliate of Texas Pacific Group, and in connection with that transaction, we issued $280.0 million of our former 9¹/2% Senior Secured Notes due 2005, and we ceased having publicly traded equity. Since 2000, our business and financial growth had been negatively affected by the extremely difficult business climate in which we have been operating. We explored a number of strategic alternatives with the assistance of our financial advisor, Lazard Frères & Co., LLC, and an informal group of holders of our senior notes who collectively held or managed approximately $165.0 million in principal amount of our senior notes.

During the course of discussions, we concluded that the best vehicle to achieve a restructuring of our senior notes was through consummation of a voluntary pre-packaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code. On January 28, 2002, we commenced solicitation of acceptances of a joint plan of reorganization, which set forth a plan to reorganize our company and our subsidiary, ZiLOG-MOD III, Inc.

We solicited acceptances of this joint plan from the holders of our senior notes and preferred stock. As permitted by bankruptcy court rules, we did not solicit votes from holders of our old common stock. In connection with this solicitation, we entered into lock-up agreements with members of the informal group of our note holders. Under the lock-up agreements, the members of the informal group agreed, among other things and subject to certain conditions, to vote to accept the plan of reorganization.

The voting period for the solicitation ended on February 26, 2002. Holders of approximately $221.0 million of our senior notes accepted the plan of reorganization, and none rejected the plan. All of the holders of our preferred stock who voted also accepted the plan of reorganization.

On February 28, 2002, we and our subsidiary, ZiLOG-MOD III, Inc., filed voluntary petitions with the United States Bankruptcy Court for the Northern District of California for reorganization under Chapter 11. The bankruptcy court subsequently confirmed MOD III, Inc.’s and our joint reorganization plan by its order entered on April 30, 2002. The joint plan of reorganization became effective on May 13, 2002, but for financial reporting purposes we use May 1, 2002, as the date of emergence from bankruptcy. We refer to the company prior to emergence from bankruptcy as the “Predecessor Company” and to the reorganized company as the “Successor Company.”

Pursuant to the joint reorganization plan, we extinguished $325.7 million of liabilities, which included $280.0 million principal amount of our former 9¹/2% Senior Secured Notes due 2005, $27.2 million in accrued interest due on the notes and $18.5 million of dividends payable on our former series A preferred stock. The former note holders received substantially all of our new common stock and a liquidation preference in the net proceeds on the sale of the assets held by MOD III, Inc. The former equity holders received an aggregate $200,000 in cash. All debt and equity securities of the Predecessor Company were cancelled. As a consequence of these events, the Predecessor Company recorded a $205.7 million net gain on discharge of debt.

On May 1, 2002, we adopted “fresh-start” reporting prescribed by the American Institute of Certified Public Accountant’s Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” or SOP 90-7. Fresh-start reporting was appropriate because our former note holders received substantially all of our new common stock and the reorganization value of the assets of the Successor Company were less than the total pre-petition liabilities plus post-petition liabilities.

SOP 90-7 required us to establish a reorganization value upon our adoption of fresh-start reporting. With the assistance of our independent financial advisor, Lazard Frères & Co., LLC, we estimated our reorganization value derived from a weighted average of three separate valuation methodologies; the first based on a comparable public company analysis, the second based on precedent transaction analysis and the third based on discounted cash flow analysis. These valuations indicated a range of reorganization values between $70 million and $109 million, based on the underlying assumptions and limitations set forth in their analysis.

These assumptions include: the successful reorganization of our business and finances in a timely manner; the implementation of our business plan as a reorganized entity; the accuracy of information supplied by management about our business and our prospects; achievement of forecasted projections; market conditions as of December 31, 2001 continuing through an assumed effective date of March 31, 2002; and the plan of reorganization becoming effective in accordance with the estimates and assumptions upon which the valuation was based. In agreement with the informal committee of note holders, and with the approval of the bankruptcy court, we established a reorganization equity value of $90.0 million as of May 1, 2002 for purposes of applying fresh-start reporting. The projections we and our advisors used for estimating the Company’s reorganization value were made as of May 13, 2002 and were based on an adjusted EBITDA measure of liquidity (see Liquidity and Capital Resources section). For the year ended December 31, 2002, our adjusted EBITDA exceeded the projections we and our advisors used to determine the recapitalization value of the Successor Company. For the years ended

December 31, 2003 and 2004 our adjusted EBITDA was less than the amounts projected in determining our recapitalization value. Overall, we believe that our projections of future results used in determining our recapitalization value were reasonable based on information available at the time.

Fresh-start reporting requires that we also record our assets at fair value upon adoption. Consequently, we engaged Key Assets as independent appraisers to assist management in valuation of our tangible assets and we engaged another independent appraisal firm to determine the fair value of our intangible assets and inventories. Key Assets was selected for the MOD II appraisal based on their expertise as resellers and appraisers of used semiconductor manufacturing equipment. The Key Assets appraisal resulted in a $13.1 million increase in property, plant and equipment related to our five-inch wafer fabrication facility. The valuation undertaken by Key Assets for fresh-start reporting included a physical inspection of the assets and assigned fair value to property, plant and equipment in Nampa, Idaho related to our five-inch wafer fabrication facility (MOD II) and our data center, as well as an adjacent 20 acre parcel of undeveloped land assuming a willing buyer and a willing seller and not under distressed sale conditions. Fair value was determined based on the current replacement cost for similar wafer fabrication capacity, considering the age, condition and other pertinent factors of the MOD II assets. Replacement cost was determined for most of the MOD II assets based on a market approach and considering such factors as recent sales prices for similar used equipment, dealer listings, and interviews with dealers who specialize in the sale of used semiconductor manufacturing equipment. For those pieces of equipment where a used-asset market does not exist, replacement cost was estimated based on the new asset cost, less estimated accumulated depreciation to reflect physical deterioration, functional obsolescence and economic obsolescence.

Although MOD II represents a unique group of assets that would only have utility to a select number of semiconductor manufacturing companies, we believed that MOD II could have been sold for its current carrying amount as determined by the Key Assets appraisal. Previously, our five-inch wafer fabrication facility had been separately held for sale at a negotiated selling price of $3.0 million, based on a non-binding purchase offer received from a potential buyer in December 2000. Management agreed to the terms of the December 2000 purchase offer for several reasons including: monetary and human cost savings compared with closing and decommissioning the facility, as well as terminating the employees; and the acquirer was also willing to assure an uninterrupted source of supply of wafers manufactured in the MOD II facility until alternative sources could be qualified. Following a change in strategy, the MOD II assets were put back into service in June 2001. In June 2001, management determined that the fair value of the MOD II assets was $3.0 million. We did not obtain an independent appraisal of MOD II in June of 2001, but determined that the fair value of MOD II had not changed materially during the six-month period between the non-binding purchase offer received in December 2000 and the decision to place MOD II back into service in June of 2001. This decision was made after consideration of the shift in our strategy to refocus on our core 8-bit micrologic business developed under the leadership of our new chief executive officer, as well as financial difficulties the Company was experiencing at the time, and the relatively short period of time between receiving the non-binding purchase offer and our decision to place MOD II back into service.

The appraisal process also resulted in a $3.9 million increase in inventories held by us and our distributors to reflect fair value at May 1, 2002. We also identified several separable intangible assets that were valued and recorded as part of our fresh-start reporting as follows (in millions):

We recorded a gain of $83.7 million in the Predecessor Company’s financial statements in connection with the fresh-start adjustments referred to above. Additionally, we recorded goodwill, with an indefinite life, in the aggregate amount of $26.7 million.

The in-process research and development was expensed on May 1, 2002. The inventory was amortized over two months consistent with the turnover of our inventory. The brand name and existing technology was amortized using the pattern-of-use method consistent with underlying discounted cash flows supporting the assets. The goodwill will not be amortized but will be subject to ongoing impairment reviews consistent with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” See the section entitled “Recent Accounting Pronouncements” below for more information on SFAS No. 142.

With the assistance of professional appraisers, our current technology was valued using the “Income Approach.” Under the Income Approach, fair value reflects the present value of the projected cash flows that are expected to be generated by the products incorporating the current technology. The projected revenues and expenses used in the Income Approach are based upon what our management expects the technology to generate over the life of its products. The cash flows earned by the products represent a return on all of the assets purchased with the technology and employed in the generation of those cash flows, including tangible assets as well as identifiable intangible assets. The total return earned by the products must provide a return on each acquired asset that is consistent with the value and the relative risk of that asset. To separately value the current technology, the value and required rate of return for other identifiable assets must be determined. The required returns on these other assets are “charged to” (deducted from) the cash flow in the model to determine the returns specifically earned by the current technology. The residual return is earned by the technology. As part of this analysis, we determined individual rates of return applicable to each fresh-start assets or asset classes, and estimated the effective “capital charge” to be applied to the cash flows generated by the acquired current technology. Capital charges were made for returns related to the following: current assets of 6%; fixed assets of 10%; and workforce-in-place of 15%.

We believe that the ZiLOG trade name is well known within the semiconductor industry and that we will realize economic benefit from the name and it is considered separable in accordance with SFAS 141. Our appraisers utilized the Relief from Royalty, or RFR, approach in the valuation of the ZiLOG trade name. To determine the appropriate royalty rate, we:

The analysis indicated an appropriate pre-tax royalty rate of 1.5%. The avoided royalty cost was determined by applying this rate, adjusted for tax affects, to the Company’s expected revenue. Therefore, the royalty rate was applied to five years of management’s revenue forecasts. The avoided royalty costs were discounted to find the present value of avoided cash flows from royalties. In identifying the discount rate to be used to calculate the present value of the avoided royalties we considered the variability of the projected royalties. We applied a discount rate of 20% to the projected royalties.

As with the current technology, our appraisers used an Income Approach to value in-process research and development, or IPR&D. Under the income approach, fair value reflects the present value of the projected free cash flows that will be generated by the products, incorporating the technologies under development, assuming they will be successfully completed. The projected revenues used in the income approach are based upon the revenues expected to be generated upon completion of the projects and the beginning of commercial sales, as estimated by ZiLOG’s management. The projections assumed that the technologies would be successful, and that the product’s development and commercialization will meet management’s time schedule. As with current technology, the cash flows generated by the IPR&D technologies represent a return on all of the assets purchased with the technologies and employed in the generation of those cash flows, including tangible as well as identifiable intangible assets. The total return earned by the new technologies must provide a return on each asset purchased that is consistent with the value and the relative risk of that asset. The returns required by each asset have been shown previously in “Current Technology,” which is a separable intangible asset included in the consolidated balance sheet. We determined the applicable discount rates to be used in the valuation of the in-process technologies based on the risks of an investment in ZiLOG. The discount rate applicable to ZiLOG as a

whole is not necessarily the rate that is applicable to the current technology or to the IPR&D when considered in isolation. The rate of return required by in-process technology typically has a higher risk profile than current technology and depends upon the stage of completion. An overall after tax discount rate of 35% was therefore applied to the cash flows expected to be generated by these products incorporating technology currently under development.

On July 16, 2004, the shareholders of MOD III approved the sale of substantially all of the manufacturing equipment of MOD III to STMicroelectronics, Inc. for an aggregate amount of $26.0 million. The sale closed and was funded on July 16, 2004. In September 2004, MOD III paid dividends and redeemed a portion of the 28,000 Preferred Series A shares outstanding for a net consideration of approximately $20.2 million after paying for reimbursements totaling approximately $4.9 million to us and $0.9 million for transaction costs related to the sale, including brokerage fees, legal fees and other professional services costs. Reimbursements to us were to pay certain costs of maintaining MOD III in a saleable condition on MOD III’s behalf that had been previously recorded in special charges and credits (see Note 6, 2004 Special Charges).

On September 27, 2004, we announced the sale of all of our wafer manufacturing equipment and related assets of our MOD II facility in Nampa, Idaho, to STMicroelectronics, Inc. for an aggregate consideration of $5.9 million net of selling costs and expenses which resulted in a gain on assets held for sale of $1.7 million. On completion of the sale, the remaining assets of MOD II consist of land and buildings with a carrying value of $3.6 million classified as assets held for sale on the Company’s balance sheet (see Note 6, 2004 Special Charges).

The following risk factors should be considered carefully in addition to the other information in this Form 10-K. The risks described below are the ones we deem to be material to our business, but are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. If any of these risks actually occurs, our business could be harmed materially.

Due to our adoption of “fresh-start” reporting upon our emergence from bankruptcy, our results of operations after April 30, 2002 and our consolidated balance sheets at December 31, 2003 and 2002 are not comparable to the results of operations and financial position prior to April 30, 2002. To provide a more meaningful analysis, in the following discussion we have combined results of our predecessor and successor company’s operations for 2002. The combined results are not meant to be a presentation in accordance with generally accepted accounting principles.

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

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

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.

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

We rely on independent third-party foundry manufacturers including X-FAB, TSMC, and UMC to fabricate wafers for all of our product needs. Industry-wide shortages in foundry capacity could harm our financial results. If we are unable to obtain the requisite foundry capacity to manufacture our products, or if we have to pay higher than anticipated prices to foundries in periods of tight capacity, we may not be able to meet our customers’ demand for our products. Any delay in initiating production at third-party foundries, any inability to have new products manufactured at such foundries or any failure to meet our customers’ demands could damage our relationships with our customers and may decrease our sales.

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

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 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 $95.6 million for the year ended December 31, 2004, $103.6 million for 2003, and $139.6 million in 2002. 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, in February 2003 we launched our new eZ80 Acclaim! micrologic product and in March 2004 our enhanced Z8 Encore! XP flash product family. 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 later in 2005. If the market for these new products does not develop as we currently expect, if we are unable to develop new products in a manner that timely meets changing market requirements, or if we are not able to achieve significant sales of our new 8-bit micrologic products for any reason, our product strategy may fail and our net sales and operating results may continue to decline or not grow as currently expected. In addition, as we introduce new products, including our flash products, we experience additional start up costs and unfavorable manufacturing prices due to low volume. Consequently, the introduction of new products could have a negative impact on our gross margin even if sales from such new products offset declining revenues of our legacy products.

