**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 July 1, 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 July 31, 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 JULY 1, 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 six months ended July 1, 2001 and July 2, 2000 | **          
|                                                                                                                                |             
|Condensed Consolidated Balance Sheets at July 1, 2001 and
     December 31, 2000                                                | **          
|                                                                                                                                |             
|Condensed Consolidated Statements of Cash Flows for the
          
    six months ended July 1, 2001 and July 2, 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 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      Six Months Ended
                                                 --------------------- ---------------------
                                                   July 1,    July 2,    July 1,    July 2,
                                                     2001       2000       2001       2000
                                                 ---------- ---------- ---------- ----------
Net sales...................................       $43,983    $61,143    $88,233   $116,987
Cost of sales...............................        35,455     35,847     73,626     69,702
                                                 ---------- ---------- ---------- ----------
Gross margin................................         8,528     25,296     14,607     47,285

Operating expenses:
  Research and development..................         7,197      9,079     16,282     18,840
  Selling, general and administrative.......        12,926     14,415     26,483     29,904
  Special charges...........................         8,116      1,191      8,116      1,191
                                                 ---------- ---------- ---------- ----------
                                                    28,239     24,685     50,881     49,935
                                                 ---------- ---------- ---------- ----------
Operating income (loss).....................       (19,711)       611    (36,274)    (2,650)

Other income (expense):
  Interest income...........................           284        690        808      1,458
  Interest expense..........................        (7,280)    (7,244)   (14,607)   (14,522)
  Other, net................................            62         20       (194)      (296)
                                                 ---------- ---------- ---------- ----------
Loss before income taxes, equity investment
  and cumulative effect of change in
  accounting principle.......................      (26,645)    (5,923)   (50,267)   (16,010)
Provision for income taxes...................           49        133        174        265
                                                 ---------- ---------- ---------- ----------
Loss before equity investment and cumulative
  effect of change in accounting principle...      (26,694)    (6,056)   (50,441)   (16,275)
Equity in loss of Qualcore Group, Inc. ......         (430)      (297)      (739)      (297)
                                                 ---------- ---------- ---------- ----------
Loss before cumulative effect of change in
  accounting principle.......................      (27,124)    (6,353)   (51,180)   (16,572)
Cumulative effect of change in accounting
   principle.................................          --         --         --      (8,518)
                                                 ---------- ---------- ---------- ----------
Net loss ....................................     $(27,124)   $(6,353)  $(51,180)  $(25,090)
                                                 ========== ========== ========== ==========`

See accompanying notes to condensed consolidated financial statements.

---

**ZILOG, INC.

                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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

`July 1,    December 31,
                                                                  2001         2000
                                                             -----------  ------------
                                  ASSETS
Current assets:
  Cash and cash equivalents..............................       $22,682       $40,726
  Accounts receivable, less allowance for doubtful
    accounts of $721 at July 1, 2001 and $879
    December 31, 2000 ...................................        19,770        29,378
  Inventories............................................        19,095        27,547
  Prepaid expenses and other current assets..............         5,138        14,005
                                                             -----------  ------------
          Total current assets...........................        66,685       111,656
                                                             -----------  ------------

Property, plant and equipment, at cost...................       296,809       315,330
Less: accumulated depreciation and amortization..........      (202,211)     (205,879)
                                                             -----------  ------------
   Net property, plant and equipment.....................        94,598       109,451

Other assets.............................................        15,876        18,640
                                                             -----------  ------------
                                                               $177,159      $239,747
                                                             ===========  ============
             LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Accounts payable.......................................       $14,343       $17,098
  Accrued compensation and employee benefits.............         9,900        27,720
  Other accrued liabilities..............................        30,691        29,148
  Short-term debt........................................        13,000          --
  Deferred income on shipments to distributors...........         9,488        13,998
                                                             -----------  ------------
          Total current liabilities......................        77,422        87,964

Notes Payable............................................       280,000       280,000

Other non-current liabilities............................        14,444        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 July 1, 2001 and December 31, 2000; aggregate
    liquidation preference $38,079........................       25,000        25,000

  Common Stock, $0.01 par value; 70,000,000 shares
    authorized; 32,016,272 shares issued and outstanding
    at July 1, 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 Julyl 1, 2001 and December 31, 2000................          420           419
  Deferred stock compensation.............................         (825)       (1,462)
  Additional paid-in capital..............................       13,369        12,151
  Accumulated deficit.....................................     (232,671)     (178,991)
                                                             -----------  ------------
          Total stockholders' deficiency..................     (194,707)     (142,883)
                                                             -----------  ------------
                                                               $177,159      $239,747
                                                             ===========  ============`

See accompanying notes to condensed consolidated financial statements.

