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

**FORM 10-Q**

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

**For the quarterly period ended September 30, 2001**

**OR**

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

**For the transition period from ________to _________**

**Commission file number 001-13748**

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



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

**910 East Hamilton AvenueCampbell, California   95008**(Address of principal executive offices)

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

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

As of September 30, 2001, there were 32,017,272 shares of the Company's Voting
Common Stock, $.01 par value, and 10,000,000 shares of the Company's Non-Voting
Common Stock, $.01 par value outstanding.

This Report on Form 10-Q and other oral and written
statements made by the Company contain and incorporate forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), regarding future events
and the Company's plans and expectations that involve risks and uncertainties.
When used in this Report, the words "estimate," "project," "intend," "expect,"
"anticipate," "believe," "may," "will," and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements in this report include, but are not limited to, those
relating to the general direction of our business; the restructuring of our debt
and equity; the utilization of our fabrication facilities; and our expected cost
savings, capital expenditures and expenses for future periods.  Although we
believe our plans, intentions, and expectations reflected in these forward-
looking statements are reasonable, we can give no assurance that these plans,
intentions, or expectations will be achieved.  Actual results, performance, or
achievements could differ materially from those contemplated, express or
implied, by the forward-looking statements contained in this report.  Factors
that may cause or contribute to differences include, but are not limited to,
under-absorption of manufacturing costs in our wafer fabs from under-utilization
of production capacity, and ZiLOG's distributors and customers significantly
reducing their existing inventories before ordering new products, and those
discussed below under "Management's Discussion and Analysis of Financial
Condition and Results of Operation," "Factors That May Affect Future
Results," as well as those discussed elsewhere in this Report and in other
reports filed with the Securities and Exchange Commission.  These factors are
not intended to represent a complete list of the general or specific factors
that affect us.  Other factors, including general economic factors and business
strategies, may be significant, presently or in the future, and the factors set
forth in this report may affect us to a greater extent than indicated. The
reader is therefore cautioned not to place undue reliance on the forward-looking
statements contained herein, which reflect our position as of the date of this
report.  The Company undertakes no obligation to publicly release updates or
revisions to these statements.



Based in Campbell, 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.  ZiLOG and Z80 are registered trademarks of ZiLOG, Inc.





Extreme Connectivity © ZiLOG, Inc. 1999.







**ZiLOG, INC.
      QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2001
                                TABLE OF CONTENTS**



|**PART I.   FINANCIAL INFORMATION**                                                                                                       | **Page No.**
|----------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                                          |             
|Item 1.   Interim Condensed Consolidated Financial Statements
                  (unaudited):                                              |             
|                                                                                                                                          |             
|Condensed Consolidated Statements of Operations for the
          
    three and nine months ended September 30, 2001 and October 1, 2000 | **          
|                                                                                                                                          |             
|Condensed Consolidated Balance Sheets at September 30, 2001 and
     December 31, 2000                                                    | **          
|                                                                                                                                          |             
|Condensed Consolidated Statements of Cash Flows for the
          
    nine months ended September 30, 2001 and October 1, 2000           | **          
|                                                                                                                                          |             
|Notes to Condensed Consolidated Financial Statements                                                                                      | **          
|                                                                                                                                          |             
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                     | **          
|                                                                                                                                          |             
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                      | **          
|                                                                                                                                          |             
|**PART II.  OTHER INFORMATION**                                                                                                           |             
|                                                                                                                                          |             
|Item 1.   Legal Proceedings                                                                                                               | **          
|                                                                                                                                          |             
|Item 3.   Defaults Upon Senior Securities                                                                                                 | **          
|                                                                                                                                          |             
|Item 6.   Exhibits and Reports on Form 8-K                                                                                                | **          
|                                                                                                                                          |             
|**Signature**                                                                                                                             | **          

---

**PART I -- FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

---

**ZILOG, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                 (in thousands)**

`Three Months Ended     Nine Months Ended
                                                 --------------------- ---------------------
                                                    Sep. 30,   Oct. 1,    Sep. 30,   Oct. 1,
                                                      2001      2000        2001      2000
                                                 ---------- ---------- ---------- ----------
Net sales...................................       $42,659    $66,216   $130,892   $183,203
Cost of sales...............................        29,447     41,547    103,073    111,249
                                                 ---------- ---------- ---------- ----------
Gross margin................................        13,212     24,669     27,819     71,954

Operating expenses:
  Research and development..................         5,853      9,020     22,135     27,860
  Selling, general and administrative.......         9,596     14,556     36,079     44,460
  Special charges...........................         4,513      1,545     12,629      2,736
                                                 ---------- ---------- ---------- ----------
                                                    19,962     25,121     70,843     75,056
                                                 ---------- ---------- ---------- ----------
Operating loss..............................        (6,750)      (452)   (43,024)    (3,102)

Other income (expense):
  Interest income...........................           182        637        990      2,095
  Interest expense..........................        (7,272)    (7,234)   (21,879)   (21,756)
  Other, net................................          (469)      (398)      (663)      (694)
                                                 ---------- ---------- ---------- ----------
Loss before income taxes, equity investment
  and cumulative effect of change in
  accounting principle.......................      (14,309)    (7,447)   (64,576)   (23,457)
Provision for income taxes...................           44        138        218        403
                                                 ---------- ---------- ---------- ----------
Loss before equity investment and cumulative
  effect of change in accounting principle...      (14,353)    (7,585)   (64,794)   (23,860)
Equity in loss of Qualcore Group, Inc. ......         (385)      (291)    (1,124)      (588)
                                                 ---------- ---------- ---------- ----------
Loss before cumulative effect of change in
  accounting principle.......................      (14,738)    (7,876)   (65,918)   (24,448)
Cumulative effect of change in accounting
   principle.................................          --         --         --      (8,518)
                                                 ---------- ---------- ---------- ----------
Net loss ....................................     $(14,738)   $(7,876)  $(65,918)  $(32,966)
                                                 ========== ========== ========== ==========`

See accompanying notes to condensed consolidated financial statements.

---

**ZILOG, INC.

                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

              (in thousands, except shares and per share amounts)**

`September 30, December 31,
                                                                  2001          2000
                                                             ------------  ------------
                                  ASSETS
Current assets:
  Cash and cash equivalents..............................        $26,706       $40,726
  Accounts receivable, less allowance for doubtful
    accounts of $721 at September 30, 2001 and $879 at
    December 31, 2000 ...................................         21,280        29,378
  Inventories............................................         17,407        27,547
  Prepaid expenses and other current assets..............          4,790        14,005
                                                             ------------  ------------
          Total current assets...........................         70,183       111,656
                                                             ------------  ------------

Property, plant and equipment, at cost...................        295,971       315,330
Less: accumulated depreciation and amortization..........       (210,007)     (205,879)
                                                             ------------  ------------
   Net property, plant and equipment.....................         85,964       109,451

Other assets.............................................         14,656        18,640
                                                             ------------  ------------
                                                                $170,803      $239,747
                                                             ============  ============
             LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Accounts payable.......................................        $15,329       $17,098
  Accrued compensation and employee benefits.............          8,871        27,720
  Other accrued liabilities..............................         26,936        20,281
  Accrued interest payable...............................         15,592         8,867
  Short-term debt........................................         12,800          --
  Deferred income on shipments to distributors...........          7,667        13,998
  Notes payable..........................................        280,000          --
                                                             ------------  ------------
          Total current liabilities......................        367,195        87,964

Notes payable............................................           --         280,000

Other non-current liabilities............................         14,319        14,666



Stockholders' deficiency:
  Preferred Stock, $100.00 par value; 5,000,000 shares
    authorized; 1,500,000 shares designated as Series A
    Cumulative Preferred Stock; 250,000 shares of Series
    A Cumulative Preferred Stock issued and outstanding
    at September 30, 2001 and December 31, 2000; aggregate
    liquidation preference $39,392........................        25,000        25,000

  Common Stock, $0.01 par value; 70,000,000 shares
    authorized; 32,017,272 shares issued and outstanding at
    September 30, 2001 and 31,962,845 shares at December 31,
    2000. Class A Stock, $0.01 par value; 30,000,000 shares
    authorized; 10,000,000 shares issued and outstanding at
    September 30, 2001 and December 31, 2000..............           420           419
  Deferred stock compensation.............................          (682)       (1,462)
  Additional paid-in capital..............................        13,273        12,151
  Accumulated deficit.....................................      (248,722)     (178,991)
                                                             ------------  ------------
          Total stockholders' deficiency..................      (210,711)     (142,883)
                                                             ------------  ------------
                                                                $170,803      $239,747
                                                             ============  ============`

See accompanying notes to condensed consolidated financial statements.

