CATALYST SEMICONDUCTOR INC, DEF 14A, 1998-12-18

CATALYST SEMICONDUCTOR INC
DEF 14A, 1998-12-18
SEMICONDUCTORS & RELATED DEVICES

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<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934

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
Commission Only (as permitted by
[X] Definitive Proxy Statement Rule 14a-6(e)(2))

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

CATALYST SEMICONDUCTOR, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

CATALYST SEMICONDUCTOR, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.

(1) Title of each class of securities to which transaction 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.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE> 2
CATALYST SEMICONDUCTOR, INC.
1250 BORREGAS AVENUE
SUNNYVALE, CA 94089

Dear Fellow Stockholders:

You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of Catalyst Semiconductor, Inc. ("Catalyst" or the "Company")
which will be held on Thursday, January 14, 1999, at 10:00 a.m., local time, at
the Company's principal executive offices in Sunnyvale, California.

At the Annual Meeting, you will be asked to consider and vote upon the
proposals set forth in the Notice of Annual Meeting accompanying this Letter.
The enclosed Proxy Statement more fully describes the details of the business to
be conducted at the Annual Meeting.

After careful consideration, the Company's Board of Directors has
unanimously approved the proposals and recommends that you vote IN FAVOR OF each
such proposal.

After reading the Proxy Statement, please mark, date, sign and return, if
possible by no later than January 7, 1999, the enclosed proxy card in the
accompanying reply envelope. If you decide to attend the Annual Meeting, please
notify the Secretary of the Company that you wish to vote in person and your
proxy will not be voted. YOUR SHARES CANNOT BE VOTED UNLESS YOU SIGN, DATE AND
RETURN THE ENCLOSED PROXY, OR ATTEND THE ANNUAL MEETING IN PERSON.

A copy of the Catalyst Semiconductor, Inc. Annual Report on Form 10-K for
the year ended May 3, 1998, as amended, is also enclosed.

We look forward to seeing you at the Annual Meeting.

Sincerely yours,

/s/ Radu M. Vanco
------------------------------
Radu M. Vanco
President, Chief Executive Officer
and Director

Sunnyvale, California
December 16, 1998

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IMPORTANT

PLEASE MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED POSTAGE-PREPAID RETURN ENVELOPE SO THAT IF YOU ARE
UNABLE TO ATTEND THE ANNUAL MEETING, YOUR SHARES MAY BE VOTED.
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<PAGE> 3

CATALYST SEMICONDUCTOR, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 14, 1999

TO THE STOCKHOLDERS OF CATALYST SEMICONDUCTOR, INC.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Catalyst
Semiconductor, Inc., a Delaware corporation (the "Company"), will be held on
January 14, 1999, at 10:00 a.m., local time, at the offices of the Company at
1250 Borregas Avenue, Sunnyvale, California 94089 for the
following purposes:

1. To elect one Class II director to serve for a two-year term expiring
upon the Annual Meeting of Stockholders next following April 30,
2000 and to elect one Class III director to serve for a three-year
period expiring upon the Annual Meeting of Stockholders next
following April 30, 2001, or until such directors respective
successors are duly elected and qualified.

2. To approve an amendment and restatement of the Company's Restated
Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 25,000,000 shares to 45,000,000 shares.

3. To approve amendments to the Company's Stock Option Plan to increase
the number of shares of Common Stock reserved for issuance
thereunder by 1,800,000 shares, to increase the maximum number of
shares subject to options that may be issued to any one employee
during a fiscal year to 1,000,000 shares and to make changes in the
Plan necessary to comply with applicable state securities law.

4. To approve the adoption of the 1998 Special Equity Incentive Plan
and the reservation of 3,500,000 shares for issuance thereunder.

5. To approve certain option grants to the Company's executive
officers, directors and certain employees under the 1998 Special
Equity Incentive Plan.

6. To ratify the appointment of Pricewaterhouse Coopers LLP as
independent accountants of the Company for the fiscal year ending
April 30, 1999.

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

The enclosed Preliminary Proxy Statement (the "Proxy Statement") more
fully describes the foregoing items and business to be conducted at the Annual
Meeting.

The Board of Directors has fixed the close of business on December 10,
1998 as the record date for determining the stockholders entitled to notice of
and to vote at the Annual Meeting and any adjournments and postponements
thereof.

THE COMPANY CURRENTLY EXPECTS THAT DEFINITIVE PROXY MATERIALS WILL BE
RELEASED TO THE COMPANY'S STOCKHOLDERS ON OR ABOUT DECEMBER 17, 1998.

<PAGE> 4

After reading the Proxy Statement, please mark, date, sign and return, as
soon as possible, the enclosed proxy card in the accompanying reply envelope. If
you decide to attend the Annual Meeting, please notify in writing the Secretary
of the Company at the Company's principal executive offices, that you wish to
vote in person and your proxy will not be voted. The Company's principal
executive offices are located at 1250 Borregas Avenue, Sunnyvale, California
94089. YOUR SHARES CANNOT BE VOTED UNLESS YOU SIGN, DATE AND RETURN THE ENCLOSED
PROXY, OR ATTEND THE ANNUAL MEETING IN PERSON.

BY ORDER OF THE BOARD OF DIRECTORS

PETER COHN
Secretary

Sunnyvale, California
December 17, 1998

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IMPORTANT

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND IN ANY EVENT NO LATER THAN
JANUARY 7, 1999 IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. IF A QUORUM IS NOT
REACHED, THE COMPANY WILL HAVE THE ADDED EXPENSE OF RE-ISSUING THESE PROXY
MATERIALS. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU MAY WITHDRAW YOUR PROXY
AND VOTE IN PERSON.

THANK YOU FOR ACTING PROMPTLY.

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<PAGE> 5
CATALYST SEMICONDUCTOR, INC.

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

PROXY STATEMENT FOR THE ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD JANUARY 14, 1999

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

GENERAL

The enclosed Proxy is solicited on behalf of the Board of Directors of
Catalyst Semiconductor, Inc. (the "Company") for use at the Annual Meeting of
Stockholders to be held on January 14, 1999 at 10:00 a.m., local time, or at any
adjournment thereof (the "Annual Meeting") for the purposes set forth herein and
in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at the offices of the Company at 1250 Borregas Avenue, Sunnyvale,
California 94089.

These proxy materials were first released to the Company's stockholders on
or about December 17, 1998.

RECORD DATE AND VOTING SECURITIES

Only stockholders of record at the close of business on December 10, 1998
(the "Record Date") are entitled to notice of and to vote at the meeting. As of
the close of business on December 8, 1998, there were 13,948,061 shares of the
Company's Common Stock outstanding and entitled to vote and approximately 4,600
stockholders of record, including several holders who are nominees for an
undetermined number of beneficial owners.

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company at its principal executive offices at 1250 Borregas Avenue, Sunnyvale,
California 94089, a written notice of revocation, or a duly executed proxy
bearing a later date, or by attending the meeting and voting in person.

VOTING GENERALLY; SOLICITATION

Each stockholder is entitled to one vote for each share of Common Stock on
all matters presented at the Annual Meeting. Stockholders do not have the right
to cumulate their votes in the election of the Company's directors.

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 will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes, whereas broker non-votes will not be
counted for purposes of determining whether a proposal has been approved or not.