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

On February 28, 2002, we filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The United States Bankruptcy Court for the Northern District of California confirmed our

prepackaged plan of reorganization on April 30, 2002, and we emerged from bankruptcy on May 13, 2002. The effect, if any, that our Chapter 11 case and plan of reorganization may have had, and may continue to have, upon our continued operations cannot be reasonably estimated, predicted or quantified. Some entities may be uncomfortable doing business with a company that emerged from bankruptcy approximately three years ago. The fact that we have a Chapter 11 bankruptcy on our credit record could adversely affect our relationships with our customers, suppliers and employees. In addition, we are aware that some of our competitors have raised our bankruptcy with customers as part of their sales pitch. This has harmed and may continue to harm our relationship with such customers.

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

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

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, Freescale, National Semiconductor, Renasas, STMicroelectronics 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 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:

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

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

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

The semiconductor industry is highly cyclical and has experienced significant economic downturns, often in connection with, or in anticipation of, maturing product cycles (for semiconductors and for the end-user products in which they are used) and declines in general economic conditions. These downturns have been characterized by diminished product demand, erosion of average selling prices, production over-capacity and high inventory

levels. For example, beginning in the fourth quarter of 2000 we experienced a three-year downturn in our business cycle and are currently experiencing another downturn. We believe that, in light of these events, some of our customers curtailed and may in the future delay or further curtail spending on technology, which could negatively affect our quarterly results or financial condition in the future. This economic downturn in the semiconductor industry could increase pressure on us to reduce our prices, which could impair our revenues, gross margins and operating cash flow. From time to time, the semiconductor industry also has experienced periods of increased demand and production capacity constraints. We have in the past experienced substantial period-to-period declines in operating results, and will likely in the future experience substantial period-to-period fluctuations in operating results that are attributable to semiconductor industry conditions or events occurring in the general economy.

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

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

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 50% of our net sales for 2004, 47% of our net sales for 2003 and approximately 44% of our net sales for 2002. In addition, our five largest distributors accounted for approximately 41% of our net sales for 2004, 33% of net sales for 2003 and 27% of net sales in 2002. Future Electronics accounted for approximately 21% of our net sales for 2004, and 18% in 2003 and was our number one customer for both 2004 and 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 37% of our net sales for 2004, approximately 38% of our net sales for 2003 and approximately 37% of our net sales for 2002. As discussed in footnote 17, for the year ended December 31, 2004, we had one distribution customer that accounted for 20.6% of our net sales and one OEM customer that accounted for 11.9% of our net sales. 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 66% of our net sales for 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:

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 threat of terrorist attacks. These attacks, coupled with an international military response, may create an uncertain economic environment, and we cannot predict the impact of these potential threats 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, 2004, excluding the one-time gain on extinguishment of debt and fresh-start adjustments in 2002. We may not be profitable in the future.

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

We depend on our ability to attract and retain highly skilled technical and managerial personnel. We believe that our future success in developing marketable products and achieving a competitive position will depend in large part on our ability to identify, recruit, hire, train, retain and motivate highly skilled technical, executive, managerial, marketing and customer service personnel. Competition for these personnel is intense, especially in Northern California, where our headquarters are located, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. Our failure to recruit and retain necessary technical, executive, managerial, marketing and customer service personnel could harm our business and our ability to obtain new customers and develop new products. In addition, our history of losses and our bankruptcy filing could impair our ability to recruit and retain employees. We do not have employment contracts with any of our executive officers other than Mr. Grace, and his contract expires in 2005.

Our current policy is that we not enter into or extend employment agreements with executives. If we are unable to retain our executive officers, including Mr. Thorburn as our Chief Executive Officer, 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.

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.

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 have received in the past 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:

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, approximately $0.7 million for 2003 and approximately $0.1 million for 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 2004. These cost cutting efforts have included:

Cost cutting measures may not increase our efficiency or lead to profitability. In the past we have reduced our spending on research and development although spending increased in 2004 compared to 2003 and 2002. 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 the remaining assets of MOD II and our MOD III subsidiary, 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 required 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 used 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.

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.

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

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.

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 terrorist 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. In particular, any flare up in past tensions between India and Pakistan could 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.

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

Section 404 of the Sarbanes-Oxley Act requires us to include an internal control report of management in our Annual Report on Form 10-K. Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2004. Management’s assessment identified two material weaknesses in the company’s internal control over financial reporting relating to our reserves for distributor price adjustments and the financial reporting of our sale of the assets of MOD II. A material weakness is a significant deficiency (as defined in PCAOB Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions. These material weaknesses are as follows:

Because of these internal weaknesses, management concluded that, as of December 31, 2004, internal control over financial reporting and its disclosure controls and procedures were not effective and our independent public accounting firm, KPMG LLP, issued an adverse opinion with respect to our internal control over financial reporting (See Item 9A for management’s evaluation of controls and procedures).

As a consequence of these material weaknesses, our investors, suppliers and customers could lose confidence in the accuracy or completeness of our financial reports, which in turn could have a material adverse effect on our stock price or net sales or results of operations. We will be required to assess the effectiveness of our internal controls on a regular basis and the risk of these consequences will increase if in the future we identify additional material weaknesses.

A system of controls, however well designed and operated, cannot provide absolute assurance that the objectives of the system will be met. In addition, the design of a control system is based in part upon certain assumptions about the likelihood of future events. Because of the inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions. While we are implementing steps to ensure the effectiveness of our internal control over financial reporting, failure to do so could impact our ability to report, on a timely basis, our financial condition and results of operations accurately and could have a material adverse effect on our business, results of operations, financial condition and liquidity.

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. We also expect that these new rules and regulations may 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.

As a result of the adoption of “fresh-start” accounting, you will not be able to compare our historical financial statements for periods before May 1, 2002, with the financial results for periods after May 1, 2002, disclosed in this Form 10-K.

As a result of the consummation of our plan of reorganization and the transactions contemplated thereby, we are operating our business under a new capital structure. In addition, we adopted fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7 upon emerging from bankruptcy. Because SOP 90-7 required us to reset our assets and liabilities to current fair values, our financial condition and results of operations disclosed in our financial statements for periods after May 1,

2002 are not comparable to the financial condition and results of operations reflected in our financial statements for periods before May 1, 2002 contained in this Form 10-K.

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 some expenses of stock options from our financial statements, effective July 1, 2005 the Company will be required to include the expense of these options and the 15% discount employees receive on purchase under the employee stock purchase plan in the income statement in accordance with FAS 123R. Technology companies generally, and our company, specifically, rely heavily on stock options as a major component of our employee compensation packages. Because we will soon be 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 on our employee stock option program 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 we had no borrowings outstanding as of December 31, 2004 and approximately $4.7 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:

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 distributors could emphasize competing products, and we may lose some of our customers as a result.

In October 2002, we engaged Future Electronics as our exclusive full-service distributor in North America. Additionally, Future Electronics provides distributor support to us in Europe and Asia on a non-exclusive basis. For the year ended December 31, 2004 and 2003, Future Electronics purchased approximately $19.7 million and $18.3 million of our products, contributing approximately 21% and 18% to our net sales, respectively. 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:

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 32% 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 four large stockholders, UBS Willow Management, L.L.C. and funds managed by Capital Research and Management Company, beneficially owned approximately 32% of our outstanding common stock, in the aggregate, as of December 31, 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

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 December 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 are short-term.

The table below presents principal amounts and related interest rates for our cash equivalents as of December 31, 2004 (dollars in millions):

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.

We have audited the accompanying consolidated balance sheets of ZiLOG, Inc. and subsidiaries (the Company) as of December 31, 2004, and 2003, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for the years ended December 31, 2004 and 2003, the eight months ended December 31, 2002, and the four months ended April 30, 2002. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15a (2). These consolidated financial statements and related financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZiLOG, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003, the eight months ended December 31, 2002, and the four months ended April 30, 2002, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole presents fairly, in all material aspects, the information set forth therein.

As discussed in note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

As discussed in notes 1, 2, and 3 to the consolidated financial statements, the Company’s plan of reorganization under Chapter 11 of the United States Bankruptcy Code became effective on May 13, 2002; however, for financial reporting purposes, the effective date of the reorganization is considered to be April 30, 2002. As a result of the adoption of “fresh-start” reporting in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, the consolidated financial statements as of and for the years ended December 31, 2004 and 2003, and as of and for the eight months ended December 31, 2002 are presented on a different reporting basis than the periods before the emergence from bankruptcy, and are therefore not comparable.

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations in the Treadway Commission (COSO), and our report dated March 29, 2005 expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.

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

The consolidated financial statements include the accounts of ZiLOG, Inc. and its subsidiaries. All significant transactions and accounts between the Company and these subsidiaries have been eliminated in consolidation.

The Company incurred recurring operating losses and had a net capital deficiency as of April 30, 2002. On February 28, 2002, ZiLOG filed and received confirmation from the United States Bankruptcy Court for the Northern District of California of its and ZiLOG-MOD III, Inc.’s (“MOD III, Inc.”) joint reorganization plan (the “Reorganization Plan”) filed pursuant to Chapter 11 of the United States Bankruptcy Code. The Reorganization Plan became effective on May 13, 2002 (see Note 2).

As a result of the court’s confirmation of ZiLOG’s Reorganization Plan, the Company adjusted its financial statements as prescribed by the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code” (SOP 90-7). The reporting requirements of SOP 90-7 are referred to as “fresh-start” reporting, which resulted in material changes to ZiLOG’s Consolidated Balance Sheet. This approach requires the recording of assets and liabilities at fair values, the valuation of equity based on the reorganization value of the ongoing business and the recording of intangible assets including goodwill (see Note 3).

Revenue from product sales to Original Equipment Manufacturers (OEM) customers is recognized when the customer or its agent receives the product and title transfers. Appropriate allowances for returns, discounts and warranty costs are recorded concurrent with the sale.

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

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 consolidated balance sheet on a net basis as “Deferred income on shipments to distributors.”

All of the Company’s subsidiaries use the U.S. dollar as the functional currency. Accordingly, monetary accounts and transactions are re-measured at current exchange rates, and non-monetary accounts are re-measured at historical rates. Revenues and expenses are re-measured at the average exchange rates for each period, except for depreciation expense, which is re-measured at historical rates. Foreign currency exchange gains and (losses) included in the results of operations for the years ended December 31, 2004 and 2003 were less than $0.1 million in each period, and aggregated approximately, $0.2 million for the eight-month period ended December 31, 2002, and $(0.1) million for the four-month period ended April 30, 2002.

Cash and cash equivalents consist of bank deposits and money market funds, which are readily convertible to cash and have maturities of three months or less at the time of acquisition.

Inventories are stated at the lower of cost (which approximates actual cost on a first-in, first-out basis) or market. Provisions, when required, are made to reduce inventory values from cost to their estimated net realizable values. It is possible that estimates of net realizable value can change in the short-term. Inventories, net of provisions, consist of the following (in millions):

Property, plant and equipment were revalued at May 1, 2002 in accordance with the adoption of fresh-start reporting (see Note 3). At that time, accumulated depreciation was offset against cost and the resulting net book value was adjusted to the fair values. For periods prior to May 1, 2002 and for additions purchased after this date, property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated economic lives of the assets, which are generally between three and seven years for machinery and equipment and 30 years for buildings. Significant impairments of property, plant and equipment were recorded in 2004 due to the write-down of ZiLOG’s MOD II five-inch wafer fabrication facility to its expected realizable value (see Note 7). Amortization of leasehold improvements is computed using the shorter of the remaining terms of the leases or the estimated economic lives of the improvements. Depreciation expense of property, plant and equipment was $3.0 million, $5.5 million, $4.4 million and $2.4 million for the years ended December 31, 2004, 2003, the eight-month period ended December 31, 2002 and the four-month period ended April 30, 2002, respectively. The Company did not have any assets leased under capital leases during the periods indicated.

Property, plant and equipment consist of the following for the periods indicated (in millions):

Effective January 1, 2002, the Company accounts for goodwill and intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”) (see Note 4).

The following table further details “Accrued and other current liabilities” (in millions):

The Company accounts for advertising costs as expense for the period in which they are incurred. Advertising expenses were approximately $1.5 million, $1.0 million, $0.2 million, and $44,300, for the years ended December 31, 2004, 2003, for the eight-month period ended December 31, 2002 and the four-month period ended April 30, 2002, respectively. Advertising costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations.

The preparation of 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 periods. Significant estimates made in preparing these financial statements include excess and obsolete inventories, allowance for doubtful accounts, sales returns and allowances and income tax contingencies. Actual results could differ from those estimates.

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,” 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, and 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 Company has applied the principles of FTB 97-1, “Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option.” Under this technical bulletin, the fair value method of accounting is used to account for shares issued to employees under the Company’s employee stock purchase plan.

For stock option grants issued with an exercise price equal to the fair market value of the stock, the Company recognizes no compensation expense. Prior to May 16, 2002, the fair market value of the Company’s stock was determined by the board of directors. The board of directors used a variety of factors in determining the fair value of the Company’s common stock. Specifically, the board of directors’ primary considerations in determining such fair values has varied overtime, but includes: from February 1998 through the third quarter of 1999, the per share acquisition price paid in connection with the going-private transaction; from the fourth quarter of 1999 through the first quarter of 2000, public company market comparisons; in the second and third quarters of 2000, ZiLOG’s estimated public offering price determined by its underwriters; and from fourth quarter of 2000 through May 15, 2002, the board of directors’ good faith judgment. The board’s good faith judgment considered the state of the business and its ability to survive under the high debt level, the continuous history of generating net losses, and uncertainty surrounding the potential outcome of the restructuring activities and fresh-start revaluation.

