Edward P. Dietrich (CSB #176118)
Michael D. Braun (CSB #167416)
STULL, STULL & BRODY
10940 Wilshire Boulevard
Suite 2300
Los Angeles, CA 90024
(310) 209-2468

Kevin J. Yourman (CSB #147159)
Vahn Alexander (CSB #167373)
WEISS & YOURMAN
10940 Wilshire Boulevard
24th Floor
Los Angeles, CA 90024
(310) 208-2800/P>

Attorneys for Plaintiffs

Plaintiff, through his attorney, brings this action on behalf of himself and all others similarly situated, and on personal knowledge as to himself and his activities, and on information and belief as to all other matters, based on investigation conducted by counsel, hereby alleges as follows:

1. This action is being brought as a class action on behalf of all individuals who purchased or otherwise acquired the common stock of Zilog, Inc. ("Zilog" or the "Company") between June 30, 1997 and November 20, 1997 (the "Class Period") inclusive. As is more fully alleged throughout the Complaint, defendants engaged in a scheme and common course of conduct including the dissemination of false and misleading statements and/or omissions concerning the present and future finances and business prospects of the Company which operated as a fraud and deceit on the Class during the Class Period.

2. Zilog is a worldwide integrated circuit company that designs, develops, manufactures and markets application specific standard products (ASSPs) for the consumer electronics, data communications and computer peripherals markets. Founded in 1974, Zilog was taken public in 1991 and opened at $8.42 per share. By July 6, 1996 the stock had reached an all time high of $53.25, but soon thereafter began a decline. By December of 1996, Zilog had become a desperate company. Its sales were flat, its management incapable of effectively marketing Zilog's arsenal of products and its stock price languished at a price 50% off of where is was 6 months earlier. Notwithstanding this dismal state of affairs, Zilog without foundation informed the market that it "believes that it is well-positioned to take advantage of the trends in its target market areas", and predicted "gross profit margins of 39% by the fourth quarter of 1997." Not having a coherent plan or strategy in place to support these optimistic plans and incapable of doing it alone, Zilog looked for a way out.

3. In March of 1997, Zilog retained Lehman Brothers to investigate "various strategic alternatives including, among other possibilities, technology transfers, mergers, alliances and acquisitions." A number of parties voiced interest in pursuing "strategic alternatives" with Zilog and by June 6, 1997 Zilog had proposals from two undisclosed bidders ("First Bidder" and "Second Bidder") and Texas Pacific Partners ("TPG")(collectively, the "Bidders"). Pursuant to strict confidentiality agreements, Zilog's Board authorized its management to permit interested parties to conduct further due diligence. As part of their disclosures, Zilog revealed that, "the Board was advised by management that, although it was too early to be certain, Zilog's order input as it entered the third quarter appeared to be softening to a greater degree than had previously been anticipated and that, if true, Zilog's financial performance for the third quarter and possibly for the year would be below Zilog's original expectations.¹ The Board was further advised that the officers and employees of Zilog were taking several actions in an effort to bolster third quarter and year end results." At the time this representation was made to the Bidders, defendants already knew that third quarter earnings would be off earlier predictions because Zilog's problems were not based on "softness" in the semiconductor industry or on a general malaise in US markets, but were systemic and could not be cured unless the Zilog's management and sales were completely restructured -- an event that would necessarily devastate its stock price.

4. A litter over a month earlier, Zilog announced lackluster first quarter results for fiscal year 1997. As a direct result of this announcement, Zilog's stock dropped 24% over a two-day period. Zilog was desperate for a business alliance that would prevent its stock from further deterioration. In order to consummate a deal, Zilog minimized its problems in its disclosures to TPG and the other Bidders, hoping that it could sustain quarterly results long enough to sign a deal and get shareholder approval. Publicly, Zilog remained silent.

5. At no time did defendants inform the market that they knew that the third quarter "as softer to a greater degree than [ ] previously anticipated" and would fall below previously anticipated expectations. This information was revealed to the Bidders and TPG in June, pursuant to a strict confidentiality agreement. The public did not learn that the third quarter would be below expectations until preliminary results were announced on September 29, 1997, a full two months after Zilog had revealed this information to TPG and other Bidders.

6. By early July 1997, Second Bidder elected not to submit a proposal leaving TPG and First Bidder ion contention for Zilog. First Bidder offered a proposal outlining two alternatives. The first was a stock-for-stock merger in a pooling of interests transaction implying a cash equivalent value of $23.74 per share based on First Bidder's then current trading price, and the other was an all cash transaction at $22.82 per share of Common Stock. TPG offered to purchase all the outstanding shares of common stock for $24.00 per share in cash and to take the Company private where it would be de-listed and no longer subject to market pressures. Defendants knew their only option in securing profits from a deal would be one by which Zilog was taken private and its sales and marketing strategies completely restructured -- a process that would devastate Zilog's stock price were it to remain public. Defendants knew that as the market learned the truth of its poor results, shareholder confidence in its stock would progressively erode thereby negatively impacting any non-cash (i.e. stock-for-stock) transaction. Moreover, as part of the black-out period, typical in stock-for-stock transactions, Zilog insiders would be prevented from immediately selling their stock and would have to wait months at which time it would be too late to reap any kind of profit. Accordingly, TPG was Zilog's only choice.

7. Defendants had already been aware of Zilog's lackluster second quarter earnings and knew if it released them to the public without concurrent positive news, the stock price would drop sharply, as it had done in April when first quarter results were announced. Defendants knew, however, that if they could pair a stock-for-cash Merger Agreement with the news of poor second quarter results, the market would react positively to the Merger and overlook the quarterly results. Knowing that in order to do this they needed to consummate a deal quickly, defendants, through Lehman Brothers, instructed First Bidder and TPG to make final offers no later than July 18, 1997. Although First Bidder's prior cash offer ($22.00) was below TPG's ($24.00), defendants knew that First Bidder's stock was rising in value and a revised stock-for-stock offer would result in a higher figure. Since defendants knew Zilog needed to be taken private -- a process where its poor management and ineffective sales strategies could be buried -- they stepped up negotiations with TPG, using First Bidder's offer and recent rise in share price as leverage to secure a more favorable offer from TPG. It worked. TPG's new offer allowed Zilog shareholders the ability to elect to receive $25.00 per share of Common Stock in cash. One of the conditions to the Offer was that Warburg, Pincus, Capital & Co., L.P. and Warburg Pincus & Co. (collectively "Warburg Pincus"), Zilog's largest shareholder, agree to elect to retain up to 400,000 shares of Common Stock. Retention of this minimal amount of stock allowed TPG to label this Agreement a recapitalization, rather than a merger, which carried more favorable accounting treatment.

8. On July 19, 1997, following the execution of an exclusivity agreement with TPG, First Bidder submitted a revised stock-for-stock proposal with an additional increase in the exchange ratio which implied a cash equivalent value of $24.41 per share based on First Bidder's then current trading price. Having already secured a $25.00 per share cash exchange from TPG, Zilog felt confident in rejecting First Bidders' stock-for-stock proposal and on July 20, Zilog's Board held a special meeting during which they unanimously approved the Merger.

9. By June 30, 1997, the start of the Class Period, rumors of the Merger began to leak out and Zilog's stock price began to rise. The day before the Merger was publicly announced, Zilog was trading at 22 1/8. On July 21, Zilog announced a definitive Merger Agreement (hereinafter, the "Merger," "Agreement" or "Merger Agreement") with TPG in which Zilog shareholders could elect to receive $25.00 in cash for their shares. As a direct result of this statement, Zilog's stock jumped to 24 3/16 where it hovered for the next two months. As planned, Zilog concurrently released its lackluster second quarter results revealing income and earnings significantly down from the same period a year ago and flat and down from the first quarter of 1997, respectively. Zilog purposefully characterized the Merger as "definitive" in order to assuage shareholder concern that poor second quarter results could jeopardize the Merger. As defendants had planned, the hype surrounding the Merger all but eclipsed second quarter results. However, defendants' deception was not over, rather it had just begun. Defendants needed to maintain shareholder confidence in Zilog's stock price and the Merger. In order to do so, defendants predicted that the third quarter operating results were expected to be "generally in line with the second quarter." This statement lent support to the "definitive" nature of the Agreement because if TPG knew the second quarter earnings before making the $25.00 per share offer and third quarter earnings were to be "in line" with the second quarter, then TPG would get what it bargained for and the Merger would go through at the price of $25.00.

10. By their own admission, as revealed in Zilog's Form S-4 filed 12/10/97, defendants knew in early June that third quarter results would be lower than internally predicted yet never released this information to the public. Moreover, by July 21 (a month an a half after their June predictions to TPG) defendants had perfect visibility that Zilog's third quarter would be way below expectations yet publicly stated that earnings would be "in line with the second quarter." Moreover, Zilog knew that a weak third quarter would constitute a "Material Adverse Change," as defined in the Agreement, affording TPG the right to terminate the Merger. Defendants also knew that based on their June disclosures of a weak third quarter, that TPG was, or soon would be, reconsidering the terms of the Merger. In spite of these facts, defendants knew that if they could maintain shareholder confidence, Zilog's stock price would stay level at or near $25.00, they could send out the proxy, take a shareholder vote and lock TPG into the Merger Agreement. In order to achieve this goal, defendants continued to tout the Merger and assure shareholders that the $25.00 price was definitive, although they knew TPG was likely to renegotiate or terminate the Merger.