The cost of soliciting proxies, consisting of the printing, handling and
mailing of the proxy card and related material, and the actual expense incurred
by brokerage houses, custodians, nominees and fiduciaries in forwarding proxy
material to the beneficial owners of stock, will be paid by the Company. In
order to assure that a majority vote will be present in person or by proxy at
the Annual Meeting, it may be necessary for certain officers, directors, regular
employees and other representatives of the Company to solicit proxies by
telephone, facsimile, telegraph, electronic means, or in person. These persons
will receive no extra compensation for their services. The Company reserves the
right to have an outside solicitor conduct the solicitation of proxies and to
pay such solicitor for its services.

<PAGE> 6

QUORUM; ABSTENTIONS; BROKER NON-VOTES

The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST," "WITHHELD" or "ABSTAIN" are treated as being present at the meeting
for purposes of establishing a quorum and are also treated as shares entitled to
vote at the Annual Meeting (the "Votes Cast") with respect to such matter.

While there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.

The Delaware Supreme Court has held that, while broker non-votes should be
counted for purposes of determining the presence or absence of a quorum for the
transaction of business, broker non-votes should not be counted for purposes of
determining the number of Votes Cast with respect to the particular proposal on
which the broker has expressly not voted. Accordingly, the Company intends to
treat broker non-votes in this manner. Thus, a broker non-vote will not affect
the outcome of the voting on a proposal.

COMPANY INFORMATION

The Company's principal executive offices are located at 1250 Borregas
Avenue, Sunnyvale, California 94089. The telephone number of the Company's
principal offices is (408) 542-1000.

PROPOSAL 1
ELECTION OF ONE CLASS II DIRECTOR AND ONE CLASS III DIRECTOR

NOMINEE

The Company's Bylaws provide that the number of directors shall be
established by the Board or the stockholders of the Company. The Company's
Certificate of Incorporation provides that the directors shall be divided into
three classes, with the classes serving for staggered, three year terms. On
September 11, 1998, Mr. C. Michael Powell resigned from the Board of Directors
and the Board amended the Bylaws to reduce the number of Directors from five to
four, consisting of two Class I directors, one Class II director and one Class
III director. One Class II director and one Class III director are to be elected
at the Annual Meeting. The Class II director will hold office until the Annual
Meeting following the fiscal year ending April 30, 2000 or until his successor
has been duly elected and qualified. The Class III director will hold office
until the Annual Meeting following the fiscal year ending April 30, 2001 or
until his successor has been duly elected and qualified. The term of each Class
I director will expire at the Annual Meeting of Stockholders next following the
fiscal year ending April 30, 1999.

Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the Company's nominee named below each of whom currently is
a director of the Company. In the event that a nominee of the Company becomes
unable or declines to serve as director at the time of the Annual Meeting, the
proxy holders will vote the proxies for any substitute nominee who is designated
by the current Board of Directors to fill such vacancy. It is not expected that
the nominees listed below will be unable or will decline to serve as a director.

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<PAGE> 7

INFORMATION WITH RESPECT TO NOMINEES AND CONTINUING DIRECTORS

Set forth below are the names of, and certain information as of September
30, 1998 about, the nominees for and current Class II and Class III directors
and the current Class I directors with unexpired terms.

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Nominee for and Current Class II Director

Patrick Verderico 54 President and Chief Executive Officer of Integrated
Packaging Assembly Corporation
Nominee for and Current Class III Director

Lionel M. Allan 55 President and Chief Executive Officer of Allan
Advisors, Inc.

Continuing Class I Directors

Radu M. Vanco 48 President, Chief Executive Officer and Director of
Catalyst Semiconductor, Inc.

Hideyuki Tanigami 48 President and Chief Executive Officer of Marubun USA
Corporation
</TABLE>

Except as indicated below, each nominee or incumbent director has been
engaged in the principal occupation set forth above during the past five years.
There are no family relationships between any directors or executive officers of
the Company.

Mr. Verderico has served as a director of the Company since April 1996.
From July 1997 to present, Mr. Verderico has served as President and Chief
Executive Officer of Integrated Packaging Assembly Corporation ("IPAC"). From
April 1997 to July 1997, Mr. Verderico served as Executive Vice President and
Chief Operating Officer of IPAC. From April 1996 to July 1996, Mr. Verderico
served as Executive Vice President and Chief Operating Officer of Maxtor
Corporation, a hard disk drive company. From 1994 to March 1996, he served as
Chief Financial Officer and Vice President, Finance and Administration, of
Creative Technology, a multimedia products manufacturer. From 1992 to 1994, he
served as Chief Financial Officer and Vice President, Finance and
Administration, of Cypress Semiconductor, and from 1989 to 1992, served as
Partner in Charge, West Region Manufacturing Consulting of Coopers & Lybrand, an
independent public accounting and consulting firm. Prior thereto he held various
positions with Philips Semiconductors, National Semiconductor and Fairchild
Semiconductor. Mr. Verderico has also been a director of Micro Component
Technology, Inc. since December 1992 and a director of Integrated Packaging
Assembly Corporation since July 1997.

Mr. Allan has served as a director of the Company since August 1995.
Mr. Allan is President and Chief Executive Officer of Allan Advisors, Inc., a
legal consulting firm that he founded in 1992. Mr. Allan is also a director
and past Chairman of the Board of KTEH Public Television Channel 54, in San
Jose, California, a director of Accom, Inc., a digital video systems company,
and director of Global Motorsport Group, Inc. a motorcycle parts company.

Mr. Vanco has served the Company as President and Chief Executive Officer
since March 1998 and as a director since November 1995. From October 1996 to
March 1998 he served as Executive Vice President of Engineering, from October
1996 to December 1997 as Chief Operating Officer, and from November 1992 to
October 1995 as Vice President, Engineering. From 1991 to 1992, Mr. Vanco served
as product line director at Cypress Semiconductor. From 1985 to 1991, Mr. Vanco
held various technical positions at SEEQ Technology, Inc. Mr. Vanco holds an
M.S. in Electrical Engineering from the Polytechnical Institute, Bucharest,
Romania.

-3-
<PAGE> 8

Mr. Tanigami became Chairman of the Company in March 1998 and has served
as a director of the Company since February 1996. From 1985 to April 1994, Mr.
Tanigami served as Vice President, Corporate Development, of the Company. From
January 1996 to present, he has served as President and Chief Executive Officer
of Marubun USA Corporation, an electronics distribution company. From June 1994
to present, he has also served as President of Technology Matrix, Inc., and
since 1985 has been President and Chief Executive Officer of Tanigami
Associates, an international consulting firm.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of nine meetings during
the period from May 1, 1997 to May 4, 1998 ("fiscal 1998"). The Board of
Directors has an Audit Committee, a Compensation Committee and a Non-Section 16
Option Committee. The Board of Directors has no nominating committee or any
committee performing similar functions.

The Audit Committee currently consists of Messrs. Tanigami and Verderico.
The Audit Committee is charged with reviewing the Company's annual audit and
meeting with the Company's independent auditors to review the Company's internal
controls and financial management practices. The Audit Committee held four
meetings during fiscal 1998.

The Compensation Committee currently consists of Messrs. Tanigami and
Verderico. The Compensation Committee is responsible for reviewing and approving
the Company's compensation policies and the compensation paid to executive
officers. The Compensation Committee held one meeting during the last fiscal
year.

