SILICON STORAGE TECHNOLOGY INC
DEF 14A, 1998-06-12
SEMICONDUCTORS & RELATED DEVICES
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                            SCHEDULE 14A INFORMATION

                  Proxy Statement Pursuant to Section 14(a) of
                      the Securities Exchange Act of 1934
                                (Amendment no. 1)


Filed by the Registrant    [X]                       
Filed by a party other than the Registrant   [ ]

Check the appropriate box:                 
[ ]  Preliminary Proxy Statement           [ ]  Confidential, for Use of the   
[X]  Definitive Proxy Statement                 Commission Only (as permitted by
[ ]  Definitive Additional Materials            Rule 14a-6(e)(2))               
[ ]  Soliciting Material Pursuant to       
     Rule 14a-11(c) or Rule 14a-12       

                        Silicon Storage Technology, Inc.
                ------------------------------------------------
                (Name of Registrant as Specified in Its Charter)


    ------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)


Payment of filing fee (Check the appropriate box):

[X]  No fee required.
[ ]  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.


(1)  Title of each class of securities to which transactions applies:

- --------------------------------------------------------------------------------

(2)  Aggregate number of securities to which transactions applies:

- --------------------------------------------------------------------------------

(3)   Per unit price or other underlying value of transaction  computed pursuant
      to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
      calculated and state how it was determined):

- --------------------------------------------------------------------------------

(4)   Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------

(5)   Total fee paid:

- --------------------------------------------------------------------------------

[ ]   Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------

[ ]   Check box if any part of the fee is offset as  provided  by  Exchange  Act
      Rule  0-11(a)(2)  and identify the filing for which the offsetting fee was
      paid  previously.  Identify the previous filing by registration  statement
      number, or the Form or Schedule and the date of its filing.

(1)   Amount previously paid:

- --------------------------------------------------------------------------------

(2)   Form, Schedule or Registration Statement No.:

- --------------------------------------------------------------------------------

(3)  Filing party:

- --------------------------------------------------------------------------------

(4)  Date filed:

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<PAGE>



June 12, 1998


Dear Silicon Storage Technology, Inc. Shareholder:

Please note that the table, Stock Option Grants and Exercises,  found on page 19
of your Proxy Statement contains certain erroneous information.

<TABLE>
The correct table is set forth below:

<CAPTION>
                                                                                         Potential Realizable Value
                                            Percent of                                     at Assumed Annual Rates
                                          Total Options                                  of Stock Price Appreciation
                                            Granted to   Exercise  Market                      for Option Term
                    Date     Options       Employees in   Price    Price   Expiration  ------------------------------
      Name        of Grant   Granted       Fiscal Year    ($/Sh)   ($/Sh)     Date            5%              10%
      ----        --------   -------       ------------   ------   ------     ----            --              ---
<S>                <C>        <C>             <C>         <C>      <C>       <C>            <C>             <C>     
Thomas A. Freeze   Jan-97     100,000         4.41%       $4.88    $4.88     1/31/07        $306,586        $776,949
Thomas A. Freeze   Apr-97     100,000         4.41%       $3.13    $3.13     4/30/07        $196,530        $498,045
Yaw-Wen Hu         Jan-97      25,640         1.13%       $4.88    $4.88     1/31/07         $78,609        $199,210
Yaw-Wen Hu         Apr-97      25,640         1.13%       $3.13    $3.13     4/30/07         $50,390        $127,699
Isao Nojima        Jan-97      24,420         1.08%       $4.88    $4.88     1/31/07         $74,868        $189,731
Isao Nojima        Apr-97      24,420         1.08%       $3.13    $3.13     4/30/07         $47,993        $121,622

</TABLE>
Please note that the Apr-97 activity is not an additional grant of options but a
re-pricing of options previously issued in January of 1997.


Sincerely,


/s/ JEFFREY L. GARON
Jeffrey L. Garon
Secretary


<PAGE>


                        SILICON STORAGE TECHNOLOGY, INC.
                                1171 Sonora Court
                           Sunnyvale, California 94086

                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

                           TO BE HELD ON JULY 17, 1998

TO THE SHAREHOLDERS OF SILICON STORAGE TECHNOLOGY, INC.:

         Notice Is Hereby  Given that the  Annual  Meeting  of  Shareholders  of
Silicon Storage Technology, Inc., a California corporation ("the Company"), will
be held on Friday, July 17, 1998 at 2:00 p.m., local time, at the offices of the
Company at 1156 Sonora  Court,  Sunnyvale,  California  94086 for the  following
purposes:

         1.       To elect  directors  to serve for the  ensuing  year and until
                  their successors are elected.

         2.       To approve  the  Company's  1995  Equity  Incentive  Plan,  as
                  amended,  to increase the aggregate number of shares of Common
                  Stock  authorized  for  issuance  under  such plan by  750,000
                  shares to 6,750,000 shares.

         3.       To  ratify  the  selection  of  Coopers &  Lybrand  L.L.P.  as
                  independent auditors of the Company for its fiscal year ending
                  December 31, 1998.

         4.       To transact  such other  business as may properly  come before
                  the meeting or any adjournment or postponement thereof.

         The foregoing  items of business are more fully  described in the Proxy
Statement accompanying this Notice.

         The Board of Directors has fixed the close of business on May 26, 1998,
as the record date for the  determination of shareholders  entitled to notice of
and to  vote at this  Annual  Meeting  and at any  adjournment  or  postponement
thereof.

                                By Order of the Board of Directors



                                JEFFREY L. GARON
                                Secretary

Sunnyvale, California
June 12, 1998

- --------------------------------------------------------------------------------
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.  WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE,  DATE, SIGN AND RETURN
THE   ENCLOSED   PROXY  AS   PROMPTLY  AS  POSSIBLE  IN  ORDER  TO  ENSURE  YOUR
REPRESENTATION  AT THE MEETING.  A RETURN  ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED  STATES) IS  ENCLOSED  FOR THAT  PURPOSE.  EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE  AND YOU WISH TO VOTE AT THE  MEETING,  YOU MUST  OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
- --------------------------------------------------------------------------------


<PAGE>


                        SILICON STORAGE TECHNOLOGY, INC.
                                1171 Sonora Court
                           Sunnyvale, California 94086

                                 PROXY STATEMENT
                       FOR ANNUAL MEETING OF SHAREHOLDERS

                                  July 17, 1998

                 INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

         The enclosed  proxy is solicited on behalf of the Board of Directors of
Silicon Storage Technology,  Inc., a California corporation (the "Company"), for
use at the Annual Meeting of Shareholders to be held on Friday, July 17, 1998 at
2:00  p.m.,  local  time,  (the  "Annual  Meeting"),  or at any  adjournment  or
postponement  thereof, for the purposes set forth herein and in the accompanying
Notice of Annual  Meeting.  The  Annual  Meeting  will be held at the  Company's
offices at 1156 Sonora Court,  Sunnyvale,  California 94086. The Company intends
to mail this proxy statement, accompanying proxy card, 1997 Annual Report (which
includes  the  Annual  Report on Form 10-K) on or about  June 12,  1998,  to all
shareholders entitled to vote at the Annual Meeting.

SOLICITATION

         The  Company  will bear the entire  cost of  solicitation  of  proxies,
including preparation,  assembly,  printing and mailing of this proxy statement,
the proxy and any additional  information  furnished to shareholders.  Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians  holding in their names shares of Common Stock beneficially owned
by others to  forward to such  beneficial  owners.  The  Company  may  reimburse
persons  representing  beneficial  owners  of Common  Stock  for their  costs of
forwarding   solicitation   materials  to  such  beneficial   owners.   Original
solicitation of proxies by mail may be supplemented by telephone,  telegram,  or
personal solicitation by directors,  officers, or other regular employees of the
Company.  No additional  compensation  will be paid to directors,  officers,  or
other regular employees for such services.

VOTING RIGHTS AND OUTSTANDING SHARES

         Only  holders of record of Common Stock at the close of business on May
26, 1998 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on May 26, 1998 the Company had  outstanding  and  entitled to
vote 22,877,585 shares of Common Stock.

         Each holder of record of Common  Stock on such date will be entitled to
one vote for each  share  held on all  matters  to be voted  upon at the  Annual
Meeting.

         All votes will be tabulated by the inspector of election  appointed for
the meeting,  who will  separately  tabulate  affirmative  and  negative  votes,
abstentions, and broker non-votes.  Abstentions and broker non-votes are counted
towards a quorum but are not counted for any purposes in  determining  whether a
matter is approved.

                                       2
<PAGE>



REVOCABILITY OF PROXIES

         Any person giving a proxy pursuant to this  solicitation  has the power
to revoke it at any time  before it is voted.  It may be revoked by filing  with
the Secretary of the Company at the Company's principal executive offices,  1171
Sonora Court,  Sunnyvale,  California 94086, a written notice of revocation or a
duly executed  proxy bearing a later date, or it may be revoked by attending the
meeting and voting in person.  Attendance  at the  meeting  will not, by itself,
revoke a proxy.

SHAREHOLDER PROPOSALS

         Proposals  of  shareholders  that are  intended to be  presented at the
Company's  1999 Annual Meeting of  Shareholders  must be received by the Company
not later than  Friday,  February  12, 1999 in order to be included in the proxy
statement  and proxy  relating  to the  Annual  Meeting.  Shareholders  are also
advised to review the Company's bylaws,  which contain  additional  requirements
with respect to advance notice shareholder proposals and director nominations.

                                       3
<PAGE>




                                   PROPOSAL 1

                              ELECTION OF DIRECTORS

         There  are  five  nominees  for  the  five  Board  positions  presently
authorized in the Company's Bylaws. Each director to be elected will hold office
until the next annual meeting of shareholders and until his successor is elected
and has  qualified,  or until such  director's  earlier  death,  resignation  or
removal.  Each nominee listed below is currently a director of the Company,  all
five having been elected by the shareholders.

         Shares  represented by the executed proxies will be voted, if authority
to do so is not withheld,  for the election of the five nominees named below. In
the event that any nominee should be unavailable  for election as a result of an
unexpected  occurrence,  such  shares  will be voted  for the  election  of such
substitute nominee as management may propose. Each person nominated for election
has agreed to serve if elected and  management has no reason to believe that any
nominee will be unable to serve.

<TABLE>
         Directors  are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote. The names of the nominees and certain
information about them are set forth below:

<CAPTION>
- ------------------------------------ --------- -------------------------------------------------------------
Name                                   Age     Principal Occupation/Position Held with the Company
- ------------------------------------ --------- -------------------------------------------------------------
<S>                                     <C>    <C>                                         
Bing Yeh (1)(4)                         47     President and Chief Executive Officer
- ------------------------------------ --------- -------------------------------------------------------------
Yaw Wen Hu                              48     Vice President, Process Development and Wafer Manufacturing
- ------------------------------------ --------- -------------------------------------------------------------
Tsuyoshi Taira (1)(2)(3)                59     President, Tazan International, Inc.
- ------------------------------------ --------- -------------------------------------------------------------
Yasushi Chikagami (1)(2)(3)             59     Director, GVC Corporation
- ------------------------------------ --------- -------------------------------------------------------------
Ronald Chwang (1)(2)(3)                 49     President, Acer Capital America
- ------------------------------------ --------- -------------------------------------------------------------
<FN>
(1)      Member of Compensation Committee
(2)      Member of Audit Committee
(3)      Member of Stock Option Committee
(4)      Sole Member of Non-Officer Stock Option Committee
</FN>
</TABLE>

         Bing Yeh,  co-founder of the Company,  has served as  President,  Chief
Executive  Officer and a director of the Company  since its  inception  in 1989.
Prior  to  founding  the  Company,  Mr.  Yeh  served  as a Senior  Research  and
Development Manager of Xicor, Inc., a nonvolatile memory semiconductor  company.
From 1981 to 1984, Mr. Yeh held program manager and other positions at Honeywell
Inc.  From 1979 to 1981,  Mr. Yeh was a senior  development  engineer  of EEPROM
technology of Intel Corporation. He was a Ph.D. candidate in Applied Physics and
earned an Engineer  degree at Stanford  University.  Mr. Yeh holds a M.S.  and a
B.S. in Physics from National Taiwan University.

         Yaw Wen Hu, Ph.D.,  has served the Company as Vice  President,  Process
Development and Wafer Manufacturing since July 1993 and became a director of the
Company in September  1995.  From 1990 to 1993,  Dr. Hu served as Deputy General
Manager of Technology  Development of Vitelic Taiwan  Corporation.  From 1988 to
1990, he served as FAB Engineering Manager of Integrated Device Technology, Inc.
From 1985 to 1988 he was the  Director  of  Technology  Development  at  Vitelic
Corporation.  From 1978 to 1985 he worked as a senior  development  engineer  in
Intel Corporation's Technology Development group. Mr. Hu holds a B.S. in Physics
from National Taiwan  University and a M.S. in Computer  Engineering and a Ph.D.
in Applied Physics from Stanford University.

                                       4

<PAGE>


         Tsuyoshi  Taira has been a director of the Company since July 1993. Mr.
Taira  served as a member of the board of directors  of Atmel  Corporation  from
1987 to 1992. Mr. Taira served as president of Sanyo  Semiconductor  Corporation
from 1986 to 1993. Mr. Taira was Chairman of the Sanyo Semiconductor Corporation
from 1993 to 1996. Mr. Taira left the Sanyo Semiconductor Corporation in August,
1996. Mr. Taira  currently  owns and runs a marketing and management  consulting
company,   Tazan  International,   Inc.  Mr.  Taira  holds  a  B.S.  from  Tokyo
Metropolitan University.