Our common stock commenced trading on the NASDAQ National Market on March 12, 2004 under the symbol “ZILG.” Previously, the Company’s common stock traded on the Over-the-Counter Bulletin Board. For the period between May 13, 2002, the effective date of the Company’s plan of reorganization, and May 16, 2002, the Company’s common stock was quoted through the Pink Sheets Electronic Quotation Service. The prices quoted on the Over-the-Counter Bulletin Board reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. Trading on the Over-the-Counter Bulletin Board has been sporadic and volumes have been low. In addition, all trades from May 16, 2002 through March 11, 2004, may not have been required to be reported on the Over-the-Counter Bulletin Board. Consequently, pricing for options issued during the first two months after the effective date of the plan of reorganization was based on the reorganization valuation as approved by the Court under the plan of reorganization. From July 2002 until March 11, 2004, option pricing was based on the last trading price on the date of grant (or if there was no trade on such date, then on the most recent date prior to the date of grant on which there was a trade). Stock option awards from March 12, 2004 on are priced at the NASDAQ closing price on the day granted by the board of directors.

The table below illustrates the effect on net income (loss) if the fair-value based method has been applied to all outstanding and unvested awards in each period (in millions):

The fair value of options granted was estimated at the date of grant using the Black Scholes option pricing model. The following weighted-average assumptions were used:

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

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

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 valued for fresh-start reporting.

As of May 1, 2002, there were four projects that satisfied the criteria listed above. These in-process research and development projects relate to next-generation products in the Company’s Z80 microprocessor and Z8 microcontroller product families, as well as a new infrared remote control device for and a new IrDA transceiver targeted at the cellular telephone market. The value of the projects identified to be in progress was determined by estimating the future cash flows from the projects once commercially feasible, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value. The gross margins from sales of these new products were then expected to be in the range of 45% to 50%, which was generally consistent with ZiLOG’s product offering at the time.

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. (See Note 12)

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. “ The Issue’s objective is to provide guidance for identifying other-than-temporary impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issue a FASB Staff Position (FSP) EITF 03-1-2 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until further notice. The disclosure requirements of EITF 03-1 are effective with this annual report for fiscal 2004. When the FASB reaches a final decision on the measurement and recognition provisions, we will evaluate the impact of the adoption of the accounting provisions of EITF 03-1. The disclosures required by EITF 03-1 did not affect the Company.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123, SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. The requirements of SFAS No. 123R are effective for fiscal periods beginning after June 15, 2005. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123R or only to interim periods in the year of adoption. Management of the Company is currently evaluating these transition methods.

SFAS No. 146 revises the accounting for specified employee and contract terminations that are part of restructuring activities. Companies will be able to record a liability for a cost associated with an exit or disposal activity only when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and therefore, does not meet the requirement for recognizing a liability and related expense. This statement only applies to termination benefits offered for a specific termination event or a specified period. It will not affect accounting for the costs to terminate a capital lease. The Company adopted this statement for exit or disposal activities initiated on or after May 1, 2002.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS 151 is an amendment to ARB 43, Chapter 4, “Inventory Pricing”. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material or spoilage. The provisions of SFAS 151 become effective on a prospective basis for fiscal years beginning after June 15, 2005 with early application permitted. The Company has not determined what, if any, impact the adoption of SFAS 151 will have on its consolidated financial statements.

In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-1, “Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The AJCA introduces a special 9% tax deduction on qualified production activities. FSP 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. The Company has not yet determined the impact, if any, of adopting FSP 109-1, but it does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued FSP No.109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP109-2 provides accounting and disclosure guidance for the repatriation provision. Although FSP 109-2 is effective immediately, the Company does not expect to be able to complete its evaluation of the repatriation provision until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury Department began to issue the first of a series of clarifying guidance documents related to this provision. The Company has not yet determined the impact of adopting FSP 109-2, if any, on its consolidated financial statements and related disclosures.

In March 2005, the FASB issued FSP No. FIN 46(R)-5, “Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003).” FSP FIN 46(R)-5 addresses whether a reporting enterprise should consider whether it holds an implicit interest in a variable interest entity or potential variable interest entity when specific conditions exist. The provisions of FSP FIN 46(R)-5 are applicable for reporting periods beginning after March 3, 2005 (ZiLOG’s fiscal quarter ending June 30, 2005). The Company has not yet determined the impact of adopting FSP FIN 46(R)-5, if any, on its consolidated financial statements and related disclosures.

The Company has suffered recurring losses from operations, had a net stockholders’ deficiency at December 31, 2001 and its business and financial growth were negatively affected by a difficult business climate. These conditions led to the need to file for Chapter 11 bankruptcy protection in order to restructure the Company’s 9¹/2% Senior Secured Notes due 2005 (the “Notes”).

ZiLOG filed the Reorganization Plan with the United States Bankruptcy Court for the Northern District of California on February 28, 2002 (the “Reorganization Plan”) and the bankruptcy court confirmed the Reorganization Plan as described herein on April 30, 2002. The Reorganization Plan became effective on May 13, 2002.

The Company operated its business under Chapter 11 in the ordinary course and had obtained the necessary approvals from the bankruptcy court to pay employees, trade, and certain other creditors in full and on time regardless of whether their claims arose before or after the Chapter 11 filing. The claims of employees, general unsecured creditors (including trade creditors, licensors, and lessors) and secured creditors, other than holders of the Notes and preferred stock, were not compromised under the Reorganization Plan.

Under the Reorganization Plan, the Notes were cancelled. Each note holder received, in exchange for their Notes, their pro rata share of:

The Reorganization Plan also provided for the cancellation of all of ZiLOG’s currently outstanding preferred and common stock and all options and warrants related thereto. All accumulated dividends and any other obligations with respect to the Company’s outstanding preferred and common shares were also extinguished. Each former holder of common stock received a pro rata share of $50,000. Each holder of preferred stock received a pro rata share of $150,000.

The Reorganization Plan also provided for the payment in full, with interest if appropriate, or reinstatement, as appropriate, of all employee and trade claims. In order for the Reorganization Plan to have become effective, the Company was required to, among other things, revise its charter and bylaws, enter into a new secured financing agreement, and designate a new board of directors. All these requirements were met to the satisfaction of the Court.

Chapter 11 reorganization-related costs of $1.0 million and $4.0 million included in the consolidated statements of operations as special charges and reorganization items for the eight and four months ended December 31, 2002, and April 30, 2002, respectively, relate primarily to legal and other professional service fees incurred by both the Company and the former informal committee of bondholders. During the period between the filing of the Reorganization Plan and its confirmation by the bankruptcy court, February 28, 2002 to April 30, 2002, ZiLOG was required to file public documents as a “debtor-in-possession.” Accordingly, legal and other professional service fees paid during this period amounting to $2.3 million have been separately identified in the Company’s consolidated statements of cash flow.

Liabilities, which were subject to compromise and subsequently forgiven under the terms of the Reorganization Plan, are summarized as follows (in millions):

On February 28, 2002, ZiLOG and its subsidiary, MOD III, Inc., filed the Reorganization Plan with the United States Bankruptcy Court for the Northern District of California under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy court subsequently confirmed the Reorganization Plan by its order entered on April 30, 2002. The Reorganization Plan became effective on May 13, 2002. The Company prior to emergence from bankruptcy is referred to as the “Predecessor Company” and the reorganized company is referred to as the “Successor Company.”

Pursuant to the Reorganization Plan, ZiLOG extinguished $325.7 million of liabilities, which included $280.0 million principal amount of the Notes, $27.2 million in accrued interest due on the Notes and $18.5 million of dividends payable on the Company’s previously outstanding series A preferred stock. The former note-holders received substantially all of the Company’s new common stock and a liquidation preference in the net proceeds on the sale of the assets held by MOD III, Inc. The former equity holders received an aggregate $200,000 in cash. All debt and equity securities of the Predecessor Company were cancelled. As a consequence of these events, the Predecessor Company recorded a $205.7 million net gain on the extinguishment of these liabilities.

On May 1, 2002, ZiLOG adopted “fresh-start” accounting principles proscribed by the American Institute of Certified Public Accountant’s Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” or SOP 90-7. Fresh-start accounting was appropriate because the Company’s former note-holders received substantially all of the Company’s new common stock and the reorganization value of the assets of the Successor Company were less than the total pre-petition liabilities plus post-petition liabilities.

SOP 90-7 requires the Company to establish a reorganization value upon the adoption of fresh-start reporting. ZiLOG’s reorganization value was estimated by Lazard Frères & Co., LLC, its independent financial advisor, using discounted projected cash flows, precedent transactions and public company comparisons. These valuations indicated a range of reorganization values between $70 million and $109 million. In agreement with the informal committee of note-holders and with the approval of the bankruptcy court, the Company established a reorganization equity value of $90.0 million as of May 1, 2002 for purposes of applying fresh-start reporting. This estimate of equity value was derived from a weighted average of three separate valuations, the first based on a comparable public company analysis, the second based on a precedent transaction analysis and the third based on a discounted cash flow analysis. These valuations were based on the underlying assumptions that include: the successful reorganization of the Company’s business and finances in a timely manner; the implementation of the Company’s business plan as a reorganized entity; the accuracy of information supplied by management about its business and prospects; achievement of forecasted projections; market conditions as of December 31, 2001 continuing through an assumed effective date of March 31, 2002; and the plan of reorganization becoming effective in accordance with the estimates and assumptions upon which the valuation was based. The value of an operating business such as the Company’s, however, is subject to numerous uncertainties and contingencies, which are difficult to predict, and will fluctuate with changing factors affecting its financial condition and prospects.

Fresh-start reporting requires that the Company also record its assets at fair value upon adoption. Consequently, the Company engaged Key Assets as independent appraisers to assist management in the valuation of its tangible assets and engaged another independent party to conduct a valuation of its intangible assets. These appraisals resulted in a $13.1 million increase in property, plant and equipment related to the five-inch wafer fabrication facility and an adjacent undeveloped parcel of land. The valuation undertaken by Key Assets for fresh-start reporting assigned fair value to property, plant and equipment in Nampa, Idaho related to the five-inch wafer fabrication facility (MOD II) and the data center, as well as an adjacent 20 acre parcel of undeveloped land assuming a willing buyer and a willing seller and not under distressed sale conditions. Previously, the Company’s five-inch wafer fabrication facility had been separately held for sale at a negotiated selling price of $3.0 million, based on a non-binding purchase offer received from a potential buyer in December 2000. Management agreed to the terms of the December 2000 purchase offer for several reasons including: monetary and human cost savings compared with closing and decommissioning the facility, as well as terminating the employees; and the acquirer was also willing to assure an uninterrupted source of supply of wafers manufactured in the MOD II facility until alternative sources could be qualified by the Company.

Following a change in strategy, the MOD II assets were put back into service in June 2001. In June 2001, management determined that the fair value of the MOD II assets was $3.0 million.

This appraisal also resulted in a $3.9 million increase in finished good inventories held by the Company and its distributors to reflect fair values at May 1, 2002. The appraisers also identified several separable intangible assets that were valued and recorded as part of fresh-start reporting as follows (in millions):

These increases in carrying value of the Company’s intangible assets were based on three valuation approaches, depending on the specific intangible asset to be valued: the income approach, the cost approach and the market approach. These increases in carrying value of the Company’s capital assets were based on physical inspections and written appraisals that included market data and cost approaches. Goodwill of $26.7 million was also recorded as part of fresh-start reporting. In the eight months ended December 31, 2002, the Company recorded a net increase in goodwill of $7.9 million to $34.6 million. This increase related primarily to a reduction in the tax basis of certain assets at December 31, 2002 as a result of the application of tax regulations to the Company following the completion of the reorganization plan.

The Company recorded a gain of $83.7 million in the Predecessor Company’s financial statements in connection with the fresh-start adjustments referred to above.

The Company’s results of operations and financial position after April 30, 2002 are not comparable to the results of operations and financial position prior to April 30, 2002 due to its adoption of “fresh-start” reporting upon the Company’s emergence from bankruptcy.

The table below provides a reconciliation of the Predecessor Company’s un-audited consolidated balance sheet as of April 30, 2002 to that of the Successor Company on May 1, 2002, which presents the adjustments that give effect to the reorganization and fresh-start reporting (in millions):

The Company’s net gain upon extinguishment of liabilities and fresh-start adjustments were comprised of the following elements (in millions):

Effective January 1, 2002, the Company adopted the provisions of FAS 142, “Goodwill and Other Intangible Assets.” At the time of adoption, the Company had no amounts of goodwill recorded in the balance sheet. Therefore the initial adoption had no material effect to the Company.

Under SFAS 142, goodwill is not amortized, but is reviewed annually (or more frequently if impairment indicators arise) for impairment. The Company did not have any impairment of goodwill in the years ended December 31, 2004, 2003 or in the eight months ended December 31, 2002. In connection with its reorganization in 2002, the Company recorded a valuation allowance against deferred tax assets and recorded deferred income tax liabilities and income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies.” These tax contingencies were primarily attributable to the Company’s reorganization of MOD III. During 2004 and 2003, the Company reassessed and updated its deferred income tax liabilities and income tax contingencies requirements and reduced the associated liabilities as an adjustment to goodwill as presented in the table below. In addition, reductions in the valuation allowance that was established under fresh-start reporting are also recorded as a reduction in the carrying value of goodwill. Changes in the carrying value of goodwill for the years ended December 31, 2004, 2003 and for the eight months ended December 31, 2002 are as follows (in millions):

Intangible assets established in connection with the Company’s fresh-start reporting, separable intangible assets that are deemed to have defined lives (primarily related to existing technology and brand name), are being amortized utilizing the pattern-of-use method over estimated useful lives ranging from 3 to 10 years. Changes in the carrying value of separable intangible assets for the years ended December 31, 2004, 2003 and for the eight months ended December 31, 2002 are as follows (in millions):

The anticipated amortization schedule for the remaining years of these separable intangible assets is as follows (in millions):

NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

Cash and cash equivalents consist primarily of cash in bank accounts and money market accounts. The short-term debt represents borrowings under a revolving line of credit with a commercial lender. The carrying amount on the balance sheet for cash and cash equivalents at December 31, 2004, and 2003 were $37.7 million and $22.0 million, respectively, which approximates fair value, due to their short maturities. The carrying amount, which approximates fair value due to its variable interest rate, on the balance sheet at December 31, 2003 for the short-term debt was $5.0 million, which represents the principle amount borrowed. There were no outstanding borrowings at December 31, 2004. The fair value of the accounts receivable and accounts payable approximates the carrying amount because of the short maturity of these instruments.