---

**ZiLOG, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)**

`Six Months Ended
                                                             ----------------------
                                                               July 1,     July 2,
                                                                 2001        2000
                                                             ----------  ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................    $(51,180)   $(25,090)
  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. ..............         739         297
     Depreciation and amortization........................      19,684      20,627
     Write-down of long lived assets......................       2,932          --
     Stock option compensation............................       1,791          90
     Loss from disposition of equipment...................         655           6
  Changes in assets and liabilities:
     Accounts receivable..................................       9,608       3,532
     Inventories..........................................       8,452      (7,011)
     Prepaid expenses and other current and noncurrent
       assets.............................................       6,194        (291)
     Accounts payable.....................................      (2,755)     (2,525)
     Accrued compensation and employee benefits...........     (17,820)        291
     Other accrued and noncurrent liabilities.............      (5,689)        523
                                                             ----------  ----------
           Cash used by operating activities..............     (27,389)     (1,033)
                                                             ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures...................................      (3,720)    (10,405)
   Purchase of equity interest in Qualcore Group, Inc. ...         --       (8,056)
                                                             ----------  ----------
          Cash used by investing activities...............      (3,720)    (18,461)
                                                             ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from short-term debt...........................      13,000        --
  Proceeds from issuance of common stock..................          65       2,124
  Principal payments under capital lease .................         --         (511)
                                                             ----------  ----------
           Cash provided by operating activities..........      13,065       1,613
                                                             ----------  ----------
Decrease in cash and cash equivalents.....................     (18,044)    (17,881)
Cash and cash equivalents at beginning of period..........      40,726      60,806
                                                             ----------  ----------
Cash and cash equivalents at end of period................     $22,682     $42,925
                                                             ==========  ==========`

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 July 1, 2001, the Company
has not paid any dividends on the Series A Stock and the corresponding accrued
dividends are $13.9 million.  During the six month period ended July 1, 2001,
$2.5 million of dividends on Series A Stock were accrued and charged to
accumulated deficit.



1. ACCOUNTING CHANGE - RECOGNITION OF REVENUE ON SALES TO
DISTRIBUTORS
2. 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  $0.5 million for the six-month
periods ended July 1, 2001 and July 2, 2000, respectively.  ZiLOG had payables
to Qualcore of approximately $0.1 million at July 1, 2001 and July 2, 2000.
Payment terms between ZiLOG and Qualcore are net zero.Under the terms
of our agreement with Qualcore Group, Inc., 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 $4.4
million, and $10.1 million for the six-month periods ended July 1, 2001 and July
2, 2000, respectively.  The Company had payments due to AIT of approximately
$0.3 million and $2.5 million at July 1, 2001 and July 2, 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 $4.8 million and $2.7
million during the six-month periods ended July 1, 2001 and July 2, 2000,
respectively.  As of July 1, 2001 and July 2, 2000, the Company had accounts
receivable from GlobeSpan of approximately $1.4 million and $0.8 million,
respectively.



1. INVENTORIES
2. 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 six-month periods ended July 1, 2001 and July 2, 2000 are as
follows (in thousands):

`Corporate
                                 Communica-   Embedded      and         Total
                                    tions      Control     Other     Consolidated
                                 ----------- ----------- ---------- --------------
Three Months Ended
 July 1, 2001:
Net sales........................   $20,713     $22,829       $441        $43,983
                                                                    ==============

EBITDA...........................    (2,482)        706        233       $ (1,543)
Depreciation and amortization....    (3,210)     (6,712)       (15)        (9,937)
Special charges..................      --          --       (8,116)        (8,116)
Amortization of stock option
   compensation expense..........      --          --          (53)           (53)
Interest income..................      --          --          284            284
Interest expense.................      --          --       (7,280)        (7,280)
                                                                    --------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                       $(26,645)
                                                                    ==============