         Yasushi  Chikagami has been a director of the Company  since  September
1995. Mr. Chikagami has been Chairman of Keian Corporation,  a personal computer
and PC  peripheral  distributor,  since 1993.  Mr.  Chikagami has also served as
director of GVC  Corporation  and Trident  Microsystems,  Inc.  since 1993.  Mr.
Chikagami holds a B.S. in Agricultural  Engineering from Taiwan University and a
M.S. in Engineering from University of Tokyo.

         Ronald  Chwang,  Ph.D.,  became a director of the Company in June 1997.
Dr. Chwang is the President of Acer Capital America and managing general partner
of Acer Technology Venture Fund. Previously,  Dr. Chwang was President and Chief
Executive  Officer of Acer  America,  a  subsidiary  of Acer Group,  a worldwide
computer,  component and semiconductor manufacturer,  from 1992 to 1997, and has
been with Acer in various  capacities since 1986. Dr. Chwang has previously held
development  and  management  positions at Intel  Corporation  and Bell Northern
Research.  Dr. Chwang holds a B.S. in Engineering  from McGill  University and a
Ph.D. in Electrical Engineering from the University of Southern California.

                        THE BOARD OF DIRECTORS RECOMMENDS
                     A VOTE IN FAVOR OF EACH NAMED NOMINEE.

                                       5
<PAGE>


BOARD COMMITTEES AND MEETINGS

         During the year ended  December 31, 1997,  the Board of Directors  held
four meetings. The Board has a Compensation  Committee,  Audit Committee,  Stock
Option Committee, and a Non-Officer Stock Option Committee.

         The  Compensation   Committee  makes  recommendations   concerning  the
salaries and benefits of all officers of the Company and reviews  general policy
relating to  compensation  and benefits of employees of the Company,  except for
the  issuance  of stock  options and other  awards  under the  Company's  equity
incentive plans. The  Compensation  Committee is composed of three  non-employee
directors:  Mssrs. Taira,  Chikagami and Chwang, and one employee director,  Mr.
Yeh. The Compensation Committee met one time during fiscal 1997.

         The Audit  Committee meets with the Company's  independent  auditors at
least once annually to review the results of the annual audit and to discuss the
Company's  financial  statements.  The Audit  Committee  recommends to the Board
whether the  independent  auditors are to be retained and receives and considers
the  accountants'  comments as to  controls,  adequacy  of staff and  management
performance and procedures in connection with audit and financial controls.  The
Audit  Committee  is composed of three  non-employee  directors:  Mssrs.  Taira,
Chikagami, and Chwang. The Audit Committee met four times during fiscal 1997.

         The Stock Option  Committee  administers  the issuance of stock options
and other awards  under the  Company's  1995 Equity  Incentive  Plan.  The Stock
Option  Committee is composed of three  non-employee  directors:  Mssrs.  Taira,
Chikagami and Chwang. The Stock Option Committee did not meet during fiscal 1997
but acted by unanimous written consent five times during fiscal 1997.

         The  Non-Officer  Stock Option  Committee  administers  the issuance of
stock  options  consisting of not more than 12,000 shares per stock option grant
under the Company's 1995 Equity  Incentive Plan to  non-officer  employees.  The
Non-Officer  Stock Option  Committee is composed of one employee  director:  Mr.
Yeh. The Non-Officer  Stock Option Committee acted by unanimous  written consent
thirteen times during fiscal 1997.

         During the year ended December 31, 1997, each Board member attended, in
person or by  telephonic  conference,  all  meetings  of the  Board,  and of the
committees  on which he  served,  held  during  the  period  for  which he was a
director or committee member, respectively.

                                       6
<PAGE>




                                   PROPOSAL 2

               APPROVAL OF 1995 EQUITY INCENTIVE PLAN, AS AMENDED


                  In  October  1995,  the Board of  Directors  adopted,  and the
shareholders  subsequently  approved,  the Company's 1995 Equity  Incentive Plan
("the Incentive  Plan") as an amendment and restatement of its 1990 Stock Option
Plan and  increased  the  number  of  shares  reserved  for  issuance  under the
Incentive Plan to 6,000,000 shares.

         As of April 30, 1998,  options to purchase a total of 2,698,000 (net of
cancelled or expired options) shares were outstanding  under the Incentive Plan.
In  addition,  options to  purchase  704,000  (plus any shares that might in the
future be returned to the plan as a result of  cancellations  or  expiration  of
options) shares remained  available for grant thereunder.  The Board has amended
the  Incentive  Plan subject to  shareholder  approval to increase the aggregate
number of shares of Common Stock  authorized  for issuance  under the  Incentive
Plan by 750,000 to 6,750,000  shares.  During  fiscal 1997,  under the Incentive
Plan,  the Company has  granted to all  current  executive  officers as a group,
options to purchase  494,000  shares at  exercise  prices of $3.125 to $6.00 per
share, and granted to all employees  (excluding  executive  officers) as a group
options to purchase  939,000  shares at  exercise  prices of $3.125 to $6.00 per
share.  The above  figures are net of 845,000  options  granted which were later
cancelled and reissued at a different exercise price ("re-priced options").

         Shareholders  are requested in this Proposal 2 to approve the Incentive
Plan, as amended.  If the shareholders  fail to approve this Proposal 2, options
granted  under the Incentive  Plan after the Annual  Meeting will not qualify as
performance-based  compensation and, in some  circumstances,  the Company may be
denied a business expense  deduction for  compensation  recognized in connection
with the exercise of these stock options. The affirmative vote of the holders of
a majority of the shares present in person or represented by proxy and voting at
the meeting  will be required to approve the  Incentive  Plan,  as amended.  For
purposes of this vote,  abstentions  will be counted  toward the  tabulation  of
votes  counted  and will have the same effect as negative  votes,  while  broker
non-votes will not be counted for any purpose in determining whether this matter
has been approved.


                        THE BOARD OF DIRECTORS RECOMMENDS
                         A VOTE IN FAVOR OF PROPOSAL 2.

                                       7

<PAGE>


        The essential features of the Incentive Plan are outlined below:

GENERAL

        The Incentive Plan provides for the grant or issuance of incentive stock
options to employees and non-statutory stock options,  restricted stock purchase
awards,  stock bonuses and stock appreciation rights to consultants,  employees,
officers  and  employee  directors.  To date only  incentive  stock  options and
non-statutory  stock  options  have  been  awarded  under  the  Incentive  Plan.
Incentive stock options granted under the Incentive Plan are intended to qualify
as "incentive  stock options"  within the meaning of Section 422 of the Internal
Revenue  Code of 1986,  as amended (the  "Code").  Non-statutory  stock  options
granted under the Incentive Plan are intended not to qualify as incentive  stock
options under the Code. See "Federal Income Tax Information" for a discussion of
the tax treatment of the various awards included in the Incentive Plan.

PURPOSE

        The Plan was adopted to provide a means by which  selected  officers and
employees of and consultants to the Company and its affiliates could be given an
opportunity to receive stock in the Company, to assist in retaining the services
of employees holding key positions, to secure and retain the services of persons
capable of filling such positions and to provide  incentives for such persons to
exert  maximum  efforts for the success of the  Company.  All of  Company's  194
employees  as of April 30, 1998 and the  Company's  consultants  are eligible to
participate in the Incentive Plan.

ADMINISTRATION

        The Plan is administered  by the Board of Directors of the Company.  The
Board has the power to construe and interpret the Incentive Plan, and subject to
the  provisions of the Incentive  Plan, to determine the persons to whom and the
dates on which awards will be granted,  what type of award will be granted,  the
number of shares to be subject to each award,  the time or times during the term
of each award within which all or a portion of such award may be exercised,  the
exercise  price,  the type of  consideration  and other terms of the award.  The
Board of Directors is  authorized  to delegate  administration  of the Incentive
Plan to a committee composed of not fewer than two members of the Board. As used
herein with  respect to the  Incentive  Plan,  the  "Board"  refers to the Stock
Option Committee as well as to the Board of Directors itself.

ELIGIBILITY

        Incentive  stock options may be granted under the Incentive Plan only to
selected key employees  (including  officers) of the Company and its affiliates.
Consultants  and selected key  employees  (including  officers)  are eligible to
receive  awards other than  incentive  stock options  under the Incentive  Plan.
Directors who are not salaried  employees of or consultants to the Company or to
any  affiliate of the Company are not eligible to  participate  in the Incentive
Plan.

        No option may be granted under the Incentive  Plan to any person who, at
the time of the grant, owns (or is deemed to own) stock possessing more than 10%
of the total  combined  voting  power of the  Company  or any  affiliate  of the
Company,  unless the option  exercise  price is at least 110% of the fair market
value of the stock  subject to the option on the date of grant,  and the term of
the option  does not exceed  five  years from the date of grant.  For  incentive
stock options granted under the Incentive Plan, the aggregate fair market value,
determined  at the time of grant,  of the shares of Common Stock with respect to
which such options are  exercisable for the first time by an optionee during any
calendar year (under all such plans of the Company and its  affiliates)  may not
exceed $100,000.

                                       8
<PAGE>

STOCK SUBJECT TO THE INCENTIVE PLAN

        If awards granted under the Incentive Plan expire or otherwise terminate
without being exercised,  the Common Stock not purchased pursuant to such awards
again becomes available for issuance under the Incentive Plan.

TERMS OF OPTIONS

        The following is a description of the permissible terms of options under
the Incentive Plan.  Individual  option grants may be more restrictive as to any
or all of the permissible terms described below.

        Exercise Price;  Payment.  The exercise price of incentive stock options
under  the  Incentive  Plan may not be less  than the fair  market  value of the
Common Stock subject to the option on the date of the option grant,  and in some
cases (see  "Eligibility"  above), may not be less than 110% of such fair market
value. The exercise price of  non-statutory  options under the Incentive Plan is
determined by the Board.  At April 30, 1998,  the closing price of the Company's
Common Stock as reported on the Nasdaq National Market was $3.00 per share.

        In the event of a decline in the value of the  Company's  Common  Stock,
the Board has the  authority  to offer  employees  the  opportunity  to  replace
outstanding higher priced options, whether incentive or non-statutory,  with new
lower priced options.  The Company has provided that opportunity to employees in
the past. To the extent  required by Section 162(m),  an option  re-priced under
the Incentive Plan is deemed to be cancelled and a new option granted. The Board
also has the  authority  to include as part of an option  agreement  a provision
entitling  the  optionee  to a further  option in the  event  that the  optionee
exercises  his or her option by  surrendering  other  shares of Common  Stock as
payment of the exercise price.

        The exercise  price of options  granted under the Incentive Plan must be
paid  either:  (a) in cash at the time the  option is  exercised;  or (b) at the
discretion  of the Board,  (i) by delivery of other Common Stock of the Company,
(ii)  pursuant  to a deferred  payment  arrangement  or (c) in any other form of
legal consideration acceptable to the Board.

        Option  Exercise.  Options  granted under the Incentive  Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the Incentive Plan typically vest
at the rate of 25% on the anniversary of the grant and 1/48th per month (25% per
year) thereafter  during the optionee's  employment or services as a consultant.
Shares covered by options  granted in the future under the Incentive Plan may be
subject to different  vesting  terms.  The Board has the power to accelerate the
time during which an option may be exercised. In addition, options granted under
the Incentive Plan may permit  exercise prior to vesting,  but in such event the
optionee  may be  required  to  enter  into an  early  exercise  stock  purchase
agreement  that allows the Company to repurchase  shares not yet vested at their
exercise  price  should  the  optionee  leave the employ of the  Company  before
vesting.  To the extent  provided  by the terms of an option,  an  optionee  may
satisfy any federal,  state or local tax withholding  obligation relating to the
exercise of such option by a cash  payment upon  exercise,  by  authorizing  the
Company to withhold a portion of the stock  otherwise  issuable to the optionee,
by delivering  already-owned  stock of the Company or by a combination  of these
means.

                                       9
<PAGE>


        Term. The maximum term of options under the Incentive Plan is ten years,
except that in certain cases (see "Eligibility") the maximum term is five years.
Options  under the  Incentive  Plan  terminate  three  months after the optionee
ceases to be employed by the Company or any affiliate of the Company, unless (a)
the  termination  of  employment  is due to such  person's  permanent  and total
disability (as defined in the Code), in which case the option may, but need not,
provide  that  it  may  be  exercised  at any  time  within  one  year  of  such
termination;  (b)  the  optionee  dies  while  employed  by the  Company  or any
affiliate of the Company,  or within  three  months  after  termination  of such
employment,  in which case the option may, but need not,  provide that it may be
exercised  (to  the  extent  the  option  was  exercisable  at the  time  of the
optionee's  death) within eighteen months of the optionee's  death by the person
or  persons  to whom the  rights to such  option  pass by will or by the laws of
descent and distribution;  or (c) the option by its terms specifically  provides
otherwise.  Individual  options by their terms may provide for exercise within a
longer period of time  following  termination  of  employment or the  consulting
relationship. The option term may also be extended in the event that exercise of
the option within these periods is prohibited for specified reasons.

TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK

        Purchase  Price;  Payment.  The purchase price under each stock purchase
agreement will be determined by the Board.  The purchase price of stock pursuant
to a stock purchase  agreement  must be paid either:  (i) in cash at the time of
purchase;  (ii) at the discretion of the Board,  according to a deferred payment
or other  arrangement with the person to whom the Common Stock is sold; or (iii)
in any other form of legal  consideration that may be acceptable to the Board in
its discretion.  Eligible  participants may be awarded stock pursuant to a stock
bonus  agreement in  consideration  of past  services  actually  rendered to the
Company or for its benefit.

Repurchase.  Shares of the Common Stock sold or awarded under the Incentive Plan
may, but need not, be subject to a repurchase  option in favor of the Company in
accordance  with a vesting  schedule  determined  by the  Board.  In the event a
person  ceases  to be an  employee  of or ceases  to serve as a  director  of or
consultant  to the  Company or an  affiliate  of the  Company,  the  Company may
repurchase  or otherwise  reacquire any or all of the shares of the Common Stock
held by that person that have not vested as of the date of termination under the
terms of the stock bonus or  restricted  stock  purchase  agreement  between the
Company and such person.