11. News of the Merger and multiple reports that it was "definitive" caused the stock price to trade near the $25.00 mark. Up until the preliminary third quarter earnings release, Zilog said nothing to the market to suggest that third quarter results would be significantly less than second quarter results or that the Merger was in jeopardy. On September 29, 1997 Zilog announced that its revenues for the third quarter were expected to be $61 million and its earnings per share for such quarter were expected to be between $0.06 and $0.08 per share, significantly off second quarter results. Zilog's stock immediately dropped 3 points in heavy trading. Defendants later revealed in Zilog's Form S-4, released on December 12, 1997 that third quarter results were "significantly less than the results which Zilog had anticipated at the time the Original Merger Agreement was executed" --- a fact never before revealed to the investing community. TPG, having access to privileged Zilog documents, knew along with Zilog that by late June third quarter results would be far below what was contemplated by the original Merger Agreement. By the terms set forth in the Merger Agreement, the dismal third quarter earnings constituted a "Material Adverse Change" that afforded TPG the right to terminate the Agreement. By September 29, TPG had long been considering termination, or at minimum a renegotiation, a fact that defendants kept from the public. Even worse, however, defendants actively made representations to the investing community that the Merger was in tact and renegotiations were not even being contemplated. On the possibility of TPG renegotiating the deal, CFO Bob Collins said, in the middle of October, "[i]f they were even thinking about renegotiating, I'd go public with that information." He noted that he did not sense TPG was contemplating lowering its price."

12. The original Merger Agreement was to be completed early in the fourth quarter which began September 29, 1997. By mid-October the proxy statement, which gave shareholders the right to vote on the Merger, had not yet been mailed out. CFO Bob Collins, explained the delay was due to a backlog at the Securities and Exchange Commission. The expected deal close was pushed back to early November, he added. In truth, however, TPG was already re-formulating its offer and refused to go forward with the deal at $25.00. Under the Merger Agreement, TPG had the right to terminate due to a "Material Adverse Change," and would do so unless Zilog would renegotiate. Having been duped by defendants before, TPG insisted upon waiting until fourth quarter results became more visible and that action, not the SEC, caused delay in issuance of the proxy statement and finalization of the Merger.

13. By Zilog's own admission in its Form S-4 (filed December 13, 1997), on the evening of November 11, 1997, TPG formally informed Zilog representatives that, as a result of Zilog's recent and current financial results, it was not prepared to proceed with the proposed transaction at the price of $25.00 per share provided for in the Original Merger Agreement, but would proceed at a price per share of $21.00. Once again, Zilog did not inform the public of this material information. Over the next week, Zilog informed TPG that fourth quarter operating results would likely "be even less favorable [than] those for the third quarter." As a consequence of this development, TPG notified Zilog on November 17, 1997 that it was only willing to proceed at a price per share of $20.00. Zilog, desperate to effect a deal before the bottom of its stock fell out, agreed to the $20.00 in return for an amendment to the Original Merger Agreement which "eliminate[d] certain provisions which gave TPG the ability to terminate the Merger Agreement based on a "Material Adverse Change" in Zilog's business." (i.e., if Zilog's earnings were even worse than predicted, TPG could not terminate or renegotiate the Merger.) As of November 17, Zilog had still not informed the public that TPG was even contemplating a change of terms in the Merger. On November 20, 1997, after defendants finally informed the market that the Merger had been renegotiated and that the price of the stock-for-cash deal had been reduced by 20%, Zilog's stock price adjusted down to $19 1/8, virtually the exact same price as it was on June 30, 1997 when Zilog began weaving its false and misleading tale.

14. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§1331 and 1337, and §27 of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. §78aa).

15. This action arises under §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5).

16. Venue is proper in this district pursuant to §27 of the Exchange Act and 28 U.S.C. 1391(b) because the acts charged herein, including the dissemination of materially false and misleading information, occurred in this district.

17. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

18. Plaintiff Steven P. Lawrence purchased 500 shares of Zilog common stock on October 2, 1997 at 21 3/16 and currently holds all 500 shares. Plaintiff Lawrence has been damaged as a result of defendants' deceptive and illegal conduct.

19. Defendant Zilog maintains its principal executive offices in this district at 210 East Hacienda Avenue, Campbell California 95008. The Company, at all relevant times, was listed as a publicly held corporation whose shares were traded on the NYSE under the ticker symbol "ZLG."

20. Defendant Edgar A. Sack ("Sack") was at all relevant times hereto, President, Chief Executive Officer and Member of the Board of Directors of Zilog.

21. Defendant Richard R. Pickard ("Pickard") was at all relevant times hereto, Vice President, General Counsel and Secretary of the Board of Directors of Zilog.

22. Defendant Robert E. Collins ("Collins") was at all relevant times hereto, Vice President of Finance and Chief Financial Officer of Zilog.

23. Defendants Sack, Pickard, and Collins (collectively the "Individual Defendants") were at all relevant times controlling persons of Zilog within the meaning of §20(a) of the Exchange Act by reason of their management positions in the Company, their membership on the Company's Board, and/or their extensive equity interest in the Company. Defendants reviewed or were aware of the false and misleading statements complained of herein, on or about the time such information was circulated to the public, knew or recklessly disregarded the false and misleading nature of the information at issue, and were in a position of control to influence their contents or otherwise use corrective action. Consequently, defendants had the power and influence, and exercised such power and influence, to cause Zilog to engage in the unlawful practices complained of herein.

24. Defendants are also each liable as individual participants in a fraudulent scheme and course of conduct that operated as a fraud and/or deceit upon the Class. Because of their executive, managerial and/or directorial positions with the Company, each of the defendants had access to the adverse, non-public information about the business, finances and future business prospects of Zilog as particularized herein and acted to misrepresent, misstate or conceal such information from plaintiff and the investing public.

25. It is also appropriate to treat the Individual Defendants as a group for pleading purposes under the federal securities laws and the Federal Rules of Civil Procedure and to presume that the false and misleading information complained of herein was disseminated through the collective actions of the Individual Defendants. Defendants were involved in the drafting, producing, reviewing, and/or disseminating of the false and misleading information detailed herein, knew or recklessly disregarded that such materially misleading statements were being issued by the Company, and/or approved or ratified these statements in violation of the federal securities laws. Defendants' false and misleading statements and omissions of fact consequently had the effect of, both on their own and in the aggregate, artificially inflating the price of the common stock of Zilog at all times during the Class Period.

26. Each defendant had the opportunity and motive to commit the acts alleged herein. Defendants, through their positions as officers and/or directors, controlled the dissemination of false and misleading information to the public through SEC filings, press releases and communications with analysts and thereby benefitted from the positive public and industry-wide perception of Zilog. By virtue of their positions with Zilog and because of the significant reputational and monetary benefits they stood to gain from a positive public perception of Zilog and as a result of artificially inflated stock prices, defendants had both the opportunity and motive to commit the acts alleged herein. Defendants were aware of Zilog's true financial condition yet recklessly disregarded the limitations of the Company.

27. Defendants each had the opportunity and motive to commit and participate in the fraud alleged herein. The air of accomplishment and success created as a result of defendants' material misrepresentations made Zilog more attractive to potential investors, including TPG, and served to maintain its stock price at artificial levels. Defendants, as officers and directors of the Company would also benefit financially from the Merger with TPG receiving millions of dollars in salaries, bonuses, severance agreements and for stock options.

28. Pursuant to employment agreements with Zilog, upon consummation of the Merger, the terms of employment of certain executive officers of Zilog will be automatically extended for 24 months from the earlier of the Effective Time of the Merger ("Effective Time") or the expiration date of each respective employment agreement. Such executive officers will also be entitled to certain payments upon termination of their employment after the Effective Time of the Merger. The Merger Agreement provides that Zilog's bonus plans (as in effect on or before March 1, 1997) will be maintained after the Merger through the end of the 1997 fiscal year. The maximum amount that may be payable under the Employee Performance Incentive Plan is $4,000,000, with the payouts to occur in the first quarter of 1998. The maximum amount that may be payable under the Executive Bonus Plan is $1,900,000 for the 1997 plan year, with the payouts to occur in the first quarters of 1999 and 2000. Residual payments for the 1996 and 1995 plan years will not exceed $1,081,000 payable in the first quarter of 1998 and $589,400 payable in the first quarter of 1999.

29. Pursuant to the employment agreement between Zilog and Edgar A. Sack, upon consummation of the Merger, the term of Dr. Sack's employment will be automatically extended for 24 months from the earlier of the Effective Time or the expiration date of his employment agreement. If Dr. Sack terminates employment with Zilog after the Effective Time, either voluntarily or involuntarily: (i) Dr. Sack will be entitled to receive the following payments in a cash lump sum: (A) the then current base salary for the period remaining under his employment agreement, (B) payouts under Zilog's Employee Performance Incentive Plan for awards granted prior to the effective date of termination of employment, and (C) payouts under Zilog's Executive Bonus Plan for awards granted prior to the effective date of termination of employment; (ii) all of Dr. Sack's outstanding unvested stock options will fully vest effective with the last date of his active employment; and (iii) Dr. Sack will be entitled to continue his participation in group insurance plans maintained by Zilog.