---

**ZiLOG, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)**

`Nine Months Ended
                                                             ----------------------
                                                                Sep. 30,    Oct. 1,
                                                                  2001       2000
                                                             ----------  ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................    $(65,918)   $(32,966)
  Adjustments to reconcile net loss to cash used by
     operating activities:
     Cumulative effect of change in accounting principle..         --        8,518
     Equity in loss of Qualcore Group, Inc. ..............       1,124         588
     Depreciation and amortization........................      28,975      31,203
     Write-down of long lived assets......................       2,932          --
     Stock option compensation............................       1,836         501
     Charge for purchased in-process research and
       development........................................         --        1,545
     Loss from disposition of equipment...................         687           6
  Changes in assets and liabilities:
     Accounts receivable..................................       8,098      (1,373)
     Inventories..........................................      10,140      (4,526)
     Prepaid expenses and other current and noncurrent
       assets.............................................       6,894         617
     Accounts payable.....................................      (1,769)     (2,953)
     Accrued compensation and employee benefits...........     (18,849)      1,860
     Accrued interest payable.............................       6,725      (6,650)
     Other accrued and noncurrent liabilities.............      (3,836)      2,392
                                                             ----------  ----------
           Cash used by operating activities..............     (22,961)     (1,238)
                                                             ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures...................................      (3,926)    (17,985)
   Acquisition of Calibre, Inc., net of cash acquired.....         --         (355)
   Purchase of equity interest in Qualcore Group, Inc. ...         --       (8,056)
                                                             ----------  ----------
          Cash used by investing activities...............      (3,926)    (26,396)
                                                             ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from short-term debt...........................      12,800        --
  Proceeds from issuance of common stock..................          67       2,593
  Principal payments under capital lease .................         --         (513)
                                                             ----------  ----------
           Cash provided by operating activities..........      12,867       2,080
                                                             ----------  ----------
Decrease in cash and cash equivalents.....................     (14,020)    (25,554)
Cash and cash equivalents at beginning of period..........      40,726      60,806
                                                             ----------  ----------
Cash and cash equivalents at end of period................     $26,706     $35,252
                                                             ==========  ==========`

See accompanying notes to condensed consolidated financial statements.

---

**ZiLOG, INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

1)	BASIS OF PRESENTATION



The accompanying interim financial information is unaudited.
In the opinion of ZiLOG, Inc.'s ("ZiLOG" or the "Company")
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of interim results have been included.  The
results for interim periods are not necessarily indicative of results to be
expected for the entire year.  These condensed consolidated financial statements
and notes should be read in conjunction with the Company's annual consolidated
financial statements and notes thereto contained in the Company's 2000 Annual
Report filed on Form 10-K (Commission File Number 001-13748) for the fiscal year
ended December 31, 2000, filed on April 2, 2001 with the Securities and Exchange
Commission.  The condensed consolidated balance sheet at December 31, 2000 has
been derived from audited financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.  Certain
reclassifications have been made to the prior year condensed consolidated
financial statements to conform to the 2001 presentation.  Such
reclassifications had no effect on previously reported results of operations or
accumulated deficit.



As described in Note 11, Stockholders' Equity (Deficiency),
to the Consolidated Financial Statements of the Company's 2000 Annual Report on
Form 10-K, ZiLOG's Series A Cumulative Preferred Stock ("Series A
Stock") accumulates 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 September 30, 2001, the
Company has not paid any dividends on the Series A Stock and the corresponding
accrued dividends are $15.2 million.  During the nine month period ended
September 30, 2001, $3.8 million of dividends on Series A Stock were accrued and
charged to accumulated deficit.



2)	ACCOUNTING CHANGE - RECOGNITION OF REVENUE ON SALES TO
DISTRIBUTORS



The Company changed its accounting method in the fourth
quarter of 2000, effective January 1, 2000, for recognizing revenue on shipments
to distributors who have rights of return and price protection on unsold
merchandise held by them.  The Company previously recognized revenue upon
shipment to these distributors, net of appropriate allowances for sales returns,
price protection and warranty costs.  Following the accounting change, revenue
recognition on shipments to these distributors is deferred until the products
are resold by the distributors to their customers.  The Company believes that
deferral of revenue recognition on these distributor shipments and related gross
margin until the product is shipped by the distributor results in a more
meaningful measurement of results of operations as it better conforms to the
changing business environment and is more consistent with industry practice;
therefore it is a preferable method of accounting.  For the quarter ended April
2, 2000, the cumulative effect of the change in accounting method was a charge
of $8.5 million, net of a zero income tax effect.  The results for each quarter
of 2000 were restated to reflect the effects of the accounting change.



3)	RELATED PARTY TRANSACTIONS



On March 22, 2000, ZiLOG acquired a 20% equity interest of
the then outstanding common stock of Qualcore Group, Inc.
("Qualcore").  ZiLOG purchased semiconductor design services from
Qualcore totaling approximately $0.4 million and  $0.8 million for the nine-
month periods ended September 30, 2001 and October 1, 2000, respectively.  ZiLOG
had payables to Qualcore of approximately $0.1 million and $0.3 million at
September 30, 2001 and October 1, 2000, respectively.  Payment terms between
ZiLOG and Qualcore are net zero.Under the terms of our agreement with
Qualcore, we had the option until the expiration date of June 30, 2001, to
obtain all of the remaining outstanding shares of common stock of Qualcore for
cash and/or common stock in ZiLOG.  Since we did not exercise this option, the
agreement with Qualcore may require us to pay up to $5.2 million to acquire up
to 1.8 million additional shares of Qualcore common stock.  We are currently
analyzing whether the conditions precedent for this obligation have been
satisfied and are continuing discussions with the management of Qualcore to
defer the payment of, or otherwise restructure this obligation.  It is uncertain
whether this deferment or restructure will be accomplished.



In January 1999 ZiLOG entered into an agreement with P.T.
Astra Microtronics Technology, now known as Advanced Interconnect Technologies,
or AIT, pursuant to which AIT provides the Company with semiconductor assembly
and test services through January 2003.  AIT is owned by Newbridge Asia, an
affiliate of Texas Pacific Group, which in turn is an affiliate of our principal
stockholder.  ZiLOG purchased services from AIT totaling approximately $5.1
million, and $14.3 million for the nine-month periods ended September 30, 2001
and October 1, 2000, respectively.  The Company had payments due to AIT of
approximately $0.3 million and $1.9 million at September 30, 2001 and October 1,
2000, respectively.  The Company's payment terms with AIT are net 30 days.



The Company sells products and engineering services to
GlobeSpan, Inc., of which Texas Pacific Group is a significant stockholder.  The
Company's net sales to GlobeSpan totaled approximately $5.7 million and $5.1
million during the nine-month periods ended September 30, 2001 and October 1,
2000, respectively.  As of September 30, 2001, the Company had no accounts
receivable from GlobeSpan, and as of October 1, 2000, the Company had accounts
receivable of approximately $1.4 million.



4)	INVENTORIES



The components of inventories are as follows (in
thousands):

`Sep. 30,    Dec. 31,
                                    2001        2000
                                 ----------- -----------
     Raw materials...............    $1,233      $1,313
     Work-in-process.............    12,040      19,827
     Finished goods..............     4,134       6,407
                                 ----------- -----------
                                    $17,407     $27,547
                                 =========== ===========`





5)	SEGMENT REPORTING



ZiLOG has two reportable business segments: Communications
and Embedded Controls.  The Company's Embedded Controls segment is comprised of
two business units:  Field Programmable Micro-controllers and Home
Entertainment.  Consistent with the rules of Statement of Financial Accounting
Standards ("SFAS") No. 131, the Company has aggregated these two
business units into one reportable segment because these product lines have
similar gross margins and target consumer and industrial customer applications
based largely on ZiLOG's Z-8 line of 8-bit micro-controllers and digital signal
processors.  The Communications segment is predominantly based on the Company's
Z80 line of 8-bit microprocessors and serial communication devices.



Net sales, EBITDA, and depreciation and amortization,
included in Corporate and Other, were generated primarily from foundry work
performed for manufacturing partners.  EBITDA represents earnings (losses)
before interest, income taxes, depreciation, amortization of intangible assets,
non-cash stock compensation expenses, equity in loss of Qualcore, cumulative
effect of change in accounting principle and special charges.

Financial information regarding reportable segments for the
three-month and nine-month periods ended September 30, 2001 and October 1, 2000
are as follows (in thousands):

`Corporate
                                 Communica-   Embedded       and        Total
                                    tions      Control      Other    Consolidated
                                 ----------- ----------- ----------- ------------
Three Months Ended
  September 30, 2001:
Net sales........................   $19,752     $22,558        $349      $42,659
                                                                     ============

EBITDA...........................     1,690       4,721         220       $6,631
Depreciation and amortization....    (3,488)     (5,735)        (68)      (9,291)
Special charges..................      --          --        (4,513)      (4,513)
Amortization of stock option
   compensation expense..........      --          --           (46)         (46)
Interest income..................      --          --           182          182
Interest expense.................      --          --        (7,272)      (7,272)
                                                                     ------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                     $(14,309)
                                                                     ============

Nine Months Ended
  September 30, 2001:
Net sales........................   $60,504     $68,556      $1,832     $130,892
                                                                     ============

EBITDA...........................    (6,285)      3,759         549     $ (1,977)
Depreciation and amortization....    (9,272)    (18,659)     (1,044)     (28,975)
Special charges..................      --          --       (12,629)     (12,629)
Amortization of stock option
   compensation expense..........      --          --          (106)        (106)
Interest income..................      --          --           990          990
Interest expense.................      --          --       (21,879)     (21,879)
                                                                     ------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                     $(64,576)
                                                                     ============

Three Months Ended
  October 1, 2000:
Net sales........................   $24,257     $39,548      $2,411      $66,216
                                                                     ============

EBITDA...........................     6,867       5,942      (1,258)     $11,551
Depreciation and amortization....    (2,526)     (7,394)       (656)     (10,576)
Special charges..................      --          --        (1,545)      (1,545)
Amortization of stock option
   compensation expense..........      --          --          (280)        (280)
Interest income..................      --          --           637          637
Interest expense.................      --          --        (7,234)      (7,234)
                                                                     ------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                      $(7,447)
                                                                     ============

Nine Months Ended
  October 1, 2000:
Net sales........................   $69,105    $111,505      $2,593     $183,203
                                                                     ============

EBITDA...........................    22,444       9,408      (1,339)     $30,513
Depreciation and amortization....    (7,020)    (23,150)     (1,032)     (31,202)
Special charges..................      --          --        (2,736)      (2,736)
Amortization of stock option
   compensation expense..........      --          --          (371)        (371)
Interest income..................      --          --         2,095        2,095
Interest expense.................      --          --       (21,756)     (21,756)
                                                                     ------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                     $(23,457)
                                                                     ============`



Major customers: During the three-month and nine-month
periods ended September 30, 2001, one distributor, Pioneer-Standard Electronics
("Pioneer"), who buys from both segments, accounted for approximately
13% and 12% of net sales, respectively. For the three-month period ended
September 30, 2001, another customer, SCI Systems, Inc., who buys primarily from
the Communications segment,  accounted for approximately 17% of net sales. For
the three-month and nine-month periods ended October 1, 2000, no customer
accounted for 10% or more of net sales.