STOCK APPRECIATION RIGHTS

        The Board may grant stock appreciation  rights to employees or directors
of, or  consultants  to,  the  Company or its  affiliates.  The  Incentive  Plan
authorizes three types of stock appreciation rights.

        Tandem Stock Appreciation  Rights.  Tandem stock appreciation rights are
tied to an underlying option and require the holder to elect whether to exercise
the  underlying   option  or  to  surrender  the  option  for  an   appreciation
distribution  equal to the market price of the vested shares  purchasable  under
the  surrendered  option  less the  aggregate  exercise  price  payable for such
shares.  Appreciation  distributions  payable  upon  exercise  of  tandem  stock
appreciation rights must be made in cash.

        Concurrent Stock  Appreciation  Rights.  Concurrent  stock  appreciation
rights are tied to an underlying  option and are exercised  automatically at the
same  time  the  underlying   option  is  exercised.   The  holder  receives  an
appreciation  distribution  equal  to the  market  price  of the  vested  shares
purchased  under the option less the aggregate  exercise  price payable for such
shares.  Appreciation  distributions  payable upon exercise of concurrent  stock
appreciation rights must be made in cash.

        Independent Stock  Appreciation  Rights.  Independent stock appreciation
rights are granted independently of any option and entitle the holder to receive
upon exercise an appreciation distribution equal to the market price of a number
of shares equal to the number of share equivalents to which the holder is vested
under the  independent  stock  appreciation  right less the fair market value of
such  number of shares  of stock on the date of grant of the  independent  stock
appreciation  rights.   Appreciation  distributions  payable  upon  exercise  of
independent stock appreciation rights may, at the Board's discretion, be made in
cash, in shares of the Common Stock or a combination thereof.

                                       10
<PAGE>

ADJUSTMENT PROVISIONS

        If there is any  change in the stock  subject to the  Incentive  Plan or
subject  to  any  award  granted  under  the  Incentive  Plan  (through  merger,
consolidation,  reorganization,  re-capitalization,  stock dividend, dividend in
property  other than cash,  stock split,  liquidating  dividend,  combination of
shares,  exchange of shares,  change in corporate  structure or otherwise),  the
Incentive Plan and awards outstanding  thereunder will be appropriately adjusted
as to the class and the  maximum  number of shares  subject to such plan and the
class, number of shares and price per share of stock subject to such outstanding
awards.

EFFECT OF CERTAIN CORPORATE EVENTS

        The  Incentive  Plan provides  that,  in the event of a  dissolution  or
liquidation  of the  Company,  specified  type  of  merger  or  other  corporate
reorganization,  to the extent permitted by law, any surviving  corporation will
be required to either assume  awards  outstanding  under the  Incentive  Plan or
substitute  similar  awards  for those  outstanding  under  such  plan,  or such
outstanding awards will continue in full force and effect. In the event that any
surviving  corporation  declines to assume or continue awards  outstanding under
the Incentive Plan, or to substitute similar awards,  then the time during which
such awards may be exercised  will be accelerated  and the awards  terminated if
not exercised  during such time. The acceleration of an award in the event of an
acquisition  or  similar  corporate  event  may be  viewed  as an  anti-takeover
provision,  which may have the effect of  discouraging  a proposal to acquire or
otherwise obtain control of the Company.

DURATION, AMENDMENT AND TERMINATION

        The  Board  may  suspend  or  terminate  the   Incentive   Plan  without
shareholder  approval or ratification  at any time or from time to time.  Unless
sooner terminated, the Incentive Plan will terminate on June 10, 2000.

        The Board may also amend the Incentive  Plan at any time or from time to
time.   However,   no  amendment  will  be  effective  unless  approved  by  the
shareholders of the Company within twelve months before or after its adoption by
the Board if the amendment  would: (a) modify the requirements as to eligibility
for participation (to the extent such modification requires shareholder approval
in order for the Plan to satisfy Section 422 of the Code, if applicable, or Rule
16b-3 ("Rule  16b-3") of the  Securities  Exchange Act of 1934,  as amended (the
"Exchange  Act"));  (b) increase the number of shares reserved for issuance upon
exercise of options;  or (c) change any other provision of the Plan in any other
way if such modification  requires  shareholder approval in order to comply with
Rule 16b-3 or satisfy the requirements of Section 422 of the Code. The Board may
submit any other  amendment  to the  Incentive  Plan for  shareholder  approval,
including,  but not limited to, amendments  intended to satisfy the requirements
of Section  162(m) of the Code  regarding  the  exclusion  of  performance-based
compensation  from the limitation on the  deductibility of compensation  paid to
certain employees.

RESTRICTIONS ON TRANSFER

        Under  the  Incentive  Plan,  an  incentive  stock  option  may  not  be
transferred by the optionee otherwise than by will or by the laws of descent and
distribution and, during the lifetime of an optionee, an option may be exercised
only by the  optionee.  A  non-statutory  stock option or an  independent  stock
appreciation  right  may not be  transferred  except  by will or by the  laws of
descent and distribution or pursuant to a "qualified  domestic relations order."
In any case, an optionee may designate in writing a third party who may exercise
the option in the event of the optionee's  death.  No rights under a stock bonus
or restricted stock purchase agreement are transferable except where required by
law or  expressly  authorized  by the  terms of the  applicable  stock  bonus or
restricted  stock  purchase  agreement.  A tandem  stock  appreciation  right or
concurrent  stock  appreciation  right may be transferred  only by the method(s)
applicable  to the  underlying  option.  In  addition,  any  shares  subject  to
repurchase by the Company under an early exercise  stock purchase  agreement may
be subject to restrictions on transfer which the Board deems appropriate.

                                       11

<PAGE>


FEDERAL INCOME TAX INFORMATION

        Incentive  Stock  Options.  Incentive  stock options under the Incentive
Plan are intended to be eligible for the favorable  federal income tax treatment
accorded "incentive stock options" under the Code.

        There  generally are no federal income tax  consequences to the optionee
or the Company by reason of the grant or exercise of an incentive  stock option.
However,  the exercise of an incentive  stock option may increase the optionee's
alternative minimum tax liability, if any.

        If an optionee  holds stock  acquired  through  exercise of an incentive
stock option for at least two years from the date on which the option is granted
and at least one year from the date on which the shares are  transferred  to the
optionee upon exercise of the option,  any gain or loss on a disposition of such
stock will be either long-term or mid-term capital gain or loss.  Generally,  if
the  optionee  disposes of the stock  before the  expiration  of either of these
holding periods (a "disqualifying disposition"), at the time of disposition, the
optionee  will realize  taxable  ordinary  income equal to the lesser of (a) the
excess  of the  stock's  fair  market  value  on the date of  exercise  over the
exercise price,  or (b) the optionee's  actual gain, if any, on the purchase and
sale.  The  optionee's  additional  gain,  or any loss,  upon the  disqualifying
disposition will be a capital gain or loss, which will be long-term, mid-term or
short-term  depending  on the length of time the stock was held.  Capital  gains
currently are generally  subject to lower tax rates than  ordinary  income.  The
maximum  long-term  capital  gains  rate for  federal  income  tax  purposes  is
currently 20% (28% for mid-term  capital gain) while the maximum ordinary income
rate is  effectively  39.6% at the present time.  Slightly  different  rules may
apply to optionees who acquire stock  subject to certain  repurchase  options or
who are subject to Section 16(b) of the Exchange Act.

        To the extent the  optionee  recognizes  ordinary  income by reason of a
disqualifying  disposition,  the Company will generally be entitled  (subject to
the requirement of reasonableness,  the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding  business
expense deduction in the tax year in which the disqualifying disposition occurs.

         Non-statutory Stock Options.  Non-statutory stock options granted under
the Incentive Plan generally have the following federal income tax consequences:

        There are no tax  consequences  to the optionee or the Company by reason
of the grant of a non-statutory  stock option.  Upon exercise of a non-statutory
stock option, the optionee normally will recognize taxable ordinary income equal
to the excess of the stock's fair market value on the date of exercise  over the
option  exercise  price.  Generally,  with respect to employees,  the Company is
required to withhold from regular wages or supplemental  wage payments an amount
based  on  the  ordinary  income  recognized.  Subject  to  the  requirement  of
reasonableness,   the   provisions  of  Section  162(m)  of  the  Code  and  the
satisfaction of a reporting  obligation,  the Company will generally be entitled
to a business expense deduction equal to the taxable ordinary income realized by
the optionee.  Upon  disposition  of the stock,  the optionee  will  recognize a
capital gain or loss equal to the  difference  between the selling price and the
sum of the amount  paid for such stock plus any amount  recognized  as  ordinary
income  upon  exercise  of the  option.  Such  gain or loss  will be  long-term,
mid-term  or  short-term  depending  on the  length  of time the stock was held.
Slightly  different  rules may apply to optionees  who acquire  stock subject to
certain  repurchase  options or who are subject to Section 16(b) of the Exchange
Act.

                                       12
<PAGE>


        Restricted  Stock and Stock Bonuses.  Restricted stock and stock bonuses
granted under the Incentive Plan generally have the following federal income tax
consequences:

        Upon acquisition of stock under a restricted stock or stock bonus award,
the  recipient  normally will  recognize  taxable  ordinary  income equal to the
excess of the  stock's  fair  market  value  over the  purchase  price,  if any.
However,  to the  extent  the  stock is  subject  to  certain  types of  vesting
restrictions,  the taxable event will be delayed until the vesting  restrictions
lapse  unless  the  recipient  elects  to be  taxed  on  receipt  of the  stock.
Generally,  with respect to employees,  the Company is required to withhold from
regular  wages or  supplemental  wage  payments an amount  based on the ordinary
income recognized. Subject to the requirement of reasonableness,  Section 162(m)
of the Code and the satisfaction of a tax reporting obligation, the Company will
generally  be  entitled  to a business  expense  deduction  equal to the taxable
ordinary income realized by the recipient.  Upon  disposition of the stock,  the
recipient will recognize a capital gain or loss equal to the difference  between
the selling  price and the sum of the amount paid for such stock,  if any,  plus
any amount  recognized as ordinary  income upon  acquisition (or vesting) of the
stock. Such gain or loss will be long-term,  mid-term or short-term depending on
the length of time the stock was held from the date ordinary income is measured.
Slightly  different  rules may apply to persons  who  acquire  stock  subject to
forfeiture under Section 16(b) of the Exchange Act.

        Stock  Appreciation  Rights.  No  taxable  income is  realized  upon the
receipt  of  a  stock  appreciation  right,  but  upon  exercise  of  the  stock
appreciation  right  the fair  market  value of the  shares  (or cash in lieu of
shares)  received must be treated as compensation  taxable as ordinary income to
the  recipient  in the  year  of  such  exercise.  Generally,  with  respect  to
employees, the Company is required to withhold from the payment made on exercise
of the stock  appreciation  right or from  regular  wages or  supplemental  wage
payments  an amount  based on the  ordinary  income  recognized.  Subject to the
requirement of  reasonableness,  Section 162(m) of the Code and the satisfaction
of a reporting  obligation,  the Company will be entitled to a business  expense
deduction equal to the taxable ordinary income recognized by the recipient.

        Potential  Limitation  on  Company  Deductions.  As part of the  Omnibus
Budget  Reconciliation  Act of 1993, the U.S.  Congress  amended the Code to add
Section  162(m) which denies a deduction to any publicly  held  corporation  for
compensation  paid to a covered  employees  in a taxable year to the extent that
non-performance-based  compensation  paid to such a covered  employee exceeds $1
million.  It is possible  that  compensation  attributable  to awards  under the
Incentive Plan, when combined with all other types of compensation received by a
covered  employee from the Company,  may cause this limitation to be exceeded in
any particular year.

        Certain kinds of compensation,  including  qualified  "performance-based
compensation,"  are  disregarded  for purposes of the deduction  limitation.  In
accordance  with Treasury  regulations  issued under Section 162(m) of the Code,
compensation  attributable to stock options and stock  appreciation  rights will
qualify as  performance-based  compensation,  provided that: (i) the stock award
plan contains a per-employee  limitation on the number of shares for which stock
options and stock appreciation  rights may be granted during a specified period;
(ii) the  per-employee  limitation  is approved by the  shareholders;  (iii) the
award is  granted  by a  compensation  committee  comprised  solely of  "outside
directors;"  and (iv) the  exercise  price of the award is no less than the fair
market  value of the  stock on the date of  grant.  Restricted  stock  and stock
bonuses qualify as performance-based  compensation under these proposed Treasury
regulations  only if:  (i) the  award is  granted  by a  compensation  committee
comprised  solely  of  "outside  directors;"  (ii)  the  award  is  granted  (or
exercisable)  only  upon  the  achievement  of  an  objective  performance  goal
established  in  writing  by the  compensation  committee  while the  outcome is
substantially  uncertain;  (iii) the compensation committee certifies in writing
prior to the granting (or exercisability) of the award that the performance goal
has been satisfied;  and (iv) prior to the granting (or  exercisability)  of the
award, shareholders have approved the material terms of the award (including the
class of employees  eligible for such award, the business  criteria on which the
performance  goal is based, and the maximum amount (or formula used to calculate
the amount) payable upon attainment of the performance goal).