Six Months Ended
 July 1, 2001:
Net sales........................   $40,752     $45,998     $1,483        $88,233
                                                                    ==============

EBITDA...........................    (7,975)       (962)       329       $ (8,608)
Depreciation and amortization....    (5,998)    (13,446)      (240)       (19,684)
Special charges..................      --          --       (8,116)        (8,116)
Amortization of stock option
   compensation expense..........      --          --          (60)           (60)
Interest income..................      --          --          808            808
Interest expense.................      --          --      (14,607)       (14,607)
                                                                    --------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                      $(50,267)
                                                                    ==============

Three Months Ended
 July 2, 2000:
Net sales........................   $24,344     $36,617       $182        $61,143
                                                                    ==============

EBITDA...........................     9,824       2,344        (31)      $ 12,137
Depreciation and amortization....    (2,314)     (7,853)       (58)       (10,225)
Special charges..................      --          --       (1,191)        (1,191)
Amortization of stock option
   compensation expense..........      --          --          (90)           (90)
Interest income..................      --          --          690            690
Interest expense.................      --          --       (7,244)        (7,244)
                                                                    --------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                      $ (5,923)
                                                                    ==============

Six Months Ended
 July 2, 2000:
Net sales........................   $44,848     $71,957       $182       $116,987
                                                                    ==============

EBITDA...........................    15,577       3,466        (81)       $18,962
Depreciation and amortization....    (4,746)    (15,823)       (58)       (20,627)
Special charges..................      --          --       (1,191)        (1,191)
Amortization of stock option
   compensation expense..........      --          --          (90)           (90)
Interest income..................      --          --        1,458          1,458
Interest expense.................      --          --      (14,522)       (14,522)
                                                                    --------------
Loss before income taxes, equity
  investment and cumulative
  effect of change in accounting
  principle........................                                      $(16,010)
                                                                    ==============`





Major customers:  During the three-month and six-month
periods ended July 1, 2001, one distributor, Pioneer-Standard Electronics
("Pioneer"), who buys from both segments, accounted for approximately
10% and 12% of net sales, respectively. For the three-month period ended July 1,
2001, another customer, Thompson Multimedia, Inc., who buys primarily from the
Embedded Control segment,  accounted for approximately 10% of net sales. For the
three-month and six-month periods ended July 2, 2000, no customer accounted for
10% or more of net sales.

1. SPECIAL CHARGES
2. SHORT TERM DEBT
3. COMPREHENSIVE INCOME.
4. LEGAL PROCEEDINGS
5. DERIVATIVE INSTRUMENTS AND HEDGING
6. RECENT ACCOUNTING PRONOUNCEMENT



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.







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; therefore, it is a preferable method of
accounting.  The cumulative effect of the change in accounting principle was
retroactively applied beginning on January 1, 2000 and resulted in a charge of
$8.5 million, net of a zero income tax effect.



Three and Six-month Periods Ended July 1, 2001 and July 2,
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 half 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 half of 2001 decreased 24.6% from the comparable period of 2000. Net sales
for the three months ended July 1, 2001 declined 28.1% to $44.0 million,
compared to $61.1 million in the second quarter of 2000.  The decrease in net
sales during both the three and six months ended July 1, 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 segment. Net sales of communications products in the
three and six-month periods ended July 1, 2001 decreased 14.9% and 9.1%,
respectively, compared with the same periods in 2000.  The decrease in
communications product sales was primarily the result of lower unit shipments of
internet processor products, partially offset by sales within our wireless
connectivity product line that was acquired from Calibre, Inc. during the third
quarter of 2000.



Net sales of embedded control products in the first half of
2001 decreased 36.1% compared to the first half in 2000.  For the second quarter
of 2001, net sales of embedded control products declined by 37.7%.   The decline
in net sales of embedded control products reflects reductions in unit shipments
for all of our embedded control product lines, particularly peripherals,
military and television microcontroller products. Compared to the second quarter
of 2000, military and peripherals products, net sales declined by 100% and
80.2%, respectively, in the second 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.  During the first half of 2001 our accounts receivable
balance declined by $9.6 million reflecting lower sales levels in the second
quarter of 2001, compared to the fourth quarter of 2000.