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash equivalents and trade accounts receivable. By policy, the Company places its investments only with high credit quality financial institutions. Almost all of the Company’s trade accounts receivable were derived from sales to electronics distributors and original equipment manufacturers in the market segments of computers and peripherals, consumer electronics, appliances, medical devices and building controls. The

Company performs ongoing credit evaluations of its customers’ financial condition and limits its exposure to financial losses by limiting the amount of credit extended whenever deemed necessary and generally does not require collateral. As of December 31, 2004, there were two customers with net accounts receivable comprising more than 10% of total net accounts receivable. SMK Corporation and Digital Security Controls had net accounts receivable at December 31, 2004 of $1.5 million and $1.0 million, respectively.

On April 16th, 2004, the Company announced the closure of its MOD II five-inch wafer manufacturing facility in Nampa, Idaho and the related transfer of MOD II production activities to its foundry partner, X-Fab, in Lubbock, Texas. MOD II ceased production operations on July 9, 2004. As a result, in 2004, the Company incurred $3.2 million in sustaining costs for post-closure maintenance of the MOD II facility. Additionally, MOD III sustaining costs for post-closure maintenance incurred by the Company totaled $1.7 million, which was offset by approximately $4.9 million reimbursement for these costs from the sale of the MOD III equipment to STMicroelectronics, Inc. in July, 2004.

As a result of the closure of MOD II, in 2004 the Company incurred the following additional special charges: (1) employee severance and termination benefits of approximately $1.8 million related to the termination of 144 employees, and; (2) an asset impairment charge of $5.4 million related to the write-down of the MOD II long-lived assets and the subsequent gain on sale of assets of $1.7 million related to the sale of the wafer manufacturing equipment and related assets to STMicroelectronics, Inc. in the fourth quarter of 2004.

Approximately $0.1 million of special charges during the year relate to third-party professional legal service fees associated with the Company’s debt and equity restructuring of May 2002, and $0.3 million severance and termination benefits related to the Company’s continued efforts to align infrastructure costs to business-level requirements.

The Company’s estimates used to determine the fair value of MOD II land and buildings held for sale as of December 31, 2004, $3.6 million, are based on an independent appraisal from a third party. There can be no assurance that the value we will realize from the ultimate sale or disposition of these assets will be equal to the estimated fair values. If the ultimate net value realized upon the disposition of the remaining MOD II assets is less than the estimated fair value, the Company’s future results of operations could be adversely impacted.

Special charges in 2003 totaled $3.8 million and the primary components of these special charges were $1.5 million of employee severance and termination benefits, $1.3 million of MOD III closure costs and professional fees of $0.6 million in connection with the Company’s bankruptcy related legal proceedings and Securities and Exchange Commission S-1 registration statement for the registration of certain common stock required by the May 2002 reorganization plan, which became effective in July 2003. The employee severance and termination benefits primarily relate to the elimination of manufacturing positions at the Company’s MOD II wafer fabrication facility and the Manila, Philippines test facility that took place in February and September 2003, respectively. The $1.3 million of MOD III closure costs were ongoing costs for the maintenance of the idled MOD III eight-inch wafer manufacturing facility in Nampa, Idaho. The Company also had long-lived asset impairments of $0.2 million and an equity investment impairment of $0.2 million.

Special charges for 2002 included $1.7 million in charges in connection with the closure of the Company’s Austin, Texas design center, as the Company abandoned furniture, fixtures and equipment with this associated book value. Also in connection with this action, the streamlining of the Company’s sales force, and reduction in headcount in Nampa, Idaho and the Philippines we paid severance and termination benefits of approximately $2.5 million.

Approximately $0.8 million of computer aided design software was impaired in 2002 as a result of the Company’s decision to cancel development of the Cartezian family of 32-bit microprocessors. Additionally, we incurred $3.2 million of special charges during 2002 in connection with the closure of the Company’s MOD III eight-inch wafer fabrication facility in Idaho and $0.5 million of lease termination costs related to the closure and relocation of certain sales offices. These costs include relocation of production to alternative manufacturing sites and the cost of closing the facilities. The Company’s recapitalization and associated Chapter 11 reorganization activities resulted in charges of $5.0 million in 2002 including legal, accounting and other professional advice and service fees. In addition, $0.2 million of unamortized goodwill relating to the Company’s 2000 acquisition of PLC Corporation was deemed to be of no future value and was written off during 2002.

The following table details special charges accrual activity for the years ended December 31, 2004, 2003, the eight months ended December 31, 2002 and four months ended April 30, 2002 (in millions):

Special charges for the years ended December 31, 2004 and 2003, for the eight months ended December 31, 2002 and four months ended April 30, 2002, are as follows (in millions):

On July 16, 2004, the shareholders of MOD III approved the sale of substantially all of the manufacturing equipment of MOD III to STMicroelectronics, Inc. for an aggregate amount of $26.0 million. The sale closed and was funded on July 16, 2004. In September 2004, MOD III paid dividends and redeemed a portion of the 28,000 Preferred Series A shares outstanding for a net consideration of approximately $20.2 million after paying for reimbursements totaling approximately $4.9 million to ZiLOG and $0.9 million for transaction costs related to the sale, including brokerage fees, legal fees and other professional services costs. Reimbursements to ZiLOG were to pay certain costs of maintaining MOD III in a saleable condition on MOD III’s behalf that had been previously recorded in special charges and credits.

In the fourth quarter of 2004, the Company sold of all of its wafer manufacturing equipment and related assets of its MOD II facility in Nampa, Idaho, to STMicroelectronics, Inc. for an aggregate cash consideration of $5.9 million, net of selling costs and expenses. A net gain of $1.7 million was recorded in connection with these sales. The remaining assets of MOD II consist of land and buildings with a carrying value of $3.6 million which have been classified as assets held for sale on the Company’s balance sheet.

Upon consummation of the Reorganization Plan, the Company entered into a senior secured financing facility (the “Facility”) with a commercial lender (the “Lender”), dated May 13, 2002, for a three-year $15.0 million senior secured revolving credit facility. Borrowings on the Facility bear interest at a rate per annum equal, at the Company’s option, to the commercial lender’s stated prime rate or LIBOR, plus 2.5%. At December 31, 2004, the Company had no borrowings outstanding under this facility. At December 31, 2003, the Company had borrowings outstanding of $5.0 million, at a LIBOR-based rate of 3.6%. The Facility is scheduled to expire on May 13, 2005. As of December 31, 2004 and December 31, 2003, the Company had $0.2 and $0.3 million of standby letters of credit, respectively, issued to vendors under the Facility. As of December 31, 2004, approximately $4.7 million was available for additional borrowing based upon our current borrowing base.

The Company is only subject to certain financial covenants under this Facility, including tangible asset and fixed charge coverage ratio, 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 Company has an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). Under the 401(k) Plan, participating U.S. employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company may make matching contributions on behalf of each participating employee in an amount equal to 100% of the participant’s deferral contribution, up to 1.5% of the participant’s compensation on a quarterly basis. The Company may also make additional discretionary contributions to the 401(k) Plan. Matching contributions to the 401(k) Plan were approximately $0.3 for the year ended December 31, 2004, $0.4 million for the year ended December 31, 2003, $0.3 million for the eight month period ended December 31, 2002 and $0.2 million for the four month period ended April 30, 2002. There were no discretionary contributions made in 2004, 2003 or 2002.

The Company’s Philippines subsidiaries maintain a defined benefit pension plan for local employees, which is consistent with local statutes and practices. This benefit plan had no material impact on the Company’s financial statements for the periods presented.

The following description summarizes information regarding the Company’s capital stock after confirmation of the Reorganization Plan described in Note 2. This information is subject in all respects to applicable provisions of ZiLOG’s amended and restated certificate of incorporation and its amended and restated bylaws.

In 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 Successor Company common shares and per-share figures have been retroactively restated to reflect this one-for-two reverse stock split. In addition, the Company reclassified $200,000 and $200,000 from “Common stock” to “Additional paid-in capital” in the Company’s balance sheet at December 31, 2003 and 2002, respectively.

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

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

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

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

At December 31, 2004 a total of 52,217 shares of the Company’s common stock have been purchased under the 2004 ESPP, leaving a total of 1,197,783 shares available to be purchased.

On July 29, 2004 the Company’s Board of Directors approved the 2004 stock repurchase program pursuant to which the Company may repurchase up to $5.0 million in market value of its outstanding shares of common stock.

In August 2004, the Company purchased 415,300 shares of its common stock in the market for $3.2 million. In September 2004, it purchased 136,400 shares of common stock in the market for $1.1 million. And, in October 2004, the Company purchased 20,400 shares of its common stock in the market for $0.1 million.

As of December 31, 2004, the company had repurchased 572,100 shares under this program at an aggregate cost of $4.4 million.

On April 17, 2003, the Company’s Board of Directors approved a stock repurchase program under which the Company may repurchase up to 500,000 shares of its outstanding common stock.

On May 30, 2003, ZiLOG’s Board of Directors approved the repurchase of 50,000 shares of common stock from ZiLOG’s President, Michael Burger, at the closing price on that day of $6.50 per share. The net cash paid to repurchase these shares from Mr. Burger was net of certain loan repayments made to the Company by Mr. Burger.

As of December 31, 2004, the Company had repurchased 405,164 shares under this program from employees and former employees pursuant to repurchase rights at an aggregate cost of $2.3 million.

On November 17, 2004, the board of directors, in conjunction with Mr. Burger’s resignation, approved the repurchase of 92,735 shares for fair market purchase price of $6.20 per share in consideration for the repayment of his loans totaling $0.6 million.

On December 17, 2003, the 2004 Omnibus Stock Incentive Plan (the “2004 Plan”) was adopted by the compensation committee of the Company’s board of directors and approved by the Company’s stockholders on February 12, 2004. The 2004 Plan became effective on March 10, 2004. The committee may grant incentive stock options (ISO”), non-statutory stock options (“NSO”) or restricted shares to certain employees, officers, directors, advisors and consultants of the Company who may purchase up to 1,500,000 shares of the Company’s common stock, par value $0.01 per share under the 2004 Plan.

In general, the options shares granted pursuant to the 2004 Plan will be exercisable at such time or times, and subject to such terms and conditions (including the vesting schedule, period of exercisability and expiration

date) as the Compensation Committee determines, in the applicable option agreement. The exercise price per share, payable upon the exercise of an option, will be established by the committee at the time of the grant. But, must not be less than par value per share of common stock on the date of the grant and in the case of an ISO generally must not be less than 100% of the fair market value per share on the date of grant.

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

At December 31, 2004, a total of 927,270 NSO grants, net of cancellations, are outstanding and 20,910 restricted shares have been granted under the 2004 Plan.

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

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

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

At December 31, 2004, one-third of the EBITDA-linked options had vested, which represent options to purchase 173,983 shares of common stock out of a total of 521,949 EBITDA-linked options granted, net of cancellations. In no event will any EBITDA-linked options vest later than May 15, 2008, even if these adjusted EBITDA thresholds have not been satisfied. The per share exercise price of shares purchasable under an EBITDA-linked option is $5.52 and each such option will be exercisable for ten years after the date such option is granted, unless earlier terminated. In general, non-EBITDA-linked options granted pursuant to the Omnibus Plan will be exercisable at such time or times, and subject to such other terms and conditions (including the vesting schedule, period of exercisability and expiration date) as the Compensation Committee determines, in the applicable award agreements or thereafter. The exercise price per share payable upon the exercise of an option will be established by the committee, in its sole discretion, at the time of grant.

When an optionee exercises an option before the option is vested, then the optionee will receive shares of restricted stock equal to the number of shares exercised. If the optionee terminates employment or service before the restrictions on the restricted stock have lapsed, then the Company has the right to repurchase these shares as described below.

The Company was permitted to grant up to 1,220,930 restricted shares of common stock under the Omnibus Plan. The restricted shares generally vest as to 25% of the shares on the date of grant and as to an additional 25% on each of the first, second and third anniversaries of such grant date.

The Omnibus Plan authorizes the Compensation Committee to make loans available to participants with respect to certain restricted stock awards for the payment of any federal or state income tax attributable to the restricted stock subject to the award. Subsequent to the passing of the Sarbanes Oxley Act of 2002, the Company no longer will offer loans to employees for the payment of taxes on restricted stock. At December 31, 2004, 2003 and 2002 employee loans outstanding aggregated $0.5 million, $1.4 million and $2.0 million, respectively, and these amounts are recorded as other assets in the accompanying balance sheet.

On termination of employment without cause, any outstanding loan amount that relates to the tax on such unvested shares is automatically forgiven.

As of December 31, 2003, there were 365,128 shares of common stock that were subject to repurchase rights by the Company upon termination of employment by the holders. Following the Company’s public offering of stock in March 2004, the restrictions as to repurchase rights no longer apply. The restrictions on these shares lapse in May 2005.

On October 18, 2002, the Board of Directors amended the Omnibus Plan to provide, among other things, that no further restricted shares be issued under the Omnibus Plan (other than those already reserved for particular plan participants) and that the shares which had formerly been allocated for restricted shares be allocated to future grants of stock options.

In January 2002, the Company entered into an employment agreement with James M. Thorburn, the Company’s Chairman and Chief Executive Officer, pursuant to which the Company was required to make awards of 88,232 shares of restricted common stock on each of May 13, 2002, 2003, 2004 and 2005. The Company committed to loan Mr. Thorburn the funds to pay the income taxes due with respect to his restricted stock awards, as the Company had 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 change, 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. The restricted stock awards of May 13, 2004 and 2005 were cancelled and replaced with options to purchase 229,420 shares of common stock at an exercise price of $5.20. The original vesting dates were retained. The Company recorded additional compensation expense for these modifications to the restricted stock awards.