                                       13


<PAGE>


                                   PROPOSAL 3

                RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

         The Board of Directors  has selected  Coopers & Lybrand  L.L.P.  as the
Company's  independent auditors for the fiscal year ending December 31, 1998 and
has  further  directed  that  management  submit the  selection  of  independent
auditors for ratification by the  shareholders at the Annual Meeting.  Coopers &
Lybrand  L.L.P.  has  audited the  Company's  financial  statements  since 1991.
Representatives  of Coopers & Lybrand  L.L.P.  are expected to be present at the
Annual  Meeting  and will have an  opportunity  to make a  statement  if they so
desire and will be available to respond to appropriate questions.

         Shareholder  ratification  of the selection of Coopers & Lybrand L.L.P.
as the Company's independent auditors is not required by the Company's Bylaws or
otherwise.  However,  the Board is submitting the selection of Coopers & Lybrand
L.L.P.  to the  shareholders  for  ratification  as a matter  of good  corporate
practice. If the shareholders fail to ratify the selection,  the Audit Committee
and the Board will  reconsider  whether or not to retain that firm.  Even if the
selection is ratified, the Audit Committee and the Board in their discretion may
direct the appointment of different  independent auditors at any time during the
year if they  determine that such a change would be in the best interests of the
Company and its shareholders.

         The affirmative vote of the holders of a majority of the shares present
in person or  represented  by proxy and  voting at the  Annual  Meeting  will be
required to ratify the selection of Coopers & Lybrand L.L.P.

                        THE BOARD OF DIRECTORS RECOMMENDS
                         A VOTE IN FAVOR OF PROPOSAL 3.

                                       14

<PAGE>

                              SECURITY OWNERSHIP OF
                    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth certain  information  regarding the ownership of
the  Company's  Common Stock as of April 30, 1998 by: (i) each director and each
nominee for director;  (ii) each of the executive  officers named in the Summary
Compensation  Table  employed by the Company in that capacity on April 30, 1998;
(iii) all executive  officers and directors of the Company as a group;  and (iv)
all those known by the Company to be beneficial owners of more than five percent
of its Common Stock.

                                                  Beneficial Ownership (1)
                                                  ------------------------
Beneficial Owner                            Number of Shares  Percent of Total
- ----------------                            ----------------  ----------------
Bing Yeh (2)                                    3,650,000            16.0%
                                                           
Ching S. Jenq                                   1,980,000             8.7
         13030 Cumbra Vista Court                          
         Los Altos Hills, CA 94022                         
Tseng Family Trust Dtd 12/26/96,                1,570,000             6.9
Carter and Su Hwa Tseng, trustees                          
         22, R&D Road 2                                    
         Hsin-Chu Science Park                             
         Taiwan, R.O.C. 30077                              
Isao Nojima (3)                                   338,408             1.5
Yaw Wen Hu (4)                                    316,149             1.4
Tsuyoshi Taira (5)                                 16,471              *
Yasushi Chikagami (5)                              16,471              *
Ronald Chwang (6)                                   6,589              *
                                                           
All executive officers and directors                       
as a group (eleven persons) (7)                 4,507,088            19.7%

- ----------                                               

*        Represents  beneficial  ownership  of less  than 1% of the  outstanding
         shares of the Company's Common Stock.

(1)      This table is based upon  information  supplied by officers,  directors
         and  principal  shareholders  and  Schedules 13D and 13G filed with the
         Securities  and  Exchange  Commission  (the  "SEC").  Unless  otherwise
         indicated  in the  footnotes  to this table,  and subject to  community
         property laws where  applicable,  the Company believes that each of the
         shareholders  named in this table above has sole voting and  investment
         power with respect to the shares of Common Stock shown as  beneficially
         owned. Percentage of beneficial ownership is based on 22,877,585 shares
         of the Company's Common Stock outstanding as of April 30, 1998 adjusted
         as required by rules promulgated by the SEC.

(2)      Includes (i) 1,160,000  shares held by the Yeh Family Trust U/D/T dated
         August 14,  1995,  of which Mr. Yeh and his wife are  trustees and (ii)
         2,480,000 shares held by the Yeh 1995 Children's Trust U/T/A dated July
         31, 1995 (the "Children's  Trust") of which Su-Wen Y. Liu and Yeon-Hong
         Chan are trustees. Mr. Yeh disclaims beneficial ownership of the shares
         held by the Children's  Trust.  Also includes  10,000 shares  purchased
         under an IRA account in the name of Bing Yeh.

(3)      Includes 308,944 shares issuable  subject to options  exercisable on or
         before June 30, 1998.

(4)      Includes (i) 5,000  shares held by each of Dr. Hu's two minor  children
         and (ii) 268,418 shares issuable  subject to options  exercisable on or
         before June 30, 1998.

(5)      Includes  16,471 shares issuable  subject to options  exercisable on or
         before June 30, 1998.

                                       15
<PAGE>

(6)      Includes  6,589 shares  issuable  subject to options  exercisable on or
         before June 30, 1998.

(7)      Includes  749,893 shares subject to stock options held by directors and
         executive  officers as a group  exercisable on or before June 30, 1998.
         See footnotes (3) through (6).


COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(A)

          Section 16(a) of the Securities  Exchange Act of 1934 (the "1934 Act")
requires the Company's  directors and  executive  officers,  and persons who own
more than ten percent of a registered class of the Company's equity  securities,
to file with the SEC  initial  reports of  ownership  and  reports of changes in
ownership of Common Stock and other equity securities of the Company.  Officers,
directors  and  greater  than  ten  percent  shareholders  are  required  by SEC
regulation  to furnish the Company  with copies of all Section  16(a) forms they
file.

          To the Company's knowledge,  based solely on a review of the copies of
such reports furnished to the Company and written  representations that no other
reports were  required,  during the year ended  December  31, 1997,  all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with.

                                       16
<PAGE>

                             EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

         Directors  do not  currently  receive  any cash  compensation  from the
Company for their  service as members of the Board of  Directors,  although they
are reimbursed for certain travel-related expenses in connection with attendance
at Board and committee meetings in accordance with Company policy.

         Each non-employee  director of the Company receives stock option grants
under the 1995  Non-Employee  Directors'  Stock  Option  Plan  ("the  Directors'
Plan").  Only  non-employee  directors  of the Company  are  eligible to receive
options under the Directors' Plan. Options granted under the Directors' Plan are
intended by the  Company not to qualify as  incentive  stock  options  under the
Internal Revenue Code of 1986, as amended (the "Code").

          Option  grants  under  the  Directors'  Plan  are   non-discretionary.
Pursuant to the terms of the Directors'  Plan,  each director who was serving on
the date of the Company's  initial  public  offering was granted on such date an
option to purchase  24,000  shares of the Company's  Common Stock.  In addition,
each non-employee  director subsequently elected to the Board will automatically
be granted an option to purchase 24,000 shares of the Company's Common Stock. On
the date of each annual meeting of shareholders  commencing with the 1997 Annual
Meeting,  each member of the Company's Board of Directors who is not an employee
of the Company is  automatically  granted  under the  Directors'  Plan,  without
further action by the Company, the Board of Directors or the shareholders of the
Company,  an  option to  purchase  up to 6,000  shares  of  Common  Stock of the
Company.  No other options may be granted at any time under the Directors' Plan.
The exercise price of options  granted under the Directors'  Plan is 100% of the
fair market value of the Common  Stock  subject to the option on the date of the
option grant.  Options granted under the Directors' Plan become exercisable over
a period  of four  years  from the date of grant in  forty-eight  equal  monthly
installments  commencing  on the date one  month  after the date of grant of the
option,  provided that the optionee has,  during the entire period prior to such
vesting date,  continuously served as a non-employee  director or employee of or
consultant to the Company or any affiliate of the Company, whereupon such option
shall become fully exercisable in accordance with its terms with respect to that
portion  of the  shares  represented  by that  installment.  The term of options
granted under the Directors'  Plan is ten years. In the event of a merger of the
Company with or into another  corporation  or a  consolidation,  acquisition  of
assets or other change-in-control transaction involving the Company, the vesting
of each option will  accelerate  and the option will  terminate if not exercised
prior to the consummation of the transaction. At April 30, 1998, options (net of
canceled or expired  options)  covering an aggregate  of 85,000  shares had been
granted under the  Directors'  Plan and 65,000  shares of the  Company's  Common
Stock remained available for grant under the Directors' Plan.

         During fiscal year 1997, the Company  granted  options  covering 37,000
shares to non-employee directors of the Company at exercise prices of $3.125 and
$3.625  per share  (based on the  closing  sales  price  reported  in the Nasdaq
National  Market on the date of grant. As of April 30, 1998, no options had been
exercised under the Directors' Plan.

                                       17

<PAGE>


COMPENSATION OF EXECUTIVE OFFICERS

                             Summary of Compensation

<TABLE>
         The following table shows for the fiscal years ended December 31, 1997,
December  31, 1996 and  December  31, 1995  compensation  awarded or paid to, or
earned by, the Company's  Chief  Executive  Officer and the Company's other four
most highly  compensated  executive  officers  at December  31, 1997 (the "Named
Executive Officers"):

<CAPTION>
                                         Annual Compensation        Long-Term Compensation         All Other
                                        --------------------------------------------------      
                                          Salary       Bonus        Securities Underlying        Compensation
   Name and Principal Position   Year      ($)         ($)(1)           Stock Options               ($)(2)
- -------------------------------- -----  ------------  ---------     ----------------------      ----------------
<S>                              <C>     <C>          <C>                  <C>                      <C>   
Bing Yeh
   President and                 1997    $207,121      -----                -----                   $1,480
   Chief Executive Officer       1996    $195,000     $78,682               -----                   $2,592
                                 1995    $128,690     $40,824               -----                    -----


Michael J. Praisner   (3)        1997    $138,877      -----                -----                    -----
   Vice President, Finance       1996    $132,000     $38,324               -----                    $712
   and Administration, Chief     1995    $37,919       -----               200,000                   -----
   Financial Officer and
   Secretary

Thomas A. Freeze (4)             1997    $161,051      -----               100,000         (5)       $240
   Chief Operating Officer and   1996     -----        -----                -----                    -----
   Executive Vice President      1995     -----        -----                -----                    -----


Yaw-Wen Hu                       1997    $137,280      -----               25,640          (5)       $280
   Vice President, Process       1996    $132,000     $40,814               -----                   $1,792
    Development and Wafer        1995    $115,121     $18,281               2,800                    -----
   Manufacturing

Isao Nojima                      1997    $141,353      -----               24,420          (5)       -----
   Vice President, Advanced      1996    $135,000     $41,851               -----                   $1,072
   Development                   1995    $115,500     $18,492               3,000                    -----
<FN>
- ----------

(1)      Bonuses  received  pursuant to the Company's  profit  sharing plan (see
         Report  of the  Compensation  Committee  of the Board of  Directors  on
         Executive Compensation).

(2)      Includes other compensation for travel time.

(3)      Michael J. Praisner left the Company in January 1998.

(4)      Thomas A. Freeze left the Company in March 1998.

(5)      Stock option grant net of impact of re-priced stock options.
</FN>
</TABLE>

                                       18

<PAGE>


                        Stock Option Grants and Exercises

         The  Company  grants  options  to  its  executive  officers  under  the
Incentive  Plan,  as described  in Proposal 2. As of April 30, 1998,  options to
purchase a total of 2,698,000 shares were  outstanding  under the Incentive Plan
and options to purchase 704,000 shares remained available for grant thereunder.

<TABLE>
         The following  tables show for the fiscal year ended December 31, 1997,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:

<CAPTION>
                                                                                       Potential Realizable Value
                                                Percent of                               at Assumed Annual Rates
                                               Total Options                           of Stock Price Appreciation
                                                Granted to     Exercise                    for Option Term (3)
                    Date of     Options        Employees in     Price      Expiration -----------------------------
       Name          Grant      Granted       Fiscal Year (1)  ($/Sh)(2)      Date         5%             10%
- ------------------- --------- ------------    ---------------- ---------   -----------     --             ---
<S>                      <C>    <C>       <C>      <C>          <C>         <C>  <C>    <C>             <C>       
Thomas A. Freeze     Jan-97     100,000   (1)      4.41%        $4.88       1/31/07     ($487,500)      ($487,500)
Thomas A. Freeze     Apr-97     100,000            4.41%        $3.13       4/30/07     ($312,500)      ($312,500)
Yaw-Wen Hu           Jan-97      25,640   (1)      1.13%        $4.88       1/31/07     ($124,995)      ($124,995)
Yaw-Wen Hu           Apr-97      25,640            1.13%        $3.13       4/30/07      ($80,125)       ($80,125)
Isao Nojima          Jan-97      24,420   (1)      1.08%        $4.88       1/31/07     ($119,048)      ($119,048)
Isao Nojima          Apr-97      24,420            1.08%        $3.13       4/30/07      ($76,313)       ($76,313)

<FN>
(1)      The  Company  granted  a net  amount  of  1,433,000  stock  options  to
         employees during fiscal 1997. A total of 2,278,000 options were granted
         to employees during the fiscal year. Of those options,  845,000 options
         granted in January 1997 were converted into re-priced  option grants in
         April 1997 as described in the Report of the Compensation  Committee of
         the  Board  of  Directors  on  Executive  Compensation  in  this  Proxy
         Statement.

(2)      The  exercise  price is equal to 100% of the fair  market  value of the
         Common Stock on the date of grant.

(3)      The potential  realizable  value is calculated based on the term of the
         option at the time of grant (ten years).  Stock price  appreciation  of
         five and ten percent is assumed  pursuant to rules  promulgated  by the
         Securities and Exchange Commission and does not represent the Company's
         prediction of its stock price  performance.  The  potential  realizable
         value at 5% and 10%  appreciation  is  calculated  by assuming that the
         exercise price appreciates at the indicated rate for the entire term of
         the option and that the option is exercised  at the exercise  price and
         sold on the last day of its term at the appreciated price.