Domestic and international sales (sales attributable to the
ship-to locations of ZiLOG's customers) in the first half of 2001 were 46.0% and
54.0%, respectively, compared to domestic and international sales of 42.5% and
57.5%, respectively, in the first half of 2000.



Gross Margin. The Company's cost of sales represents
the cost of its wafer fabrication, assembly and test operations.  Cost of sales
fluctuates, depending on manufacturing productivity, product mix, equipment
utilization, inventory reserves and depreciation. Gross margin as a percent of
net sales declined to 16.6% in the first half of 2001 from 40.4% in the first
half of 2000.  During the second quarter of 2001 gross margin as a percentage of
sales was 19.4%, compared to 41.4% in the same period of 2000.  The decline in
gross margin in both the six months and three months ended July 1, 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.



Research and Development Expenses.  Research and
development expenses were $16.3 million in the first half of 2001, reflecting a
13.6% decrease from the $18.8 million reported in the first half of 2000.
During the second quarter of 2001 research and development expense was 20.7%
lower than the same period in 2000.  The decrease in research and development
expense was due principally to lower payroll-related costs 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 decreased to $26.5 million in the
first half of 2001 from $29.9 million in the first half of 2000. During the
second quarter of 2001 selling, general and administrative expenses were 10.3%
lower than the same period in 2000.  The decrease in our selling, general and
administrative spending in 2001 was due primarily to lower payroll-related costs
as a result of reduced headcount.  In addition, sales commissions and incentive
compensation have declined compared to the first half of 2000 as a result of
lower sales levels and the elimination of our sales representative commission
arrangements.



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
$3.3 million, including planning software and surplus test equipment; and $0.8
million relating to consultants who are assisting with our company's
restructuring plans.  In connection with this action, we eliminated
approximately 200 positions worldwide during the second quarter of 2001.  The
Company expects to save approximately $7.0 million of payroll-related costs per
year as a result of these actions.  As of July 1, 2001, approximately $1.1
million was reserved for future payments in connection with these special
charges.



During 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.  These actions are expected to cost approximately
$8.0 million, which will be expensed over the next nine months and 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.



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 original plan of selling 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 strategy 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 first half of 2001 depreciation expense was reduced
by approximately $1.6 million, compared to what would have been recorded, as a
result of the December 2000 write-down and reclassification of these assets.
The related depreciation will commence at the beginning of the third quarter of
2001.



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.



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 Company's
9.5% Senior Secured Notes ("Notes") and quarterly amortization of
deferred financing costs of $0.3 million. The Company incurs approximately $26.6
million in interest coupon payments annually on the Notes.



Equity in Loss of Qualcore Group, Inc.  In March
2000, we acquired a 20% equity stake in Qualcore Group, Inc. for approximately
$8.1 million.  We account for this investment under the equity method.  The loss
in equity of Qualcore Group, Inc. 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 on June 30, 2001.



Income Taxes. Our provision for income taxes in
the first and second quarters of both 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.  For the three months ended July 1, 2001, the
Company incurred a loss of $8.6 million in EBITDA.  The Company generated $19.0
million in EBITDA in the six months ended July 2, 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 July 1, 2001
we had cash and cash equivalents of approximately $22.7 million. Additionally,
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.  The ability to borrow these amounts
is limited by certain financial tests. As of July 1, 2001, we had borrowings of
$13.0 million under the revolving credit facility. Our ability to borrow under
the Facility may fluctuate such that at any time, we may not have available the
difference between total permitted borrowings and the current borrowings of
$13.0 million. Based on these financial tests and other factors, currently there
is no remaining 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 (6.75% at July 1, 2001) or the London Interbank Overnight
Rate, commonly known as LIBOR, plus 2.0% (7.7% at July 1, 2001) for the
revolving credit facility and the commercial lender's prime rate plus 1.0%
(7.75% at July 1, 2001) or LIBOR plus 3.0% (8.7% at July 1, 2001) for the
capital expenditure line.