For the years ended December 31, 2004 and 2003 and the eight-month period ended December 31, 2002, ZiLOG recognized $2.0 million, $1.5 million and $2.9 million, respectively, of stock-based compensation expense primarily in connection with the award of restricted stock, during May 2002 to certain employees, executives and consultants at purchase prices below their deemed fair market value for accounting purposes at the date of grant. The restrictions on the shares of restricted stock lapsed 25% on the award date which was May 15^th, 2002 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. Compensation expense for stock awards to consultants will be re-measured at each balance sheet date until the awards vest and will be recognized over the vesting periods. Based on the employee stock and option award grants the Company made during May 2002, ZiLOG anticipates that it will recognize stock compensation charges of $0.5 million, $0.1 million and $0.1 million for the years ending December 31, 2005, 2006 and 2007, respectively.

Deferred compensation expense is generally being amortized ratably over the four-year option-vesting period. Stock option compensation expense related to these options totaled approximately $0.1 million for the four-month period ended April 30, 2002. The remaining balance of approximately $0.5 million, net of amortization and cancellations, was reclassified in accordance with “fresh-start” accounting principles as proscribed under S0P-90-7 (See Note 3).

Holders of Common Stock were entitled to one vote per share on all matters submitted to a vote of stockholders. Approval of matters brought before the stockholders required the affirmative vote of a majority of the holders of the outstanding shares of Common Stock, except as otherwise required by the General Corporation Law of the State of Delaware (the “DGCL”). Holders of Class A Non-Voting Common Stock did not have any voting rights, except the right to vote as a class to the extent required by DGCL.

Except for differences in voting rights described above, the rights, powers, preferences, and limitations of the Common Stock and Class A Non-Voting Common Stock were identical. Subject to the rights of holders of Series A Stock and other classes and/or series of preferred stock, if any, all shares of Common Stock and Class A Non-Voting Common Stock were entitled to share in such dividends as the Board may from time to time declare from sources legally available therefore. Subject to the rights of creditors and holders of Series A Stock and other classes and/or series of preferred stock, if any, holders of Common Stock and Class A Non-Voting Common Stock were entitled to share ratably in a distribution of assets of the surviving corporation upon any liquidation, dissolution or winding up of surviving corporation. At April 30, 2002 and at December 31, 2001, 32,017,272 shares of Common Stock and 10,000,000 shares of Class A Non-Voting Common Stock were issued and outstanding. Under the Reorganization Plan, all currently outstanding shares of Common Stock were cancelled (See Note 2).

The Board of Directors had the authority to issue, from time to time, by resolution and without any action by stockholders, up to 5,000,000 shares of preferred stock, par value $100.00 per share, in one or more classes and/or series and may establish the powers, designations, preferences, rights and qualifications, limitations or restrictions (which may differ with respect to each such class and/or series) of such class and/or series. The Board of Directors adopted a resolution on February 26, 1998, providing for the creation of series A cumulative preferred stock (“Series A Stock”). On February 28, 1998, the Board of Directors issued 250,000 shares of series A stock, which is a non-voting 13.5% preferred stock with a par value of $100.00 per share.

The series A stock accumulated dividends at the rate of 13.5% per annum (payable quarterly) for periods ending on or prior to February 27, 2008, and 15.5% per annum thereafter. Dividends were payable, at the election of the Board of Directors but subject to availability of funds and the terms of the Notes in cash or in kind through corresponding increase in the liquidation preference (as described below) of the Series A Stock. The Series A Stock had an initial liquidation preference of $100.00 per share.

To the extent that a quarterly dividend payment in respect to a share of series A stock was not made in cash when due, the amount of such unpaid dividend accumulated (whether or not declared by the Board of Directors) through an increase in the liquidation preference of such share of series A stock equal to the amount of such unpaid dividend, and compounded dividends will accumulate on all such accumulated and unpaid dividends. The liquidation preference was to be reduced to the extent that previously accumulated dividends are thereafter paid in cash. The Company was required to pay in cash all accumulated dividends that have been applied to increase the liquidation preference on February 27, 2008 (the “Clean-Down”).

Shares of Series A Stock were redeemable at the option of the Company, in whole or in part, at 100% of par value, if redeemed after February 25, 2003, in each case of the sum of (i), the liquidation preference thereof, increases to the extent that accumulated dividends thereon shall not have been paid in cash, plus (ii) accrued and unpaid dividends thereon to the date of redemption. Redemption of shares of the series A stock prior to February 26, 2003 was to be at a premium to par value based on a declining scale as follows: 103.5% after August 25, 1999; 103.0% after February 25, 2000; 102.5% after August 25, 2000; 102.0% after February 25, 2001; 101.5% after August 25, 2001; 101% after February 25, 2002 and 100.5% after August 25, 2002. Optional redemption of the series A stock was to be subject to, and expressly conditioned upon, certain limitations under the notes.

In certain circumstances, including the occurrence of a change of control at the Company, but again subject to certain limitations under the notes, the Company might have been required to repurchase shares of series A stock at 101% of the sum of the liquidation preference thereof, increased to the extent that accumulated dividends thereon shall not have been paid in cash, plus accumulated and unpaid dividends to the repurchase date.

Holders of series A stock did not have any voting rights with respect thereto, except for (i) such rights as are provided under the DGCL, (ii) the right to elect, as a class, one director of the Company in the event that the Company fails to comply with its Clean-Down or repurchase obligations, and (iii) class voting rights with respect to transactions adversely affecting the rights, preferences or powers of the series A stock and certain transactions involving stock that ranks junior in payment of dividends, or upon liquidation, to the series A stock. At April 30, 2002, and at December 31, 2001, 250,000 shares of series A cumulative preferred stock were issued and outstanding. Under the Reorganization Plans all currently outstanding shares of series A cumulative preferred stock were cancelled.

A summary of the Company’s activity for all stock plans for the years ended December 31, 2004, 2003, the eight-month period ended December 31, 2002 and the four-month period ended April 30, 2002 is as follows:

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

Options that were exercisable as of December 31, 2004, 2003 and 2002 were 689,787, 465,217 and 286,314, respectively.

The weighted average grant date fair value of options granted for the years ended December 31, 2004, 2003 and the eight months ended December 31, 2002 were $5.67, $4.26 and $3.96 per share, respectively. No options were granted in the four months ended April 30, 2002. The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model applying the following weighted average assumptions:

As described in Note 11, before ZiLOG’s Series A Cumulative Preferred Stock (“Series A Stock”) was cancelled pursuant to the Reorganization Plan, these shares accumulated dividends at a rate of 13.5% per annum, with dividends payable quarterly at the election of the Board of Directors. Unpaid dividends are recognized as a charge to accumulated deficit and as an increase in the liquidation preference of the Series A Stock. As of April 30, 2002, the Company had not paid any dividends on the Series A Stock and the corresponding accrued dividends of approximately $18.5 million were included, in liabilities subject to compromise (See Note 3). During the four-month period ended April 30, 2002, $1.9 million of dividends on Series A Stock were accrued and charged to accumulated deficit. As of the effective date of the Reorganization Plan, all accumulated dividends were extinguished in accordance with the plan.

At December 31, 2003, a minority interest of approximately $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 represents 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 held for sale at December 31, 2003.

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

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

Substantially all of the equipment of MOD III was sold on July 16, 2004. The remaining assets of MOD III consist primarily of land and a building. The Company expects to continue incurring period expenses, totaling approximately $0.2 million per quarter, for the ongoing costs of maintaining the remaining assets of MOD III, which will be recorded as a special charge in the consolidated statement of operations as they are incurred. Also, under the terms of the MOD III, Inc. Series A preferred stock liquidation preference, approximately $4.9 million of historical costs incurred by the Company on behalf of MOD III, Inc. to maintain its assets in saleable condition was reimbursed to the Company from the net proceeds received from the sale of MOD III’s assets. Such reimbursement is included within the caption special charges and reorganization items in the Company’s consolidated statement of operations for the year ended December 31, 2004 (See Note 6).

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

At December 31, 2004, 2003 and 2002, options to purchase 1.7 million, 1.2 million and 0.9 million shares of common stock, respectively, are excluded from the determination of diluted net loss per share, as the effect of such shares is anti-dilutive.

The components of income (loss) before tax for the year ended December 31, 2004, the year ended December 31, 2003, the eight months ended December 31, 2002, and the four months ended as April 30, 2002 are as follows (in millions):

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

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

Realization of the net deferred tax assets is dependent on future earnings, which are uncertain. Accordingly, a valuation allowance, in an amount equal to the net deferred tax assets as of December 31, 2004, has been established to reflect this uncertainty. The valuation allowance decreased by approximately $8.3 million for the fiscal year ended December 31, 2004, resulting in a credit to goodwill of $8.3 million as the valuation allowance is attributable to fresh-start accounting items. This net decrease was attributable to reversal of timing differences during 2004 related primarily to accruals and reserves and the change from the recognition of the deferred tax assets offsetting the deferred tax liabilities.

The $2.5 million valuation allowance at December 31, 2004 relates to fresh start accounting items that, when reversed, will result in a credit to goodwill and not income tax expense.

The Company has federal and state net operating loss carryforwards (“NOLs”) of $3.5 million and $5.0 million, respectively. The federal NOLs will expire in 2024, if not utilized, and the state NOL carryforwards will begin to expire in 2013 if not utilized. The Company has foreign tax carryforwards of approximately $1.2 million that will expire between 2009 and 2011 if not utilized.

In connection with its reorganization in 2002, the Company recorded income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” These contingencies were primarily attributable to the Company’s reorganization of MOD III. During 2003, the Company reassessed its deferred income tax liabilities and income tax contingencies and reduced the associated liabilities as an adjustment to goodwill. As of December 31, 2004, the remaining reserves for tax contingencies associated with these fresh start accounting items was $6.6 million and are reflected in the accompanying balance sheet as other long-term liabilities.

The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless they are considered permanently reinvested outside of the U.S. At December 31, 2004, the cumulative amount of earnings upon which U.S. income tax has not been provided is approximately $1.5 million.

Some of the Company’s leases for facilities and equipment are under non-cancelable operating leases, which expire in 2006 through 2009. The facility lease agreements generally provide for base rental rates which increase at various times during the terms of the leases and also provide for renewal options at fair market rental value.

Minimum future lease payments under these non-cancelable operating leases at December 31, 2004 are as follows (in millions):

The Company is 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, were approximately $2.6 million, $2.7 million, $1.7 million and $1.2 million for the years ended December 31, 2004, 2003, the eight-month period ended December 31, 2002 and the four-month period ended April 30, 2002.

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

On February 17, 2005, the Company received an unfavorable arbitration judgment related to a contract dispute with a former employee totaling approximately $0.2 million that was ongoing at December 31, 2004. This judgment has been reflected in the Company’s financial statements at December 31, 2004, as an increase to accrued liabilities and to general and administrative expense.

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

ZiLOG entered into employment agreements with each of its named executive officers. In June 2002, prior to the issuance of the Sarbanes Oxley Act, loans were made to executive officers and certain other employees and consultants to pay the income taxes due on the restricted shares of common stock that were granted to them. At December 31, 2004 and December 31, 2003, total loans outstanding were $0.5 million and $1.4 million, respectively. Each loan recipient pledged the shares of restricted stock as collateral for these loans pursuant to stock pledge agreements. All such loans come due five years from the date of issuance and they bear interest at 5.5% per annum.

On May 17, 2002, the Company sold 45,290 shares of common stock to Federico Faggin, a member of ZiLOG’s board of directors, for $5.52 per share, for an aggregate amount of $250,000. On the date of this sale, the Over-the-Counter Bulletin Board quoted the closing sale at $12.50 per share. The Company does not believe that this quoted price reflected the common stock’s fair market value because its common stock, at that time, was thinly traded and had just emerged from bankruptcy.

On May 30, 2003, the Company repurchased 50,000 shares of common stock from its President and Director, Michael D. Burger, for a purchase price of $6.50 per share, which was the closing price on the Over-the-Counter Bulletin Board on the date of repurchase net of the repayment of certain loans to Mr. Burger that were secured against the restricted stock. The amount of debt repaid was $161,245 with interest accruing at a rate of 5.5% per year. Subsequent to Mr. Burger’s resignation in December 2004, the Company repurchased 92,735 shares for a fair market purchase price of $6.20 per share in consideration for the repayment of his loans totaling $574,956.

In June, 2004, the Company’s CEO, James M. Thorburn paid $247,582 in cash to satisfy all of his outstanding loans and interest.

Beginning in May 2002, ZiLOG consolidated its business segments into one reportable segment to reflect the change in the manner in which its chief operating decision maker allocates resources and assesses the performance of the Company’s business. The Company engages primarily in the design, development, manufacture and marketing of semiconductor products. The Company sells its products to distributors and original equipment manufacturers (OEMs) in a broad range of market segments. 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.

Prior to the consummation of the Company’s reorganization, there were two reportable business segments called communications and embedded control. The prior reporting structure was based on a previous operating and reporting organization that was focused largely on development of new products targeted on the communications and networking sectors. ZiLOG is now organized and focused on its core business, which is based on 8-bit micrologic product solutions. The Company operates in one reporting segment and engages primarily in the design, development, manufacture and marketing of semiconductor products. ZiLOG has two broad business lines called micrologic devices and other devices and foundry services within the Company’s one reportable segment.

The Company’s two broad business lines are based on product technologies and can be summarized as follows:

Prior reporting period has been restated to reflect the Company’s decision to operate in one reportable segment as of May 1, 2002 in the following table, which summarizes ZiLOG’s net sales by region, by channel, and by business line (in millions):

Net sales are attributable to the ship-to location of ZiLOG’s customers as presented in the following table (in millions):

For the year ended December 31, 2004, two customers, Future Electronics, Inc., a worldwide distributor of product with an exclusive arrangement for distribution of the Company’s products in North America, and SMK Corporation, an OEM customer, accounted for approximately 20.6% and 11.9% of net sales, respectively. For the year ended December 31, 2003, two customers, Future Electronics, Inc. and Globespan Virata, Inc. accounted for 17.6% and 10.6% of net sales, respectively. For the eight-month period ended December 31, 2002 and the four-month period ended April 30, 2002, Pioneer-Standard Electronics, a distributor, accounted for approximately 14.0% and 10.5% of net sales, respectively. The relationship with Pioneer-Standard Electronics was terminated in the fourth quarter of 2002.