30. Pursuant to the employment agreements between Zilog and each of Robert E. Collins, Richard R. Pickard, upon consummation of the Merger, the term of each such executive officer's employment will be automatically extended for 24 months from the earlier of the Effective Time or the expiration date of each respective employment agreement. If any of such executive officers terminates employment with Zilog after the Effective Time, either voluntarily for Good Reason (as defined in each respective employment agreement) or involuntarily for reasons other than for Cause or Detrimental Activity (as defined in each respective employment agreement): (i) the executive officer will be entitled to receive the following payments in a cash lump sum: (A) the then current base salary for the period remaining under the employment agreement, (B) payouts under Zilog's Employee Performance Incentive Plan for awards granted prior to the effective date of termination of employment, and (C) payouts under Zilog's Executive Bonus Plan for awards granted prior to the effective date of termination of employment; (ii) the executive officer's outstanding unvested stock options will continue to vest for the period of time remaining under the employment agreement; and (iii) the executive officer will be entitled to continue participation in group insurance plans maintained by Zilog.

31. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased or otherwise acquired shares of Zilog common stock from June 30, 1997 to November 20, 1997 inclusive, and who were damaged thereby. Excluded from the Class are the defendants, officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.

32. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe that there are over a thousand members of the Class. As of December 10, 1997 Zilog had 1,193 stockholders of record. As of October 26, 1997 Zilog had 20,0290,767 shares of Common Stock issued and outstanding. Zilog stock was actively traded in an efficient market, the New York Stock Exchange. Record owners and other members of the Class may be identified from records maintained by Zilog or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.

33. Plaintiff's claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of the federal law that is complained of herein.

34. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation.

35. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:

(a) Whether the federal securities laws were violated by defendants' acts as alleged herein;

(b) Whether defendants participated in and pursued the common course of conduct complained of herein.

(c) Whether documents, press releases and other statements disseminated to the investing public and the Company's shareholders during the Class Period misrepresented and/or omitted material facts about the business, management, markets, financial condition, and future business prospects of Zilog;

(d) Whether defendants acted with scienter in knowingly or recklessly omitting and/or misrepresenting material facts regarding the financial state of the Company;

(e) Whether the market price of Zilog common stock during the Class Period was artificially inflated due to the material misrepresentations and failure to correct the material misrepresentations complained of herein; and

(f) Whether the members of the Class have sustained damages and, if so, the proper measure of damages.

36. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations or omitted material facts during the Class Period, as alleged herein;

(b) the misrepresentations and/or omissions were material;

(c) Zilog's common stock was traded in an efficient market;

(d) the misrepresentations and/or omissions alleged tended to induce reasonable investors to misjudge the value of Zilog shares; and

(e) plaintiff and members of the Class acquired their shares between the time defendants made the misrepresentations and/or omissions and the time the truth was revealed, without knowledge of the falsity of the misrepresentations.

37. Based upon the foregoing, plaintiff and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for, at least, the purposes of class certification, as well as for ultimate proof of the claims on their merit. Similarly, plaintiff and the members of the Class are entitled to a presumption of reliance with respect to the omissions alleged herein.

38. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this class action.

39. Zilog is a worldwide integrated circuit company that designs, develops, manufactures and markets application specific standard integrated circuit products "ASSPs" for the data communications, consumer product controller and intelligent peripheral controller markets. ASSPs are very large scale integrated circuits which are designed for a particular market application rather than a single customer. The Company utilizes its proprietary SuperintegrationT design technology to combine cores and cells from the Company's extensive library of proprietary, customer familiar microprocessor, microcontroller, digital signal processor, memory and logic circuits to meet the design, cost and time to market requirements of its customers.

40. Founded in 1974, Zilog was taken public in 1991 when the stock opened at $8.42 per share. By July 6, 1996 the stock had reached an all time high of $53.25 but that is where the fairytale ends. By December of 1996, Zilog had become a desperate company. Its sales were flat, its management incapable of effectively marketing Zilog's arsenal of products and its stock price was languishing, 50% off of where is was 6 months earlier. Notwithstanding this dismal state of affairs Zilog represented to the market that it was competitive and "well-positioned" to take advantage of future growth in the semiconductor industry. As stated in a December 15, 1996 Investext Report:

Through its customer relationships, Zilog is better able to establish and maintain technological leadership, attract additional customers in the same market and create industry standards. [The Company] believes that it is well-positioned to take advantage of the trends in its target market areas, which include the networking of computers and peripherals, the increase in the complexity and sophistication of consumer electronic products and the migration of intelligence from the computer to its peripherals.

41. Zilog continued to tout its abilities and predicted "gross profit margins of 39% by the fourth quarter of 1997." As reported in the February 25, 1997 edition of the TechInvestor:

After coming off a weak fourth quarter ended December 31, with a 6.5% decline in sales of $68.2 million compared with $73 million in the fourth quarter of 1995, and a 67.1% decrease in net income, which reached $3.7 million from $11.2 million, Zilog Inc. has given itself lofty goals for the fourth quarter of 1997. The company hopes to reach gross profit margins of 39% in the fourth quarter of 1997 compared with 36% in the fourth quarter of 1996.

42. Despite these positive representations made to the public, Zilog's board of directors had already determined that Zilog needed "both to renew growth in its business and to keep its new fabrication facility in Nampa, Idaho at or near full capacity in the face of a changing and consolidating industry and customer base." Realizing Zilog would never be able to achieve the financial objectives that it had been representing to the public, it secretly retained Lehman Brothers to "investigate various strategic alternatives including, among other possibilities, technology transfers, mergers, alliances and acquisitions."

43. According to representations made by Zilog in its Form S-4, filed with the SEC on December 12, 1997, recapping the background to its Merger with TPG, by April 1997 "Lehman Brothers and management identified a list of leading candidates, both foreign and domestic, that might be expected to have an interest in engaging in one or more of the above strategic alternatives with Zilog. In addition, Zilog's management compiled a confidential descriptive memorandum regarding Zilog, its current business and prospects."

44. By this time defendants knew that Zilog's sales and income would be significantly down from the same period a year earlier and that overall flat to worsening sales could be expected in 1997. Zilog's share price had been steadily dropping from a 52 week high of $29.25 nearly 4 months ago. Although Zilog had an arsenal of products, its management and sales teams were entirely ineffective and needed to be thoroughly restructured. With this knowledge, known only to Company insiders and defendants, Zilog entered discussions with a number of interested parties including TPG, seeking a business combination that would prevent the entire decimation of Zilog's stock price.

45. As reflected in the same S-4 filed on December 12, 1997:

On April 7, 1997 . . . Zilog received a written, nonbinding indication of interest from another company ("First Bidder") regarding a business combination between it and Zilog. The indication of interest proposed an acquisition of Zilog in a stock-for-stock transaction, which would be accounted for as a pooling of interests. First Bidder proposed to exchange shares of its common stock for shares of Common Stock at an exchange ratio determined by dividing Zilog's average closing price for the ten trading days ending two trading days prior to execution of a definitive agreement by First Bidder's average closing price during that same period and then multiplying the amount by 1.30, subject to a maximum number of shares equal to one-third of the combined company on a fully diluted basis. At the time, Zilog's Common Stock was trading at approximately $21.00 per share, and the exchange ratio implied a cash equivalent value of $27.30 per share. In light of the process which Zilog had just started with Lehman Brothers, Zilog advised First Bidder that it intended to continue with the process it had recently started and that First Bidder was welcome to execute a confidentiality agreement, obtain the same materials as the other potential strategic partners and participate in the process.

46. On April 21, 1997, Zilog announced its first quarter 1997 financial results which were significantly below figures for the same period a year ago. As a result, Zilog's stock dropped 6 points over the next two days, losing 24% of its value.

Campbell, Calif. -- Apr. 21, 1997 -- Zilog, Inc. (NYSE:ZLG), a leading semiconductor manufacturer, today reported sales and net income for first quarter 1997.

Net sales for the first quarter of fiscal 1997 were $70.1 million, up 2.9 percent from the $68.2 million reported in the fourth quarter of 1996 and down 13.4 percent from the same period a year ago.

Net income for the first quarter was $4.8 million, up 29.6 percent from the $3.7 million reported in the prior quarter and down 60.4 percent from the first quarter of 1996.

Earnings per share for the first quarter were $0.23 on 20.9 million shares, compared with $0.18 on 20.5 million shares reported in the fourth quarter of 1996, and down from $0.59 on 20.4 million shares reported in the first quarter of 1996.

"During the first quarter of 1997, we strengthened our position as a major chip supplier to the television industry by unveiling new products and forging new strategic partnerships," said Dr. Edgar Sack, president and chief executive officer of Zilog. "We believe that these investments prepare us well for the PC/TV convergence which is now prominent as a major electronics trend."

47. Defendants did not explain why profits plummeted 60 percent from the first quarter of 1995 although they knew at the time that disappointing first quarter earnings would be just the beginning of a progressively worsening year.

48. By the time first quarter results were released, defendants had engaged in discussions with a number of parties interested in exploring business combinations with Zilog. These parties, as well as First Bidder and TPG, entered into confidentiality agreements with Zilog and were given the opportunity to examine certain non-public information regarding the Company, including financial projections through fiscal 1998. On June 5, 1997, a second interested party ("Second Bidder") submitted a written preliminary proposal to pursue a pooling of interests transaction with Zilog. Second Bidder indicated it would consider a valuation premium to Zilog's trading price in the range of 30% to 50%, implying a cash equivalent value of $28.44 per share to $32.81 per share based on Zilog's then Common Stock price of $21.88 per share. Also on June 5, 1997, TPG submitted a written, non-binding indication of interest to acquire all of the outstanding Common Stock of Zilog for cash at an anticipated price between $26.00 and $28.00 per share. First Bidder also reiterated its interest in Zilog by orally reaffirming its earlier indication of interest of April 7, 1997 with no modification of the terms.