(4)      Each of the options listed in the table was granted under the Incentive
         Plan and vests over four years.
</FN>
</TABLE>

                                       19

<PAGE>


<TABLE>
                        Aggregated Option Exercises of Named Executive Officers in Last Fiscal Year
                                         and Fiscal Year-End Option Values

<CAPTION>
                                                                   Number (#) of Securities             $ Value of Unexercised
                                                                    Underlying Unexercised             In-the-Money Options at
                           Shares Acquired         $ Value       Options at December 31, 1997              December 31, 1997
Name                       On Exercise (#)       Realized (1)      Exercisable/Unexercisable          Exercisable/Unexercisable (2)
- ------------------         ---------------       ------------    ----------------------------         -----------------------------
<S>                           <C>                  <C>                    <C>                                 <C>   
Bing Yeh                        --                     --                      -/-                                   -/-
Michael J. Praisner             --                     --                 93,333/106,667                      $198,333/$226,668
Isao Nojima                   30,000               $198,000               287,000/42,420                      $853,675/$53,550
Yaw Wen Hu                    15,500               $ 24,200               243,967/46,973                      $725,662/$63,446
Thomas A. Freeze                --                     --                  25,000/75,000                             -/-
<FN>

(1)      Based on the fair market  value of the  Company's  Common  Stock on the
         date of exercise minus the exercise price,  multiplied by the number of
         shares underlying the option.

(2)      Based on the closing  price of the Company's  Common Stock  ($3.125) on
         December 31, 1997 as reported on the Nasdaq  National  Market minus the
         exercise  price,  multiplied  by the  number of shares  underlying  the
         option.
</FN>
</TABLE>

Employee Stock Purchase Plan

         In October 1995,  the Company  adopted the Employee Stock Purchase Plan
(the  "Purchase  Plan") which became  effective  upon the effective  date of the
Company's  initial  public  offering.  A total of 850,000 shares of common stock
have been  reserved for  issuance  under the Purchase  Plan.  The Purchase  Plan
provides for eligible employees, which include all executive officers except the
Chief Executive Officer,  to purchase shares of common stock at a price equal to
85% of the fair market  value of the  Company's  common stock on the date of the
option grant by withholding up to 10 percent of their annual base earnings.

                                       20
<PAGE>

         REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
                          ON EXECUTIVE COMPENSATION (1)

         The Company's  executive  compensation  program is  administered by the
Compensation  Committee  of the Board of  Directors  which is composed of Mssrs.
Taira,  Chikagami,  and Chwang, each a non-employee  director of the Company and
Bing Yeh, President and Chief Executive Officer; and, the Stock Option Committee
which consists of Mssrs. Taira, Chikagami, and Chwang.

        The Company's executive  compensation  program is designed to retain and
reward  executives who are  responsible for leading the Company in achieving its
business objectives. All decisions by the Compensation Committee relating to the
salary compensation of the Company's  executive officers,  with the exception of
the Chief  Executive  Officer,  are  reviewed by the full Board;  and, all stock
option  awards by the Stock Option  Committee to the  executive  officers of the
Company are  reviewed by the full Board.  The salary  compensation  of the Chief
Executive Officer is established by the non-employee members of the Compensation
Committee,  Mssrs. Taira, Chikagami, and Chwang. This report is submitted by the
Compensation  Committee  and  the  Stock  Option  Committee  (collectively,  the
Committee) and addresses the Company's compensation policies for the fiscal year
ended  December  31, 1997 as they affect Bing Yeh, in his  capacity as President
and Chief Executive Officer of the Company,  and the other executive officers of
the Company.

COMPENSATION PHILOSOPHY

        The  objectives of the executive  compensation  program are to (i) align
compensation with the Company's business objectives and individual  performance,
(ii) motivate and reward high levels of performance,  (iii) recognize and reward
the  achievement  of team and individual  goals,  and (iv) enable the Company to
attract,  retain and reward  executive  officers who contribute to the long-term
success of the Company.

        The Company's executive compensation  philosophy is to tie a significant
portion  of  executive  compensation  to  the  performance  of the  Company  and
attainment of team and individual goals and objectives by its executive officers
and is based on the following:

         --    The  Committees   regularly   compare  the  Company's   executive
               compensation  practices  with  those  of other  companies  in the
               semiconductor  industry and other  technology-related  industries
               and sets its compensation  guidelines  based on this review.  The
               Company's  base annual  salaries for its executives are generally
               in the low-range of those paid to  executives  of companies  with
               comparable  revenue  targets in high technology  industries.  The
               Compensation  Committee  and the  Stock  Option  Committee  seek,
               however,  to provide the Company's  executives with opportunities
               for higher compensation  through profit sharing and stock options
               which, when the Company is profitable,  places total compensation
               at the mid-range of comparable companies.

         --    The  Committees  believe that an executive  compensation  program
               that ties profit sharing awards to performance and achievement of
               the  Company's   stated  goals  serves  both  as  an  influential
               motivator to its  executives  and as an effective  instrument for
               aligning their  interests with those of the  shareholders  of the
               Company.

- -----------

(1)  Notwithstanding  anything to the contrary set forth in any of the Company's
previous  filings under the Securities Act of 1933, as amended (the "1933 Act"),
or the Securities  Exchange Act of 1934 (the "1934 Act"), that might incorporate
future  filings,  including  this  Proxy  Statement,  in whole  or in part,  the
following  report and Performance  Graph on page 25 shall not be incorporated by
reference into any such filings.

                                       21
<PAGE>


         --    The  Committees  also believe that a  substantial  portion of the
               compensation of the Company's  executives should be linked to the
               success of the Company's stock in the marketplace. The linkage is
               achieved  through the Company's  stock option  program which also
               serves to more fully align the interests of management with those
               of the Company's shareholders.

IMPLEMENTATION OF COMPENSATION PROGRAM

         Annual  compensation  for the  Company's  executives  consists of three
principal elements -- salary, profit sharing and stock options.

         The  Compensation  Committee  sets the base annual salary and levels of
compensation for executives by reviewing  compensation for comparable  positions
in  the  market  and  the  historical   compensation  levels  of  the  Company's
executives.  Currently, the base annual salaries of the Company's executives are
at  levels  which the  Compensation  Committee  believes  are  generally  in the
mid-range of those of  executives of companies  with which the Company  compares
itself. The Compensation  Committee members  participate in the deliberations of
the annual salaries for all executive  officers other than for  compensation for
Mr. Yeh. The non-employee members of the Compensation  Committee deliberate upon
and set Mr. Yeh's  annual  salary.  Increases in annual  salaries are based on a
review  and  evaluation  of  executive   salary  levels  and  the   demonstrated
capabilities  of the  executives in managing the key aspects of a  semiconductor
company,  including (i) corporate  partnering,  patent  strategy and  technology
collaborations,  (ii) research and  development,  (iii) market  development  and
market  penetration,  (iv) financial matters,  including  attracting capital and
financial planning, and (v) human resources.

1997 RE-PRICING PROGRAM

<TABLE>
         On April  23,  1997 the  Board of  Directors  approved  an offer to all
employees of the Company to re-price  outstanding  options granted prior to that
date with an  exercise  price  above  $3.125  per share  (the  "1997  Re-pricing
Program").  Under the 1997  Re-pricing  Program,  as of April 28, 1997,  845,000
option grants were converted into re-priced option grants with an exercise price
of $3.125 (based on the closing price as reported on the Nasdaq  National Market
on such date). As consideration  for the grant of re-priced  options,  optionees
are  prohibited  from  exercising  the  re-priced  options for a period of three
months  following  the initial  vest date of such  re-priced  options.  The 1997
Re-pricing Program terminated on April 28, 1997. The following officers received
re-priced option grants pursuant to the 1997 Re-pricing Program:

<CAPTION>
                                                    
                                    Number of                                                      Length of Original
                                   Securities         Market Price of Stock                       Option Term Remaining     
                               Underlying Options     At Time of Re-pricing     New Exercise      At Date of Re-pricing
      Name          Date      Re-priced or Amended        Or Amendment             Price              Or Amendment
      ----          ----      --------------------        ------------             -----              ------------
<S>                <C>               <C>                     <C>                   <C>                 <C>       
Isao Nojima        4/28/97           24,420                  $4.875                $3.125              117 months
Thomas A. Freeze   4/28/97           100,000                 $4.875                $3.125              117 months
Yaw Wen Hu         4/28/97           25,640                  $4.875                $3.125              117 months
David Sweetman     4/28/97           25,640                  $4.875                $3.125              117 months
</TABLE>

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER IN FISCAL 1997

As discussed  below,  Mr. Yeh is eligible to  participate  in the same executive
compensation plans available to the other executive officers of the Company. The
non-employee  members of the  Compensation  Committee set Mr. Yeh's total annual
compensation,  including  compensation derived from the Company's profit sharing
program,  at a level it believes is appropriate  in comparison  with other Chief
Executive Officers at mid-sized companies in technology-related  industries with
comparable  revenue  targets.  The  non-employee  members  of  the  Compensation
Committee agreed to Mr. Yeh's request to be paid at the low end of the range for
his position until the Company returns to profitability.

                                       22

<PAGE>

         Mr. Yeh earned  $205,725 in 1997 as base salary.  Effective  January 1,
1998, his salary was increased to $220,000  annually.  In determining  Mr. Yeh's
salary, the non-employee members of the Compensation  Committee reviewed various
factors,  including Mr. Yeh's  contributions  with respect to the advancement of
market  development and  diversification of market  penetration,  development of
corporate  partnership   strategy,   refinement  of  overall  Company  strategic
direction,   reinforcement  of  corporate  infrastructure,   the  selection  and
retention of Dr. Ronald  Chwang as a member of the Company's  Board of Directors
in June 1997, and the  recruitment of the Company's new Vice President of Memory
Design,  Mr. Michael  Briner,  in November 1997. No profit sharing was earned by
Mr. Yeh during 1997 due to the operating  loss for that year.  Profit sharing is
calculated  and based on a  pre-determined  formula  which is  applied  to every
employee of the Company as described below.

PROFIT SHARING

         Bonuses are calculated for all employees, including executive officers,
twice each year using two  pre-determined  profit  sharing-based  formulas.  The
first  formula  allocates  10% of the  Company's  operating  profit  to a profit
sharing pool provided the Company has met its twin  profitability  goals of both
pre-tax  profits  and  operating  profits in excess of 10% of sales.  If pre-tax
profits or operating  profits are less than 10% of sales,  no allocation is made
to profit  sharing.  The second  formula  apportions  some of the profit sharing
pool, if any, to each employee  based on the  employee's  length of  employment,
level of  performance  and base salary.  No bonus is paid to an employee who has
worked for the  Company  for less than six  months.  Level of  performance  is a
numerical  value assigned in  performance  reviews  independently  of the profit
sharing program. The Company currently calculates bonuses based on the Company's
financial  performance  in the  periods  January  1  through  June 30 and July 1
through December 31.

         As the Company did not achieve its  profitability  goals for the period
January 1, 1997  through  June 30, 1997 and for the period July 1, 1997  through
December 31, 1997, none of the Named Executive Officers,  or any other employee,
were eligible for or received profit sharing bonuses related to fiscal 1997.

STOCK AWARDS

         Total  compensation  at the  executive  level also  includes  long-term
incentives  offered by stock awards under the Incentive  Plan.  Stock awards are
designed to align the long-term  interests of the Company's employees with those
of its shareholders and to assist in the retention of employees.  The size of an
individual stock award is generally intended to reflect the employee's  position
with  the  Company  and  his or her  importance,  past  and  future  anticipated
contributions to the Company, and how many years of future service for which the
employee has non-vested  options.  It has been the Company's practice to fix the
exercise price of stock option grants at 100% of the fair market value per share
on the date of grant.  Options are  generally  subject to vesting over a four or
five year period to  encourage  key  employees  to continue in the employ of the
Company.

         The Stock Option Committee administers the Incentive Plan for executive
officers of the  Company.  The Board has  delegated  to the  Non-Officers  Stock
Option  Committee  the  administration  of the  Incentive  Plan  for  all  other
employees  of the Company for option  grants of not more than 12,000  shares per
option grant. In January,  1997, a stock  replenishment  program was approved by
the Board of  Directors  whereby  options  may be granted on a smaller  and more
frequent basis to both executive  officers and employees in order to ensure that
each eligible  employee  possesses  non-vested  options for four years of future
service. The Company intends to grant options to executive officers on a routine
basis as part of this stock replenishment program.

LIMITATIONS  ON  DEDUCTION  OF  COMPENSATION  PAID TO  CERTAIN  NAMED  EXECUTIVE
OFFICERS

         Section  162(m) of the Code  limits  the  Company  to a  deduction  for
federal income tax purposes of no more than $1 million of  compensation  paid to
certain executive officers in a taxable year.  Compensation above $1 million may
be deducted if it is "performance-based  compensation" within the meaning of the
Code.

                                       23
<PAGE>

         The statute containing this law and the applicable Treasury regulations
offer  a  number  of  transitional   exceptions  to  this  deduction  limit  for
pre-existing  compensation  plans,  arrangements  and  binding  contracts.  As a
result, the Compensation Committee believes that at the present time it is quite
unlikely that the compensation  paid to any Named Executive Officer in a taxable
year which is subject to the deduction limit will exceed $1 million.  Therefore,
the  Compensation  Committee has not yet  established  a policy for  determining
which forms of incentive  compensation  awarded to its Named Executive  Officers
shall  be  designed  to  qualify  as   "performance-based   compensation."   The
Compensation  Committee  intends to  continue  to  evaluate  the  effects of the
statute and Treasury regulations.