The Non-Section 16 Option Committee may make grants of up to 50,000 shares
to persons who are not executive officers or directors of the Company. This
Committee currently consists of Mr. Vanco, the Chief Executive Officer of the
Company. The Non-Section 16 Option Committee acted by written consent on two
occasions during fiscal 1998.

No incumbent director attended fewer than 75% of the meetings of the Board
of Directors and of the committees on which such director served and that were
held during the period such individual was a director during fiscal 1998.

COMPENSATION OF DIRECTORS

The Company's non-employee directors, currently consisting of Messrs.
Allan, Tanigami and Verderico, receive cash compensation in the amount of $3,600
for each quarter in which they attend one or more meetings of the Board of
Directors. In addition, directors are reimbursed for reasonable out-of-pocket
expenses incurred in connection with attendance at such meetings.

Each non-employee director of the Company is entitled to participate in
the Company's 1993 Director Stock Option Plan (the "Director Option Plan") by
receiving automatic annual grants of Common Stock of the Company. Initial grants
under the Director Option Plan of options to purchase 20,000 shares each were
made to Messrs. Allan, Tanigami and Verderico on August 14, 1995, February 10,
1996 and April 4, 1996, respectively, at exercise prices of $5.125, $6.00 and
$5.00 per share, respectively. On April 1, 1996, Mr. Allan was granted options
under the Director Option Plan to purchase 7,500 shares of Common Stock at an
exercise price of $5.00 per share. Each of Mr. Allan, Mr. Verderico and Mr.
Tanigami were granted options under the Director Option Plan to purchase 7,500
shares of Common Stock on April 1, 1997 at an exercise price of $1.6875 and on
April 1, 1998 at an exercise price of $0.9603.. Each option expires five years
from the date of grant. All options which have been granted under the Director
Option Plan are subject to cumulative yearly vesting as to one-third of the
total grant on each anniversary of the date of grant, and terminate five years
from the date of grant unless terminated sooner upon termination of the
optionee's status as a director or otherwise pursuant to the Director Option
Plan.

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<PAGE> 9

VOTE REQUIRED FOR ELECTION

The affirmative vote of a majority of the Votes Cast is required for a
nominee to be elected as a Class II or Class III director. Votes withheld from a
director will be counted for purposes of determining the presence or absence of
a quorum but will not be counted as affirmative votes. A broker non-vote will be
counted for purposes of determining the presence or absence of a quorum, but,
under Delaware law, will have no other legal effect upon the election of a Class
II director or Class III director.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
CLASS II DIRECTOR NOMINEE AND THE CLASS III DIRECTOR NOMINEE SET FORTH HEREIN.

PROPOSAL 2
AMENDMENT AND RESTATEMENT OF THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK

The Company is asking the stockholders to vote on a proposal to amend and
restate the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 25,000,000 shares to 45,000,000
shares (the "Restated Certificate"). That is the only change contemplated by the
Restated Certificate. The Board of Directors has unanimously approved such an
amendment to and restatement of the Company's Restated Certificate of
Incorporation.

The Company desires to change the Company's authorized capitalization to
increase the number of authorized shares of Common Stock from 25,000,000 shares
to 45,000,000 shares in order to afford the Company sufficient authorized
capital stock to be able to raise funding for its capital needs through future
equity issuances and to provide sufficient reserves under the Company's employee
stock option and other incentive plans. From time to time the Company may
continue to engage in equity financing transactions in order to raise working
capital and other funds for continuing operations.

The Company is seeking stockholder approval to authorize an additional
20,000,000 shares of Common Stock, $0.001 par value, resulting in a total of
45,000,000 authorized shares of the Company's Common Stock. The holder of each
share of Common Stock will have the right to one vote for each share of Common
Stock held, will be entitled to notice of any stockholders' meeting in
accordance with the bylaws of the Company, and will be entitled to vote upon
such matters and in such manner as may be provided by law. The Common Stock has
no preemptive or conversion rights or other subscription rights. The outstanding
shares of Common Stock are, and the shares of Common Stock to be issued in the
future will be, fully paid and non-assessable. The Restated Certificate, upon
approval, will result in an increase in the Company's Delaware Franchise Tax and
will become effective when the Restated Certificate is filed with the Secretary
of State of the State of Delaware, which is expected to be on or about
January 15, 1999.

REQUIRED VOTE

Approval of adoption of the Restated Certificate in order to change the
Company's authorized capitalization to increase the number of authorized shares
of Common Stock from 25,000,000 shares to 45,000,000 shares requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled to
vote.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT AND RESTATEMENT OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 25,000,000
SHARES TO 45,000,000 SHARES.

-5-
<PAGE> 10
PROPOSAL 3
APPROVAL OF AMENDMENTS TO THE STOCK OPTION PLAN

At the Annual Meeting, the stockholders are being asked to approve
amendments (the "Option Plan Amendments") to the Company's Stock Option Plan
(the "Option Plan") to increase the number of shares of Common Stock reserved
for issuance thereunder by 1,800,000 shares, to increase the maximum number of
shares that may be issued to any one employee during a fiscal year to 1,000,000
and make changes in the Plan necessary to comply with applicable state
securities law. The following is a summary of principal features of the Option
Plan. The summary, however, does not purport to be a complete description of all
the provisions of the Option Plan. Any stockholder of the Company who wishes to
obtain a copy of the actual plan document may do so upon written request to the
Secretary of the Company at its principal executive offices.

GENERAL

The Option Plan was adopted by the Board of Directors and approved by the
stockholders in 1989. An amendment and restatement of the Option Plan to comply
with Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to allow for cashless exercises and to increase the number of
shares available for issuance thereunder was approved by the Board of Directors
and by the stockholders in 1993.

Amendments to the Option Plan to increase the number of shares available
for issuance thereunder and to limit the number of options, stock appreciation
rights ("SARs") and stock purchase rights an employee may be granted under the
Option Plan in any fiscal year of the Company to comply with Section 162(m) of
the Internal Revenue Code (the "Code") were approved by the Board of Directors
and by the stockholders in 1995. An amendment to increase the number of shares
reserved for issuance under the Option Plan was approved by the Board of
Directors and by the stockholders in 1996. In 1998, the Board of Directors
approved amendments to increase the number of shares reserved for issuance under
the Option Plan by 1,800,000, to increase the maximum number of shares subject
to options that may be issued to any one employee in any fiscal year to
1,000,000 shares, and to comply with applicable state law. Such amendments are
subject to approval by the Company's stockholders. The stockholders are being
asked to approve the Option Plan Amendments at the Annual Meeting.

The Option Plan provides for the grant of options, stock purchase rights
and SARs to officers, employees and consultants of the Company. The Option Plan
Amendments increasing the number of shares reserved for issuance under the
Option Plan has been necessitated by the hiring of new officers, employees and
consultants, the grant of additional stock options to current officers,
employees and consultants as previously granted options vest and become
exercisable, and by the need to provide adequate incentive to the Company's
officers, employees and consultants to retain their services. The increase will
provide additional stock to continue the Company's policy of equity ownership by
officers, employees and consultants as an incentive to contribute to the
Company's success.

Options granted under the Option Plan may be either "incentive stock
options" within the meaning of Section 422 of the Code or nonstatutory stock
options at the discretion of the Board of Directors and as reflected in the
terms of the written option agreement. The Option Plan is not a qualified
deferred compensation plan under Section 401(a) of the Code, and is not subject
to the provisions of the Employee Retirement Income Security Act of 1974, as
amended.