6)	SPECIAL CHARGES



During the third quarter of 2001, ZiLOG incurred special
charges of $4.5 million.  These special charges included termination benefits of
$2.7 million, which were accrued for a reduction in force due to ZiLOG's wafer
fab consolidation efforts at its facilities in Nampa, Idaho, which is expected
to affect approximately 200 employees.  A charge of $0.5 million was recognized
for manufacturing consolidation costs including new mask sets to support ZiLOG's
wafer fab consolidation efforts, and relocation costs relating to moving the
Company's wafer probe operation to its facilities in the Philippines.  These
actions are expected to cost approximately $8.0 million and will be expensed
through the completion of the fab consolidation, which is anticipated to be in
the first quarter of 2002.  Also, $1.3 million was charged for professional
service fees incurred in connection with ZiLOG's debt restructuring plans.  As
of September 30, 2001, approximately $4.4 million was reserved for future
payments in connection  with these special charges.



During the second quarter of 2001, ZiLOG incurred special
charges of $8.1 million for restructuring of operations comprised of severance-
related expenses of $4.0 million, including $1.7 million of non-cash stock-
option related expenses, fixed-asset related write-offs of $2.9 million,
including planning software and surplus test equipment; manufacturing
consolidation charges of $0.4, and $0.8 million primarily relating to
consultants who are assisting with the Company's restructuring plans.  In
connection with this restructuring, we eliminated approximately 200 positions
worldwide during the second quarter of 2001. As of September 30, 2001,
approximately $1.0 million was reserved for future payments in connection with
these special charges.



During the third quarter of 2000, ZiLOG incurred a special
charge of $1.5 million of in-process research and development resulting from the
acquisition of Calibre.



During December 2000, the book value of our five-inch wafer
fabrication facility, one of our two facilities in Nampa, Idaho, was written
down by $6.9 million, to an estimated realizable value of $3.0 million,  in
connection with the Company's previous plan to sell the facility.  During the
first six months of 2001, the Company had reclassified these assets and the
remaining carrying value of $3.0 million to other current assets, as these
assets were held for sale.  Based on the Company's current plan to consolidate
its wafer fab operations into the five-inch wafer fabrication  facility, we
reclassified these assets back into property, plant and equipment as of July 1,
2001.  For the nine-month period ended September 30, 2001, depreciation expense
was reduced by approximately $2.4 million, compared to what would have been
recorded, without the December 2000 write-down and reclassification of these
assets.  The related depreciation on these assets commenced at the beginning of
the third quarter of 2001.  During December 2000, the Company also terminated 86
employees, including 5 senior vice presidents, with continuation payments
through the length of such senior vice presidents' employment agreements.  As of
September 30, 2001, approximately $1.4 million was reserved for future payments
in connection with these special charges.



During the second quarter of 2000, ZiLOG incurred special charges of $1.2
million relating to the Company refocusing its resources on the communications
segment.  In connection with this action, 24 people were terminated and 12
people were transferred into the communications segment from other areas of the
Company.  The components of these special charges are as follows (in
thousands):

`Three  Months Ended      Nine  Months Ended
                                 ----------------------- ------------------------
                                  Sep. 30,     Oct. 1,    Sep. 30,     Oct. 1,
                                    2001        2000        2001         2000
                                 ----------- ----------- ----------- ------------
Employee severance pay and
   termination benefits.........     $2,700     $  --        $6,768         $951
Professional service fees.......      1,311        --         2,075         --
Write-off of impaired assets....       --          --         2,932          140
Contractual obligations.........       --          --          --            100
Manufacturing consolidations....        502        --           854         --
In-process research and
   development..................       --         1,545        --          1,545
                                 ----------- ----------- ----------- ------------
                                     $4,513      $1,545     $12,629       $2,736
                                 =========== =========== =========== ============`





7)	NOTES PAYABLE



ZiLOG did not make its scheduled semi-annual interest payment
of $13.3 million on the outstanding 9.5% senior secured notes due 2005 (the
"Notes") that was due on September 4, 2001. As a result, the Notes are now
callable by the bondholders at any time. Accordingly, during the third quarter
of 2001, the Company reclassified its indebtedness under the Notes from a long-
term liability to a current liability on the balance sheet.  ZiLOG is currently
in negotiations with an informal group of the holders of the Notes (the
"Noteholders") about the possibility of restructuring its Notes.



8)	SHORT TERM DEBT



We have a senior secured credit facility (the
"Facility") from a commercial lender that provides for total
borrowings of up to $40.0 million, consisting of a four-year revolving credit
facility of up to $25.0 million and a five-year capital expenditure line of up
to $15.0 million which expire on December 30, 2002 and 2003, respectively. As of
September 30, 2001, the revolving credit facility bore interest at the stated
prime rate of 6.00% per annum.  There were no borrowings under the capital
equipment credit facility.   At September 30, 2001, the Company's calculated
availability, net of borrowings, under the revolving credit facility, was $1.3
million.Our default on the payment due on the Notes, and the expiration
of the applicable grace period on this payment on October 4, 2001, constitutes a
default under the Facility.  As a result, this lender is under no obligation to
make additional loans to the Company and we therefore may not be able to borrow
any such additional amounts  under this Facility.  In addition, this lender has
the option to call the loan and render the amounts outstanding under the
Facility immediately due and payable.



9)	COMPREHENSIVE INCOME



The Company had no items of other comprehensive income to
report in either of the nine-month periods ended September 30, 2001 or October
1, 2000.



10)	LEGAL PROCEEDINGS



On July 29, 1996, the Company filed an action in the Superior Court of the
State of California in and for Santa Clara County against Pacific Indemnity
Company ("Pacific"), Federal Insurance Company ("Federal")
and Chubb & Son Inc. ("Chubb" and together with Pacific and
Federal, the "Defendants").  In that action,  the Company seeks a
declaration that its former insurers, Pacific  and Federal had an unconditional
duty to defend and indemnify the Company in connection with two lawsuits brought
in 1994:  (1) in Santana v. ZiLOG an employee of the Company and her
husband filed an action in Idaho state court for negligence, failure to warn and
battery; and, (2) in Ko v. ZiLOG employees of the Company filed an action
in federal court asserting several claims (including a claim under the Americans
with Disabilities Act), based on bodily injury arising out of their employment.
Santana was removed to federal court, where the court granted the
Company's motion to dismiss on the ground that the complaint failed to state a
claim upon which relief could be granted.  The Ko action settled in
September 1996.  The Company's complaint in the Santa Clara County action also
alleges that Chubb, which handled the defense of Santana and Ko on
behalf of Pacific and Federal, was negligent.  Pacific cross-complained against
the Company, seeking reimbursement of defense costs for both underlying lawsuits
and a payment it contributed to the settlement of Ko.  On    May 19,
1999, Pacific voluntarily dismissed without prejudice its cause of action for
reimbursement of defense costs in Santana.  According to its cross-
complaint, a total of approximately six million, three hundred thousand dollars
($6,300,000), plus interest and costs of suit, is sought by Pacific.  In April
1998, the Defendants moved for summary judgment or, in the alternative, for
summary adjudication of various issues, including that the Defendants had no
duty to defend Ko.  The Court denied this motion, and the Court of Appeal
summarily denied Defendants' petition for review.  In April 1999, the Company
filed a motion for summary adjudication that the Defendants had a duty to
defend, which motion was denied.  The Court of Appeal and later the California
Supreme Court denied the Company's petitions for review of the denial of its
summary judgment motion without making any decision on the merits.  In December
1999, Pacific filed another motion for summary adjudication that it had no duty
to defend Ko.  As a result of motions brought by the Company, and
subsequent Court of Appeal proceedings, the hearing on Pacific's summary
adjudication motion was postponed until September 25, 2001, at which time it was
denied.  On October 23, 2001, the Company renewed its motion for summary
adjudication that Pacific had a duty to defend.  This motion is scheduled for
hearing on November 20, 2001.   No trial date has been set.