As of December 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, and as a result of the material weaknesses previously disclosed on the Company’s Form 12b-25 filing and described in greater detail in the “Risk Factors” section of this Annual Report and below, Mr. Thorburn and Mr. Grace concluded that the Company’s disclosure controls and procedures did not operate effectively as of December 31, 2004. Disclosure controls ensure that material information is properly compiled, communicated and analyzed by management of the Company on a timely basis so that the quality and timeliness of the Company’s public disclosures comply with its SEC disclosure requirements.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, including those policies and procedures that:

A material weakness is a significant deficiency, as defined in Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2, or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, using the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Management’s assessment identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2004:

Management concluded that the internal control deficiencies noted above each represent a material weakness in internal control over financial reporting and, accordingly, management concluded that, as of December 31, 2004, the Company’s internal control over financial reporting was not effective.

KPMG LLP, our independent registered public accounting firm, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. That report appears on page 106.

The following discussion sets forth the 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 three-month period ended December 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Significant management effort and resources were expended during the fourth quarter of 2004 to document, test and enhance the Company’s internal control over financial reporting. The Company implemented the following initiatives to improve internal control over financial reporting in the fourth quarter of 2004;

To address the material weaknesses identified in Management’s Report on Internal Control over Financial Reporting, management has undertaken remediation actions related to the policies and procedures over the determination of the reserve for distributor price adjustments and the preparation of the Company’s consolidated financial statements. Specifically, management has remediated the design and operating effectiveness of the Company’s internal control over recording distributor price adjustment reserves by:

Remediation of internal controls in the area of preparing the Company’s consolidated financial statements, including the consolidated statement of cash flows, will include additional staff training and increased levels of supervision and review to improve the effectiveness of the compilation of the statement of cash flows.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that ZiLOG, Inc. and subsidiaries did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of material weaknesses identified in management’s assessment, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ZiLOG, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment as of December 31, 2004:

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ZiLOG, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for the years ended December 31, 2004 and 2003, the eight months ended December 31, 2002, and the four months ended April 30, 2002. The aforementioned material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and this report does not affect our report dated March 29, 2005 which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, management’s assessment that ZiLOG, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, ZiLOG, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The information required by this item relating to the Company’s directors and nominees, and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from ZiLOG’s Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2004

The following sets forth certain information with respect to the other executive officers of ZiLOG:

James M. Thorburn was appointed Chief Executive Officer, Chairman of the Board, and a director in January 2002. Between March 2001 and January 2002, Mr. Thorburn was appointed as our acting Chief Executive Officer and President in connection with a consulting agreement between Mr. Thorburn and Texas Pacific Group, an affiliate of our former principal stockholder. From July 1999 to March 2001, Mr. Thorburn was Senior Vice President and Chief Operating Officer of ON Semiconductor. From May 1998 until August 1999, Mr. Thorburn served as our Senior Vice President and Chief Financial Officer. Prior to May 1998, Mr. Thorburn was the Vice President of Operations Finance at National Semiconductor. During his 17-year career at National Semiconductor, Mr. Thorburn held various executive positions. Mr. Thorburn holds a Bachelor of Science degree in Economics from the University of Glasgow, Scotland and is a qualified accountant with the Institute of Chartered Management Accountants. Mr. Thorburn is a Group III director, subject to re-election in 2005.

Bruce Diamond was appointed Executive Vice President and Chief Operating Officer in November 2002. From January 2001 to October 2002, Mr. Diamond served as President and Chief Operating Officer for Sipex, Inc., an analog semiconductor company. From October 1997 to December 2000, Mr. Diamond served as Sr. Vice President Operations for ANADIGICS, Inc., an RF-based semiconductor IC company. From June 1982 to October 1997, Mr. Diamond held various senior positions within National Semiconductor including engineering and operations positions. Mr. Diamond holds a Bachelor of Science degree in electrical engineering from the University of Illinois at Champaign-Urbana.

Perry J. Grace was appointed as our Vice President and Chief Financial Officer in July 2001. From June 1999 to January 2001, Mr. Grace served as Controller and then Vice President of Finance and Chief Financial Officer for Ramp Networks, an Internet security appliance provider acquired by Nokia in January 2001, for whom he assisted in the post-merger integration through May 2001. Prior to Ramp Networks, Mr. Grace was employed by National Semiconductor from 1987 to 1999, where he held several finance and controller positions, and by PricewaterhouseCoopers from 1980 to 1987 in Melbourne, Australia, London, England, and San Jose, California, where he served as an audit manager. Mr. Grace holds a Bachelor of Science degree in Accounting, Business Law and Computer Science from Deakin University in Geelong, Australia, and was admitted to the Institute of Chartered Accountants in Australia in 1983.

Ramesh G. Ramchandani. Ramesh G. Ramchandani was appointed Executive Vice President of Marketing in November 2004. Mr. Ramchandani joined ZiLOG in July 2004, and between July 2004 and November 2004 he served as Senior Vice President of Marketing. From September 2000 to June 2004, Mr. Ramchandani served as the Vice President and General Manager of the Integrated Power Devices Division for ON Semiconductor Corp. From March 1997 to September 2000, Mr. Ramchandani served as Director of Worldwide Sales/Marketing and Applications for Celeritek, Inc. Prior to Celeritek, he held various senior management positions in marketing

and engineering with Mitsubishi Electronics America, Fujitsu Compound Semiconductor, and Avantek. Mr. Ramchandani graduated from Cornell University’s Johnson Graduate School of Management with a Master of Business Administration (MBA). Mr. Ramchandani holds a Bachelor of Science in Electrical Engineering (BSEE) from San Jose State University.

We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and Controller. You may request a copy of this code of ethics free of charge by sending a written request to ZiLOG, Inc. c/o Investor Relations at 532 Race Street, San Jose, California 95126.

Incorporated by reference from ZiLOG’s Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2004.

Incorporated by reference from ZiLOG’s Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2004

All other schedules are omitted because the information required to be set forth therein is not applicable or is contained in the financial statements or notes to the financial statements.

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this annual report.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29^th day of March, 2005.


ZiLOG, INC.

By:		/s/ JAMES M. THORBURN
		James M. Thorburn Chairman and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James M. Thorburn and Perry J. Grace, his/her attorneys-in-fact, each with the power of substitution, for him/her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:


532 Race Street, San Jose, CA		95126
(Address of principal executive offices)		(Zip Code)


		Page

PART I

Item 1.	Business	4

Item 2.	Properties	17

Item 3.	Legal Proceedings	18

Item 4.	Submission of Matters to a Vote of Security Holders	18

PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	19

Item 6.	Selected Consolidated Financial Data	21

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	63

Item 8.	Financial Statements and Supplementary Data	64

Item 9.	Changes in and Disagreements with Accountant on Accounting and Financial Disclosures	104

Item 9A.	Controls and Procedures	104

PART III

Item 10.	Directors and Executive Officers of the Registrant	108

Item 11.	Executive Compensation	109

Item 12.	Security Ownership of Certain Beneficial Owners and Management	109

Item 13.	Certain Relationships and Related Transactions	109

Item 14.	Principal Accounting Fees and Services	109

PART IV

Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	110


Device/Memory	Peripheral Feature Sets Offered	Markets/End Products
Z80/Z180 6-33 MHz Microprocessor No memory	CT, DMA, ESCC, GPIO, PIO, SIO, UART, WDT	telecommunication equipment, industrial controls, point of sale terminals
Z8 4-33 MHz Microcontroller OTP (0.5KB to 32KB); ROM (0.5KB to 64KB)	ADC, comparator, CT, GPIO, POR, UART, VBO, WDT	remote controls, sprinklers, keyboards, thermostats, toys, electric toothbrushes, automotive after market, automobile window winders, security systems and fire alarms, consumer electronics
Z8 Encore! 20 MHz Microcontroller Flash EPROM (4KB to 64KB); Flash SRAM up to 4KB	ADC, CT (16-bit), DMA, GPIO, IRDA, I2C, POR, PWM, SPI, UART, VBO, WDT	carbon monoxide detectors, security alarms, motor controls, wireless speakers, pointing devices and keyboards, mp3 players, consumer electronics, vending machines, point of sale terminals, fitness treadmills
eZ80 Acclaim! 20-50 MHz Microcontroller Flash EPROM (64KB, 128KB or 256KB); Flash SRAM up to 16KB	CT (16-bit), 10/100 Ethernet MAC and MII, glue-less support of Intel and Motorola modes, GPIO, IEEE 1149.1 compliant JTAG and boundary scan, IRDA, I2C, 1-10 MHz input/50 MHz output PLL, POR, RTC, SPI, UART, VBO, WDT	industrial controls, internet appliances, security controls, home connectivity, toys, time keeping systems, consumer electronics, vending machines, point of sale terminals


ADC	Analog to digital converter	PIO	Parallel IO
CT	Counter timer	PLL	Phase-locked loop
DMA	Direct memory access	POR	Power on reset
ESCC	Extended serial communications controller	PWM	Pulse width modulator
GPIO	General purpose IO	RTC	Real time clock
I2C	Philips Integrated Controller (Chip-to-Chip	SIO	Serial IO
	communication)	SPI	Serial peripheral interface
IRDA	Infra red data association interface	UART	Universal asynchronous receive transmit
JTAG	Joint test action group	VBO	Voltage brown out
MAC	Media access controller	WDT	Watch dog timer
MII	Media independent interface


	High		Low
*2003*
First Quarter	$	6.40	$	3.38
Second Quarter	$	6.96	$	3.32
Third Quarter	$	8.00	$	5.62
Fourth Quarter	$	11.68	$	6.70

*2004*
First Quarter	$	14.98	$	10.44
Second Quarter	$	13.85	$	8.77
Third Quarter	$	10.96	$	7.35
Fourth Quarter	$	8.00	$	5.10


Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1&2)	2,000,527	$	7.26	1,199,770

Equity compensation plans not approved by security holders	—		—	—

Total	2,000,527	$	7.26	1,199,770


	Successor Company						Combined			Successor Company			Predecessor Company
	Year Ended December 31,						Year Ended Dec. 31, 2002			Eight Months Ended Dec. 31, 2002			Four Months Ended April. 30, 2002			Year Ended December 31,
(In millions, except per share data)	2004			2003			Year Ended Dec. 31, 2002			Eight Months Ended Dec. 31, 2002			Four Months Ended April. 30, 2002			2001			2000
Consolidated Statement of Operations Data:
Net sales	$	95.6		$	103.6		$	139.6		$	93.6		$	46.0		$	172.3		$	239.2
Cost of sales		52.2			55.2			77.3			51.2			26.1			130.1			151.7
Cost of sales – fresh-start inventory adjustment		—			—			3.9			3.9			—			—			—

Gross margin		43.4			48.4			58.4			38.5			19.9			42.2			87.5
Operating expenses:
Research and development		20.9			18.0			17.9			11.1			6.8			28.7			36.9
Selling, general and administrative		29.6			27.6			33.4			22.6			10.8			46.1			54.5
Special charges and reorganization items⁽¹⁾		5.9			3.8			9.7			2.8			6.9			54.3			17.5
Amortization of intangible assets		4.2			6.8			7.9			7.9			—			—			—
In-process research and development		—			—			18.7			18.7			—			—			—

Total operating expenses		60.6			56.2			87.6			63.1			24.5			129.1			108.9

Operating loss		(17.2	)		(7.8	)		(29.2	)		(24.6	)		(4.6	)		(86.9	)		(21.4	)
Other income (expense):
Fresh-start adjustments		—			—			83.7			—			83.7			—			—
Net gain on discharge of debt		—			—			205.7			—			205.7			—			—
Interest income		0.3			0.3			0.3			0.2			0.1			1.1			2.8
Interest expense⁽²⁾		(0.2	)		(0.4	)		(5.5	)		(0.5	)		(5.0	)		(33.7	)		(29.1	)
Other, net		—			0.5			0.6			0.5			0.1			(0.8	)		(0.8	)

Total other income (expense)		0.1			0.4			284.8			0.2			284.6			(33.4	)		(27.1	)

Income (loss) before reorganization items, provision (benefit) for income taxes, equity method investment loss and cumulative effect of change in accounting principle		(17.1	)		(7.4	)		255.6			(24.4	)		280.0			(120.3	)		(48.5	)
Reorganization items		—			—			4.0			—			4.0			—			—
Provision (benefit) for income taxes		1.4			(1.5	)		1.7			1.6			0.1			0.5			0.3
Equity method investment loss		—			—			—			—			—			7.2			0.9
Cumulative effect of change in accounting principle		—			—			—			—			—			—			8.5

Net income (loss)		(18.5	)		(5.9	)		249.9			(26.0	)		275.9			(128.0	)		(58.2	)
Less: preferred stock dividends accrued		—			—			1.9			—			1.9			5.1			4.5

Net income (loss) attributable to common stockholders	$	(18.5	)	$	(5.9	)	$	248.0		$	(26.0	)	$	274.0		$	(133.1	)	$	(62.7	)

Basic and diluted net loss per share⁽³⁾	$	(1.16	)	$	(0.41	)				$	(1.82	)

Weighted-average shares used in computing basic and diluted net loss per share⁽⁴⁾		16.0			14.3						14.3


	Successor Company								Predecessor Company
	As of December 31,						As of May 1, 2002		As of April 30, 2002			As of December 31,
(In millions)	2004		2003		2002		As of May 1, 2002		As of April 30, 2002			2001			2000
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	37.7	$	22.0	$	29.4	$	18.8	$	18.8		$	30.7		$	40.7
Working capital (deficiency)		41.6		21.0		19.1		12.5		7.5			(306.9	)		23.6
Total assets		98.1		133.9		168.8		181.9		94.5			115.7			239.7
Total assets excluding MOD III, Inc.		98.1		103.9		138.8		151.9		94.5			115.7			239.7
Current liabilities		24.9		27.4		35.1		41.8		44.1			375.5			88.0
Liabilities subject to compromise		—		—		—		—		325.7			—			—
Total liabilities		34.2		43.2		72.0		61.9		383.9			389.8			382.6
Stockholders’ equity (deficiency)		63.9		60.7		66.8		90.0		(289.4	)		(274.1	)		(142.9	)