As of December 8, 1998, and after giving effect to the Option Plan
Amendments which are the subject of stockholder approval at the Annual Meeting
contemplated by this Proxy Statement), 928,715 shares had been issued upon
exercise of options granted under the Option Plan, options for 2,957,485 shares
were outstanding under the Option Plan and 1,213,786 shares remained available
for future grants. As of December 8, 1998, the fair market value of shares
underlying outstanding options was approximately $975,970 based upon the closing
price of $0.33 per share for the Common Stock as reported on the OTC Bulletin
Board on such date.

The following table sets forth information with respect to the stock
options granted to the current executive officers, all current executive
officers as a group, all current directors who are not executive officers as a
group, and

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<PAGE> 11

all employees and consultants (including all current officers who are not
executive officers) as a group under the Plan as of December 8, 1998. This table
assumes stockholder approval of the Option Plan amendments.

<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO
OPTIONS GRANTED UNDER WEIGHTED AVERAGE
THE OPTION PLAN ASSUMING EXERCISE PRICE
NAME APPROVAL OF THE OPTION PLAN AMENDMENTS PER SHARE
---- -------------------------------------- ----------------
<S> <C> <C>
Radu M. Vanco
President and Chief
Executive Officer (1) ................. 413,166 $0.125

Marc H. Cremer
Vice President, Strategic Business
Development (1) ....................... 125,000 $0.125

William Felton-Priestner
Vice President - Information
Systems and Product Planning(1)........ 22,000 $0.125

Thomas E. Gay III
Vice President, Finance and
Administration, and Chief
Financial Officer (1) ................. 60,000 $0.125

Bassam Khoury
Vice President, Marketing (1) ......... 94,746 $0.125

Gelu Voicu
Vice President, Product
Engineering and
Manufacturing (1) .................... 103,000 $0.125

Lionel M. Allan (1) ..................... 90,000 $0.125

Hideyuki Tanigami (1) ................... 66,250 $0.125

All current executive officers
as a group (9 persons) (2) ............ 817,912 $0.125

All current directors who are
not executive officers 156,250 $0.125
(3 persons) (3) ......................

All employees (not including current
executive officers and directors) as
a group................................ 990,157 $0.125
</TABLE>

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(1) Includes options to purchase the following numbers of shares granted by
the Board of Directors subject to approval of the Option Plan Amendments:
Mr. Vanco - 100,000 shares; Mr. Cremer - 50,000 shares; Mr. Gay - 60,000
shares; Mr. Khoury - 25,000 shares; Mr. Voicu - 20,000 shares; Mr. Allan
20,000 shares; and Mr. Stemm - 25,000.

(2) Includes options to purchase the following numbers of shares granted by
the Board of Directors to the following individuals subject to approval of
the Option Plan Amendments: Mr. Vanco - 100,000 shares; Mr. Cremer -
50,000; Mr. Gay - 60,000 shares; Mr. Khoury - 25,000 shares; and Mr. Voicu
- 20,000 shares.

(3) Includes options to purchase the following numbers of shares granted by
the Board of Directors to the following individuals subject to stockholder
approval: Mr. Allan - 20,000 shares.

PURPOSE

The purpose of the Option Plan is to provide incentive to eligible
employees, consultants and officers whose present and potential contributions
are important to the continued success of the Company, to afford these
individuals the opportunity to acquire a proprietary interest in the Company,
and to enable the Company to enlist and retain qualified personnel for the
successful conduct of its business. The Board of Directors does not believe that
the shares currently available for grant under the Option Plan are sufficient to
retain existing employees and attract new employees.

ADMINISTRATION

The Option Plan may be administered by the Board of Directors or by a
committee of the Board of Directors and shall be administered in a manner that
complies with Rule 16b-3 under the Exchange Act. Currently, the Option Plan is
administered by the Board of Directors. Members of the Board of Directors
receive no additional compensation for their services in connection with the
administration of the Option Plan. All questions of interpretation of the Option
Plan are determined by the Board of Directors (or its committee or committees)
and its decisions are final and binding upon all participants. The Company has
established a Non-Section 16 Option Committee which may make grants of options
to purchase up to 50,000 shares in any fiscal year to persons who are not
directors or executive officers of the Company. This Committee currently
consists of Mr. Vanco, the Chief Executive Officer of the Company.

ELIGIBILITY

The Option Plan provides that either incentive stock options or
nonstatutory stock options may be granted to employees (including officers and
directors who are also employees) of the Company or any of its subsidiaries. In
addition, the Option Plan provides that nonstatutory stock options may be
granted to consultants (excluding directors who are not compensated for their
consulting services or are paid only a director's fee by the Company) of the
Company or any of its subsidiaries. The Board of Directors or its committee
selects the optionees and determines the number of shares to be subject to each
option. In making such determination, there are taken into account the duties
and responsibilities of the optionee, the value of the optionee's services, the
optionee's present and potential contribution to the success of the Company, and
other relevant factors.

The Option Plan provides that the maximum number of shares of Common Stock
which may be granted under options (or rights) to any one employee during any
fiscal year shall be 750,000. Upon approval of the Option Plan Amendments, that
number will be increased to 1,000,000. In addition, the Company may make an
additional one time grant of options (or rights) for 250,000 shares for any
newly hired employee. These limitations are intended to preserve the Company's
ability to deduct for federal income tax purposes any compensation expense
relating to stock options granted to certain executive officers under the Option
Plan. Without this limitation, federal tax legislation enacted in 1993 might not
allow the Company to deduct such compensation expense.

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<PAGE> 13

In addition to the foregoing limitation on discretion for certain grants,
there is also a limit on the aggregate market value of shares subject to all
incentive stock options that may be granted to an optionee during any calendar
year.

TERMS OF OPTIONS

Each option is evidenced by a stock option agreement between the Company
and the optionee. Each option is subject to the following additional principal
terms and conditions:

(a) Exercise of the Option. The Board of Directors or its committee
determines when options may be exercised. In general, such options become
exercisable as to one-fourth of the total shares granted on the one-year
anniversary of the date of grant with the remainder becoming exercisable on a
ratable monthly basis over the three year period thereafter, for so long as the
optionee remains an employee of or consultant to the Company, but must become
exercisable at the rate of at least 20% per year over five years from the date
the option is granted. An option is exercised by giving written notice of
exercise to the Company specifying the number of full shares of Common Stock to
be purchased and by tendering of payment of the purchase price. The option
exercise price may be paid in cash, promissory note, shares of the Company's
Common Stock, or through a broker-dealer sale and remittance procedure which
will allow the optionee to exercise the option and sell the purchased shares on
the same day, with the sale proceeds used to satisfy the option price payable
for the purchased shares.

(b) Exercise Price. The exercise price of each option granted under the
Option Plan is determined by the Board of Directors or its committee and may
not be less than 85% of the fair market value of the Common Stock on the date
the option is granted, or, in the case of an incentive stock option, may not be
less than 100% of the fair market value of the Common Stock on the date the
option is granted. The fair market value per share is equal to the closing price
of the Company's Common Stock on the OTC Bulletin Board on the last market
trading day prior to the date of grant. In the case of any option granted to an
optionee who owns more than 10% of the voting power of all classes of stock of
the Company, its parent or subsidiaries, the exercise price must not be less
than 110% of the fair market value on the date the option is granted.