Cash used by operating activities was $27.4 millionfor the six months ended July 1, 2001, compared to $1.0 million in the
similar period of 2000. The use of cash by operating activities in the first
half of 2001 primarily reflects our net loss of  $51.2 million, adjusted by
depreciation and amortization of $19.7 million, write-off of long-lived assets
of $2.9 million, a decrease in accounts receivable of $9.6 million, a decrease
in inventories of $8.5 million, and a decrease in prepaid expenses and other
assets of $6.2 million, offset by a decrease in accrued compensation and
employee benefits of $17.8 million and a decrease of other accrued and non-
current liabilities of  $5.7 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 July 1,
2001, which is reflected in the change in both prepaid expenses and other assets
and accrued compensation and employee benefits during the six months ended July
1, 2001.  The use of cash by operating activities in the first half of 2000 was
primarily attributable to our net loss of $25.1 million, adjusted for $20.6
million of depreciation and amortization and $8.5 million cumulative effect of
our change in accounting principle for sales to distributors. Also during the
first half of 2000 accounts receivable declined by $3.5 million, inventories
increased by $7.0 million, and accounts payable decreased by $2.5 million.



Cash used by investing activities was $3.7million
for the six months ended July 1, 2001 and was $18.5 million for the six months
ended July 2, 2000. Cash used for investing activities in the first half of 2001
was for capital expenditures, primarily relating to equipment in our 0.35 micron
wafer fab.  We now expect capital expenditures for 2001 to total approximately
$5.0 million. Cash used for investing activities in the first half of 2000
related to the first payment of $8.1 million for an equity interest in Qualcore
Group, Inc. and capital expenditures of $10.4 million, primarily for
manufacturing equipment and supply chain management software.



Cash provided by financing activities was $13.1million for the six months ended July 1, 2001, primarily consisting of
$13.0 million of borrowings under our revolving credit facility. Cash provided
by investing activities was $1.6million for the six months ended July 1,
2000, reflecting $2.1 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. Our
decision to make scheduled interest payments on our indebtedness,  will depend
on the status of our ongoing restructuring discussions, our available cash and
our projected cash uses. 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 will
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.



Under the terms of our agreement with Qualcore Group, Inc.,
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.



Our cash needs include future requirements for working
capital, capital expenditures, and other projected expenditures, including
payment to Qualcore during 2001, expenditures related to our announced
restructuring and wafer fabrication facility consolidation plans and payment of
scheduled interest payments on our indebtedness. The 2001 business climate
continues to be extremely difficult. We presently expect that anticipated cash
flows from operations and available cash will be insufficient for us to satisfy
all of our cash needs through 2001.  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 evaluating whether we will have or be able
to raise sufficient cash, through pursuit of strategic alternatives or
otherwise, to enable us to service our indebtedness, including the Notes, or to
make anticipated capital and other expenditures.  If not, there could be several
material adverse consequences to us.  We would be required to significantly
modify our current business plan for the remainder of 2001 and beyond, which
could result in a significant reduction in planned expenditures. We might be
unable to satisfy our obligations to third parties, which could result in
defaults under our debt and other financing agreements. Alternatively, we may
engage in a restructuring of our Notes or other obligations.



Recent Developments



On July 30, 2001, Perry Grace joined us as our Vice President
and Chief Financial Officer.  He replaces Gary Patten who recently left the
Company.



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
payment to Qualcore during 2001, expenditures related to our announced
restructuring and wafer fabrication facility consolidation plans and payment of
scheduled interest payments of our indebtedness.  The 2001 business climate
continues to be extremely difficult.  We presently expect that anticipated cash
flows from operations and available cash will be insufficient for us to satisfy
all of our cash needs through 2001.  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 evaluating whether we will have or be able
to raise sufficient cash, through pursuit of strategic alternatives or
otherwise, to enable us to service our indebtedness, including the Notes, or to
make anticipated capital and other expenditures.  If not, there could be several
material adverse consequences to us.  We would be required to significantly
modify our current business plan for the remainder of 2001 and beyond, which
could result in a significant reduction in planned expenditures.  We might be
unable to satisfy our obligations to third parties, which could result in
defaults under our debt and other financing agreements.  Alternatively, we may
engage in a restructuring of our Notes or other obligations.