49. According to Zilog's Form S-4 filed December 12, 1997, on June 6, 1997 the Board of Directors authorized Zilog's management to permit interested parties to conduct further due diligence. Zilog assembled due diligence materials for review by the interested parties and scheduled management presentations with First Bidder, Second Bidder and TPG. "During this period, the Board was advised by management that, although it was too early to be certain, Zilog's order input as it entered the third quarter appeared to be softening to a greater degree than had previously been anticipated and that, if true, Zilog's financial performance for the third quarter and possibly for the year would be below Zilog's original expectations. The Board was further advised that the officers and employees of Zilog were taking several actions in an effort to bolster third quarter and year end results." These material misrepresentations were not made publicly by Zilog nor the Individual Defendants.

50. Defendants already knew results for the second quarter were going to be poor and also knew that third quarter results would likely be significantly lower than projected. This notwithstanding, desperate to effect a deal and maintain the price of Zilog stock, defendants assured First Bidder, Second Bidder, and TPG that management was taking "several actions to bolster third quarter and year end results" even though defendants knew that Zilog's problems were systemic and fundamental and that only a serious restructuring of management and sales would put Zilog back on the road to recovery.

51. Based on this new information, on July 7, 1997, TPG formally submitted a written proposal to acquire all the outstanding shares of Common Stock for $24.00 per share in cash, $2-4 less than its original offer. On July 7, 1997, First Bidder also submitted a revised term sheet, which outlined two alternative proposals. The first was a stock-for-stock merger in a pooling of interests transaction implying a cash equivalent value of $23.74 per share based on First Bidder's then current trading price, and the other was an all cash transaction at $22.82 per share of Common Stock. Second Bidder elected not to submit a proposal.

52. Defendants knew their only option in securing profits from a deal would be one by which Zilog was taken private and its sales and marketing strategies completely restructured -- a process that would devastate Zilog's stock price were it to remain public. Defendants knew that as the market learned the truth of its poor results, shareholder confidence in Zilog stock would progressively erode, thereby negatively impacting any non-cash (i.e. stock-for-stock) transaction. Moreover, as part of the black-out period, typical in stock-for-stock transactions, Zilog insiders would be prevented from immediately selling their stock and would have to wait months at which time it would be too late to reap any kind of profit. Accordingly, TPG was Zilog's only choice.

53. Zilog had already received its lackluster second quarter earnings and knew if it released them to the public without concurrent positive news, the stock price would drop sharply, as it had done earlier in the first quarter. Zilog knew that if it could pair a Merger Agreement that had a definitive price with the news of poor second quarter results, the market would react positively to the Merger and overlook the quarterly results. Knowing that they needed to consummate a deal quickly, defendants, through Lehman Brothers, instructed First Bidder and TPG to make final offers by July 18, 1997. Although First Bidder's cash offer was below TPG's, Zilog knew that First Bidder's stock was rising and accordingly a revised stock-for-stock offer would certainly result in a higher price than TPG's cash offer. Since defendants knew Zilog needed to be taken private -- a process whereby its poor management and ineffective sales strategies could be buried -- they stepped up negotiations with TPG, using First Bidder's offer as leverage to secure a more favorable offer from TPG. Zilog's strategy worked. Although TPG would have preferred to wait and conduct a more thorough due dilligence, it relied on the defendants representations a made a new offer which gave Zilog stockholders the choice of $25.00 per share of Common Stock in cash or the ability to retain a limited number of shares in what would become a private company.

54. Just as Zilog had anticipated, First Bidder submitted a revised stock-for-stock proposal with an additional increase in the exchange ratio which implied a cash equivalent value of $24.41 per share. However, having already secured a $25.00 per share cash exchange from TPG, Zilog felt confident in rejecting First Bidders' stock-for-stock proposal and on July 20, Zilog's Board held a special meeting during which they unanimously approved the Merger with TPG.

55. By June 30, the beginning of the Class Period, rumors of the potential Merger began to fly and Zilog's stock price began to rise. On July 20, a definitive Merger Agreement between Zilog and TPG was executed. As they had planned, defendants released news of the Merger with Zilog's lackluster second quarter results. As reported in the Business Wire and on the Company's Web Site on July 21, 1997 "Zilog agrees to $25 per share Merger with Texas Pacific Group [and] Announces second quarter 1997 financial results:

Campbell, CA -- July 21, 1997 -- Zilog, Inc. (NYSE: ZLG), a leading semiconductor manufacturer, has signed a definitive merger agreement with Texas Pacific Group (TPG), a private investment partnership, in which TPG will acquire substantially all of the stock of Zilog. The transaction values Zilog at approximately $527 million.

Under the terms of the agreement, the owner of each outstanding share of Zilog common stock can elect either to receive $25.00 in cash or to retain the share. However, in no event can more than 400,000 shares of Zilog common stock (approximately 2% of the outstanding shares) be retained by current Zilog shareholders. Warburg, Pincus Capital Company, L.P., and related affiliates (Warburg), Zilog's largest current shareholder, have committed to elect to retain up to 400,000 shares, ensuring that all other shareholders who do not elect to retain stock in the company will receive $25.00 in cash for their shares. To the extent that other shareholders also elect to retain shares, the 400,000 shares available to be retained will be prorated among all shareholders electing to retain and cash will be paid for all other shares. The merger is intended to be treated as a recapitalization for accounting purposes.

Following the merger, TPG will own approximately 90% of Zilog's voting common stock, the shares to be retained will represent the remaining 10% of the voting shares. In addition, TPG will own non-voting common stock that will increase its overall economic interest in Zilog to approximately 93.3%. The shares to be retained will have an economic interest of approximately 6.7%. It is not expected that Zilog will have publicly listed shares following the merger.

The Board of Directors of Zilog has unanimously approved the merger agreement. The merger, which is subject to completion of contemplated financing, requires Zilog shareholder and regulatory approvals and is expected to be consummated early in the fourth quarter of 1997. Warburg has agreed to vote its shares, which represent approximately 27% of Zilog's current shares outstanding, in favor of the merger.

Edgar A. Sack, Chairman, President and Chief Executive Officer of Zilog, commented, "This transaction represents an excellent opportunity for Zilog's shareholders, customers and employees. TPG has a proven track record of creating value in its portfolio companies and provides Zilog an outstanding partner with whom we can continue to successfully pursue our business strategies."

"Zilog has a rich history as one of the most experienced designers and manufacturers of microprocessors and microcontrollers, and the company is well positioned to use its expertise to capitalize on the very attractive growing markets in which it participates," said David M. Stanton, partner of TPG. "Technology is an active area of investment for us. We are committed to supporting Zilog as it invests in R&D, manufacturing and marketing of its innovative product line."

* * *

Lehman Brothers Inc. has advised Zilog with respect to the merger. TPG has received commitment letters from Goldman, Sachs & Co. to provide senior and subordinated debt financing for the merger. BankBoston, N.A. is also expected to participate in the financing.

Zilog Second Quarter 1997 Financial Results

Zilog today reported sales and net income for the second quarter of 1997. Net sales for the second quarter of fiscal 1997 were $71.3 million, up 1.6 percent from the $70.1 million reported in the first quarter of 1997 and down 16.6 percent from the $85.5 million reported in the second quarter of 1996.

Net income for the second quarter was $4.7 million, down 1.7 percent from the $4.8 million reported in the first quarter of 1997 and down 62 percent from the $12.4 million reported in the second quarter of 1996.

Earnings per share were $0.23 on 20.4 million shares; the same earnings per share as reported in the first quarter of 1997 on 20.9 million shares, and down from $0.60 on 20.6 million shares a year ago.

Zilog's results in the second quarter 1997 were impacted by continued difficult industry conditions. The company believes that its current visibility regarding the third quarter 1997 suggests operating results generally in line with the second quarter.

56. Zilog piggy-backed its poor second quarter results with the news of the Merger in order to maintain, and in fact increase, the stock price and to prevent a sell-off similar to what occurred after the announcement of first quarter results in April. The financial results were completely eclipsed by news of the Merger and seemed to end Zilog's problems.

57. These statements were false and misleading because defendants knew or should have known that: (a) This was not a "definitive" agreement that "ensur[ed]" shareholders would receive $25.00 in cash per share; (b) Zilog's third quarter results would not be "in line" with the second quarter but would fall significantly below; (c) Zilog's expected poor third quarter performance would constitute a "Material Adverse Change" within the meaning of the Merger Agreement that would subsequently entitle TPG to terminate or renegotiate the Merger; (d) Due to the expected poor third quarter results and subsequent renegotiations or termination, shareholders would not receive $25.00 per share; (e) The Merger would not be consummated "early in the fourth quarter" because once TPG became aware of third quarter results, it would not allow Zilog to issue a proxy until fourth quarter and year end results became more visible; (f) This was not an "excellent opportunity for shareholders" because once TPG learned about third quarter results it would definitely try to renegotiate the Agreement at a significant financial cost to shareholders; and (g) The company was not "well positioned" to use its expertise to capitalize on the very attractive growing markets in which it participates because its management was ineffective and the sales team was unable to properly market Zilog products.