(c) Termination of Employment. Currently, the Option Plan provides that if
the optionee's employment or consulting relationship terminates for any reason
other than disability or death, options under the Option Plan may be exercised
during the period of time determined by the Board or Committee at the date of
grant but not later than six months (three months in the case of an incentive
stock option) but not less than 30 days after such termination and may be
exercised only to the extent the option was exercisable on the date of
termination. In no event (either under the current terms of the Option Plan or
under the proposed amendments thereto) may an option be exercised by any person
after the expiration of its term.

(d) Disability. If an optionee is unable to continue his or her employment
or consulting relationship with the Company as a result of his total and
permanent disability, options may be exercised within six months of termination
and may be exercised only to the extent the option was exercisable on the date
of termination, but in no event may an option be exercised after its expiration
date.

(e) Death. Under the Option Plan, if an optionee should die while employed
or retained by the Company, options may be exercised within six months after the
date of death (or such longer period of time not exceeding twelve months as is
determined by the Board or its committee and specified in the option agreement)
to the extent the options would have been exercisable on the date of death. In
no event may an option be exercised after its expiration date.

(f) Term of Options. The Option Plan provides that options granted under
the Option Plan shall be exercisable during the period of time specified by the
Board of Directors or its committee as provided in the option agreement but as
to incentive stock options, no later than ten years from the date of grant. In
general, these agreements provide for a term of ten years. Incentive stock
options granted to an optionee who, immediately before the grant of such option,
owned more than 10% of the total combined voting power of all classes of stock
of the Company, its parents or subsidiaries, may not in any case have a term of
more than five years. No option may be exercised by any person after its
expiration date.

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<PAGE> 14

(g) Options Not Transferable. An option is not transferable by the
optionee other than by will or the laws of descent and distribution, and is
exercisable only by the optionee during his or her lifetime and in the event of
the optionee's death by a person who acquires the right to exercise the option
by bequest or inheritance or by reason of the optionee's death.

(h) Acceleration of Options. In the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each option will be assumed or an equivalent option substituted by the
successor corporation. In the event that the successor corporation does not
assume the option or substitute an equivalent option, the Board shall provide
that the exercisability of all outstanding options shall be automatically
accelerated and that the options shall be exercisable for a period of not less
than 15 days following the date notice of such acceleration is given.

(i) Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Option Plan as may be
determined by the Board of Directors or its committee.

OTHER AWARDS

The Option Plan also allows the Company to grant SARs and stock purchase
rights. SARs may be granted in connection with or independent of options and
entitle the holder thereof to receive an amount, in cash or Common Stock, at the
Company's discretion, equal to the excess of the fair market value of the shares
subject to the SAR on the date of its exercise over the fair market value on the
date of grant. Stock purchase rights allow an offeree to purchase stock, subject
to a right of the Company to repurchase unvested shares in the event of
termination of employment. Shares purchased pursuant to stock purchase rights
vest over time, based on continued employment. No SARs or stock purchase rights
have been granted under the Option Plan.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

In the event any change is made in the Company's capitalization upon any
stock split, reverse stock split, stock dividend, combination or
reclassification of Common Stock or any other increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price of each
outstanding option, the number of shares subject to each option, the annual
limitation on grants to employees, as well as the number of shares available for
issuance under the Option Plan. In the event of the proposed dissolution or
liquidation of the Company, each option will terminate unless otherwise provided
by the Board of Directors or its committee.

AMENDMENT AND TERMINATION

The Board of Directors may amend the Option Plan at any time or from time
to time or may terminate it without approval of the stockholders; provided,
however, that stockholder approval is required for any amendment to the Option
Plan that increases the number of shares that may be issued under the Option
Plan, modifies the standards of eligibility, modifies the limitation on grants
to employees described in the Option Plan or results in other changes which
would require stockholder approval to qualify options granted under the Option
Plan as performance-based compensation under Section 162(m) of the Code.
However, no action by the Board of Directors or stockholders may alter or impair
any option previously granted under the Option Plan. Unless sooner terminated,
the Option Plan will terminate on December 31, 2002, provided that any
outstanding option, SAR, stock purchase right or long term performance award
under the Option Plan shall remain outstanding until they expire by their
terms. At such time as the Company has securities listed on the Nasdaq National
Market, or another appropriate market, the Company may, without stockholder
approval, amend the requirement that options grants or stock purchase rights
not be issued at a price below 85% of the fair market value of the Common Stock
on the date the option or stock purchase right is granted.

UNITED STATES FEDERAL INCOME TAX INFORMATION

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<PAGE> 15
intended to be exhaustive and does not address all matters which may be relevant
to a particular optionee based on his or her specific circumstances. The summary
addresses only current U.S. federal income tax law and expressly does not
discuss the income tax laws of any state, municipality, non-U.S. taxing
jurisdiction or gift, estate or other tax laws other than federal income tax
law. The Company advises all optionees to consult their own tax advisor
concerning the tax implications of option grants and exercises and the
disposition of stock acquired upon such exercises, under the Option Plan.

Options granted under the Option Plan may be either incentive stock
options, which are intended to qualify for the special tax treatment provided by
Section 422 of the Code, or nonstatutory stock options, which will not qualify.
If an option granted under the Option Plan is an incentive stock option, the
optionee will recognize no income upon grant of the incentive stock option and
will incur no tax liability due to the exercise, except to the extent that such
exercise causes the optionee to incur alternative minimum tax. (See discussion
below.) The Company will not be allowed a deduction for federal income tax
purposes as a result of the exercise of an incentive stock option regardless of
the applicability of the alternative minimum tax. Upon the sale or exchange of
the shares more than two years after grant of the option and one year after
exercise of the option by the optionee, any gain will be treated as a long-term
capital gain. If both of these holding periods are not satisfied, the optionee
will recognize ordinary income equal to the difference between the exercise
price and the lower of the fair market value of the Common Stock on the date of
the option exercise or the sale price of the Common Stock. The Company will be
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee. Any gain or loss recognized on a disposition of the shares prior
to completion of both of the above holding periods in excess of the amount
treated as ordinary income will be characterized as long-term capital gain if
the sale occurs more than one year after exercise of the option or as short-term
capital gain if the sale is made earlier. For individual taxpayers, the current
U.S. federal income tax rate on long-term capital gains is 20% whereas the
maximum rate on other income is 39.6%. Capital losses for individual taxpayers
are allowed in full against capital gains plus $3,000 of other income.

All other options which do not qualify as incentive stock options are
referred to as nonstatutory stock options. An optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory stock option.
However, upon its exercise, the optionee will recognize ordinary income for tax
purposes measured by the excess of the fair market value of the shares over the
exercise price. In certain circumstances, where the shares are subject to a
substantial risk of forfeiture when acquired, the date of taxation may be
deferred unless the optionee files an election with the Internal Revenue Service
under Section 83(b) of the Code. The income recognized by an optionee who is
also an employee of the Company will be subject to income and employment tax
withholding by the Company by payment in cash by the optionee or out of the
optionee's current earnings. Upon the sale of such shares by the optionee, any
difference between the sale price and the fair market value of the shares as of
the date of exercise of the option will be treated as capital gain or loss, and
will qualify for long-term capital gain or loss treatment if the shares have
been held for more than one year from date of exercise.

Stock purchases, stock appreciation rights and long-term performance
awards will generally be taxed in the same manner as the exercise of a
nonstatutory stock option.