                             Compensation Committee

                                    Bing Yeh
                                 Tsuyoshi Taira
                                Yasushi Chikagami
                                  Ronald Chwang

COMPENSATION  COMMITTEE  INTERLOCKS AND INSIDER  PARTICIPATION  IN  COMPENSATION
DECISIONS

         The Compensation Committee of the Board of Directors is composed of the
following  persons:  Bing Yeh,  Tsuyoshi Taira,  Yasushi  Chikagami,  and Ronald
Chwang. Of these Directors, Mr. Yeh is also an officer of the Company.

                                       24

<PAGE>

PERFORMANCE MEASUREMENT COMPARISON (1)

         The following chart shows the total shareholder return of an investment
of $100 in cash on November 21, 1995 for (i) the Company's  Common  Stock,  (ii)
the  Nasdaq  Stock  Market  - U.S.  Index,  and  (iii)  the  Hambrecht  &  Quist
Semiconductor  Index.  All values assume  reinvestment of the full amount of all
dividends and are calculated as of December 31, 1996 and 1997.


[The following  descriptive  data is supplied in accordance  with Rule 304(d) of
Regulation S-T]

                                                Cumulative Total Return
                                   ---------------------------------------------
                                    11/21/95    12/31/95    12/31/96    12/31/97

SILICON STORAGE TECHNOLOGY, INC.      100         147          54          35
NASDAQ STOCK MARKET (U.S.)            100         103         127         155
HAMBRECHT & QUIST SEMICONDUCTORS      100          91         118         125


(1) This Section is not  "soliciting  material," is not deemed  "filed" with the
SEC,  and is not to be  incorporated  by  reference in any filing of the Company
under the 1933 Act or the 1934 Act whether  made before or after the date hereof
and irrespective of any general incorporation of language in any such filings.

                                       25
<PAGE>


                              CERTAIN TRANSACTIONS

         On January 31, 1996, the Company  acquired a 14% interest in a Japanese
company for  approximately  $939,000 paid in cash. The president of the Japanese
company  is a  shareholder  of the  Company.  In 1996  and  1997  this  customer
accounted for 12.7% or  approximately  $11.8 million and 15.4% or  approximately
$11.6 million,  respectfully,  of net revenues of the Company. This was the only
customer that  accounted for more than 10% of the Company's net revenues in 1996
and 1997.

         Dr.  Chwang is the  President  of Acer  Capital  America  and  managing
general  partner  of Acer  Technology  Venture  Fund.  A  related  entity,  Acer
Corporation,  is a customer of the Company. In 1997, this customer accounted for
6.0% or $4.5 million of net revenues.

         As a matter of policy, all transactions  between the Company and any of
its officers, directors or principal shareholders will be approved by a majority
of the independent and disinterested members of the Board of Directors, and will
be on terms no less  favorable  to the  Company  than  could  be  obtained  from
unaffiliated  third  parties and will be in  connection  with bona fide business
purposes of the Company.

                                  OTHER MATTERS

         The Board of Directors knows of no other matters that will be presented
for  consideration  at the Annual  Meeting.  If any other  matters are  properly
brought  before the meeting,  it is the  intention  of the persons  named in the
accompanying  proxy  to vote on such  matters  in  accordance  with  their  best
judgment.

                                            By Order of the Board of Directors




                                            JEFFREY L. GARON
                                            Secretary


June 12, 1998


A copy of the Company's Annual Report to the Securities and Exchange  Commission
on Form 10-K for the fiscal year ended  December 31, 1997 is  available  without
charge upon written request to: Corporate Secretary, Silicon Storage Technology,
Inc., 1171 Sonora Court, Sunnyvale, California 94086.

                                       26


<PAGE>

                                                                      Appendix A


                        SILICON STORAGE TECHNOLOGY, INC.

                              EQUITY INCENTIVE PLAN

                           Adopted on October 3, 1995

                   Approved by the Stockholders November 1995

                   Amended by the Board of Directors June 1998


                                  INTRODUCTION

         This Silicon  Storage  Technology,  Inc.  Equity  Incentive  Plan is an
amendment and  restatement of the Silicon  Storage  Technology,  Inc. 1990 Stock
Option Plan. Shares reserved for issuance under the 1990 Stock Option Plan shall
hereafter be reserved for issuance,  and issued,  under the terms of this Equity
Incentive Plan, as amended and restated in the form below.

1.       PURPOSES.

         (a) The  purpose  of the Plan is to  provide a means by which  selected
Employees and Consultants to the Company,  and its  Affiliates,  may be given an
opportunity  to  benefit  from  increases  in value of the stock of the  Company
through the granting of (i) Incentive  Stock Options,  (ii)  Nonstatutory  Stock
Options,  (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v)
stock appreciation rights, all as defined below.

         (b) The Company,  by means of the Plan, seeks to retain the services of
persons  who  are  now  Employees  of or  Consultants  to  the  Company  or  its
Affiliates,  to secure and retain the services of new Employees and Consultants,
and to provide  incentives  for such  persons to exert  maximum  efforts for the
success of the Company and its Affiliates.

         (c) The Company  intends  that the Stock  Awards  issued under the Plan
shall,  in the discretion of the Board or any Committee to which  responsibility
for  administration of the Plan has been delegated  pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof,  including Incentive
Stock Options and  Nonstatutory  Stock Options,  (ii) stock bonuses or rights to
purchase  restricted stock granted pursuant to Section 7 hereof,  or (iii) stock
appreciation  rights granted pursuant to Section 8 hereof.  All Options shall be
separately  designated  Incentive Stock Options or Nonstatutory Stock Options at
the time of grant,  and in such  form as issued  pursuant  to  Section  6, and a
separate  certificate  or  certificates  will be issued for shares  purchased on
exercise of each type of Option.

                                       1.
<PAGE>



2.       DEFINITIONS.

         (a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.

         (b) "Board" means the Board of Directors of the Company.

         (c) "Code" means the Internal Revenue Code of 1986, as amended.

         (d) "Committee" means a Committee  appointed by the Board in accordance
with subsection 3(c) of the Plan.

         (e) "Company"  means  Silicon  Storage  Technology,  Inc., a California
corporation.

         (f) "Concurrent Stock Appreciation Right" or "Concurrent Right" means a
right granted pursuant to subsection 8(b)(2) of the Plan.

         (g) "Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services,  provided that the term "Consultant"  shall not include Directors
who are paid only a director's fee by the Company or who are not  compensated by
the Company for their services as Directors.

         (h) "Continuous  Status as an Employee,  Director or Consultant"  means
the employment or relationship as a Director or Consultant is not interrupted or
terminated.  The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence  approved  by the  Board,  including  sick
leave,  military leave,  or any other personal leave; or (ii) transfers  between
locations of the Company or between the Company, Affiliates or their successors.

         (i) "Director" means a member of the Board.

         (j)  "Disinterested  Person"  means a Director:  who either (i) was not
during the one year prior to service as an  administrator of the Plan granted or
awarded equity securities  pursuant to the Plan or any other plan of the Company
or any Affiliate entitling the participants therein to acquire equity securities
of the Company or any Affiliate except as permitted by Rule  16b-3(c)(2)(i);  or
(ii) is otherwise  considered to be a "disinterested  person" in accordance with
Rule   16b-3(c)(2)(i),   or  any  other   applicable   rules,   regulations   or
interpretations of the Securities and Exchange Commission.

         (k)  "Employee"  means  any  person  employed  by  the  Company  or any
Affiliate  of the  Company.  Neither  service  as a  Director  nor  payment of a
director's fee by the Company shall be sufficient to constitute  "employment" by
the Company.

                                       2.
<PAGE>

         (l)  "Exchange  Act"  means the  Securities  Exchange  Act of 1934,  as
amended.

         (m) "Fair Market Value" means,  as of any date, the value of the common
stock of the Company determined as follows:

                  (1) If the  common  stock is listed on any  established  stock
exchange or a national market system,  including without limitation the National
Market System of the National Association of Securities Dealers,  Inc. Automated
Quotation  ("NASDAQ")  System,  the Fair Market Value of a share of common stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were  reported) as quoted on such system or exchange  (or the exchange  with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of  determination,  as reported  in the Wall  Street  Journal or such
other source as the Board deems reliable;

                  (2) If the common  stock is quoted on the NASDAQ  System  (but
not  on  the  National  Market  System  thereof)  or is  regularly  quoted  by a
recognized  securities  dealer but  selling  prices are not  reported,  the Fair
Market  Value of a share of common  stock shall be the mean  between the bid and
asked  prices for the common  stock on the last market  trading day prior to the
day of  determination,  as  reported  in the Wall  Street  Journal or such other
source as the Board deems reliable;

                  (3) In the  absence  of an  established  market for the common
stock, the Fair Market Value shall be determined in good faith by the Board.

         (n) "Incentive  Stock Option" means an Option intended to qualify as an
incentive  stock  option  within the  meaning of Section 422 of the Code and the
regulations promulgated thereunder.

         (o) "Independent Stock Appreciation Right" or "Independent Right" means
a right granted pursuant to subsection 8(b)(3) of the Plan.

         (p) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.

         (q)  "Officer"  means a person who is an officer of the Company  within
the  meaning  of Section 16 of the  Exchange  Act and the rules and  regulations
promulgated thereunder.

         (r) "Option" means a stock option granted pursuant to the Plan.

         (s) "Option  Agreement" means a written  agreement  between the Company
and an Optionee  evidencing  the terms and  conditions of an  individual  Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.

         (t) "Optionee"  means an Employee,  Director or Consultant who holds an
outstanding Option.

                                       3.
<PAGE>

         (u) "Plan" means this Silicon Storage Technology, Inc. Equity Incentive
Plan.

         (v) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any  successor
to Rule 16b-3,  as in effect when  discretion is being exercised with respect to
the Plan.

         (w) "Stock Appreciation Right" means any of the various types of rights
which may be granted under Section 8 of the Plan.

         (x) "Stock Award" means any right granted under the Plan, including any
Option,  any stock bonus, any right to purchase  restricted stock, and any Stock
Appreciation Right.

         (y) "Stock  Award  Agreement"  means a written  agreement  between  the
Company and a holder of a Stock Award  evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.

         (z) "Tandem Stock  Appreciation  Right" or "Tandem Right" means a right
granted pursuant to subsection 8(b)(1) of the Plan.

3.       ADMINISTRATION.

         (a) The Plan shall be  administered  by the Board  unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).

         (b) The  Board  shall  have the  power,  subject  to,  and  within  the
limitations of, the express provisions of the Plan:

                  (1) To  determine  from  time to  time  which  of the  persons
eligible  under the Plan shall be granted Stock Awards;  when and how each Stock
Award shall be granted; whether a Stock Award will be an Incentive Stock Option,
a  Nonstatutory  Stock  Option,  a stock bonus,  a right to purchase  restricted
stock,  a Stock  Appreciation  Right,  or a combination  of the  foregoing;  the
provisions of each Stock Award granted (which need not be identical),  including
the time or times when a person shall be permitted to receive stock  pursuant to
a Stock  Award;  whether a person  shall be  permitted  to  receive  stock  upon
exercise of an Independent  Stock  Appreciation  Right; and the number of shares
with respect to which a Stock Award shall be granted to each such person.

                  (2) To  construe  and  interpret  the  Plan and  Stock  Awards
granted under it, and to establish,  amend and revoke rules and  regulations for
its  administration.  The Board, in the exercise of this power,  may correct any
defect,  omission or  inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem  necessary  or expedient to make the
Plan fully effective.

                  (3) To amend the Plan or a Stock  Award as provided in Section
14.

                                       4.
<PAGE>

         (c) The Board may  delegate  administration  of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the members
of  which  Committee  shall  be  Disinterested  Persons.  If  administration  is
delegated to a Committee,  the  Committee  shall have,  in  connection  with the
administration of the Plan, the powers  theretofore  possessed by the Board (and
references  in this Plan to the Board  shall  thereafter  be to the  Committee),
subject,  however, to such resolutions,  not inconsistent with the provisions of
the  Plan,  as may be  adopted  from  time to time by the  Board.  The Board may
abolish the Committee at any time and revest in the Board the  administration of
the Plan. Additionally, prior to the date of the first registration of an equity
security  of  the  Company   under   Section  12  of  the   Exchange   Act,  and
notwithstanding  anything  to the  contrary  contained  herein,  the  Board  may
delegate  administration  of the  Plan to any  person  or  persons  and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated.  Notwithstanding  anything in this Section 3 to the contrary,  at any
time the Board or the  Committee  may  delegate  to a  committee  of one or more
members of the Board the authority to grant Stock Awards to eligible persons who
are not then subject to Section 16 of the Exchange Act.

         (d)  Any  requirement   that  an   administrator   of  the  Plan  be  a
Disinterested  Person  shall  not  apply  (i)  prior  to the  date of the  first
registration  of an equity  security  of the  Company  under  Section  12 of the
Exchange Act, or (ii) if the Board or the Committee expressly declares that such
requirement  shall not apply.  Any  Disinterested  Person shall otherwise comply
with the requirements of Rule 16b-3.

4.       SHARES SUBJECT TO THE PLAN.

         (a) Subject to the  provisions  of Section 13  relating to  adjustments
upon  changes in stock,  the stock that may be issued  pursuant to Stock  Awards
shall not exceed in the  aggregate  six million  seven  hundred  fifty  thousand
(6,750,000)  shares of the Company's  common stock. If any Stock Award shall for
any reason expire or otherwise  terminate,  in whole or in part,  without having
been  exercised  in full,  the stock not  acquired  under such Stock Award shall
revert to and again become available for issuance under the Plan. Shares subject
to Stock Appreciation  Rights exercised in accordance with Section 8 of the Plan
shall not be available for subsequent issuance under the Plan.

         (b) The stock subject to the Plan may be unissued  shares or reacquired
shares, bought on the market or otherwise.