	Shares	Net Cost		Loan Repayment
2003 repurchases from open market	125,000	$	0.5	$	—
2003 repurchases from President, Michael D. Burger	50,000	$	0.2	$	0.1
2003 repurchases from other and former employees	207,664	$	0.7	$	0.5

2003 Total repurchases	382,664	$	1.4	$	0.6

2004 repurchases from other and former employees	22,500	$	0.2	$	0.1

Total repurchases through December 31, 2004	405,164	$	1.6	$	0.7


	Successor Company				Combined Company		Successor Company		Predecessor Company
	Year Ended Dec. 31, 2004		Year Ended Dec. 31, 2003		Year Ended Dec. 31, 2002		Eight Months Ended Dec. 31, 2003		Four Months Ended April 30, 2002
Net sales by region:
Americas	$	49.4	$	59.7	$	81.1	$	55.9	$	25.2
Asia (including Japan)		33.5		30.9		40.6		26.8		13.8
Europe		12.7		13.0		17.9		10.9		7.0

Net sales	$	95.6	$	103.6	$	139.6	$	93.6	$	46.0

Net sales by channel:
OEM	$	44.7	$	44.0	$	70.6	$	45.7	$	24.9
Distribution		47.3		48.5		61.1		40.9		20.2
Foundry services		3.6		11.1		7.9		7.0		0.9

Net sales	$	95.6	$	103.6	$	139.6	$	93.6	$	46.0

Net sales by business line:
Micrologic	$	68.3	$	68.0	$	90.3	$	61.2	$	29.1

Other Devices
Serial Communications Controllers		14.4		13.7		15.4		10.4		5.0
Modems		2.8		3.1		10.5		5.8		4.7
IrDA Transceivers		2.1		2.4		2.8		2.3		0.5
Television, PC Peripherals and Other		4.4		5.3		12.7		6.9		5.8

Other Devices		23.7		24.5		41.4		25.4		16.0

Subtotal – Base business		92.0		92.5		131.7		86.6		45.1
Foundry Services		3.6		11.1		7.9		7.0		0.9

Net sales	$	95.6	$	103.6	$	139.6	$	93.6	$	46.0


	Severance and Termination Benefits			Lease Termination Charges			Debt Restructuring			MOD III Closure Costs			MOD II Closure Costs			Total
Balance at December 31, 2001	$	5.6		$	2.8		$	1.1		$	0.2		$	—		$	9.7
Provisions to special charges		1.2			0.7			4.0			2.3			—			8.2
Cash payments		(6.0	)		(3.0	)		(2.5	)		(2.3	)		—			(13.8	)

Balance at April 30, 2002		0.8			0.5			2.6			0.2			—			4.1
Provisions to special charges		1.3			(0.2	)		1.0			0.9			—			3.0
Cash payments		(1.6	)		(0.3	)		(3.6	)		(1.0	)		—			(6.5	)

Balance at December 31, 2002		0.5			—			—			0.1			—			0.6
Provisions to special charges		1.5			—			0.6			1.3			—			3.4
Cash payments		(2.0	)		—			(0.6	)		(1.3	)		—			(3.9	)

Balance at December 31, 2003		—			—			—			0.1			—		$	0.1
Provisions to special charges		2.1			—			0.1			1.7			3.2			7.1
Provisions to cost of sales relating to MOD II closure		0.4			—			—			—			0.1			0.5
Cash payments		(2.2	)		—			(0.1	)		(1.8	)		(2.6	)		(6.7	)

Balance at December 31, 2004	$	0.3		$	—		$	—		$	—		$	0.7		$	1.0


	Current Technology		Brand Name		Total
Gross carrying amount	$	17.0	$	9.2	$	26.2
Accumulated amortization		15.2		3.7		18.9

Book value at December 31, 2004	$	1.8	$	5.5	$	7.3


Year	Current Technology		Brand Name		Total Amortization
2005	$	1.1	$	1.1	$	2.2
2006		0.4		1.0		1.4
2007		0.2		0.8		1.0
2008		0.1		0.8		0.9
2009		—		0.7		0.7
Thereafter		—		1.1		1.1

Total	$	1.8	$	5.5	$	7.3


	For the Quarters Ended
	Dec. 31, 2004			Sep. 30, 2004			June 30, 2004			Mar. 31, 2004			Dec. 31, 2003			Sep. 30, 2003			June 30, 2003			Mar. 31, 2003
	(Unaudited, in millions)
Net sales	$	18.9		$	22.8		$	27.9		$	26.0		$	26.7		$	26.0		$	25.7		$	25.2
Cost of sales		13.0			12.4			14.2			12.6			13.2			13.3			13.7			14.9

Gross margin		5.9			10.4			13.7			13.4			13.5			12.7			12.0			10.3
Gross margin as a percentage of net sales		31	%		46	%		49	%		52	%		51	%		49	%		47	%		41	%
Operating Expenses:
Research and development		5.4			5.2			5.3			5.1			4.9			4.5			4.7			3.9
Selling, general and administrative		7.8			7.2			7.7			6.8			7.1			7.2			7.1			6.2
Special charges and reorganization items		(0.4	)		(1.9	)		7.7			0.5			0.7			1.3			0.5			1.3
Amortization of intangible assets		1.0			1.0			1.1			1.1			1.7			1.7			1.7			1.7

Operating loss		(7.9	)		(1.1	)		(8.1	)		(0.1	)		(0.9	)		(2.0	)		(2.0	)		(2.8	)

Other income (expense):
Interest income		0.1			0.1			0.1			0.1			0.1			0.1			—			0.1
Interest expense		—			(0.1	)		(0.1	)		(0.1	)		(0.1	)		(0.1	)		(0.1	)		(0.1	)
Other, net		0.1			—			—			(0.1	)		0.3			—			0.2			—

Income (loss) before provision (benefit) for income taxes		(7.7	)		(1.1	)		(8.1	)		(0.2	)		(0.6	)		(2.0	)		(1.9	)		(2.8	)
Provision (benefit) for income taxes		1.6			0.9			(0.9	)		(0.2	)		(1.6	)		—			0.1			0.1

Net income (loss)	$	(9.3	)	$	(2.0	)	$	(7.2	)	$	0.0		$	1.0		$	(2.0	)	$	(2.0	)	$	(2.9	)

Net income (loss) per share
Basic	$	(0.57	)	$	(0.12	)	$	(0.44	)	$	0.00		$	0.07		$	(0.13	)	$	(0.14	)	$	(0.20	)
Diluted	$	(0.57	)	$	(0.12	)	$	(0.44	)	$	0.00		$	0.07		$	(0.13	)	$	(0.14	)	$	(0.20	)


	For the Quarters Ended
	Dec. 31 2004			Sep. 30, 2004			June 30, 2004		Mar. 31, 2004		Dec. 31, 2003		Sep. 30, 2003		June 30, 2003		Mar. 31, 2003
	(Unaudited, in millions)
Asset impairments:
MOD II assets write-down, net	$	(1.7	)	$	—		$	5.4	$	—	$	—	$	—	$	—	$	—
Test, probe and other equipment written-off		—			—			—		—		—		—		—		0.2
Equity investment write-down		—			—			—		—		—		0.2		—		—
Restructuring of operations:
Employee severance and termination benefits, other		0.2			—			—		0.1		0.3		0.6		—		0.6
MOD II employee severance and termination benefits		—			—			1.8		—		—		—		—		—
MOD II sustaining cost for post-closure maintenance		0.8			2.3			0.1		—		—		—		—		—
MOD III sustaining cost for post-closure maintenance		0.4			0.6			0.4		0.3		0.2		0.4		0.4		0.3
MOD III reimbursement of maintenance costs		(0.1	)		(4.8	)		—		—		—		—		—		—
Professional fees for debt restructuring		—			—			—		0.1		0.2		0.1		0.1		0.2

Total	$	(0.4	)	$	(1.9	)	$	7.7	$	0.5	$	0.7	$	1.3	$	0.5	$	1.3


	For the Quarters Ended
	Dec. 31, 2004			Sept 30, 2004			June 30, 2004			Mar. 31, 2004			Dec. 31, 2003			Sept. 30, 2003			June 30, 2003			Mar. 31, 2003
	(Unaudited, in millions)
Reconciliation of net income (loss) to EBITDA:
Net income (loss)	$	(9.3	)	$	(2.0	)	$	(7.2	)	$	—		$	1.0		$	(2.0	)	$	(2.0	)	$	(2.9	)
Depreciation and amortization		1.6			1.7			1.6			2.3			2.9			3.1			3.1			3.2
Interest expense (income), net		(0.1	)		—			—			—			—			—			0.1			—
Provision (benefit) for income taxes		1.6			0.9			(0.9	)		(0.2	)		(1.7	)		—			0.1			0.1

EBITDA	$	(6.2	)	$	0.6		$	(6.5	)	$	2.1		$	2.2		$	1.1		$	1.3		$	0.4

Reconciliation of EBITDA to net cash by operating activities cash flow:
EBITDA	$	(6.2	)	$	0.6		$	(6.5	)	$	2.1		$	2.2		$	1.1		$	1.3		$	0.4
Interest income (expense), net		0.1			—			—			—			—			—			(0.1	)		—
Benefit (provision) for income taxes		(1.6	)		(0.9	)		0.9			0.2			1.7			—			(0.1	)		(0.1	)
Deferred income tax assets and liabilities		0.1			(6.8	)		(2.5	)		(0.7	)		(8.9	)		(0.9	)		(1.3	)		(1.3	)
Asset impairments		0.1			0.1			5.4			—			—			0.2			—			0.2
Stock-based compensation		0.5			0.5			0.6			0.4			0.3			0.4			0.4			0.4
Net gain on sale of MODII assets held for sale		(1.7	)		—			—			—			—			—			—			—
Changes in operating assets and liabilities		1.8			17.1			0.1			(4.2	)		4.5			—			0.1			0.1

Net cash provided (used) by operating activities	$	(6.9	)	$	10.6		$	(2.0	)	$	(2.2	)	$	(0.2	)	$	1.0		$	0.6		$	(3.8	)


			Payment due by period
	Total		Within 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	6.6	$	2.2	$	3.1	$	1.3	$	—
Purchase obligations		6.9		6.0		0.9		—		—

Total	$	13.5	$	8.2	$	4.0	$	1.3	$	—


Existing technology	$	17.0
In-process research and development		18.7
Brand name		9.2

Total separable intangible assets	$	44.9


	Carrying Value			Fair Value
Cash Equivalents:
Fixed rate	$	34.9		$	34.9
Average interest rate		1.57	%		—


		Page

Report of KPMG LLP, Independent Auditors Independent Registered Public Accounting Firm		65

Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003		66

Consolidated Statements of Operations for the years ended December 31, 2004, December 31, 2003, the eight months ended December 31, 2002 and the four months ended April 30, 2002		67

Consolidated Statements of Cash Flows for the years ended December 31, 2004, December 31, 2003, the eight months ended December 31, 2002 and the four months ended April 30, 2002		68

Consolidated Statements of Stockholders’ Equity (Deficiency) for the four months ended April 30, 2002, for the eight months ended December 31, 2002 and for the years ended December 31, 2003 and December 31, 2004		69

Notes to Consolidated Financial Statements		70


	Successor Company
	December 31,
	2004			2003
ASSETS:
Current assets:
Cash and cash equivalents	$	37.7		$	22.0
Accounts receivable, less allowance for doubtful accounts of $0.3 at both December 31, 2004 and 2003		10.0			13.0
Inventories		12.1			9.6
Deferred income taxes		2.7			—
Prepaid expenses and other current assets		4.0			3.8

Total current assets		66.5			48.4

MOD III, Inc. assets held for sale		—			30.0
MOD II assets held for sale		3.6			—
Property, plant and equipment, net		6.1			18.1
Goodwill		8.6			16.9
Intangible assets, net		7.3			11.5
Other assets		6.0			9.0

Total assets	$	98.1		$	133.9


LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Short-term debt	$	—		$	5.0
Accounts payable		12.3			8.6
Deferred income on shipments to distributors		6.0			7.4
Accrued and other current liabilities		6.6			6.4

Total current liabilities		24.9			27.4

Deferred income taxes		2.7			9.9
Other long-term liabilities		6.6			5.9

Total liabilities		34.2			43.2

Commitments and contingencies

Minority interest in MOD III assets		—			30.0

Stockholders’ equity:
Common stock, $0.01 par value; 60.0 shares authorized; 16.2 and 14.5 shares issued and outstanding at December 31, 2004 and 2003, respectively		0.2			0.1
Deferred stock compensation		(0.7	)		(2.0	)
Additional paid-in capital		121.9			96.4
Treasury stock		(7.1	)		(1.9	)
Accumulated deficit		(50.4	)		(31.9	)

Total stockholders’ equity		63.9			60.7

Total liabilities and stockholders’ equity	$	98.1		$	133.9


	Successor Company									Predecessor Company
	Year Ended December 31						Eight Months Ended Dec. 31, 2002			Four Months Ended April 30, 2002
	2004			2003			Eight Months Ended Dec. 31, 2002			Four Months Ended April 30, 2002
Net sales	$	95.6		$	103.6		$	93.6		$	46.0
Cost of sales		52.2			55.2			51.2			26.1
Cost of sales—fresh-start inventory adjustment		—			—			3.9			—

Gross margin		43.4			48.4			38.5			19.9
Operating expenses:
Research and development		20.9			18.0			11.1			6.8
Selling, general and administrative		29.6			27.6			22.6			10.8
Special charges and reorganization items		5.9			3.8			2.8			6.9
Amortization of intangible assets		4.2			6.8			7.9			—
In-process research and development		—			—			18.7			—

Total operating expenses		60.6			56.2			63.1			24.5

Operating loss		(17.2	)		(7.8	)		(24.6	)		(4.6	)

Other income (expense):
Fresh-start adjustments		—			—			—			83.7
Net gain on discharge of debt		—			—			—			205.7
Interest income		0.3			0.3			0.2			0.1
Interest expense⁽¹⁾		(0.2	)		(0.4	)		(0.5	)		(5.0	)
Other, net		—			0.5			0.5			0.1