ALTERNATIVE MINIMUM TAX

The exercise of an incentive stock option may subject the optionee to the
alternative minimum tax under Section 55 of the Code. The alternative minimum
tax is calculated by applying a tax rate of 26% to alternative minimum taxable
income of joint filers up to $175,000 ($87,500 for married taxpayers filing
separately) and 28% to alternative minimum taxable income above that amount.
Alternative minimum taxable income is equal to (i) taxable income adjusted for
certain items, plus (ii) items of tax preference less (iii) an exemption amount
of $45,000 for joint returns, $33,750 for unmarried individual returns and
$22,500 in the case of married taxpayers filing separately (which exemption
amounts are phased out for upper income taxpayers). Alternative minimum tax will
be due if the tax determined under the foregoing formula exceeds the regular tax
of the taxpayer for the year.

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<PAGE> 16
As a result, the optionee recognizes alternative minimum taxable income equal to
the excess of the fair market value of the Common Stock on the date of exercise
over the option exercise price. Because the alternative minimum tax calculation
may be complex, optionees should consult their own tax advisors prior to
exercising incentive stock options.

If an optionee pays alternative minimum tax, the amount of such tax may be
carried forward as a credit against any subsequent year's regular tax in excess
of the alternative minimum tax for such year.

THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE SUMMARY OF THE EFFECT OF
FEDERAL INCOME TAXATION UPON HOLDERS OF OPTIONS OR UPON THE COMPANY AND DOES NOT
ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES TO TAXPAYERS WITH SPECIAL TAX
STATUS. IT ALSO DOES NOT REFLECT PROVISIONS OF THE INCOME TAX LAWS OF ANY
MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH AN OPTIONEE MAY RESIDE, AND DOES
NOT DISCUSS ESTATE, GIFT OR OTHER TAX CONSEQUENCES OTHER THAN INCOME TAX
CONSEQUENCES.

RESTRICTIONS ON RESALE

Certain officers and directors of the Company may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act.
The Common Stock acquired under the Option Plan by an affiliate may be reoffered
or resold only pursuant to an effective registration statement or pursuant to
Rule 144 under the Securities Act or another exemption from the registration
requirements of the Securities Act.

VOTE REQUIRED

The affirmative vote of a majority of the Votes Cast is required to
approve the proposed amendments to the Option Plan. If an insufficient number of
affirmative votes are obtained, the amendments to the Option Plan will not be
implemented.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
PROPOSED AMENDMENTS TO THE OPTION PLAN TO INCREASE THE NUMBER OF SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER BY 1,800,000 SHARES, TO INCREASE
THE MAXIMUM NUMBER OF SHARES SUBJECT TO OPTIONS THAT MAY BE ISSUED TO ANY ONE
EMPLOYEE DURING ANY FISCAL YEAR FROM 750,000 SHARES TO 1,000,000 SHARES AND TO
MAKE OTHER CHANGES NECESSARY TO COMPLY WITH APPLICABLE STATE LAW.

PROPOSAL 4
APPROVAL OF THE 1998 SPECIAL EQUITY INCENTIVE PLAN
AND THE RESERVATION OF 3,500,000 SHARES FOR ISSUANCE THEREUNDER

At the Annual Meeting, the stockholders are being asked to approve the
adoption of the Company's 1998 Special Equity Incentive Plan (the "1998 Plan")
and to reserve 3,500,000 shares for issuance thereunder. The following is a
summary of principal features of the 1998 Plan. The summary, however, does not
purport to be a complete description of all the provisions of the 1998 Plan. Any
stockholder of the Company who wishes to obtain a copy of the actual plan
document may do so upon written request to the Secretary of the Company at its
principal executive offices.

GENERAL

In view of the recent declines in the Company's financial condition,
results of operations and stock price, the Company believes that, in order to
retain and provide incentives to its current executive officers, employees,
consultants and directors and to attract qualified employees, officers,
consultants and directors to the Company, it is necessary to grant additional
equity incentives through the grant of options to purchase Common Stock to such
persons pursuant to the 1998 Plan. Accordingly, the stockholders are being asked
to approve the 1998 Plan. The

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<PAGE> 17

1998 Plan was approved by the Company's Board of Directors in December 1998.

The 1998 Plan provides for the grant of options, stock purchase rights,
SARs and long-term performance awards to officers, employees, consultants and
directors of the Company. The 1998 Plan provides additional stock to
continue the Company's policy of equity ownership by officers, employees,
consultants and directors as an incentive to contribute to the Company's
success.

Options granted under the 1998 Plan may be either "incentive stock
options" within the meaning of Section 422 of the Code or nonstatutory stock
options at the discretion of the Board of Directors and as reflected in the
terms of the written option agreement. The 1998 Plan is not a qualified deferred
compensation plan under Section 401(a) of the Code, and is not subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.

As of December 8, 1998, and subject to stockholder approval at the Annual
Meeting, no shares had been issued upon exercise of options granted under the
1998 Plan, an aggregate of 3,250,000 options were outstanding under the 1998
Plan subject to stockholder approval and 250,000 shares remained available for
future grants. As of December 8, 1998, the fair market value of shares
underlying outstanding options was approximately $1,072,500 based upon the
closing price of $0.33 per share for the Common Stock as reported on the OTC
Bulletin Board on such date. Options to purchase the following respective
numbers of shares under the 1998 Plan have been granted to the following
executive officers and directors subject to stockholder approval as provided in
Proposal 5: 1,000,000 shares to Mr. Vanco; 200,000 shares to each of Messrs.
Cremer, Gay, Khoury, Voicu, Allan, Tanigami and Verderico; 250,000 shares to
each of Messrs. Kovalik and Mogri; 150,000 shares to Mr. Felton-Priestner; and
100,000 shares to Mr. Reynolds. The exercise price of all such options is $0.125
per share. Except as set forth above, the Company cannot now determine the exact
number of options to be granted in the future to the directors and Named
Officers, all current executive officers as a group or all employees (excluding
executive officers) under the 1998 Plan.

PURPOSE

The purpose of the 1998 Plan is to provide special additional incentives
to eligible employees, consultants, officers and directors whose present and
potential contributions are important to the continued success of the Company,
to afford these individuals the opportunity to acquire a proprietary interest in
the Company, and to enable the Company to enlist and retain qualified personnel
for the successful conduct of its business. The 1998 Plan is intended to serve
as an extra measure to enable the Company to attract and retain key executives,
directors and employees by providing them with a special incentive since at this
time it is particularly difficult to attract and retain qualified persons in
view of the Company's financial condition. Highly qualified executives and
employees are highly sought after by companies in far stronger financial
condition. If the Company is to succeed it will need to retain its executives
and employees and prevent them from being lured away by companies with far
greater financial resources. The 1998 Plan is intended as an additional tool to
provide the incentives necessary to retain existing officers, directors and
employees and attract new officers, directors and employees at a time when
working with the Company may not appear as attractive as working for other
companies which may be financially better situated.

ADMINISTRATION

The 1998 Plan may be administered by the Board of Directors or by a
committee of the Board of Directors and shall be administered in a manner that
complies with Rule 16b-3 under the Exchange Act. Currently, the 1998 Plan is
administered by the Board of Directors. Members of the Board of Directors
receive no additional compensation for their services in connection with the
administration of the 1998 Plan. All questions of interpretation of the 1998
Plan are determined by the Board of Directors or its committee and its decisions
are final and binding upon all participants. In addition the Company has
established a Non-Section 16 Option Committee which may make grants of options
to purchase up to 50,000 to persons who are not directors or executive officers
of the Company. This Committee currently consists of the Chief Executive Officer
of the Company.