5.       ELIGIBILITY.

         (a) Incentive Stock Options and Stock  Appreciation  Rights appurtenant
thereto may be granted only to  Employees.  Stock  Awards  other than  Incentive
Stock Options and Stock Appreciation  Rights appurtenant  thereto may be granted
only to Employees or Consultants.

         (b) A Director  may be eligible  for  benefits of the Plan only if such
Director is also an Employee at the time of the grant.

                                       5.
<PAGE>

         (c) A Director  shall in no event be eligible  for the  benefits of the
Plan unless at the time discretion is exercised in the selection of the Director
as a person to whom Stock Awards may be granted,  or in the determination of the
number of shares which may be covered by Stock Awards  granted to the  Director:
(i) the Board  has  delegated  its  discretionary  authority  over the Plan to a
Committee  which  consists  solely of  Disinterested  Persons;  or (ii) the Plan
otherwise  complies  with  the  requirements  of Rule  16b-3.  The  Board  shall
otherwise comply with the requirements of Rule 16b-3. This subsection 5(c) shall
not apply (i) prior to the date of the first  registration of an equity security
of the Company  under  Section 12 of the  Exchange  Act, or (ii) if the Board or
Committee expressly declares that it shall not apply.

         (d) No person  shall be eligible for the grant of an Option or an award
to purchase  restricted stock if, at the time of grant,  such person owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined  voting power of all classes of stock of
the Company or of any of its Affiliates unless the exercise price of such Option
is at least one  hundred ten  percent  (110%) of the Fair  Market  Value of such
stock  at the  date of  grant  and  the  Option  is not  exercisable  after  the
expiration  of five  (5)  years  from  the  date of  grant,  or in the case of a
restricted  stock  purchase  award,  the purchase  price is at least one hundred
percent (100%) of the Fair Market Value of such stock at the date of grant.

6.       OPTION PROVISIONS.

         Each  Option  shall be in such form and shall  contain  such  terms and
conditions  as the Board  shall deem  appropriate.  The  provisions  of separate
Options  need  not  be  identical,   but  each  Option  shall  include  (through
incorporation of provisions  hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

         (a) Term. No Option shall be  exercisable  after the  expiration of ten
(10) years from the date it was granted.

                                       6.
<PAGE>

         (b) Price.  The exercise price of each Incentive  Stock Option shall be
not less than one hundred  percent  (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted;  the exercise  price of
each Nonstatutory Stock Option shall be determined by the Board. Notwithstanding
the foregoing,  an Option  (whether an Incentive  Stock Option or a Nonstatutory
Stock Option) may be granted with an exercise price lower than that set forth in
the  preceding  sentence if such Option is granted  pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.

         (c) Consideration.  The purchase price of stock acquired pursuant to an
Option  shall be paid,  to the  extent  permitted  by  applicable  statutes  and
regulations,  either (i) in cash at the time the Option is exercised, or (ii) at
the  discretion of the Board or the  Committee,  at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the  foregoing,  the use of other common stock of the
Company)  with the person to whom the Option is granted or to whom the Option is
transferred  pursuant  to  subsection  6(d),  or (C) in any other  form of legal
consideration that may be acceptable to the Board.

         In the case of any  deferred  payment  arrangement,  interest  shall be
payable at least  annually  and shall be charged at the minimum rate of interest
necessary to avoid the treatment as interest, under any applicable provisions of
the Code,  of any amounts  other than  amounts  stated to be interest  under the
deferred payment arrangement.

         (d)   Transferability.   An   Incentive   Stock  Option  shall  not  be
transferable  except by will or by the laws of  descent  and  distribution,  and
shall be  exercisable  during the  lifetime of the person to whom the  Incentive
Stock Option is granted only by such person.  A Nonstatutory  Stock Option shall
not be transferable except by will or by the laws of descent and distribution or
pursuant to a qualified  domestic relations order satisfying the requirements of
Rule 16b-3 and any administrative  interpretations or pronouncements  thereunder
(a "QDRO"),  and shall be exercisable  during the lifetime of the person to whom
the Option is granted only by such person or any transferee  pursuant to a QDRO.
Notwithstanding the foregoing,  the person to whom the Option is granted may, by
delivering written notice to the Company, in a form satisfactory to the Company,
designate a third party who,  in the event of the death of the  Optionee,  shall
thereafter be entitled to exercise the Option.

         (e) Vesting.  The total number of shares of stock  subject to an Option
may,  but need not, be allotted in periodic  installments  (which may,  but need
not, be equal).  The Option  Agreement may provide that from time to time during
each of such installment  periods,  the Option may become  exercisable  ("vest")
with respect to some or all of the shares  allotted to that  period,  and may be
exercised  with  respect to some or all of the shares  allotted  to such  period
and/or any prior period as to which the Option  became  vested but was not fully
exercised.  The Option may be subject to such other terms and  conditions on the
time or times when it may be  exercised  (which may be based on  performance  or
other  criteria)  as the  Board may deem  appropriate.  The  provisions  of this
subsection  6(e) are  subject to any Option  provisions  governing  the  minimum
number of shares as to which an Option may be exercised.

                                       7.
<PAGE>

         (f)  Termination  of  Employment  or  Relationship  as  a  Director  or
Consultant.  In the  event  an  Optionee's  Continuous  Status  as an  Employee,
Director  or  Consultant  terminates  (other than upon the  Optionee's  death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination) but only within
such period of time ending on the earlier of (i) the date three (3) months after
the termination of the Optionee's Continuous Status as an Employee,  Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
or (ii) the  expiration  of the term of the  Option as set  forth in the  Option
Agreement.  If, after  termination,  the  Optionee  does not exercise his or her
Option  within the time  specified  in the Option  Agreement,  the Option  shall
terminate,  and the shares  covered  by such  Option  shall  revert to and again
become available for issuance under the Plan.

         An Optionee's Option Agreement may also provide that if the exercise of
the Option following the termination of the Optionee's  Continuous  Status as an
Employee,  Director,  or  Consultant  (other than upon the  Optionee's  death or
disability)  would result in liability  under Section 16(b) of the Exchange Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in the Option  Agreement,  or (ii) the tenth  (10th) day
after the last date on which such exercise would result in such liability  under
Section 16(b) of the Exchange Act.  Finally,  an Optionee's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionee's Continuous Status as an Employee,  Director or Consultant (other than
upon the Optionee's death or disability)  would be prohibited at any time solely
because the issuance of shares would violate the registration requirements under
the Act, then the Option shall terminate on the earlier of (i) the expiration of
the term of the Option set forth in the first paragraph of this subsection 6(f),
or (ii) the expiration of a period of three (3) months after the  termination of
the Optionee's  Continuous Status as an Employee,  Director or Consultant during
which the exercise of the Option would not be in violation of such  registration
requirements.

         (g)  Disability  of  Optionee.  In the event an  Optionee's  Continuous
Status as an  Employee,  Director or  Consultant  terminates  as a result of the
Optionee's  disability,  the  Optionee  may  exercise  his or her Option (to the
extent  that  the   Optionee  was  entitled  to  exercise  it  at  the  date  of
termination),  but only  within such period of time ending on the earlier of (i)
the date  twelve  (12)  months  following  such  termination  (or such longer or
shorter period specified in the Option Agreement), or (ii) the expiration of the
term of the  Option as set  forth in the  Option  Agreement.  If, at the date of
termination,  the Optionee is not entitled to exercise his or her entire Option,
the shares  covered by the  unexercisable  portion of the Option shall revert to
and again become  available for issuance under the Plan. If, after  termination,
the  Optionee  does not  exercise  his or her Option  within the time  specified
herein, the Option shall terminate,  and the shares covered by such Option shall
revert to and again become available for issuance under the Plan.

         (h) Death of Optionee. In the event of the death of an Optionee during,
or within a period  specified  in the  Option  after  the  termination  of,  the
Optionee's Continuous Status as an Employee,  Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the  Optionee's  estate,  by a person who  acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's  death  pursuant to subsection  6(d),
but only within the period  ending on the earlier of (i) the 

                                       8.
<PAGE>


date eighteen (18) months following the date of death (or such longer or shorter
period specified in the Option Agreement), or (ii) the expiration of the term of
such Option as set forth in the Option Agreement.  If, at the time of death, the
Optionee  was not  entitled to  exercise  his or her entire  Option,  the shares
covered by the  unexercisable  portion of the Option  shall  revert to and again
become available for issuance under the Plan. If, after death, the Option is not
exercised within the time specified herein, the Option shall terminate,  and the
shares  covered by such Option shall revert to and again  become  available  for
issuance under the Plan.

         (i) Early Exercise.  The Option may, but need not,  include a provision
whereby  the  Optionee  may elect at any time  while an  Employee,  Director  or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option  prior to the full  vesting of the  Option.  Any  unvested  shares so
purchased shall be subject to a repurchase  right in favor of the Company,  with
the repurchase price to be equal to the original purchase price of the stock, or
to any other restriction the Board determines to be appropriate.

         (j) Re-Load  Options.  Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the Board
or Committee shall have the authority (but not an obligation) to include as part
of any Option  Agreement a provision  entitling the Optionee to a further Option
(a "Re-Load Option") in the event the Optionee exercises the Option evidenced by
the Option  agreement,  in whole or in part,  by  surrendering  other  shares of
Common Stock in  accordance  with this Plan and the terms and  conditions of the
Option  Agreement.  Any such Re-Load  Option (i) shall be for a number of shares
equal to the number of shares  surrendered  as part or all of the exercise price
of such  Option;  (ii)  shall have an  expiration  date which is the same as the
expiration  date of the Option the  exercise of which gave rise to such  Re-Load
Option;  and (iii)  shall have an  exercise  price which is equal to one hundred
percent  (100%) of the Fair  Market  Value of the  Common  Stock  subject to the
Re-Load Option on the date of exercise of the original  Option.  Notwithstanding
the foregoing,  a Re-Load Option which is an Incentive Stock Option and which is
granted to a 10%  stockholder (as described in subsection  5(c)),  shall have an
exercise  price which is equal to one  hundred  ten  percent  (110%) of the Fair
Market Value of the stock subject to the Re-Load  Option on the date of exercise
of the  original  Option and shall have a term which is no longer  than five (5)
years.

         Any  such  Re-Load  Option  may  be  an  Incentive  Stock  Option  or a
Nonstatutory  Stock Option,  as the Board or Committee may designate at the time
of the grant of the original Option; provided,  however, that the designation of
any Re-Load  Option as an  Incentive  Stock  Option  shall be subject to the one
hundred  thousand  dollar  ($100,000)  annual  limitation on  exercisability  of
Incentive Stock Options described in subsection 12(e) of the Plan and in Section
422(d) of the Code.  There shall be no Re-Load Options on a Re-Load Option.  Any
such Re-Load Option shall be subject to the  availability  of sufficient  shares
under subsection 4(a) and shall be subject to such other terms and conditions as
the Board or Committee may determine which are not inconsistent with the express
provisions of the Plan regarding the terms of Options.

7.       TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.


                                       9.

<PAGE>

         Each stock bonus or restricted  stock  purchase  agreement  shall be in
such form and  shall  contain  such  terms  and  conditions  as the Board or the
Committee  shall deem  appropriate.  The terms and  conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the terms
and  conditions of separate  agreements  need not be  identical,  but each stock
bonus  or  restricted   stock   purchase   agreement   shall  include   (through
incorporation  of provisions  hereof by reference in the agreement or otherwise)
the substance of each of the following provisions as appropriate:

         (a) Purchase  Price.  The purchase  price under each  restricted  stock
purchase  agreement  shall  be such  amount  as the  Board  or  Committee  shall
determine  and designate in such  agreement,  but in no event shall the purchase
price be less than eighty-five percent (85%) of the stock's Fair Market Value on
the date such award is made.  Notwithstanding  the  foregoing,  the Board or the
Committee may determine  that eligible  participants  in the Plan may be awarded
stock  pursuant to a stock bonus  agreement in  consideration  for past services
actually rendered to the Company or for its benefit.

         (b) Transferability.  No rights under a stock bonus or restricted stock
purchase  agreement shall be transferable  except by will or the laws of descent
and distribution or pursuant to a qualified  domestic relations order satisfying
the  requirements  of Rule  16b-3  and  any  administrative  interpretations  or
pronouncements thereunder, so long as stock awarded under such agreement remains
subject to the terms of the agreement.

         (c)  Consideration.  The purchase price of stock acquired pursuant to a
stock  purchase  agreement  shall  be paid  either:  (i) in cash at the  time of
purchase;  (ii) at the discretion of the Board or the Committee,  according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal  consideration that may be acceptable to the
Board or the Committee in its  discretion.  Notwithstanding  the foregoing,  the
Board or the Committee to which  administration  of the Plan has been  delegated
may award stock pursuant to a stock bonus  agreement in  consideration  for past
services actually rendered to the Company or for its benefit.

         (d)  Vesting.  Shares of stock sold or awarded  under the Plan may, but
need  not,  be  subject  to a  repurchase  option  in  favor of the  Company  in
accordance  with  a  vesting  schedule  to be  determined  by the  Board  or the
Committee.

         (e)  Termination  of  Employment  or  Relationship  as  a  Director  or
Consultant.  In the event a  Participant's  Continuous  Status  as an  Employee,
Director or  Consultant  terminates,  the Company may  repurchase  or  otherwise
reacquire  any or all of the shares of stock held by that person  which have not
vested as of the date of  termination  under  the  terms of the  stock  bonus or
restricted stock purchase agreement between the Company and such person.