11)	DERIVATIVE INSTRUMENTS AND HEDGING



Effective January 1, 2001, the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 133,
"Accounting for Derivative Financial Instruments and Hedging
Activities." This statement requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value.  Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualified for hedge
accounting. The adoption of FASB Statement No. 133 did not have a significant
impact on the Company's financial position or results of operations as the
Company holds no derivative financial instruments and does not currently engage
in hedging activities.



12)	RECENT ACCOUNTING PRONOUNCEMENTS



In July 2001, the FASB issued Statements of Financial
Accounting Standards No. 141, "Business Combinations" ("FAS 141") and
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142").  FAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method.  Under FAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment.  Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life).  The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
July 1, 2001.  With respect to goodwill and intangible assets acquired prior to
July 2, 2001, ZiLOG is required to adopt FAS 142 effective January 1, 2002.  The
Company is currently evaluating the effect that adoption of the provisions of
FAS 142 that are effective January 1, 2002 will have on its results of operations
and financial position.



In August 2001,  the FASB issued Statement of Financial
Accounting Standards No. 144, "Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which is applicable to financial statements
issued for fiscal years beginning after December 15, 2001.  The provisions of
this statement provide a single accounting model for impairment of long-lived
assets.  The Company is in process of determining the impact, ifany, of
adopting SFAS 144.





FINANCIAL INFORMATION

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



FINANCIAL INFORMATION



Item 2.  Management's Discussion and Analysis of Financial

Condition and Results of Operations



The information presented below should be read in conjunction
with the Condensed Consolidated Financial Statements included elsewhere herein.
Interim results are based on fiscal quarters of thirteen weeks in duration
ending on the last Sunday of each quarter.  The operating results for any
quarter or interim period are not necessarily indicative of results for any
subsequent quarter or the full fiscal year.



Results of Operations



The Company's quarterly operating results have and will vary
because of a number of factors, including the timing and success of new product
introductions, customer design wins and losses, the success of cost reduction
programs, changes in product mix, volume, timing and shipment of orders,
fluctuations in manufacturing productivity and overall economic conditions.
Sales comparisons are also subject to customer order patterns and seasonality.
Because the Company's products are available from both the Company and its
distributors, the customer's decision to buy from a distributor or directly from
the Company can affect ZiLOG's quarterly sales and profitability.



In the fourth quarter of 2000, the Company changed its
accounting method for recognizing revenue on shipments to distributors who have
rights of return and price protection on unsold merchandise held by them.  The
Company previously recognized revenue upon shipment to these distributors net of
appropriate allowances for sales returns, price protection and warranty costs.
Following the accounting change, revenue recognition on shipments to these
distributors is deferred until the products are resold by the distributors to
their customers.  The Company believes that deferral of revenue recognition on
these distributor shipments and related gross margin until the product is
shipped by the distributor results in a more meaningful measurement of results
of operations as it better conforms to the changing business environment and is
more consistent with industry practice. It is, therefore, a preferable method of
accounting.  The cumulative effect of the change in accounting principle was
retroactively applied to the periods beginning on January 1, 2000 and resulted
in a charge of $8.5 million, net of a zero income tax effect.



Three and Nine-month Periods Ended September 30, 2001 and
October 1, 2000



Net Sales.  Overall, we experienced a significant
decline in bookings and net sales during the fourth quarter of 2000 which has
continued into the first nine months of 2001 and has adversely affected net
sales for most of our product lines.  We believe that this overall decline in
demand for our products is reflective of general economic trends, particularly
in the high technology sector, and may continue for several quarters.  Net sales
for the first nine months of 2001 decreased 28.6% from the comparable period of
2000. Net sales for the third quarter of 2001 declined 35.6% to $42.7 million,
compared to $66.2 million in the third quarter of 2000.  The decrease in net
sales during both the three and nine months ended September 30, 2001 compared to
the same periods in 2000 was attributable primarily to lower unit shipments in
our embedded control business segment and, to a lesser extent, lower unit
shipments within the communications business segment.



Net sales of communications products in the three and nine-
month periods ended September 30, 2001 decreased 18.6% and 12.4%, respectively,
compared with the same periods in 2000.  The decrease in communication product
sales during the third quarter of 2001 compared to the third quarter of 2000 was
primarily the result of lower unit shipments of networking products, which was
partially offset by higher unit shipments of modem products within our Internet
processor business line.  The decrease in communication product net sales for
the nine-month period ended September 30, 2001 compared to the same period in
2000, reflects lower unit sales of both Internet processor and networking
products, partially offset by sales of our wireless connectivity product line
that was acquired from Calibre during the third quarter of 2000.



Net sales of embedded control products in the first nine
months of 2001 decreased 38.5% compared to the same period in 2000.  For the
third quarter of 2001, net sales of embedded control products declined by 43.0%
compared to the third quarter of 2000.   The decline in net sales of embedded
control products for both the three-months and nine-months ended September 30,
2001 reflects reductions in unit shipments for all of our embedded control
product lines compared to the same periods in 2000. Compared to the third
quarter of 2000, military and peripherals products net sales declined by 100%
and 84.9%, respectively, in the third quarter of 2001 which reflects the phase-
out and de-emphasized status of these business lines.  We expect the downward
trend in net sales of peripherals products to continue and we expect no further
sales of military products.



Domestic and international sales (sales attributable to the
ship-to locations of ZiLOG's customers) in the first nine months of 2001 were
41.1% and 58.9%, respectively, compared to domestic and international sales of
41.0% and 59.0%, respectively, in the same period of 2000.



Gross Margin. The Company's cost of sales represents
the cost of wafer fabrication, assembly and test operations, as well as
production planning and freight costs.  Cost of sales fluctuates, depending on,
among other things, manufacturing productivity, product mix, equipment
utilization, inventory reserves and depreciation. Gross margin as a percent of
net sales declined to 21.3% in the first nine months of 2001 from 39.3% in the
same period of 2000.  During the third quarter of 2001 gross margin as a
percentage of sales was 31.0%, compared to 37.3% in the same period of 2000.
The decline in gross margin in both the nine months and three months ended
September 30, 2001 compared to the same periods in 2000, primarily resulted from
lower sales, coupled with significant under-absorption of manufacturing costs in
our fabrication facilities due to under-utilization of production capacity.
During the nine-month period ended September 30, 2001, the Company initiated a
series of manufacturing cost reduction initiatives including transfer of wafer
probe operations from Idaho to the Philippines, consolidation of our two wafer
fabrication facilities, reductions in force and renegotiation of purchase prices
with certain suppliers.  As part of the consolidation of our five-inch and
eight-inch wafer fabs, we plan to close our  eight-inch fab and eliminate
approximately 200 positions.  We expect to complete this consolidation by the
first quarter of 2002.



Research and Development Expenses.  Research and
development expenses were $36.1 million in the first nine months of 2001,
reflecting a 20.5% decrease from the $44.5 million reported in the same period
of 2000.  During the third quarter of 2001, research and development expense was
$5.9 million, which is 35.1% lower than the same period in 2000.  The decrease
in research and development expenses for these 2001 periods compared to same
periods in 2000 was due principally to lower payroll-related costs associated
with headcount reductions and the elimination of amortization of intangible
assets of our Seattle Design Center, which were written-off in December 2000.



Selling, General and Administrative Expenses.
Selling, general and administrative expenses were $36.1 million for the first
nine months of 2001 compared to $44.5 million for the same period of 2000.
During the third quarter of 2001, selling, general and administrative expenses
were 34.1% lower than the same period in 2000.  The decrease in our selling,
general and administrative spending in these 2001 periods was due primarily to
lower payroll-related costs associated with our reduced headcount.  Sales
commissions and incentive compensation  during the first nine months of 2001
have also declined compared to the same period of 2000 as a result of lower
sales levels and the elimination of our sales representative commission
arrangements.  Selling, general and administrative expenses for the third
quarter of 2001 included $1.1 million of costs associated with the Company's
unsuccessful effort to complete an initial public offering of common stock.



Special Charges.  During the third quarter of 2001, ZiLOG
incurred special charges of $4.5 million for restructuring of operations,
including accrued termination benefits of $2.7 million, wafer fab transfer costs
of $0.5 million; and $1.3 million relating to fees for professional services
associated with our Company's financial restructuring initiative. As of
September 30, 2001, approximately $6.8 million was accrued for future payments
in connection with these special charges.



In June 2001, the Company announced plans to consolidate its
two Nampa, Idaho wafer fab operations and to transfer wafer probe operations
from Nampa to the Philippines.  Excluding any asset impairment charges, these
actions are expected to cost approximately $8.0 million, which is being incurred
during an approximate nine-month period that commenced in July 2001. These
actions are expected to result in annual cost savings of approximately $18.0
million, based upon our annualized manufacturing spending rate in the first
quarter of 2001.



In December 2000, the book value of our five-inch wafer
fabrication facility, one of our two facilities in Nampa, Idaho, was written
down by $6.9 million, to an estimated realizable value of $3.0 million, in
connection with the Company's original plan to sell that facility.  During the
first six months of 2001, the Company had reclassified these assets and the
remaining carrying value of $3.0 million to other current assets, as these
assets were held for sale.  Based on the Company's current plan to consolidate
its wafer fab operations into the five-inch wafer fabrication facility, we
reclassified these assets back into property, plant and equipment at the end of
the second quarter of 2001.  For the first nine months of 2001, depreciation
expense was reduced by approximately $2.4 million, compared to what would have
been recorded, as a result of the December 2000 write-down and reclassification
of these assets.