58. As a result of the definitive Merger announcement and assurances that shareholders would get $25.00 in cash, Zilog's stock rose 8%. As reported by the July 21, 1997, TechInvestor: Zilog shares were up 8 percent Monday after the company said it will be acquired by Texas Pacific Group, a private investment partnership, for $527 million. Once the acquisition is completed, Zilog stock will not be publicly traded. The acquisition is expected to be completed in the fourth quarter. Under the terms of the Agreement, the owner of each outstanding share of Zilog common stock can elect either to receive $25 in cash or to retain the share.

59. Both defendants and TPG touted the deal as beneficial for Zilog shareholders. TPG, based on information provided by Zilog throughout the course of merger negotiations, and defendants made false and misleading representations to the investing community that served to maintain the stock at an artificially high price. As reported in the July 22, 1997 issue of EETimes:

Texas Pacific has faith in Zilog's product line, which includes controllers for PC peripherals and a variety of communications components, including the upcoming V-chip for blocking television content.

* * *

"This is not a turnaround story. It's a story about a company with growth opportunities caught in a current downdraft, in a market that's susceptible to occasional downdrafts," Stanton said.

In addition, Zilog won't have to worry about capacity any time soon. The company just completed its fabrication facility in Nampa, Idaho, and paid for it in cash. That the fab expenses are said and done is "one of the reasons we're all optimistic about the prospects of this company," Pickard said.

60. Similarly, as reported in the Idaho Business Review of July 28, 1997

The market has traditionally undervalued Zilog because it is a diversified company that doesn't gamble everything on one product, Collins said.

"We don't hit home runs, but we don't strike out," he said. "Unfortunately, the industry doesn't value it that way. So, we always felt we were undervalued, even though we managed the company quite well."

* * *

Going private may stimulate growth for Zilog, which experienced lagging revenues and profit in its second quarter.

Using an example, Collins said a case might develop in which $10 million in earnings could be reinvested quickly in the company instead of maintaining it to boost quarterly earnings for the benefit of public shareholders.

"This new company that's private is not so much concerned with earnings as it is cash flow," Collins said. "It might say, take that money and invest it in research and development."

61. Zilog undertook great efforts to explain the fairness of the Merger and to convince the market that Zilog was an undervalued company. As reported in the Electronic Buyers' News July 28, 1997,

"We never felt that we were fairly valued, because people in this industry are only concerned with high growth," he said. "When I looked at our P/E ratios, they always seemed to be at the bottom end."

Indeed, by returning to the fold of a private company, Zilog believes it can now accomplish what it set out to do when it went public six years ago.

"We can now focus more on cash flow than on quarterly earnings," Collins said. "I can now put more money into R&D, the sales force, and product opportunity, and not have to worry about the bottom line as long as the cash is there."

* * *

With sales in its most recent quarter of $71.3 million and net income of $4.7 million, the company appears to meet TPG's growth and cash requirements.

62. These statements were false and misleading because: (a) Defendants knew that Zilog's problems, as TPG had discovered, were based on Zilog's own unique failings in management and sales and not due to "downdrafts" in the industry; (b) Defendants knew Zilog would experience poor third quarter results which would constitute a "Material Adverse Change" within the meaning of the Merger Agreement that would subsequently entitle TPG to terminate or renegotiate the Merger; (c) Once TPG was informed, in late June, that Zilog's third quarter results would likely be far below expectations, TPG was less than "optimistic" about the Company and began reconsidering the terms of the merger; (d) Defendants knew that taking Zilog private would be good for Zilog, not for the reasons stated, but to cover up mismanagement, ineffective sales efforts and to secure large profits for Zilog insiders.

63. A week after the Merger was announced, knowing that the third quarter would be significantly below expectations and cause TPG to renegotiate, defendants still touted the deal and explained why Zilog was undervalued. As reported in Electronic News July 28, 1997, "[w]e're in great shape, but in a poor position," said Robert Collins, Zilog VP and CFO.

64. At the time of the Merger defendants assured investors that this Agreement was "definitive," not subject to the whim of TPG and moreover, that $25 was a fair price for the stock. As reported by the EDGE: Work-Group Computing Report July 28, 1997:

Zilog, Inc. (NYSE:ZLG), a leading semiconductor manufacturer, has signed a definitive merger agreement with Texas Pacific Group (TPG), a private investment partnership, in which TPG will acquire substantially all of the stock of Zilog. The transaction values Zilog at approximately $527 million.

* * *

Lehman Brothers Inc. has advised Zilog with respect to the merger. TPG has received commitment letters from Goldman, Sachs & Co. to provide senior and subordinated debt financing for the merger. BankBoston, N.A. is also expected to participate in the financing.

65. These statements were false and misleading because defendants knew or should have known that: (a) Zilog was not in "great shape" but suffered from serious systemic and fundamental problems in management and sales which could not be easily cured; and (b) The Merger Agreement was not "definitive" because projected poor third quarter earnings, known to defendants at the time of the Merger announcement, constituted a "Material Adverse Change" in the Merger Agreement affording TPG the right to terminate.

66. As reported in Zilog's Form S-4 filed with the SEC on December 12, 1997, Lehman Brothers provided an oral opinion (which was subsequently confirmed in writing) that, as of the date of the Original Merger Agreement, the $25.00 cash per share payable in the Merger was fair, from a financial point of view, to the stockholders of Zilog.

67. As of late August, although third quarter results were clearly visible, defendants still represented to the investing community that the deal was definitive and they would get $25 a share. As reported in Buyouts on August 18, 1997: Banking on the performance of the semiconductor industry, Texas Pacific Group on July 21 signed a definitive agreement to acquire Zilog Inc. for $527 million. The agreement pegged the price of the company at $25 per share.

68. On August 21, First Bidder asked Zilog to reconsider its offer of a stock-for-stock transaction. First Bidder's stock price had recently risen making the deal worth $27.08 to Zilog shareholders. Although First Bidder's offer was now worth $2.08 more than TPG's ($25.00), defendants knew a stock-for-stock transaction would not inure to their benefit. Desperate to take Zilog private, hide their wrong doings and reap profit from the transaction, Zilog rejected First Bidder's latest offer. As reported in Zilog's Form S-4 filed on December 12, 1997:

On August 21, 1997, the chief executive officer of First Bidder telephoned Zilog's chairman to note the recent improvement in the trading price of First Bidder's common stock and to indicate that Zilog should still consider "open" First Bidder's proposal of July 19, 1997.

* * *

Based on First Bidder's closing price on August 21, 1997, the exchange ratio set forth in such proposal would have implied a cash equivalent value of $25.44. The following day, First Bidder's closing price improved significantly, resulting in an implied cash equivalent value of $27.08. At a special telephone meeting on August 25, 1997, the Board of Directors was briefed about this development and again considered, with the advice and assistance of Lehman Brothers and outside legal counsel, First Bidder's proposal. After reviewing the then implied cash equivalent value of such a proposal, the significant volatility of First Bidder's stock price and other concerns and uncertainties including those considered by the Board at its July 20, 1997 meeting, the Board determined not to pursue First Bidder's oral expression of continued interest. On several further occasions in October 1997, representatives of First Bidder telephoned representatives of Zilog to express First Bidder's continued interest in pursuing a transaction with Zilog, although no new proposal was made.

69. Notwithstanding, defendants' representations that third quarter earnings would be "in line" with the second quarter, on September 29, 1997 as reported by the Business Wire, Zilog revealed horrible Third Quarter earnings: Zilog Inc. (NYSE:ZLG) announced today that the company currently expects revenues for the third quarter ending Sept. 28, 1997 to be approximately $61M. Earnings per share are expected to be between $0.06 to $0.08 per share.

70. As revealed by Zilog's Form S-4, filed on December 12, 1997, the preliminary third quarter earnings release revealed earnings significantly less than the results which Zilog had anticipated at the time the Original Merger Agreement was executed. Third quarter results were indeed "significantly" lower than the estimates defendants made to the public on September 29 assuring them that the third quarter would be "in line" with second quarter results. However, it is untrue that Zilog did not know that the third quarter results would be significantly below those publicly estimated on September 29, 1997. In late June Zilog informed TPG of softness in the third quarter, a fact that was kept from the public. "On June 6, 1997, the Board of Directors authorized Zilog's management to permit interested parties to conduct further due diligence . . . During this period, the Board was advised by management that, although it was too early to be certain, Zilog's order input as it entered the third quarter appeared to be softening to a greater degree than had previously been anticipated and that, if true, Zilog's financial performance for the third quarter and possibly for the year would be below Zilog's original expectations." Zilog did its best to minimize this disclosure by assuring TPG that, "the officers and employees of Zilog were taking several actions in an effort to bolster third quarter and year end results." Certainly by late August, with only a month left in the quarter, Zilog already knew that third quarter results would be significantly off. Pursuant to Section 6.2 of the Merger Agreement, Zilog was obligated to inform TPG of the projected significantly lower earnings. TPG, privy to Zilog's internal data, immediately began re-assessing it merger proposal.

SECTION 6.2 FILINGS; OTHER ACTIONS; NOTIFICATION; ACCESS TO INFORMATION.

(c) The Company and Parent each shall, upon request by the other, furnish the other with all information concerning itself, its Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Prospectus/Proxy Statement, the S-4 Registration Statement or any other statement, filing, notice or application made by or on behalf of Parent, the Company or any of their respective Subsidiaries to any third party and/or any Governmental Entity in connection with the Merger and the transactions contemplated by this Agreement.

(d) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of its Subsidiaries, from any third party and/or any Governmental Entity with respect to the Merger and the other transactions contemplated by this Agreement. Each of the Company and Parent shall give prompt notice to the other of any change that is reasonably likely to result in a Material Adverse Effect on it.