Our quarterly operating results are likely to fluctuate and may fail to
meet expectations, which may cause our bond price 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 our bond price to
fluctuate or decline significantly. In addition, a high proportion 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 bond price fluctuations, 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.  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.  Similarly, in 1997 and 1998, we experienced significant declines in
customer demand for our products.  In response to these reductions in demand, we
and other semiconductor manufacturers 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 may
be required to 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 July 1, 2001, we had an accumulated deficit of approximately $ 232.7
million.



We have implemented and are considering 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 shut downs.



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 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 is dependent on the release and acceptance
of our new eZ80 Internet Engine and CarteZian Communication Engine family of
products.



We announced our newest products, the eZ80 Internet
Engine and the CarteZian Communications Engine family of products, in September
1999 and November 1999, respectively. We have delivered samples of our first
eZ80 product to some of our customers. Our CarteZian family of products is still
being designed.   We are  considering simplifying the design of the initial
CarteZian family product that is planned for release to the marketplace. 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 and
CarteZian Communications Engine family of products 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
may 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.



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 six months
ended July 1, 2001, peripheral product net sales totaled $3.2 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
have elected not to exercise this option although we may be obligated to
purchase an additional 1.8 million shares for approximately $5.2 million.  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 July 1, 2001, we had $280.0 million of consolidated long-
term indebtedness, $13.0 million of short-term indebtedness and a stockholders'
deficiency of $194.7 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.



To satisfy our obligations under our indebtedness, we will be
required to generate substantial operating cash flow. Our ability to meet debt
service and other obligations or to refinance any such obligation will depend on
our future performance, which will be subject to prevailing economic conditions
and to financial, business and other factors, many of which may be beyond our
control.



The 2001 business climate is expected to be extremely
difficult. We presently expect that anticipated cash flows from operations and
available cash, coupled with some operational restructuring activities and other
cash-savings initiatives will not be sufficient to satisfy all of our cash needs
through 2001.  Whether we are able to do so will depend primarily on our results
of operations and other restructuring activities during the next six  months and
on the success of our other initiatives.  If we are not able to do so, we may
require additional cash resources, such as from new sources of debt or equity
financing or one or more sales of assets.  We have engaged a financial advisor
to advise us with respect to possible strategic alternatives, including raising
new debt or equity financing and possible sales of assets.



We cannot assure you that we will have or be able to raise
sufficient cash, through pursuit of strategic alternatives or otherwise, to
enable us to service our indebtedness, including the Notes, or to make
anticipated capital and other expenditures.  If not, there could be several
material adverse consequences to us.  We would be required to significantly
modify our current business plan for the remainder of 2001 and beyond, which
could result in a significant reduction in planned capital expenditures or in
reductions in force.  We might be unable to satisfy our obligations to third
parties, which could result in defaults under our debt and other financing
agreements and, after the passage of any applicable time and notice provisions,
would enable creditors in respect to those obligations to accelerate the
indebtedness and assert other remedies against us. Alternatively, we may require
a restructuring of our Notes or other obligations.



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 a default, which would permit some of our creditors to cause all
amounts we owe them to accelerate and become due and payable, together with
accrued and unpaid interest.  We may not be able to repay all of our borrowings
if they are accelerated and, in such event, our business may be harmed
materially and the value of our common stock and debt securities could decrease
significantly.





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 July 1, 2001
(dollars in thousands):

`2001       2005      Total    Fair Value
                                                 ---------- ---------- ---------- ----------
Cash Equivalents:
  Fixed rate .........................             $19,258    $  --      $19,258    $19,258
  Average interest rate ..............                3.95%      --         3.95%      --

Short-Term debt:
  Fixed rate .........................             $13,000    $  --      $13,000    $13,000
  Interest rate ......................                6.75%      --         6.75%      --

Long-Term Debt:
  Fixed rate .........................             $  --     $280,000   $280,000    $42,000
  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 but has been recently
rescheduled for September 25, 2001.  No trial date has been set.



Item 6.  Exhibits and Reports on Form 8-K



1. The following exhibits are filed herewith:



None.



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: August 14, 2001

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