During the third quarter of 2000, ZiLOG incurred special
charges of $1.5 million representing purchased in-process research and
development projects in connection with our acquisition of Calibre, Inc. on July
27, 2000.



Other Income/(Expense), Net. Interest income
represents interest earned on cash and cash equivalents with maturities of less
than 90 days.  Interest expense is primarily comprised of the interest on the
Notes  and quarterly amortization of deferred financing costs of $0.3 million.
The Company's interest expense on the Notes totals approximately $26.6 million
per year, which is payable in equal semi-annual installments on March 1 and
September 1.   The Company did not make the September 2001 scheduled interest
payment on the Notes.  Accordingly, repayment of the Notes could be accelerated
by the Noteholders and, as a result, the Notes and all related accrued interest
expense has been recorded as a current liability as of September 30, 2001.  We
are currently in discussions with an informal group of our Noteholders to
restructure the Notes.  There can be no assurance that such discussions will be
successful or that the necessary  Noteholders will agree to any restructuring
plan.

Equity in Loss of Qualcore Group, Inc.  In March 2000,
we acquired a 20% equity stake in Qualcore for approximately $8.1 million.  We
account for this investment under the equity method.  The loss in equity of
Qualcore primarily represents amortization of goodwill associated with our
equity investment.  In connection with our equity investment, we also received
an option to acquire the remaining shares of Qualcore Group, Inc. which expired
unexercised on June 30, 2001.



Income Taxes. Our provision for income taxes in
the three-month and nine-month periods ended September 30, 2001 and 2000
reflects foreign income taxes for the jurisdictions in which we were profitable
as well as foreign withholding taxes.



EBITDA.  EBITDA represents earnings (losses) before
interest, income taxes, depreciation, amortization of intangible assets, non-
cash stock compensation expenses, equity in loss of Qualcore, cumulative effect
of change in accounting principle and special charges.  EBITDA is presented
because it is a widely accepted financial indicator of a company's ability to
service and/or incur indebtedness.  However, EBITDA should not be construed as a
substitute for income from operations, net income or cash flows from operating
activities in analyzing our operation performance, financial position and cash
flows.  The EBITDA measure presented herein may not be comparable to EBITDA as
presented by other companies.  EBITDA was $6.6 million for the third quarter of
2001 compared to $11.6 million for the third quarter of 2000.  For the nine
months ended September 30, 2001, the Company incurred an EBITDA loss of $2.0
million, compared to EBITDA of $30.5 million recorded for the nine months ended
October 1, 2000.



Liquidity and Capital Resources



Our primary cash needs are debt service, working capital,
capital expenditures and equity investments.  We meet these needs with our
operating cash flow, cash on hand and available credit lines.  As of September
30, 2001 we had cash and cash equivalents of approximately $26.7 million.  We
also have a senior secured credit facility (the "Facility") from a
commercial lender that provides for total borrowings of up to $40.0 million,
consisting of a four-year revolving credit facility of up to $25.0 million and a
five-year capital expenditure line of up to $15.0 million which expire on
December 30, 2002 and 2003, respectively.  The ability to borrow these amounts
is limited by certain financial tests.  As of September 30, 2001, we had
borrowings of $12.8 million under the revolving credit facility and there was
$1.3 million of remaining calculated availability on the Facility.  Borrowings
under the Facility bear interest at a rate per annum equal, at our option, to
the commercial lender's stated prime rate (6.0% at September 30, 2001) or the
London Interbank Overnight Rate, commonly known as LIBOR, plus 2.0% (6.9% at
September 30, 2001) for the revolving credit facility and the commercial
lender's prime rate plus 1.0% (7.0% at September 30, 2001) or LIBOR plus 3.0%
(7.9% at September 30, 2001) for the capital expenditure line.



Our default on the payment due on the Notes, and the
expiration of the applicable grace period on this payment on October 4, 2001,
constitutes a default under the Facility.  As a result, this lender is under no
obligation to make additional loans to the Company and we therefore may not be
able to borrow any such  additional amounts under this Facility.   In addition,
this lender has the option to call the loan and render the amounts outstanding
under the Facility immediately due and payable.  Accordingly, during the third
quarter of 2001, the Company reclassified its indebtedness under the Facility
from a long-term liability to a current liability on the balance sheet.  To
date, however, the lender has not called for repayment of the outstanding
balance under the Facility.  We are currently engaged in discussions with this
lender regarding the default under the Facility.  There can be no assurance,
however, that the lender will not call for the repayment of such outstanding
balance.



Cash used by operating activities was $23.0 millionfor the nine months ended September 30, 2001, compared to $1.2 million in
the same period of 2000. The use of cash by operating activities in the first
nine months of 2001 primarily reflects our net loss of  $65.9 million, adjusted
by depreciation and amortization of $29.0 million, write-off of long-lived
assets of $2.9 million, stock option compensation of $1.8 million, a decrease in
accounts receivable of $8.1 million, a decrease in inventories of $10.1 million,
a decrease in prepaid expenses and other assets of $6.9 million and an increase
in accrued interest of $6.7 million, offset by a decrease in accrued
compensation and employee benefits of $18.8 million and a decrease of other
accrued and non-current liabilities of  $3.8 million.



During the first quarter of 2001, we paid $10.3 million to
our former Chief Executive Officer, pursuant to a contractual obligation, which
is reflected in the change in accrued compensation and employee benefits.  In
April 2001, we terminated our deferred compensation plan and paid out all
participants' balances. The deferred compensation asset and liability balances
were $6.2 million at December 31, 2000 and zero at September 30, 2001, which is
reflected in the change in both prepaid expenses and other assets and accrued
compensation and employee benefits during the nine months ended September 30,
2001.



The $1.2 million use of cash by operating activities in the
first nine months of 2000 was primarily attributable to our net loss of $33.0
million, adjusted for $31.0 million of depreciation and amortization and $8.5
million cumulative effect of our change in accounting principle for sales to
distributors and a $1.5 million in-process research and development  charge.
Also during the first nine months of 2000 inventories increased by $4.5 million,
accrued interest payable decreased by $6.7 million and other accrued and non-
current liabilities increased by $2.4 million.



Cash used by investing activities was $3.9million
for the nine months ended September 30, 2001 and was $26.4 million for the nine
months ended October 1, 2000. Cash used for investing activities in the first
nine months of 2001 was for capital expenditures, primarily relating to wafer
fabrication equipment. We now expect capital expenditures for 2001 to total
approximately $4.5 million. Cash used for investing activities in the first nine
months of 2000 was comprised of $8.1 million for an equity interest in Qualcore,
$0.4 million for net cash expenditures in connection with the acquisition of
Calibre and capital expenditures of $18.0 million, primarily for manufacturing
equipment and supply chain management software.



Cash provided by financing activities was $12.9million for the nine months ended September 30, 2001, primarily consisting
of  $12.8 million of borrowings under our revolving credit facility. Cash
provided by investing activities was $2.1million for the nine months
ended September 30, 2000, reflecting $2.6 million from issuance of common stock,
offset by $0.5 million principal payments under capital leases.



We incurred substantial indebtedness in connection with
our recapitalization merger. We currently have $280.0 million in aggregate
principal amount of Notes outstanding which are publicly registered and subject
us to the reporting requirements of the Securities Exchange Act of 1934. The
agreement governing our Notes contains covenants that, among other things, limit
our ability and the ability of our subsidiaries to incur particular types of
additional indebtedness, issue particular types of capital stock, pay dividends
or distributions, make investments or other payments, enter into transactions
with affiliates, dispose of particular types of assets, incur liens and engage
in mergers and consolidations. The Notes are scheduled to mature on March 1,
2005. Interest on the Notes accrues at the rate of 9.5% per annum and is payable
semi-annually in arrears on March 1 and September 1, to holders of record on the
immediately preceding February 15 and August 15, respectively. The Company's
interest expense on the Notes totals approximately $26.6 million per year, which
is payable in equal semi-annual installments on March 1 and September 1.   The
Company did not make the September 2001 scheduled interest payment on the Notes.
Accordingly, the Notes are callable at any time by the Noteholders and the Notes
and all related accrued interest expense has therefore been recorded as a
current liability as of September 30, 2001. We are currently in discussions with
an informal group of the Noteholders to restructure the Notes.  There can be no
assurance that such discussions will be successful or that all such Noteholders
will agree to any proposed restructuring plan.



Under the terms of our agreement with Qualcore, we had the
option until the expiration date of June 30, 2001, to obtain all of the
remaining outstanding shares of common stock of Qualcore for cash and/or common
stock in ZiLOG.  Since we did not exercise this option, the agreement with
Qualcore may require us to pay up to $5.2 million plus accrued interest to
acquire up to 1.8 million additional shares of Qualcore common stock.  We are
currently analyzing whether the conditions precedent for this obligation have
been satisfied and are continuing discussions with the management of Qualcore to
defer the payment of, or otherwise restructure, this obligation.  It is
uncertain whether this deferment or restructure will be accomplished.