71. By the time preliminary third quarter earnings were publicly announced, TPG had long been aware of Zilog's financial situation and had already informally informed Zilog that it was considering termination of the Merger under Section 3. 7 of the Merger Agreement.

SECTION 3.7 ABSENCE OF MATERIAL ADVERSE CHANGE. Except as disclosed in items 3.7 or 3.12(a) of the Company Letter or in the Company SEC Documents filed and publicly available prior to the date of this Agreement (the "Company Filed SEC Documents"), since December 31, 1996, the Company and its Subsidiaries have conducted their respective businesses in all material respects only in the ordinary course consistent with past practice, and there has not been (i) any Material Adverse Change (as defined in Section 9.3), or any event that would reasonably be expected to result in or give rise to a Material Adverse Change, in either case with respect to the Company.....

SECTION 9.3 INTERPRETATION.

* * *

As used in this Agreement, "Material Adverse Change" or "Material Adverse Effect" means, when used in connection with the Company or Parent, as the case may be, any change or effect that is materially adverse to the business, financial condition or results of operations of such entity and its Subsidiaries taken as a whole; provided, however, that (i) any adverse change, event or effect that is demonstrated to be primarily caused by conditions affecting the United States economy generally or the economy of any nation or region in which such entity or any of its Subsidiaries conducts business that is material to the business of such entity and its Subsidiaries, taken as a whole, shall not be taken into account in determining whether there as been or would be a "Material Adverse Change" or "Material Adverse Effect" on or with respect to such entity, (ii) any adverse change, event or effect that is demonstrated to be primarily caused by conditions generally affecting the semiconductor industry shall not be taken into account in determining whether there has been or would be a "Material Adverse Change" or "Material Adverse Effect" on or with respect to such entity and (iii) any adverse change, event or effect that is demonstrated to be primarily caused by the announcement or pendency of the Merger or the transactions contemplated hereby shall not be taken into account in determining whether there has been or would be a "Material Adverse Change" or "Material Adverse Effect" on or with respect to such entity. Whenever the word "knowledge" is used in this Agreement, it shall mean the actual knowledge of any officer of the Company, in the case of the Company, or any officer of TPG Advisors II, Inc., in the case of Parent.

72. TPG could not reveal to the public that it was planning to terminate or renegotiate the Merger Agreement because it was required to keep all such information confidential. "All information obtained by or on behalf of Parent pursuant to this Section 6.2 shall be kept confidential in accordance with the letter agreement dated May 27, 1997 between Parent and Lehman Brothers, on behalf of the Company (the "Confidentiality Agreement")."

73. Zilog was under no such obligation and, in any event, had a duty to inform its shareholders of a material change in what it had earlier proclaimed to be a definitive Agreement contingent only upon shareholder approval and securing adequate financing.

SECTION 6.5 PUBLIC ANNOUNCEMENTS. Parent and the Company will consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, fiduciary duties or by obligations pursuant to any listing agreement with any national securities exchange.

74. Notwithstanding defendants' obligation to reveal these ongoings to the investment community, they actively prevented investors from learning the truth. A number of concerned shareholders that called the Company were lead to believe that the Agreement remained in tact on the terms announced in July.

Date: Wed, Oct 1, 1997 00:19 EDT

. . . I phoned the co[pany]. this morning, and got a callback. I asked if the sellout was still in place, and the response was that they are in registration with the SEC and cannot comment. (oh ya, that helps!) I asked when they anticipated mailing the proxy materials, and the response was that if the comment process with the SEC could be settled this week, then proxy materials might be mailed next week. Man, this is unsettling.. I'm one of those who thought I'd just sell into the buyout. I'm now regretting not liquidating in past weeks. Could it be that Texas Pacific Group will be re-thinking their acquisition, or their price?

Date: Oct 1 1997 1:08 P.M PST

Question: If Zilog is being bought out by Texas Pacific Group for $25/share (announced 7/21/97). Why would Zilog's announcement of lower expected earning on 9/29/97 affect the stock price. All the indications I've read indicate that the merger is going ahead.

Date: Oct 1 1997 3:52 P.M PST

I contacted the company on September 30th about the merger buyout of $25 per share. They indicated that nothing has changed to their knowledge. It is possible that when the earnings came out, some individuals dumped the stock and other followed, fearing that maybe the merger is in trouble (my own personal opinion); however, if the company is holding back vital information on this merger and some insiders have knowledge, they can be in for a nasty stockholders suit)

Date: Thu, Oct 2, 1997 12:20 EDT

. . . If the Texas group was surprised by the earnings, they might have second thoughts about making the acquisition. Or they might try to adjust the price downward. Obviously, with the stock trading at 21 or so, people are worried that this may not be a done deal. On the other hand, there have been no public statements to the effect that it won't go through just as announced. I'm waiting to see; kicking myself for not selling the stock at 24+.

Date: Sat, Oct 4, 1997 07:09 EDT

I called the company a couple of days ago. The woman in investor relations told me the deal was still on and was expected to close in mid-November. I made some comment about the stock price and the response was silence. Not sure what to make of situation. However, you have to believe that the earnings announcement was no surprise to TPG.

75. Zilog's representatives were actively deceiving shareholders in order to prevent a massive sell-off of stock. Defendants knew, since late June, that Zilog's third quarter performance would constitute a "Material Adverse Change" in the Merger Agreement and afford TPG the right to terminate or force Zilog into renegotiations. Despite this fact, defendants instructed Zilog representatives to inform the investing community that the Merger Agreement remained definitive and in tact.

76. Zilog's announcement of poor third quarter earnings caused its stock to drop three points in one day on very heavy trading, reminiscent of the stock drop that came after the announcement of first quarter results. As shareholders and analysts began to worry that third quarter earnings might negatively impact the terms of the Merger, defendants were quick to point out that if TPG were "even thinking about renegotiating" Zilog would go public with that information. As reported by Buyouts on October 13, 1997:

HEADLINE: Will Zilog's Poor Earnings Trigger a TPG Rejigger ?

Pacific Group's $527 million agreement to buy semiconductor manufacturer Zilog hit a snag two weeks ago, with some sources saying they expected to see the price rejiggered down.

The cause was the less-than-stellar third quarter numbers released Sept. 30, which saw Zilog's stock price diving more than 11% to close at $21.8125, widening the deal spread to 15%. Indeed, the stock dipped as low as $19.875 that day. At press time, Zilog shares were trading at $21.06.

The buyout firm signed the definitive agreement July 21 (BUYOUTS Aug. 18, p. 9), providing for an exchange of each Zilog share for $25 cash. Zilog stockholders may also opt to retain the shares, but no more than roughly 2% of the stock can remain outstanding. Zilog's largest shareholder Warburg, Pincus Capital Co. L.P., with 27%, has committed to maintaining that 2%, which TPG needs outstanding for recapitalization purposes.

Deal Close Pushed Back

The proxy was expected to come out at press time, according to Zilog CFO Bob Collins, who explained the delay was due to a backlog at the Securities and Exchange Commission. The expected deal close was pushed back to early November, he added.

On the possibility of TPG cutting the deal, he said, "If they were even thinking about renegotiating, I'd go public with that information ." He noted that he did not sense TPG was contemplating lowering its price.

A TPG spokesman declined comment.

* * *

"I don't hear anything that gives me comfort," noted another arbitrageur watching from the sidelines. This makes for a "great story, but not a good investment," he said.

An analyst said it seemed clear to him TPG would revisit its price. "Look at it this way-if you'd just gone ahead and bought something that you thought was going to do $72 million in revenue . . . and its earnings were a third of what you thought they were going to be, wouldn't you go back and try to renegotiate the price?" he said.

77. These statements were false and misleading because at the time defendants knew, or should have known, that: (a) The Merger Agreement was not definitive -- Zilog's poor third quarter earnings would trigger the "Material Adverse Change" clause of the Merger Agreement giving TPG the right to terminate the Agreement; (b) TPG was in the process of reassessing the Agreement and that shareholders would no longer receive $25.00 per share; (c) TPG could not, under the terms of the May 27, 1997 Confidentiality Agreement, reveal to the public that it was reassessing the Agreement; (d) The delay in sending out the proxy statement was not due solely to a backlog at the SEC but due in part to the fact TPG was currently reassessing the Agreement and would not allow a proxy statement to be sent out until fourth quarter results became more visible and a new Agreement could be reached; and (e) if the public were informed of TPG's re-assessment, shareholders would loose confidence in Zilog and its stock price would drop further perhaps precipitating an offer of less that $20.00 per share.

78. On October 21, Zilog announced third quarter earnings confirming its preliminary estimates:

Campbell, Calif. -- Oct.21, 1997 -- Zilog, Inc. (NYSE:ZLG), a leading semiconductor manufacturer, today reported sales and net income for the third quarter ended Sept. 28, 1997.

Net sales for the third quarter of fiscal 1997 were $60.8 million, down 4.7 percent from the $63.8 million reported in the third quarter of 1996.

Net income for the third quarter was $2.0 million, up 10.0 percent from the $1.8 million reported in the third quarter of the prior year.

Earnings per share for the third quarter were $0.10 on 20.9 million shares, compared with $0.09 on 20.3 million shares reported in the same quarter of 1996.

Earnings for the third quarter of 1997 were favorably impacted by accumulated adjustments to the Company's estimated tax rate for the fiscal year. Without this favorable tax adjustment, earnings would have been $0.07 per share.