Total other income (expense)		0.1			0.4			0.2			284.6

Income (loss) before reorganization items and provision (benefit) for income taxes		(17.1	)		(7.4	)		(24.4	)		280.0
Reorganization items		—			—			—			4.0
Provision (benefit) for income taxes		1.4			(1.5	)		1.6			0.1

Net income (loss)	$	(18.5	)	$	(5.9	)	$	(26.0	)	$	275.9
Preferred stock dividends accrued		—			—			—			1.9

Net income (loss) attributable to common stockholders	$	(18.5	)	$	(5.9	)	$	(26.0	)	$	274.0

Basic and diluted net loss per share	$	(1.16	)	$	(0.41	)	$	(1.82	)

Weighted-average shares used in computing basic and diluted net loss per share		16.0			14.3			14.3


	Preferred Stock					Common Stock Voting					Common Stock Class A					Deferred Stock Compen- sation			Additional Paid-in Capital			Treasury Stock			Accumu- lated Deficit			Total Stock- holders’ Equity (Deficiency)
	Shares		Amount			Shares		Amount			Shares		Amount			Deferred Stock Compen- sation			Additional Paid-in Capital			Treasury Stock			Accumu- lated Deficit			Total Stock- holders’ Equity (Deficiency)
Balance at December 31, 2001 (Predecessor)	0.3		$	25.0		32.0		$	0.3		10.0		$	0.1			(0.6	)	$	13.2			—		$	(312.1	)	$	(274.1	)
Preferred dividend accrued	—			—		—			—		—			—			—			—			—			(1.9	)		(1.9	)
Amortization of deferred stock compensation	—			—		—			—		—			—			0.1			—			—			—			0.1
Net income and comprehensive income	—			—		—			—		—			—			—			—			—			275.9			275.9
Issuance of new common stock	—			—		28.0			0.3		—			—			—			89.7			—			—			90.0
Reclassifications	(0.3	)		(25.0	)	(46.0	)		(0.5	)	(10.0	)		(0.1	)		0.5			(13.0	)		—			38.1			—

Balance at May 1, 2002 (Successor)	—			—		14.0			0.1		—			—			—			89.9			—			—			90.0
Proceeds from sales of common stock, net of repurchases	—			—		0.1			—		—			—			—			0.1			—			—			0.1
Deferred stock compensation	—			—		—			—		—			—			(7.9	)		7.9			—			—			—
Deferred stock compensation cancellations	—			—		—			—		—			—			0.6			(0.6	)		—			—			—
Amortization of deferred stock compensation	—			—		—			—		—			—			2.7			0.2			—			—			2.9
Issuances of restricted stock	—			—		0.9			—		—			—			—			—			—			—			—
Restricted shares repurchased	—			—		(0.1	)		—		—			—			—			(0.2	)		—			—			(0.2	)
Net loss and comprehensive loss	—			—		—			—		—			—			—			—			—			(26.0	)		(26.0	)

Balance at December 31, 2002 (Successor)	—			—		14.9			0.1		—			—			(4.6	)		97.3			—			(26.0	)		66.8
Issuance of common stock under stock option plans, including tax benefit of $0.1	—			—		—			—		—			—			—			0.2			—			—			0.2
Amortization of deferred stock compensation	—			—		—			—		—			—			1.2			0.3			—			—			1.5
Deferred stock compensation cancellations	—			—		—			—		—			—			1.4			(1.4	)		—			—			—
Purchase of treasury shares	—			—		(0.4	)		—		—			—			—			—			(1.9	)		—			(1.9	)
Net loss and comprehensive loss	—			—		—			—		—			—			—			—			—			(5.9	)		(5.9	)

Balance at December 31, 2003 (Successor)	—		$	—		14.5		$	0.1		—		$	—		$	(2.0	)	$	96.4		$	(1.9	)	$	(31.9	)	$	60.7
Common stock issued in public offering, net of offering costs						2.3			—		—			—			—			24.4			—			—			24.4
Issuance of common stock under stock option plans	—			—		—			—		—			—			—			0.1			—			—			0.1
Issuance of common stock under employee stock purchase plan						0.1			0.1		—			—			—			0.3			—			—			0.4
Deferred stock compensation	—			—		—			—		—			—			(0.5	)		0.5			—			—			—
Deferred stock compensation cancellations	—			—		—			—		—			—			0.2			(0.2	)		—			—			—
Amortization of deferred stock compensation	—			—		—			—		—			—			1.6			0.4			—			—			2.0
Purchase of treasury shares	—			—		(0.7	)		—		—			—			—			—			(5.2	)		—			(5.2	)
Net loss and comprehensive loss	—			—		—			—		—			—			—			—			—			(18.5	)		(18.5	)

Balance at December 31, 2004 (Successor)	—		$	—		16.2		$	0.2		—		$	—		$	(0.7	)	$	121.9		$	(7.1	)	$	(50.4	)	$	63.9


	Successor Company									Predecessor Company
	Year Ended Dec. 31,						Eight Months Ended			Four Months Ended
	2004			2003			Dec. 31, 2002			Apr 30, 2002
Net income (loss), as reported	$	(18.5	)	$	(5.9	)	$	(26.0	)	$	275.9
Deduct stock-based employee compensation expense included in reported net income (loss)		2.0			1.5			2.9			0.1
Add total stock-based employee compensation expense determined under fair-value-based method for all rewards		(4.3	)		(2.5	)		(4.0	)		(0.4	)

Net income (loss)—pro forma	$	(20.8	)	$	(6.9	)	$	(27.1	)	$	275.6

Loss Per Share
Basic and diluted—as reported	$	(1.16	)	$	(0.41	)		(1.82	)		—
Basic and diluted—pro forma		(1.30	)		(0.48	)		(1.90	)		—

Number of shares used in computing loss per share
Basic and diluted—as reported		16.0			14.3			14.3			—
Basic and diluted—pro forma		16.0			14.3			14.3			—


	Successor Company				Predecessor Company
	Year Ended December. 31,			Eight Months Ended	Four Months Ended
	2004		2003	Dec. 31, 2002	April 30, 2002
Risk-free interest rate	1.81 to 2.75	%	—	—	—
Estimated life in years	0.5		—	—	—
Dividend yield	0.0	%	—	—	—
Volatility	50.7	%	—	—	—


Senior secured notes payable	$	280.0
Accrued interest on senior secured notes		27.2
Dividends payable on preferred stock		18.5

Total liabilities subject to compromise	$	325.7


	Predecessor Company at April 30, 2002			Reorganization⁽¹⁾			Fresh-Start Adjustments⁽²⁾			Reclassification⁽³⁾			Successor Company at May 1, 2002
ASSETS:
Current assets	$	51.6		$	—		$	2.7		$	—		$	54.3
MOD III, Inc. assets held for sale		30.0			—			—			—			30.0
Net property, plant and equipment		11.9			—			13.1			—			25.0
Other assets		1.0			—			—			—			1.0
Fresh start separable intangible assets		—			—			44.9			—			44.9
Fresh-start goodwill (indefinite life)		—			—			26.7			—			26.7

	$	94.5		$	—		$	87.4		$	—		$	181.9


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY):
Current liabilities	$	44.1		$	—		$	(2.3	)	$	—		$	41.8
Other long-term liabilities		14.1			—			6.0			—			20.1
Liabilities subject to compromise		325.7			(325.7	)		—			—			—
Minority interest in MOD III, Inc. assets		—			30.0			—			—			30.0

Stockholders’ equity (deficiency):
Preferred stock		25.0			—			—			(25.0	)		—
Common stock		0.4			0.3			—			(0.6	)		0.1
Deferred stock compensation		(0.5	)		—			—			0.5			—
Additional paid-in capital		13.2			89.7			—			(13.0	)		89.9
Accumulated deficit		(327.5	)		205.7			83.7			38.1			—

Total stockholders’ equity (deficiency)		(289.4	)		295.7			83.7			—			90.0

Total liabilities and stockholders’ equity	$	94.5		$	—		$	87.4		$	—		$	181.9


Extinguishment of debt	$	280.0
Extinguishment of accrued interest		27.2
Extinguishment of dividends payable on preferred stock		18.5
Minority interest in MOD III, Inc. assets		(30.0	)
Reorganization equity value		(90.0	)

Net gain on discharge of debt	$	205.7


Effect of fresh-start adjustments	$	66.7
Revaluation of fixed and tangible assets to fair value		17.0

Total fresh-start adjustments	$	83.7


Balance at April 30, 2002	$	—
Establishment of goodwill under SOP 90-7		34.6

Balance at December 31, 2002		34.6
Goodwill adjustments during 2003		(17.7	)

Balance at December 31, 2003		16.9
Goodwill adjustments during 2004		(8.3	)

Balance at December 31, 2004	$	8.6


	Existing Technology			Brand Name			Total Amortization
Balance at April 30, 2002	$	—		$	—		$	—
Establishment of intangibles under SOP 90-7		17.0			9.2			26.2
Amortization for eight months ended December 31, 2002		(6.8	)		(1.1	)		(7.9	)

Balance at December 31, 2002		10.2			8.1			18.3
Amortization for year ended December 31, 2003		(5.5	)		(1.3	)		(6.8	)

Balance at December 31, 2003		4.7			6.8			11.5
Amortization for the year ended December 31, 2004		(2.9	)		(1.3	)		(4.2	)

Balance at December 31, 2004	$	1.8		$	5.5		$	7.3


	Severance and Termination Benefits			Lease Termination Charges			Debt Restructuring			MOD III Closure Costs			MOD II Closure Costs			Total
Balance at Dec. 31, 2001	$	5.6		$	2.8		$	1.1		$	0.2		$	—		$	9.7
Provisions to special charges		1.2			0.7			4.0			2.3			—			8.2
Cash paid		(6.0	)		(3.0	)		(2.5	)		(2.3			—			(13.8	)

Balance at April 30, 2002		0.8			0.5			2.6			0.2			—			4.1
Provisions to special charges		1.3			(0.2	)		1.0			0.9			—			3.0
Cash paid		(1.6	)		(0.3	)		(3.6	)		(1.0	)		—			(6.5	)

Balance at Dec. 31, 2002		0.5			—			—			0.1						0.6
Provisions to special charges		1.5			—			0.6			1.3						3.4
Cash paid		(2.0	)		—			(0.6	)		(1.3	)		—			(3.9	)

Balance at Dec. 31, 2003		—			—			—			0.1			—			0.1
Provisions to special charges		2.1			—			0.1			1.7			3.2			7.1
Provisions to cost of sales relating to MOD II closure for retention bonus		0.4			—			—			—			0.1			0.5
Cash paid, before MOD III reimbursement		(2.2	)		—			(0.1	)		(1.8	)		(2.6	)		(6.7	)

Balance at Dec. 31, 2004	$	0.3		$	—		$	—		$	—		$	0.7		$	1.0


	Shares	Net Amount		Loan Repayment
2003 repurchases from open market	125,000	$	0.5	$	—
2003 repurchases from President, Michael D. Burger	50,000	$	0.2	$	0.1
2003 repurchases from other and former employees	207,664	$	0.7	$	0.5

2003 Total repurchases	382,664	$	1.4	$	0.6

2004 Repurchases from other and former employees	22,500	$	0.2	$	0.1

TOTAL Repurchase at December 31, 2004	405,164	$	1.6	$	0.7


	Shares Available for Grant		Options Outstanding		Weighted-Average Exercise Price
The 1998 and 2000 Plans (Predecessor)
Balance as of December 31, 2001	6,506,214		6,498,730			3.83
Options cancelled (See Note 2)	(6,506,214	)	(6,498,730	)		3.83

Balance as of April 30, 2002	—		—		$	—

2002 and 2004 Omnibus Stock Incentive Plans (Successor)
Options and shares reserved	2,279,070		—		$	—
Restricted shares granted	(931,233	)	—			0.02
Shares reserved for future grants to CEO as restricted stock	(264,697	)	—			0.02
Options granted	(1,049,333	)	1,049,333			5.48
Restricted shares repurchased	78,250		—			2.66
Options cancelled	113,508		(113,508	)		5.52

Balance as of December 31, 2002	225,565		935,825		$	5.42
Options granted	(437,959	)	437,959			5.60
Options exercised	—		(30,687	)		5.52
Options cancelled	116,607		(116,607	)		5.58
Restricted shares cancelled	88,232		—			0.02
Restricted shares repurchased	253,250		—			5.58

Balance as of December 31, 2003	245,695		1,226,490		$	5.48
Options and shares reserved – 2004 plan approval	1,500,000		—			—
Restricted shares granted	(37,730	)	—			—
Options granted	(1,037,206	)	1,037,206			9.55
Options exercised	—		(25,858	)		4.87
Options cancelled	237,311		(237,311	)		8.33
Restricted shares cancelled	176,465		—			0.02
Restricted shares repurchased	115,235		—			6.45

Balance as of December 31, 2004	1,199,770		2,000,527		$	7.26


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
$2.00-$4.76	163,226	8.25	$	2.63	141,183	$	2.39
$5.20-$5.20	229,420	9.36		5.20	114,710		5.20
$5.52-$5.52	596,197	8.08		5.52	259,427		5.52
$5.80-$6.40	334,638	8.70		6.29	128,620		6.32
$7.12-$7.90	88,396	8.63		7.87	34,523		7.88
$8.44-$8.44	2,500	8.79		8.44	781		8.44
$9.30-$9.30	181,950	9.51		9.30	—		0.00
$12.44-$12.44	363,400	9.33		12.44	3,750		12.44
$13.58-$13.58	29,050	9.29		13.58	5,033		13.58
$14.30-$14.30	11,750	9.06		14.30	1,760		14.30

$0.00-$14.30	2,000,527	8.75	$	7.26	689,787	$	5.22


	Successor Company
	Year Ended December 31,				Eight Months Ended Dec. 31, 2002
	2004		2003		Eight Months Ended Dec. 31, 2002
Annual average risk free interest rate	3.4	%	3.0	%	3.0	%
Estimated life in years	5		5		5
Dividend yield	0.0	%	0.0	%	0.0	%
Volatility	51.8	%	66.5	%	89.9	%