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<PAGE> 18

ELIGIBILITY

The 1998 Plan provides that either incentive stock options or nonstatutory
stock options may be granted to employees (including officers and directors who
are also employees) of the Company or any of its subsidiaries. In addition, the
1998 Plan provides that nonstatutory stock options may be granted to consultants
and directors of the Company or any of its subsidiaries. The Board of Directors
or its committee selects the optionees and determines the number of shares to be
subject to each option. In making such determination, there are taken into
account the duties and responsibilities of the optionee, the value of the
optionee's services, the optionee's present and potential contribution to the
success of the Company, and other relevant factors.

The 1998 Plan provides that the maximum number of shares of Common Stock
which may be granted under options (or rights) to any one employee during any
fiscal year shall be 2,000,000. This limitation is intended to preserve the
Company's ability to deduct for federal income tax purposes any compensation
expense relating to stock options granted to certain executive officers under
the 1998 Plan. Without this limitation, federal tax legislation enacted in 1993
might not allow the Company to deduct such compensation expense.

TERMS OF OPTIONS

Each option is evidenced by a stock option agreement between the Company
and the optionee. Each option is subject to the following additional principal
terms and conditions:

(a) Exercise of the Option. The Board of Directors or its committee
determines when options may be exercised. In general, such options become
exercisable as to one-fourth of the total shares granted on the one-year
anniversary of the date of grant with the remainder becoming exercisable on a
ratable monthly basis over the three year period thereafter, for so long as the
optionee remains an employee of or consultant to the Company. An option is
exercised by giving written notice of exercise to the Company specifying the
number of full shares of Common Stock to be purchased and by tendering of
payment of the purchase price. The option exercise price may be paid in cash,
promissory note, shares of the Company's Common Stock, or through a
broker-dealer sale and remittance procedure which will allow the optionee to
exercise the option and sell the purchased shares on the same day, with the sale
proceeds used to satisfy the option price payable for the purchased shares.

(b) Exercise Price. The exercise price of each option granted under the
1998 Plan is determined by the Board of Directors or its committee and, in the
case of an incentive stock option, may not be less than 100% of the fair market
value of the Common Stock on the date the option is granted. The fair market
value per share is equal to the closing price of the Company's Common Stock on
the OTC Bulletin Board on the last market trading day prior to the date of
grant. In the case of an incentive stock option granted to an optionee who owns
more than 10% of the voting power of all classes of stock of the Company, its
parent or subsidiaries, the exercise price must not be less than 110% of the
fair market value on the date of the grant.

(c) Termination of Employment. Currently, the 1998 Plan provides that if
the optionee's employment or consulting relationship terminates for any reason
other than disability or death, options under the 1998 Plan may be exercised
during the period of time determined by the Board or Committee at the date of
grant but not later than six months (three months in the case of an incentive
stock option) after such termination and may be exercised only to the extent the
option was exercisable on the date of termination. In no event (either under the
current terms of the 1998 Plan or under the proposed amendments thereto) may an
option be exercised by any person after the expiration of its term.

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<PAGE> 19
termination and may be exercised only to the extent the option was exercisable
on the date of termination, but in no event may an option be exercised after its
expiration date.

(e) Death. Under the 1998 Plan, if an optionee should die while employed
or retained by the Company, options may be exercised within six months after the
date of death (or such other period of time not exceeding twelve months as is
determined by the Board or its committee and specified in the option agreement)
to the extent the options would have been exercisable on the date of death. In
no event may an option be exercised after its expiration date.

(f) Term of Options. The 1998 Plan provides that options granted under the
1998 Plan shall be exercisable during the period of time specified by the Board
of Directors or its committee as provided in the option agreement but as to
incentive stock options, no later than ten years from the date of grant. In
general, these agreements provide for a term of ten years. Incentive stock
options granted to an optionee who, immediately before the grant of such option,
owned more than 10% of the total combined voting power of all classes of stock
of the Company, its parents or subsidiaries, may not in any case have a term of
more than five years. No option may be exercised by any person after its
expiration date.

(i) Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the 1998 Plan as may be
determined by the Board of Directors or its committee.

OTHER AWARDS

The 1998 Plan also allows the Company to grant SARs, stock purchase rights
and long-term performance awards. SARs may be granted in connection with or
independent of options and entitle the holder thereof to receive an amount, in
cash or Common Stock, at the Company's discretion, equal to the excess of the
fair market value of the shares subject to the SAR on the date of its exercise
over the fair market value on the date of grant. Stock purchase rights allow an
offeree to purchase stock, subject to a right of the Company to repurchase
unvested shares in the event of termination of employment. Shares purchased
pursuant to stock purchase rights vest over time, based on continued employment.
Long-term performance awards are cash or stock bonus awards which may be earned
over a specified period after grant, based upon performance or employment
factors. No SARs, stock purchase rights or long-term performance awards have
been granted under the 1998 Plan.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

In the event any change is made in the Company's capitalization upon any
stock split, reverse stock split, stock dividend, combination or
reclassification of Common Stock or any other increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price of each
outstanding option, the number of shares subject to each option, the annual
limitation on grants to employees, as well as the number of shares available for
issuance under the 1998 Plan. In the event of the proposed dissolution or
liquidation of the Company, each option will terminate unless otherwise provided
by the Board of Directors or its committee.

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<PAGE> 20

AMENDMENT AND TERMINATION

The Board of Directors may amend the 1998 Plan at any time or from time to
time or may terminate it without approval of the stockholders; provided,
however, that stockholder approval is required for any amendment to the 1998
Plan that increases the number of shares that may be issued under the 1998 Plan,
modifies the standards of eligibility, modifies the limitation on grants to
employees described in the 1998 Plan or results in other changes which would
require stockholder approval to qualify options granted under the 1998 Plan as
performance-based compensation under Section 162(m) of the Code. However, no
action by the Board of Directors or stockholders may alter or impair any option
previously granted under the 1998 Plan. Unless sooner terminated, the 1998 Plan
will terminate on December 31, 2002, provided that any outstanding option, SAR,
stock purchase right or long term performance award under the 1998 Plan shall
remain outstanding until they expire by their terms.

UNITED STATES FEDERAL INCOME TAX INFORMATION

The following is a brief summary of the U.S. federal income tax
consequences of transactions under the Option Plan based on federal income tax
laws in effect on the date of this Proxy Statement. This summary is not intended
to be exhaustive and does not address all matters which may be relevant to a
particular optionee based on his or her specific circumstances. The summary
addresses only current U.S. federal income tax law and expressly does not
discuss the income tax laws of any state, municipality, non-U.S. taxing
jurisdiction or gift, estate or other tax laws other than federal income tax
law. The Company advises all optionees to consult their own tax advisor
concerning the tax implications of option grants and exercises and the
disposition of stock acquired upon such exercises, under the Option Plan.

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<PAGE> 21
Stock purchases, stock appreciation rights and long-term performance
awards will generally be taxed in the same manner as the exercise of a
nonstatutory stock option.

ALTERNATIVE MINIMUM TAX

In computing alternative minimum taxable income, shares purchased upon
exercise of an incentive stock option are treated as if they had been acquired
by the optionee pursuant to exercise of a nonstatutory stock option. As a
result, the optionee recognizes alternative minimum taxable income equal to the
excess of the fair market value of the Common Stock on the date of exercise over
the option exercise price. Because the alternative minimum tax calculation may
be complex, optionees should consult their own tax advisors prior to exercising
incentive stock options.