79. Concerned shareholders, based on the defendants' representations that the Agreement was in tact, continued to wait for the proxy and still expected to receive $25.00 per share:

Date: Thu, Oct 23, 1997 23:26 EDT

Zilog is not gone. The majority of shares will be purchased, with a small percentage in the hands of public shareholders. The option to sell for $25.00 /share is supposed to be mailed to shareholders any day now -- actually when I called Shareholder services 2 weeks ago at Zilog, that is what they told me. That the deal was still on and they had no reason to believe otherwise.

Earnings came out and were pretty sorry -- thus the decline in price. I am worried the word is the deal may not fly. But I didn't hear from the company and am awaiting the sell papers. I also cannot understand why the stock does not bounce right back up near $25.00.

Date: Nov 3 1997 10:36 A.M PST

Does anybody have any recent information on the timetable for this Company's pending merger? The original news release announcing the merger indicated a completion date of "early" fourth quarter.

80. Pursuant to Zilog's S-4 filed with the SEC on December 12, 1997, on November 11, 1997 TPG formally informed Zilog that Zilog's performance constituted a "Material Adverse Change" and that it would not go forward with the transaction at $25.00 but would consider $21.00. As renegotiations were undertaken, Zilog also revealed that fourth quarter earnings could be even "less favorable than the third." Pursuant to this latest revelation of bad news, on November 17, TPG formally informed Zilog that it would only go forward at a price of $20.00 per share -- a full 20% lower than its original Merger price. Although defendants already knew that TPG would reduce its offer, once TPG officially informed them on November 11 and on November 17, defendants had an obligation to immediately inform Zilog's shareholders, which it did not do fearing that such a revelation would further decrease Zilog's stock price.

On the evening of November 11, 1997, TPG informed Zilog representatives that, as a result of Zilog's recent and current financial results, it was not prepared to proceed with the proposed transaction at the price of $25.00 per share provided for in the Original Merger Agreement, but would consider proceeding at a price per share of $21.00. At a special telephonic meeting on November 14, 1997, Zilog's Board reviewed at length with Lehman Brothers and Zilog's outside counsel the nature of Zilog's decline in operating results, the relative rights and obligations of both TPG and Zilog under the Original Merger Agreement, and the various alternatives (and potential consequences) available to Zilog with respect to TPG's position. At the conclusion of the meeting, the Board, although deferring any decision with respect to TPG's position, authorized Zilog's advisors and management to explore with TPG certain other modifications to the Original Merger Agreement which the Board believed would be appropriate if it ultimately were to agree to a reduction in price. During the course of these discussions, Zilog informed TPG of the possibility that fourth quarter operating results in fact might be even less favorable to those for the third quarter. As a consequence of this development, TPG notified Zilog on November 17, 1997 that it was only willing to proceed at a price per share of $20.00, and that in return it would agree to amend the Original Merger Agreement to eliminate certain provisions which gave TPG the ability to terminate the Merger Agreement based on a material adverse change in Zilog's business.

81. As Zilog's stock price began to decline on fears that the Merger price of $25.00 was in jeopardy, concerned shareholders anxiously waited for news from the Company.

Date: Nov 17 1997 5:02 P.M PST

. . . I am trying to understand why the stock price is not reflecting what is supposedly a "definitive merger agreement." The price should be much closer to $25, in my opinion. I bought some shares a couple of months ago and am now hooked for a few points. I am concerned the stock will tank if the deal is called off.

82. In a press release dated November 20, 1997 defendants, having no other choice, finally revealed the truth, which they had known for months but kept from the investing community

-- that the definitive Merger Agreement was not definitive and shareholders would no longer get $25.00 per share.

ZILOG AND TPG AMEND MERGER AGREEMENT

Campbell, Calif. -- Nov.19, 1997 -- Zilog, Inc. (NYSE:ZLG), announced today that, in light of its recent and current financial performance, its previously announced merger agreement with Texas Pacific Group has been amended. The amendment reduces the per share cash merger consideration from $25 per share to $20 and effects certain other modifications to the rights and obligations of the parties. Zilog expects that its revenues and earnings for the quarter ending December 31, 1997 will likely be below the revenues and earnings for the quarter ended September 30, 1997.

The agreement continues to be subject to certain conditions, including the approval of Zilog's stockholders and the completion of financing in accordance with commitment letters issued by Goldman, Sachs & Co. to TPG or on other reasonable terms. It is expected that Zilog will mail a proxy statement to its stockholders in December for a special meeting to consider the merger to be held in January or February 1998.

Under the original agreement, 400,000 shares of Zilog common stock were to have been retained by current shareholders as shares of the surviving corporation, representing 10% of the voting power and 6.7% of the total common equity of the surviving corporation. Under the amended agreement, 375,000 shares of Zilog common stock will be retained by current shareholders, representing 10% of the voting power and 7.5% of the total common equity.

As originally agreed, Warburg, Pincus Capital Company, L.P., Zilog's largest stockholder, has committed to vote in favor of the amended transaction and to elect to retain up to 375,000 shares to enable all other stockholders to receive cash for their shares. To the extent that other stockholders elect to retain shares, they will be permitted to do so on a pro rata basis and the number of shares retained by Warburg will be reduced to accommodate such elections.

The Board of Directors of Zilog has unanimously approved the revised merger agreement.

83. Once again Zilog's Board of Directors reassessed TPG's new offer that was 20% less than the original, voted unanimously to approve it, and sanctified it with a fairness opinion issued by Lehman Brothers. To help justify the new price, Zilog revealed that fourth quarter revenue and earnings will "fall below results in the third." As reported in the November 20, 1997, TechInvestor

Zilog said Wednesday that Texas Pacific Group has reduced its cash offer to $20 per share from $25 per share because of Zilog's disappointing financial performance. Citing competitive pressures, Zilog said it expects its fourth quarter revenue and earnings will fall below its results in the third quarter, when it earned $2 million on sales of $60.8 million. The Campbell, Calif., company develops, designs, and manufactures application-specific standard products (ASSPs).

84. Zilog blamed shortfalls in the third and fourth quarter on slower sales by key customers and a general downturn in the industry. As reported by the Los Angeles Times on November 20, 1997:

Zilog Inc. said Texas Pacific Group cut its takeover offer by 20%, to $20 a share, because of declining revenue and earnings at Zilog, a Campbell-based a maker of specialized computer chips. Fort Worth-based Texas Pacific cut the price from $25 a share after Zilog disclosed that fiscal fourth-quarter sales and earnings will fall below the third quarter's, which trailed year-earlier results. Zilog blamed the shortfall on slower sales by a key customer, South Korean television maker Samsung Electronics Co., as well as falling prices throughout the industry as chip makers compete for orders and amid a growing inventory. The adjustment in the offer will be sufficient to allow the takeover to proceed unless Zilog discloses further deterioration in its fourth-quarter performance. Zilog shares were unchanged at $19.19 on the New York Stock Exchange.

85. As explained in the November 20, 1997 edition of The Idaho Statesman, Zilog identified three major customers who had lower than expected orders. These lower orders were not, however, unexpected. Zilog had over-shipped product to many of its major customers knowing that by year end orders would slow, but hoping that by the time earnings and income were impacted, the Merger would have been consummated.

Texas Pacific Group has cut its takeover offer of Zilog Inc. by 20 percent to $20 a share because of declining revenue and earnings at the California-based manufacturer of specialized computer chips.

Texas Pacific cut the price from $25 a share after Zilog disclosed that fourth-quarter sales and earnings will fall below the third quarter's, which trailed year-earlier results.

Zilog blamed the shortfall on lower prices throughout the industry as chipmakers compete for orders and manufacturing capacity is high, as well as lower sales to a key customer, South Korean television maker Samsung Electronics Co.

In addition to falling chip prices and flagging sales at Samsung, he said, the company has suffered from lower-than-expected orders from three major customers - VeriFone, Microcom and Zenith - acquired by larger companies this year.

86. Defendants statements regarding their poor third quarter and expected fourth quarter results were false and misleading because defendants knew or should have known that: (a) Zilog's poor results were not due to a downturn in the industry but were systemic and fundamental. Moreover, by terms of the original Merger Agreement, TPG could not exercise its rights under the "Material Adverse Change" clause for negative results caused by "falling prices throughout the industry." Section 9.3 states in relevant part: "any adverse change, event or effect that is demonstrated to be primarily caused by conditions generally affecting the semiconductor industry shall not be taken into account in determining whether there has been or would be a "Material Adverse Change" or "Material Adverse Effect . . ."; (b) Zilog had over-shipped product to many of its major customers knowing that by year-end orders would slow, but hoping that by the time earnings and income were impacted, the Merger would have already been consummated.

87. A post-mortem analysis of the Agreement revealed that it was far less "definitive" than the defendants had led the shareholders to believe, belying defendants representations made throughout the class period. As report in Buyouts of November 24, 1997:

HEADLINE: Due Diligence Does Not Get Its Due in Rush to Close Are Definitive Agreements Still Definitive?

With the rush to clinch the agreement and close out deals, it is inevitable, sources say, that agreements are signed before G.P.s realize the need to adjust certain terms. Definitive agreements - once implemented to assure the completion of a deal, the hard copy of a handshake if you will - have now slipped to the point of ensuring little more than the minimum amount to be paid for a company, sources say.