Our cash needs include future requirements for working
capital, capital expenditures, and other projected expenditures, including
possible payments related to Qualcore, , expenditures related to our announced
restructuring and wafer fabrication facility consolidation plans and payment of
interest on our indebtedness.  The 2001 business climate continues to be
extremely difficult.  Cash flows from operations and available cash have not
been sufficient for us to satisfy all of our cash needs through 2001 and, as a
result, we are in default under our Notes and our Facility. We continue to
pursue a combination of operational and financial restructuring alternatives
with the assistance of our investment banker, Lazard.  These alternatives
include raising new financing, restructuring our indebtedness and asset sales.
From an operational perspective, we continue to address cost management, cash
and working capital management, and the timely release of new products.   We are
currently in discussions with an informal group of the Noteholders to
restructure the Notes and with our working capital facility lender regarding the
default under the Facility.  There can be no assurance, however, that such
discussions will be successful.



Recent Developments



ZiLOG has not filled the position of Chief Operating Officer
that had been filled on a contract basis for six months by Stefan Braken-Guelke
and terminated in September 2001.

Factors That May Affect Future Results



Risks Related to Our Business and Industry



Our cash flow will not be sufficient to satisfy all of our
cash needs for the remainder of 2001.



Our cash needs include future requirements for working
capital, capital expenditures, and other projected expenditures, including a
possible payment related to Qualcore during 2001, expenditures related to our
announced restructuring and wafer fabrication facility consolidation plans and
payment of our indebtedness, .  In the event we are unsuccessful in negotiating
a restructuring with the Noteholders and our working capital facility lender, we
could be required to repay the total outstanding balances due under the Notes
and under the Facility.  We do not have sufficient cash to make these payments
and we can make no assurances that our discussions and negotiations with the
Noteholders and our working capital facility  lender regarding a restructuring
of these obligations will be successful.  If we are unable to restructure these
obligations, our creditors could force us into bankruptcy and liquidate our
assets to satisfy their debt.



Recent terrorist activities and resulting military and
other actions could harm our business.



Terrorist attacks in New York, Washington, D.C. and
Pennsylvania in September 2001 have disrupted domestic and international
commerce.  The continued threat of terrorism, any ongoing military action and
heightened security measures in response to this threat may cause significant
disruption to commerce throughout the world.  To the extent that this disruption
results in delays or cancellations of orders, a general decrease in spending on
technology products or our inability to effectively market and ship our
products, our business and results of operations could be harmed.  We are unable
to predict whether the threat of terrorism or the responses thereto will result
in any long-term commercial disruptions or if such activities or responses will
have a long-term adverse effect on our business, results of operations or
financial condition.



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



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



- our ability to introduce and sell new products and
technologies on a timely basis;



- changes in the prices of our products;



- technological change and product
obsolescence;



- changes in product mix or fluctuations in manufacturing
yields;



- variability of our customers' product life
cycles;



- the level of orders that we receive and can ship in a
quarter, customer order patterns and seasonality;



- increases in the cost of raw materials;
and



- gain or loss of significant customers.



In addition to causing fluctuations in the price of the
Notes, any significant declines in our operating performance could harm our
ability to meet our debt service and other obligations.



We are currently experiencing a downturn in the business
cycle and our revenues, cash generation and profitability are being adversely
affected.



The semiconductor industry is highly cyclical and has
experienced significant economic downturns at various times in the last three
decades, characterized by diminished product demand, erosion of average selling
prices and production over-capacity.  In the fourth quarter of 2000, another
downturn in our business cycle began and continues today.  The terrorist acts of
September 2001 in New York City, Washington, D.C. and Pennsylvania, and the
United States' military response, have exacerbated the downturn and created an
uncertain economic environment.  We cannot predict the impact of these events,
any subsequent terrorist acts or of any related military action, on our
customers or business.  We believe that, in light of these events, some
businesses may curtail spending on technology, which could also negatively
affect our quarterly results or financial condition in the future.  We are
experiencing a decline in revenues as our customers are not ordering product
from us in the quantities that they previously ordered.  We are uncertain how
long this decline will last.  In 1997 and 1998, we experienced similar
significant declines in customer demand for our products.  In response to these
reductions in demand, other semiconductor manufacturers and we reduced prices to
avoid a significant decline in capacity utilization. We are currently
experiencing significant declines in our capacity utilization in our
manufacturing facilities and we have reduced selling prices on certain products.
We may be required to further reduce selling prices given the fixed costs
associated with such manufacturing capacity, this decline has had and will
continue to have a negative impact on our financial condition.  In addition, we
are currently, and will likely in the future experience substantial period-to-
period fluctuations in future operating results that are attributable to general
industry conditions or events occurring in the general economy. Any economic
downturn could pressure us to reduce our prices and decrease our revenues, cash
generation and profitability.



We have a history of losses, we expect future losses and
we may not achieve or maintain profitability in the future.



We have a history of net losses, we expect future net losses
and we do not expect to achieve profitability in the near future. We incurred
net losses of $58.2 million in 2000,  $37.9 million in 1999 and $87.5 million in
1998. As of September 30, 2001, we had an accumulated deficit of approximately
$248.7 million.



We have implemented and are considering additional
implementing significant cost cutting measures, but these cost-cutting measures
may not result in increased efficiency or future profitability.



Similar to other semiconductor companies, we have implemented
and may consider implementing additional significant cost cutting measures that
may include:



- consolidation of our wafer fabrication facilities and
transfer of our probe operations to the Philippines;



- refocusing of business priorities;



- reallocation of personnel and responsibilities to better
utilize human resources;



- reductions in workforce; and



- temporary office and facility shutdowns.



As part of our cost cutting measures, we are considering the
disposition of one or more product lines, business units or other assets. We may
not be able to consummate any divestiture at a fair market price. We may also be
unable to reinvest the proceeds from any disposition to produce the same level
of operating profit as the divested product lines or to generate a commensurate
rate of return on the amount of our investment. We may also be required to pay
some or all of the proceeds from assets sales to our senior lenders rather than
retaining such proceeds for working capital.  Our cost cutting measures may not
increase our efficiency or future profitability.





If we are unable to implement our business strategy, our
revenues and future profitability may be harmed materially.



Our future financial performance and success are largely
dependent on our ability to implement our business strategy, which is described
in our Annual Report on Form 10-K. We have recently changed our business
strategy to focus more of our resources on the communications market. We may be
unable to implement our business strategy and, even if we do implement our
strategy successfully, our results of operations may fail to improve.



In addition, although the communications market has grown
rapidly in the last few years, it is currently in a significant downturn.  Our
revenues and future profitability could be harmed seriously.  It is uncertain
for how long this slowdown will last.



We may not be able to introduce and sell new products and our
inability to do so may harm our business materially.



Our operating results depend on our ability to introduce and
sell new products. 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 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.



Our ability to introduce new products successfully depends on
several factors, including:

.

- proper new product selection;



- timely completion and introduction of new product
designs;



- complexity of the new products to be designed and
manufactured;



- development of support tools and collateral literature
that make complex products easy for engineers to understand and use;
and



- market acceptance of our products and our customers'
products.



We cannot assure you that the design and introduction
schedules for any new products or any additions or modifications to our existing
products will be met, that these products will achieve market acceptance or that
we will be able to sell these products at prices that are favorable to us.



Our future success may be dependent on the release and
acceptance of our new eZ80 Internet Engine family of products.



We announced our newest product, the eZ80 Internet Engine
family of products, in September 1999.  We have delivered samples of our first
eZ80 product to some of our customers.  These new products may not perform as
anticipated and there may be unforeseen redesigns or delays in their final
release. Our failure to release these products as scheduled or the failure of
these products to meet our customers' expectations would affect us adversely. We
do not expect to receive significant revenues from these products in 2001 and
future revenues may be insufficient to recover the costs associated with their
development.



Products as complicated as the eZ80 Internet Engine
frequently contain errors and defects when first introduced or as new versions
are released. Delivery of products with such errors or defects, or reliability,
quality or compatibility problems, could require significant expenditures of
capital and other resources and significantly delay or hinder market acceptance
of these products. Any such capital expenditures or delays could harm our
operating results materially, damage our reputation and affect our ability to
retain our existing customers and to attract new customers.



Our industry is highly competitive and we cannot assure
you that we will 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 communications products compete with, or are expected to
compete with, products offered by Advanced Micro Devices, ARM, Atmel,  Conexant,
Intel, Lucent Technologies, Maxim, MIPS Technologies, Mitel, Motorola, NEC,
NetSilicon, Philips, PMC-Sierra, Sharp, Texas Instruments and Toshiba.  Our
current and future embedded control products compete with, or are expected to
compete with, products offered by Atmel, Hitachi, Intel, Microchip, Mitsubishi,
Motorola, NEC, Philips, Samsung, Sanyo, Sharp, ST Microelectronics and
Toshiba.

Our ability to compete successfully in our markets depends on
factors both within and outside of our control, including:



- our ability to design and manufacture new products that implement new
technologies;



- our ability to protect our products by effectively utilizing intellectual
property laws;



- our product quality, reliability, ease of use and price;



- the diversity of product line and our efficiency of production;



- the pace at which customers incorporate our devices into their products;
and



- the success of our competitors' products and general economic
conditions.



To the extent that our products achieve market acceptance, competitors
typically seek to offer competitive products or embark on pricing strategies,
which, if successful, could harm our results of operations and financial
condition materially.

Unless we maintain manufacturing efficiency and avoid manufacturing
difficulties, our future profitability could be harmed.