8.       STOCK APPRECIATION RIGHTS.

         (a) The  Board or  Committee  shall  have  full  power  and  authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights under the
Plan to  Employees  or  Directors  of or  Consultants  to,  the  Company  or its
Affiliates.  To exercise any outstanding  Stock  Appreciation  Right, 


                                      10.
<PAGE>

the holder must provide  written notice of exercise to the Company in compliance
with the provisions of the Stock Award  Agreement  evidencing  such right.  If a
Stock  Appreciation Right is granted to an individual who is at the time subject
to Section  16(b) of the Exchange  Act (a "Section  16(b)  Insider"),  the Stock
Award  Agreement of grant shall  incorporate all the terms and conditions at the
time  necessary  to assure  that the  subsequent  exercise  of such right  shall
qualify for the safe-harbor exemption from short-swing profit liability provided
by Rule 16b-3  promulgated  under the  Exchange  Act (or any  successor  rule or
regulation).  No limitation shall exist on the aggregate amount of cash payments
the Company may make under the Plan in  connection  with the exercise of a Stock
Appreciation Rights.

         (b) Three types of Stock  Appreciation  Rights shall be authorized  for
issuance under the Plan:

                  (1)   Tandem   Stock   Appreciation   Rights.   Tandem   Stock
Appreciation  Rights will be granted appurtenant to an Option, and shall, except
as  specifically  set forth in this  Section 8, be subject to the same terms and
conditions  applicable  to the  particular  Option  grant to which it  pertains.
Tandem Stock  Appreciation  Rights will require the holder to elect  between the
exercise  of the  underlying  Option for shares of stock and the  surrender,  in
whole  or in  part,  of  such  Option  for  an  appreciation  distribution.  The
appreciation distribution payable on the exercised Tandem Right shall be in cash
(or, if so provided,  in an  equivalent  number of shares of stock based on Fair
Market Value on the date of the Option  surrender) in an amount up to the excess
of (A) the Fair Market Value (on the date of the Option surrender) of the number
of shares of stock  covered by that portion of the  surrendered  Option in which
the Optionee is vested over (B) the  aggregate  exercise  price payable for such
vested shares.

                  (2) Concurrent Stock  Appreciation  Rights.  Concurrent Rights
will be granted  appurtenant to an Option and may apply to all or any portion of
the shares of stock  subject  to the  underlying  Option  and  shall,  except as
specifically  set forth in this  Section  8, be  subject  to the same  terms and
conditions  applicable to the  particular  Option grant to which it pertains.  A
Concurrent  Right  shall  be  exercised  automatically  at  the  same  time  the
underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on an
exercised  Concurrent  Right  shall  be  in  cash  (or,  if so  provided,  in an
equivalent  number of shares of stock based on Fair Market  Value on the date of
the  exercise of the  Concurrent  Right) in an amount  equal to such  portion as
shall be  determined  by the Board or the  Committee at the time of the grant of
the excess of (A) the  aggregate  Fair Market Value (on the date of the exercise
of the  Concurrent  Right) of the  vested  shares of stock  purchased  under the
underlying Option which have Concurrent Rights  appurtenant to them over (B) the
aggregate exercise price paid for such shares.

                  (3) Independent Stock Appreciation Rights.  Independent Rights
will be granted  independently  of any Option and shall,  except as specifically
set  forth in this  Section  8, be  subject  to the same  terms  and  conditions
applicable to  Nonstatutory  Stock Options as set forth in Section 6. They shall
be denominated in share equivalents.  The appreciation  distribution  payable on
the exercised Independent Right shall be not greater than an amount equal to the
excess of (A) the  aggregate  Fair Market  Value (on the date of the exercise of
the  Independent  Right) of a number of 



                                      11.
<PAGE>

shares of Company  stock equal to the number of share  equivalents  in which the
holder is vested  under such  Independent  Right,  and with respect to which the
holder is exercising the Independent  Right on such date, over (B) the aggregate
Fair Market  Value (on the date of the grant of the  Independent  Right) of such
number of shares of Company stock. The appreciation  distribution payable on the
exercised  Independent  Right  shall  be  in  cash  or,  if so  provided,  in an
equivalent  number of shares of stock based on Fair Market  Value on the date of
the exercise of the Independent Right.

9.       CANCELLATION AND RE-GRANT OF OPTIONS.

         The Board or the Committee  shall have the authority to effect,  at any
time and from time to time, (i) the repricing of any outstanding  Options and/or
any Stock Appreciation Rights under the Plan and/or (ii) with the consent of the
affected holders of Options and/or Stock  Appreciation  Rights, the cancellation
of any outstanding  Options and/or any Stock Appreciation  Rights under the Plan
and the grant in substitution  therefor of new Options and/or Stock Appreciation
Rights under the Plan covering the same or different numbers of shares of stock,
but having an exercise price per share not less than  eighty-five  percent (85%)
of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in
the case of an Incentive  Stock Option) or, in the case of a 10% stockholder (as
described in subsection  5(c)),  not less than one hundred ten percent (110%) of
the Fair Market Value) per share of stock on the new grant date. Notwithstanding
the  foregoing,  the Board or the  Committee  may grant an Option  and/or  Stock
Appreciation  Right with an  exercise  price  lower than that set forth above if
such Option and/or Stock  Appreciation Right is granted as part of a transaction
to which section 424(a) of the Code applies.

10.      COVENANTS OF THE COMPANY.

         (a)  During  the terms of the Stock  Awards,  the  Company  shall  keep
available  at all times the number of shares of stock  required to satisfy  such
Stock Awards.

         (b) The Company shall seek to obtain from each regulatory commission or
agency having  jurisdiction  over the Plan such  authority as may be required to
issue and sell  shares of stock  upon  exercise  of the Stock  Award;  provided,
however,  that this undertaking  shall not require the Company to register under
the Securities Act of 1933, as amended (the  "Securities  Act") either the Plan,
any Stock  Award or any stock  issued or  issuable  pursuant  to any such  Stock
Award.  If, after reasonable  efforts,  the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the Company
deems  necessary for the lawful  issuance and sale of stock under the Plan,  the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Stock Awards unless and until such authority is obtained.

11.      USE OF PROCEEDS FROM STOCK.

         Proceeds  from  the  sale of  stock  pursuant  to  Stock  Awards  shall
constitute general funds of the Company.

12.      MISCELLANEOUS.

                                      12.
<PAGE>

         (a) The Board  shall have the power to  accelerate  the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part   thereof  will  vest   pursuant  to   subsection   6(e),   7(d)  or  8(b),
notwithstanding  the  provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.

         (b) Neither an Employee,  Director or Consultant nor any person to whom
a Stock Award is  transferred  under  subsection  6(d),  7(b),  or 8(b) shall be
deemed  to be the  holder  of,  or to have any of the  rights  of a holder  with
respect to, any shares  subject to such Stock Award unless and until such person
has satisfied all  requirements  for exercise of the Stock Award pursuant to its
terms.

         (c)  Nothing  in the Plan or any  instrument  executed  or Stock  Award
granted pursuant thereto shall confer upon any Employee, Director, Consultant or
other  holder of Stock Awards any right to continue in the employ of the Company
or any Affiliate (or to continue  acting as a Director or  Consultant)  or shall
affect the right of the Company or any Affiliate to terminate the  employment of
any Employee with or without cause the right of the Company's Board of Directors
and/or the Company's  shareholders to remove any Director  pursuant to the terms
of the Company's By-Laws and the provisions of the California Corporations Code,
or the right to terminate the  relationship  of any  Consultant  pursuant to the
terms of such Consultant's agreement with the Company or Affiliate.

         (d) To the extent that the aggregate  Fair Market Value  (determined at
the time of grant) of stock with respect to which  Incentive  Stock  Options are
exercisable  for the first time by any Optionee  during any calendar  year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000),  the Options or portions  thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory  Stock
Options.

         (e) The  Company  may  require  any  person  to whom a Stock  Award  is
granted,  or any  person  to whom a  Stock  Award  is  transferred  pursuant  to
subsection  6(d),  7(b) or 8(b), as a condition of exercising or acquiring stock
under  any Stock  Award,  (1) to give  written  assurances  satisfactory  to the
Company as to such person's  knowledge and  experience in financial and business
matters and/or to employ a purchaser  representative  reasonably satisfactory to
the Company who is  knowledgeable  and  experienced  in  financial  and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser  representative,  the merits and risks of exercising  the Stock Award;
and (2) to give written assurances satisfactory to the Company stating that such
person is acquiring  the stock  subject to the Stock Award for such person's own
account and not with any present intention of selling or otherwise  distributing
the stock. The foregoing requirements, and any assurances given pursuant to such
requirements,  shall be  inoperative  if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective  registration  statement under the Securities Act, or
(ii) as to any particular  requirement,  a determination  is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable  securities laws. The Company may, upon advice of counsel to the
Company,  place  legends  on stock  certificates  issued  under the Plan as such
counsel  deems  necessary  or  appropriate  in order to comply  with  applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.

                                      13.
<PAGE>

         (f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal,  state or local
tax  withholding  obligation  relating to the exercise or  acquisition  of stock
under a Stock Award by any of the following  means or by a  combination  of such
means:  (1) tendering a cash payment;  (2)  authorizing  the Company to withhold
shares from the shares of the common stock otherwise issuable to the participant
as a result of the exercise or  acquisition  of stock under the Stock Award;  or
(3) delivering to the Company owned and unencumbered  shares of the common stock
of the Company.

13.      ADJUSTMENTS UPON CHANGES IN STOCK.

         (a) If any change is made in the stock  subject to the Plan, or subject
to any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization,  reincorporation, stock
dividend,  dividend  in  property  other than  cash,  stock  split,  liquidating
dividend,  combination  of  shares,  exchange  of  shares,  change in  corporate
structure or other transaction not involving the receipt of consideration by the
Company),  the Plan will be appropriately  adjusted in the class(es) and maximum
number  of  shares  subject  to the Plan  pursuant  to  subsection  4(a) and the
outstanding  Stock Awards will be  appropriately  adjusted in the  class(es) and
number of shares and price per share of stock subject to such outstanding  Stock
Awards.  Such  adjustments  shall  be made by the  Board or the  Committee,  the
determination of which shall be final,  binding and conclusive.  (The conversion
of any  convertible  securities  of  the  Company  shall  not  be  treated  as a
"transaction not involving the receipt of consideration by the Company".)

         (b)  In the  event  of:  (1) a  dissolution,  liquidation  or  sale  of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving  corporation;  or (3) a reverse merger in
which the Company is the surviving  corporation  but the shares of the Company's
common  stock  outstanding  immediately  preceding  the merger are  converted by
virtue of the merger  into other  property,  whether in the form of  securities,
cash or  otherwise,  then to the extent  permitted  by  applicable  law: (i) any
surviving corporation or an Affiliate of such surviving corporation shall assume
any Stock Awards  outstanding  under the Plan or shall substitute  similar Stock
Awards for those  outstanding  under the Plan,  or (ii) such Stock  Awards shall
continue in full force and effect.  In the event any surviving  corporation  and
its Affiliates  refuse to assume or continue such Stock Awards, or to substitute
similar  options for those  outstanding  under the Plan,  then,  with respect to
Stock Awards held by persons then performing services as Employees, Directors or
Consultants,  the time during which such Stock Awards may be exercised  shall be
accelerated  and the Stock  Awards  terminated  if not  exercised  prior to such
event.

14.      AMENDMENT OF THE PLAN AND STOCK AWARDS.

         (a) The Board at any time,  and from time to time,  may amend the Plan.
However,  except as provided in Section 13 relating to adjustments  upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the  Company  within  twelve  (12)  months  before or after the  adoption of the
amendment, where the amendment will:

                                      14.
<PAGE>

                        (i)  Increase  the number of shares  reserved  for Stock
Awards under the Plan;

                        (ii)  Modify  the  requirements  as to  eligibility  for
participation in the Plan (to the extent such modification  requires stockholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code); or

                        (iii)   Modify  the  Plan  in  any  other  way  if  such
modification  requires stockholder approval in order for the Plan to satisfy the
requirements  of Section 422 of the Code or to comply with the  requirements  of
Rule 16b-3.

         (b) The Board may in its sole discretion  submit any other amendment to
the Plan for stockholder approval,  including, but not limited to, amendments to
the Plan intended to satisfy the  requirements of Section 162(m) of the Code and
the   regulations    promulgated   thereunder   regarding   the   exclusion   of
performance-based  compensation  from the limit on  corporate  deductibility  of
compensation paid to certain executive officers.

         (c) It is expressly  contemplated  that the Board may amend the Plan in
any  respect  the  Board  deems  necessary  or  advisable  to  provide  eligible
Employees,  Directors or Consultants with the maximum benefits provided or to be
provided  under  the  provisions  of the  Code and the  regulations  promulgated
thereunder  relating to Incentive  Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.

         (d)  Rights  and  obligations  under any  Stock  Award  granted  before
amendment of the Plan shall not be impaired by any  amendment of the Plan unless
(i) the Company  requests  the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.

         (e) The Board at any time,  and from time to time,  may amend the terms
of any  one or  more  Stock  Award;  provided,  however,  that  the  rights  and
obligations  under any Stock Award  shall not be impaired by any such  amendment
unless  (i) the  Company  requests  the  consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.

15.      TERMINATION OR SUSPENSION OF THE PLAN.

         (a) The Board may  suspend or  terminate  the Plan at any time.  Unless
sooner  terminated,  the Plan shall  terminate on June 10, 2000,  which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.

         (b) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be impaired by  suspension  or  termination  of the Plan,
except with the consent of the person to whom the Stock Award was granted.

                                      15.
<PAGE>

16.      EFFECTIVE DATE OF PLAN.

         The Plan shall become  effective  as  determined  by the Board,  but no
Stock Awards granted under the Plan shall be exercised unless and until the Plan
has been approved by the  stockholders  of the Company,  which approval shall be
within  twelve (12)  months  before or after the date the Plan is adopted by the
Board,  and,  if  required,  an  appropriate  permit  has  been  issued  by  the
Commissioner of Corporations of the State of California.


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