This potentially lands buyout firms in two different scenarios: Where the buyout firm has clinched the definitive agreement only to see another buyer, and more often than not a strategic buyer, come up with a competing offer, G.P.s are scrambling for ways to buttress their agreements to ensure that deals go through; where the buyout firm has inked the definitive only to realize the target is less than alluring after the rush of early meetings, G.P.s again are scrambling, but this time for ways to chip away at the price or even to undo the deal.

Buyout G.P.s have always sought to take advantage of the more casual definitive agreement by renegotiating key terms after having rushed through due diligence, most commonly after they become privy to problems such as falling revenue and management problems.

For example . . . . TPG last week also was able to readjust its bid to buy semiconductor manufacturer Zilog, from $25 per share down to $20 per share, after the company's stock price dove more than 11% through September (BUYOUTS Oct. 13, p. 10). TPG partners did not return calls.

"We're certainly seeing a trend by investment bankers to get definitive agreements locked up early on," says Peter Hermann, a partner at Heritage Partners. "Today's buyout economy hides many sins," he adds. "The beauty of this environment is groups can afford to rush due diligence in a buoyant economy; but when the economy begins to turn, the most troubled deals will be the ones with the least due diligence. It will not be a forgiving environment."

88. Subsequent to the November 20, 1997 announcement, shareholders flocked to internet message boards confused at how a "definitive" Merger could be reduced by 20% and outraged that they had been deceived into supporting the stock of a Company whose directors and officers had been issuing false and misleading information for their own personal gain at the expense of its shareholders.

Date: Nov 20 1997 9:04 A.M PST

So, TPG decides to amend their offer reducing it by 20% AND Zilog's Board votes to recommend acceptance? Looks like this transaction is going to be railroaded thru without regard to stockholders other than the largest ones.

This deal must have been baked for some time and someone knew about it. What else explains the stock going below $20. Somehow I suspect some parties other than the average investors are going to be made whole on this deal. We could have sold above $20 very recently. The stock has been to $29 within the last year.

Does anyone besides me feel fleeced?

Date: Dec 4 1997 9:30 A.M PST

Yes, I too feel fleeced. The $25 agreement was described, I believe by company press release, as "definitive", meaning "determined with finality, conclusive". If indeed the company used that word (I only know for sure that it is the word I relied on), then WHY did they blythely [sic] change the deal? or, why did they use that word (to mislead investors and jack the stock price up)?

* * *

For me this is a major experience in investing, a lesson: don't believe what you read. Of course, this means I can't invest as an individual investor making his own choices, a conclusion which I believe I shall draw from being burned here.

Date: Sun, Dec 7, 1997 19:02 EST

HOW CAN YOU CHANGE YOUR PRICE AFTER THE DEAL IS DONE.TOP DOGS SOLD OUT THE STOCKHOLDERS. SOUNDS LIKE A GOOD LAWSUIT TO ME! I WILL GIVE YOU $25 .NO MAYBE $20. NO MAYBE $15.

Date: Dec 9 1997 6:59 A.M PST

You are absolutely correct regarding their use of the term "definitive." . . . . This aquisition [sic] price appeared to be "final," an appearance none of us can ever trust again. It seemed that the discount in price was due to the time element. It also seemed reliable as the release stated: "Warburg, Pincus Capital Co. L.P. and related affiliates (Warburg), ZLG's largest current shareholder, agreed to retain up to 400,000 shares, ensuring that all other shareholders that do not elect to retain stock in the company will receive $25 in cash for their shares." Note the term "ensuring," also used to encourage investment. I believe that the release was worded to have the deal sound final, as you have noted. You can be sure that those who knew it was not final were selling . . . . These are all investment lessons. They are costly, but should make us wiser.

89. On December 17, 1997 Zilog finally mailed its proxy statement reflected the Amended Merger Agreement. As reflected in Zilog's press release:

Campbell, CA -- December 17, 1997 -- Zilog, Inc. (NYSE:ZLG) today announced that its proxy statement relating to the proposed merger of TPG Acquisition Corporation, a wholly owned subsidiary of TPG Partners II, L.P., an affiliate of Texas Pacific Group, was mailed today to the stockholders of Zilog. The special meeting of stockholders is scheduled to occur on January 27, 1998.

Subject to the approval of the stockholders of Zilog, the merger will occur as soon as practicable on or after the satisfaction or waiver of various conditions which include obtaining certain merger financings as described in the Merger Agreement by and between TPG and Zilog.

90. Lehman Brothers conducted another fairness opinion and based on the new set of facts concluded that the deal was once again fair. By issuing a fairness opinion, Lehman validated TPG's action under the Material Adverse Change clause of the original Merger Agreement.

91. On January 6, 1997 Zilog announced that CEO Sack would step down. As reported in the January 6, 1998 Business Wire:

Texas Pacific Group Names Curtis Crawford as President, CEO of Zilog, Inc.

Jan. 6, 1998 -- Texas Pacific Group announced today that it will appoint Curtis J. Crawford, a senior executive with Lucent Technologies, as President and Chief Executive Officer of Zilog, Inc. (NYSE: ZLG), following the completion of its previously announced acquisition of the company. He will replace Edgar A. Sack who has announced his intention to step down. Mr. Crawford, 50, has more than 24 years of experience in software, systems and semiconductors.

92. As more information entered the market, it now appeared that defendants had done a good job at hiding the true facts about the viability of Zilog's business and got away with millions in ill-gotten gains. As reported by USA Today on January 13, 1998:

Sack plans to depart as chief executive when the deal is complete, receiving $11.4 million in stock and salary payments and possibly more in bonuses. Bradshaw gets $2.4 million for his stock and a two-year contract extension.

93. The statutory safe harbor for certain forward-looking statements does not apply to the material misrepresentations and omissions alleged in this complaint because the statements disseminated to the public were not specifically identified as "forward-looking statements" when made. Furthermore, to the degree that any statements made by defendants constitute forward-looking statements, defendants failed to include any significant cautionary statements in an attempt to distinguish those crucial factors that could and did cause actual results to differ materially from those in the purportedly forward-looking statements. Nevertheless, if the statutory safe harbor provisions do apply to any forward-looking statements pleaded herein, defendants are still liable since each material misrepresentation was known to the particular speaker(s) to be false or misleading at the time it was made.

94. Plaintiff repeats and realleges the paragraphs above as though fully set forth herein.

95. During the Class Period, defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiff and the other class members, as alleged herein; (ii) artificially inflate and maintain the market price of Zilog securities; and (iii) cause plaintiff and other members of the Class to purchase Zilog securities at inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.

96. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's stock in an effort to maintain artificially high market prices for Zilog's securities in violation of section 10(b) of the Exchange act and Rule 10b-5.

97. The statements made by defendants during the Class Period were materially false and misleading because at the time they were made, the Company and persons acting as corporate officers knew or recklessly ignored, but failed to disclose, the matters set forth herein.

98. In ignorance of the artificially high market prices of Zilog's publicly traded securities, and relying directly on defendants or indirectly on the false and misleading statements made by defendants, upon the integrity of the market in which the securities trade, on the integrity of the regulatory process and the truth of any representations made to appropriate agencies at the time of the public offering and/or on the absence of material adverse information that was known to defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired Zilog securities during the Class Period at artificially high prices and were damaged thereby.

99. Had plaintiff and the other members of the Class and the marketplace known the truth about the true financial condition and business prospects of Zilog, which were not timely disclosed by defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their Zilog securities during the Class Period, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid. Hence, plaintiff and the Class were damaged by defendants' violations of Section 10(b) and Rule 10b-5.

100. As a direct and proximate result of defendants' wrongful conduct, plaintiff and the other members of the Class, suffered damages in connection with their purchases of the Company's securities during the Class Period.

(For Violations of §20(a) of the Exchange Act)

101. Plaintiff incorporates by reference the paragraphs above as if set forth fully herein. Individual Defendants acted as controlling persons of Zilog within the meaning of § 20 of the Exchange Act as alleged herein. By virtue of their executive and directorial positions, their knowledge and involvement in the business of Zilog, and stock ownership, and their power and ability to make public statements on behalf of Zilog to shareholders, potential investors and the media, Individual Defendants had the power and ability to control the actions of Zilog.

102. By reasons of wrongful conduct, Individual Defendants are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of Individual Defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for relief and judgment, as follows:

1. Determining that this action is a proper class action, certifying plaintiff as a class representative under Rule 23 of the Federal Rules of Civil Procedure and his counsel as class counsel;

2. Awarding compensatory damages in favor of plaintiff and the other class members against all defendants, jointly and severally, for all damages sustained as a result of the defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

3. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

4. Awarding such other and further relief as this Court may deem just and proper including any extraordinary equitable relief and/or injunctive relief as permitted by law or equity to attach, impound or otherwise restrict the defendants' assets to assure plaintiff and the members of the Class have an effective remedy.

JURY DEMAND

Plaintiff hereby demands a trial by jury.

Dated: January 23, 1998

Edward P. Dietrich Michael D. Braun STULL, STULL & BRODY By: ___________________________ Michael D. Braun 10940 Wilshire Boulevard Suite 2300 Los Angeles, CA 90024 (310) 209-2468 Kevin J. Yourman Vahn Alexander WEISS & YOURMAN 10940 Wilshire Boulevard 24th Floor Los Angeles, CA 90024 (310) 208-2800 Attorneys for Plaintiffs

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¹ Emphasis is added throughout the complaint unless otherwise indicated.

Source: Computer file from Weiss & Yourman