Our semiconductors are highly complex to manufacture
and our production yields are sensitive. Our production yields may be inadequate
in the future to meet our customers' demands. Production yields are sensitive to
a wide variety of factors, including the level of contaminants in the
manufacturing environment, impurities in the materials used and the performance
of personnel and equipment. From time to time, we have experienced difficulties
in effecting transitions to new manufacturing processes and have suffered delays
in product deliveries or reduced yields. We may experience similar difficulties
or suffer similar delays in the future, and our operating results could be
harmed as a result.



For example, we may experience problems that make it
difficult to manufacture the quantities of our products that we anticipate
producing in our .35 and .65 micron wafer fabrication processes. These
difficulties may include:



- equipment being delivered later than or not performing as
expected;



- process technology changes not operating as expected;

- complications in moving production from our eight-inch wafer fabrication
facility to our five-inch wafer fabrication facility or to outside foundries in
connection with our announced wafer fab consolidation plans; and







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



We intend to rely on independent third-party foundry
manufacturers to fabricate some of our products, including some of our
communications products.  Industry-wide shortages in foundry capacity could harm
our financial results.  Should we be unable to obtain the requisite foundry
capacity to manufacture our complex new products, or should we have to pay high
prices to foundries in periods of tight capacity, our ability to increase our
revenues might be impaired. Any delay in initiating production at third-party
facilities, any inability to have new products manufactured at 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 manufacturers include:



- reduced control over the cost of our products, delivery
schedules and product quality;



- the warranties on wafers or products supplied to us are
limited;



- increased exposure to potential misappropriation of our
intellectual property; and



- the cost and consumption of time associated with
switching foundries.



We depend on third-party assemblers 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 for packaging our
products. If we are unable to obtain additional assembly capacity on
sufficiently favorable terms, our ability to achieve continued revenue growth
might be impaired. Shortages in contract assembly capacity could cause shortages
in our products and could also result in the loss of customers. Because we rely
on these third parties, we also have less control over our costs, delivery
schedules and quality of our products and our intellectual property is at
greater risk of misappropriation.



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



Approximately 54% of our net sales in 2000 were 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 and rely on a number of contract manufacturers in the Philippines,
Indonesia, Taiwan, Malaysia and India.   We cannot assure you that we will be
successful in overcoming the risks that relate to or arise from operating in
international markets.  Risks inherent in doing business on an international
level include:



- economic and political instability;



- changes in regulatory requirements, tariffs, customs,
duties and other trade barriers;



- transportation delays;



- power supply shortages and shutdowns;



- difficulties in staffing and managing foreign operations
and other labor problems;



- existence of language barriers and cultural
distinctions;



- taxation of our earnings and the earnings of our
personnel; and



- other uncertainties relating to the administration of or
changes in, or new interpretation of, the laws, regulations and policies of the
jurisdictions in which we conduct our business.



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



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



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



Historically we have been, and we expect to continue to be,
dependent on a relatively small number of customers for a significant portion of
our revenues primarily because we depend on third-party distributors to market
and sell our products. These third-party distributors accounted for
approximately 40% of our sales in 1999 and 40% of our sales in 2000. Our
distributors may not continue to effectively market, sell or support our
products. Our ten largest customers accounted for approximately 48% of our net
sales in 1999 and 49% of our net sales in 2000. Arrow Electronics alone
accounted for approximately 13% of our net sales in 1999 and Pioneer-Standard
accounted for approximately 12% of our net sales in 2000. 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. 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
harm our business materially.



We have very few long-term contracts with our customers and,
like us, our customers typically compete in cyclical industries. In the future,
these 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,
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. Customers may still cancel or
reschedule within these time periods, however they routinely incur a
cancellation or rescheduling charge. This risk is increased because our
customers can purchase some similar products from our competitors.



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



As a result of technological changes, from time to time, our
products are designed out of some devices by our customers. Any resulting
decreased sales could reduce our profitability. For example, we have learned
that a number of our customers have changed the designs of computer mouse
pointing devices that they manufacture, and that as a result, these devices will
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. As a result of these
design changes, net sales of our computer mouse pointing devices and other
computer peripheral products decreased substantially from approximately $28.2
million in 1999 to approximately $15.4 million in 2000.  For the nine months
ended September 30, 2001, peripheral product net sales totaled $3.9 million.
These reduced sales have and may continue to harm our operating results
materially.





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



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,
merchandising, marketing and customer service personnel could harm our business
and our ability to obtain new customers and develop new products.  In addition,
the current financial condition of the Company could have a negative impact on
our ability to recruit and retain employees.



Our Chairman of the Board, President and Chief Executive
Officer, Curtis J. Crawford, resigned effective March 16, 2001.  Mr. James M.
Thorburn is currently serving as Acting Chief Executive Officer. Our failure to
replace Mr. Crawford with a permanent Chief Executive Officer may harm our
business materially.



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 measures we take to protect our intellectual property
rights may be inadequate to protect our proprietary technologies and processes
from misappropriation, and these measures may not prevent independent third
party development of competitive products. We may not be able to detect the
unauthorized use of, or take appropriate steps to enforce, our intellectual
property rights. Despite our efforts to protect our proprietary rights in both
the United States and in foreign countries, existing intellectual property laws
in the United States provide only limited protection and, in some cases, the
laws of foreign countries provide even less protection.



Litigation may be necessary in the future 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.



We could be subject to claims of infringement of third-party
intellectual property rights, which could result in significant expense to us
and/or our loss of such rights.



The semiconductor industry is characterized by frequent
claims and related litigation regarding patent and other intellectual property
rights. Third parties may assert claims or initiate litigation against us, our
licensors, our foundries, our service providers or our customers with respect to
existing or future products. Any intellectual property litigation initiated
against us could subject us to significant liability for damages and attorneys'
fees, invalidation of our proprietary rights, injunctions or other court orders
that could prevent us from using specific technologies or engaging in specific
business activities.



These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management's time and
attention from our business. Any potential intellectual property litigation
could also force us to do one or more of the following:



- pay substantial damages;



- cease using key aspects of our technologies or processes
that incorporate the challenged intellectual property;



- cease the manufacture, use, sale, offer for sale and
importation of infringing products;



- alter our designs around a third party's
patent;



- obtain licenses to use the technology that is the subject
of the litigation from a third party;



- expend significant resources to develop or obtain non-
infringing technology;



- create new brands for our services and establish
recognition of these new brands; or



- make significant changes to the structure and the
operation of our business.



Implementation of any of these alternatives could be costly
and time-consuming and might not be possible at all. An adverse determination in
any litigation to which we were a party could harm our business, our results of
operations and financial condition. In addition, we may not be able to develop
or acquire the technologies we need, and licenses to such technologies, if
available, may not be obtainable on commercially reasonable terms. Any necessary
development or acquisition could require us to expend substantial time and other
resources.



One party has notified ZiLOG that it may be infringing
certain patents.  Four of our customers have notified us that they have been
approached by patent holders who claim that they are infringing certain patents.
The customers have asked us for indemnification.  ZiLOG is investigating the
claims of all of these parties.  We believe that we are unlikely to have
liability in any of these situations, but no assurance can be given in this
regard.  In the event ZiLOG determines that such notice may involve meritorious
claims, ZiLOG may seek a license.  Based on industry practice, ZiLOG believes
that in most cases any necessary licenses or other rights could be obtained on
commercially reasonable terms.  However, no assurance can be given that licenses
could be obtained on acceptable terms or that litigation will not occur.  The
failure to obtain necessary licenses or other rights or the advent of litigation
arising out of such claims could have a material adverse effect on ZiLOG.





We are defending several lawsuits, both in and out of the
ordinary course of business; we may lose these suits and we may be subject to
material judgments against us.



In July 1996 we filed suit against our former
insurers, Pacific Indemnity Company, Federal Insurance Company and Chubb &
Son, Inc., in the Superior Court of the State of California in and for Santa
Clara County.  Our former insurers counter-claimed, alleging that two lawsuits
brought against us were not covered by our insurance policies. In these
underlying lawsuits, some of our employees and their families claimed that they
suffered personal injuries and discrimination because of alleged exposure to
chemicals at our manufacturing facility in Idaho in 1993 and 1994. The insurers
seek reimbursement of attorneys' fees, costs and settlement funds expended on
our behalf, totaling approximately $6.3 million plus interest. Based upon
information presently known to management, we are unable to determine the
ultimate resolution of this lawsuit or whether it will materially harm our
financial condition.



The insurance coverage lawsuit has been and is likely to
continue to be time consuming and expensive to resolve. We are also
participating in other litigation and responding to claims arising in the
ordinary course of business. We intend to defend ourselves vigorously in these
matters. Our management believes that it is unlikely that the outcome of these
matters will materially harm our business, but as the results are still
undetermined, we may face liabilities that may harm our business.



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



To grow our business and maintain our competitive position,
we have made acquisitions in the past and may acquire other businesses in the
future. In the past, for example, we acquired substantially all of the assets
and assumed the operating liabilities of Seattle Silicon Corporation in April
1999 for approximately $6.1 million. In March 2000, we acquired 20% of the
common stock of Qualcore, along with an option to acquire the remaining 80%
interest in Qualcore, for approximately $8.1 million, including expenses. We did
not elect to exercise this option although we may be obligated to purchase an
additional 1.8 million shares for approximately $5.2 million plus interest.  In
July 2000, we acquired Calibre in exchange for 743,714 shares of our common
stock, including shares of our common stock issuable upon the exercise of vested
options, plus additional shares issuable pursuant to an earn-out provision.



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



- insufficient experience with technologies and markets in
which the acquired business is involved that may be necessary to successfully
operate and integrate the business;



- ineffective communication and cooperation in product
development and marketing among senior executives and key technical personnel;



- problems integrating the acquired operations, personnel,
technologies or products with the existing business and products;



- diversion of management time and attention from our core
business and to the acquired business;



- potential failure to retain key technical, management,
sales and other personnel of the acquired business; and



- difficulties in retaining relationships with suppliers
and customers of the acquired business.



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.



We are subject to a variety of environmental laws and
regulations and our failure to comply with present or future laws and
regulations could harm our business materially.



Our manufacturing processes require us to use 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. Although we believe that we are in
material compliance with all relevant laws and regulations and have all material
permits necessary to conduct our business, 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 any future
environmental laws and regulations 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 materials could
subject us to future liabilities that could materially harm our business. In
addition, we may be required to incur significant expense in connection with
governmental investigations and/or environmental employee health and safety
matters.



Risks Related to Our Capital Structure



Our substantial indebtedness may limit the cash flow we
have available for our operations and place us at a competitive
disadvantage.



At September 30, 2001, we had a principal amount of $280.0
million of Notes outstanding, $12.8 million of short-term indebtedness, and a
stockholders' deficiency of $210.7 million.



The high degree to which we are leveraged may have
important consequences to our business, including:



- our ability to obtain additional financing for working
capital, capital expenditures, product development, possible future acquisitions
or other purposes may be impaired or any such financing may not be available on
terms favorable to us;



- a substantial portion of our cash flow available from
operations after satisfying liabilities that arise in the ordinary course of
business will be dedicated to the payment of debt service obligations, thereby
reducing funds that would otherwise be available to us;



- a decrease in net operating cash flows or an increase in
expenses could make it difficult for us to meet our debt service requirements or
force us to modify our operations; and



- high  leverage may place us at a competitive
disadvantage, limit our flexibility in reacting to changes in our operating
environment and make us vulnerable to a downturn in our business or the economy
generally.



The 2001 business climate has been extremely difficult. Cash
flows from operations and available cash, coupled with some operational
restructuring activities and other cash-savings initiatives, have not been
sufficient to satisfy all of our cash needs  through 2001.  We have been unable
to satisfy our obligations under our indebtedness and, as a result, we are
currently in default under the Notes and the Facility. As a result of the
default on the Notes, the Noteholders have the option to accelerate the amounts
due on the Notes.   In addition, as a result of the default under the Facility,
the working capital facility lender is under no obligation to make additional
loans to the Company and we may not be able to borrow any additional amount
under this Facility.  In addition, this lender has the option to call the loan
and render the amounts outstanding under the Facility immediately due and
payable.  We do not have sufficient cash to make these payments and we can make
no assurances that our discussions and negotiations with the Noteholders and the
lender regarding a restructuring of these obligations will be successful.  If we
are unable to restructure these obligations, our creditors could force us into
bankruptcy and liquidate our assets to pay their debt.



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



The terms of our indebtedness contain restrictive
covenants that may impair our ability to take corporate actions that we believe
to be in the best interests of our stockholders, including restricting our
ability to:



- dispose of assets;



- incur additional indebtedness;



- prepay other indebtedness or amend some debt
instruments;



- pay dividends or repurchase our stock;



- create liens on assets;



- enter into sale and leaseback transactions;



- make investments, loans or advances;



- make acquisitions or engage in mergers or
consolidations;



- change the business conducted by us or our
subsidiaries;



- make capital expenditures or engage in specific
transactions with affiliates; and



- otherwise restrict other corporate
activities.



Our ability to comply with these agreements 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 additional defaults, which may impair the willingness of the
Noteholders and the working capital facility lender to restructure their
debt.



Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates
relates primarily to our short-term investment portfolio and long-term debt
obligations.  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.
We mitigate default risk by investing in only the highest quality securities and
monitoring the credit ratings of such investments.  We have no cash flow
exposure due to rate changes for our cash equivalents or our Notes as these
instruments have fixed interest rates.

The table below presents principal amounts and related average rates by year
of maturity for our cash equivalents and debt obligations as of September 30,
2001 (dollars in thousands):

`2001       2005      Total    Fair Value
                                                 ---------- ---------- ---------- ----------
Cash Equivalents:
  Fixed rate .........................             $24,917    $  --      $24,917    $24,917
  Average interest rate ..............                2.93%      --         2.93%      --

Short-Term debt:
  Variable rate debt..................             $12,800    $  --      $12,800    $12,800
  Interest rate ......................                6.00%      --         6.00%      --

Long-Term Debt:
  Fixed rate debt.....................            $280,000    $  --     $280,000    $47,600
  Stated interest rate ...............                9.50%      --         9.50%      --`

Part II.  OTHER INFORMATION

Item 1.  Legal Proceedings



On July 29, 1996, the Company filed an action in the Superior
Court of the State of California in and for Santa Clara County filed on July 29,
1996 against Pacific Indemnity Company ("Pacific"), Federal Insurance
Company ("Federal") and Chubb & Son Inc. ("Chubb" and
together with Pacific and Federal, the "Defendants").  In that action,
the Company seeks a declaration that its former insurers, Pacific  and Federal
had an unconditional duty to defend and indemnify the Company in connection with
two lawsuits brought in 1994:  (1) in Santana v. ZiLOG an employee of the
Company and her husband filed an action in Idaho state court for negligence,
failure to warn and battery; and, (2) in Ko v. ZiLOG employees of the
Company filed an action in federal court asserting several claims (including a
claim under the Americans with Disabilities Act), based on bodily injury arising
out of their employment.  Santana was removed to federal court, where the
court granted the Company's motion to dismiss on the ground that the complaint
failed to state a claim upon which relief could be granted.  The Ko
action settled in September 1996.  The Company's complaint in the Santa Clara
County action also alleges that Chubb, which handled the defense of
Santana and Ko on behalf of Pacific and Federal, was negligent.
Pacific cross-complained against the Company, seeking reimbursement of defense
costs for both underlying lawsuits and a payment it contributed to the
settlement of Ko.  On    May 19, 1999, Pacific voluntarily dismissed
without prejudice its cause of action for reimbursement of defense costs in
Santana.  According to its cross-complaint, a total of approximately six
million, three hundred thousand dollars ($6,300,000), plus interest and costs of
suit, is sought by Pacific.  In April 1998, the Defendants moved for summary
judgment or, in the alternative, for summary adjudication of various issues,
including that the Defendants had no duty to defend Ko.  The Court denied
this motion, and the Court of Appeal summarily denied Defendants' petition for
review.  In April 1999, the Company filed a motion for summary adjudication that
the Defendants had a duty to defend, which motion was denied.  The Court of
Appeal and later the California Supreme Court denied the Company's petitions for
review of the denial of its summary judgment motion without making any decision
on the merits.  In December 1999, Pacific filed another motion for summary
adjudication that it had no duty to defend Ko.  As a result of motions
brought by the Company, and subsequent Court of Appeal proceedings, the hearing
on Pacific's summary adjudication motion was postponed until September 25, 2001,
at which time it was denied.  On October 23, 2001, the Company renewed its
motion for summary adjudication that Pacific had a duty to defend.  This motion
is scheduled for hearing on November 20, 2001.  No trial date has been set.



Item 3.  Defaults Upon Senior Securities



ZiLOG did not make its scheduled semi-annual interest payment
of $13.3 million on the Notes that was due on September 4, 2001.  At November
12, 2001, the total amount of interest accrued on the Notes was approximately
$18.8 million.  Our default on the payment due on the Notes, and the expiration
of the applicable grace period on this payment on October 4, 2001, constitutes a
default under the Facility. An  aggregate of $12.8 million, plus approximately
$0.1 million in accrued interest was outstanding on the Facility as of November
12, 2001.



Item 6.  Exhibits and Reports on Form 8-K



1. Exhibits are incorporated herein by reference as indicated below:



|**Exhibit Number** | **Exhibit Description**                                                
|------------------ | -----------------------------------------------------------------------
|3.1 (a)            | Certificate of Incorporation of ZiLOG, Inc.                            
|3.3 (a)            | Bylaws of ZiLOG, Inc.                                                  
|3.5 (b)            | Certificate of Amendment of Certificate of Incorporation of ZiLOG, Inc.

_____________________

(a) Incorporation herein by reference to the item of the same
name filed as an Exhibit to the Company's Registration Statement on Form S-4 (File
No. 333-51203) declared effective by the Securities and Exchange Commission on
July 9, 1998.

(b) Incorporation herein by reference to the item of the same
name filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1998.



b. Reports on Form 8-K:



None.

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**ZiLOG, INC.

                                   SIGNATURES**

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



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

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



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

| |                                           
| | ------------------------------------------
| |                                           
| | Perry Grace                               
| | Vice President and Chief Financial Officer
| | (Chief Financial Officer)                 



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

| |                                             
| | --------------------------------------------
| |                                             
| | James M. Thorburn                           
| | President and Acting Chief Executive Officer
| | (Duly Authorized Officer)                   

Date: November 12, 2001

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