RESTRICTIONS ON RESALE

The Special Option Grants are intended to provide extra incentive
necessary to retain existing officers, directors and employees and attract new
officers, directors and employees at a time when working with the Company may
not appear as attractive as working for Companies financially better situated.
Certain officers and directors of the Company may be deemed to be "affiliates"
of the Company as that term is defined under the Securities Act. The Common
Stock acquired under the Option Plan by an affiliate may be reoffered or resold
only pursuant to an effective registration statement or pursuant to Rule 144
under the Securities Act or another exemption from the registration requirements
of the Securities Act.

VOTE REQUIRED

The affirmative vote of a majority of the Votes Cast is required to
approve the proposed amendments to the 1998 Plan. If an insufficient number of
affirmative votes are obtained, the amendments to the 1998 Plan will not be
implemented.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR"
APPROVAL OF THE 1998 SPECIAL EQUITY INCENTIVE PLAN AND TO RESERVE 3,500,000
SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER.

-17-
<PAGE> 22

PROPOSAL 5
APPROVAL OF OPTION GRANTS TO EXECUTIVE OFFICERS AND DIRECTORS
UNDER THE 1998 SPECIAL EQUITY INCENTIVE PLAN

At the Annual Meeting, the Company's stockholders are being asked to
approve specific grants of options to the Company's executive officers and
directors under the 1998 Plan. To provide appropriate incentive to the Company's
executive officers and directors to continue to provide services, the Company
has granted options to the executive officers and directors as follows:
1,000,000 shares to Mr. Vanco; 200,000 to each of Messrs. Vanco, Cremer, Gay,
Khoury, Voicu, Allan, Tanigami and Verderico; 250,000 shares to each of Messrs.
Kovalik and Mogri; 150,000 shares to Mr. Felton-Priestner; and 100,000 shares to
Mr. Reynolds (collectively, the "Special Option Grants"). The exercise price for
such options was $0.125 per share. Although the Special Option Grants are not
required to be submitted to a vote of security holders under applicable law,
those grants, by their terms, are subject to stockholder approval. The Special
Option Grants are being submitted for a vote to afford the stockholders the
opportunity to consider and approve or reject such options. If the grants are
not approved at the Annual Meeting then the grants will not be effective. The
stockholders are being asked to approve at the Annual Meeting the Special Option
Grants.

DESCRIPTION OF THE SPECIAL OPTION GRANTS

The Special Option Grants will be issued pursuant to the terms of the
1998 Plan. All such options will vest and become exercisable as to 25% of the
total number of options granted to each person on the date one year following
the date of grant, with the remainder of the options vesting and becoming
exercisable ratably on a monthly basis over the three years thereafter for as
long as the grantee continues to provide services to the Company. The Options
will have a term of 10 years.

The Special Option Grants have been necessitated by the condition of the
Company's business, and its financial condition and results of operations. The
Company is at a crucial time in its existence. The Company has incurred
significant losses and experienced significant negative cash flow from
operations for over two years. Such negative cash flow has significantly reduced
the Company's available capital, impaired its ongoing business and resulted in
the Company having negative net worth. See the Annual Report on Form 10-K for
the fiscal year ended May 3, 1998 accompanying this Proxy Statement. The
Company's President resigned in March 1998 and its Chief Financial Officer
resigned in May 1998. The Company's new executive team is making extensive
efforts on behalf of the Company, however, it is believed necessary to provide
such individuals with appropriate incentives to motivate them properly, to
retain their services and to be able to attract and retain other key employees.
It is believed that similar motivation is necessary to retain the services of
current and future directors of the Company. Highly qualified executives and
employees are highly sought after by companies in far stronger financial
condition. If the Company is to succeed it will need to retain its executives
and employees and prevent them from being lured away by companies with far
greater financial resources. The Special Option Grants are intended to provide
extra incentives to help retain existing officers, directors and employees and
attract new officers, directors and employees at a time when working with the
Company may not appear as attractive as working for companies which are
financially better situated.

VOTE REQUIRED

The affirmative vote of a majority of the Votes Cast is required to
approve the Special Option Grants. If an insufficient number of affirmative
votes are obtained, the Special Option Grants will not be effective.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
SPECIAL OPTION GRANTS.

PROPOSAL 6
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors has selected PriceWaterhouse Coopers LLP,
independent auditors, to audit the financial statements of the Company for the
year ending April 30, 1999, and recommends that the stockholders vote for
ratification of such appointment. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection.

-18-
<PAGE> 23

Representatives of PriceWaterhouse Coopers LLP are expected to be present
at the Annual Meeting and will have the opportunity to make a statement if they
desire to do so. The representatives also are expected to be available to
respond to appropriate questions from stockholders. The Board of Directors
believes that reappointing PriceWaterhouse Coopers LLP is in the best interest
of the Company.

VOTE REQUIRED

The affirmative vote of a majority of the Votes Cast is required to ratify
the appointment of PriceWaterhouse Coopers LLP as the Company's independent
auditors.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSE COOPERS LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING APRIL 30, 1999.

EXECUTIVES, COMPENSATION AND RELATED INFORMATION

EXECUTIVE OFFICERS AND KEY PERSONNEL

The executive officers and certain key personnel of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Radu M. Vanco............. 49 President, Chief Executive Officer and Director
Marc H. Cremer............ 34 Vice President Strategic Business Development
William Felton-Priestner.. 31 Vice President, Information Systems and
Product Planning
Thomas E. Gay III......... 50 Vice President, Finance and Administration
and Chief Financial Officer
Bassam I. Khoury.......... 38 Vice President, Marketing
Irv Kovolik............... 61 Vice President, Sales
Juzer Mogri............... 45 Vice President, Mixed Signal Products
Frank Reynolds............ 53 Vice President, Distribution Sales
Gelu Voicu................ 49 Vice President, Product Engineering and
Manufacturing
</TABLE>

Radu M. Vanco has served the Company as President and Chief Executive
Officer since March 1998 and as a director since November 1995. From October
1996 to March 1998 he served as Executive Vice President of Engineering, from
October 1996 to December 1997 as Chief Operating Officer, and from November 1992
to October 1995 as Vice President, Engineering. From 1991 to 1992, Mr. Vanco
served as product line director at Cypress Semiconductor. From 1985 to 1991, Mr.
Vanco held various technical positions at SEEQ Technology, Inc. Mr. Vanco holds
an M.S. in Electrical Engineering from the Polytechnical Institute, Bucharest,
Romania.

Mr. Cremer has served the Company as Vice President, Sales since March
1998. From April 1997 to March 1998, he served the Company as Director of North
American Sales and as Eastern U.S. Area Sales Manager from February 1997 when he
joined the Company until April 1997. From 1995 to 1997, Mr. Cremer held various
sales management positions at Exel Microelectronics, Inc., a semiconductor
company, most recently as national sales manager. From 1993 to 1995, Mr. Cremer
held the position of sales engineer at Sales Engineering Concepts, Inc., a
manufacturers representative. From 1990 to 1993, he held various sales
management and field applications positions for Xicor, Inc., a semiconductor
company. Mr. Cremer holds a B.S. in Electrical Engineering from Northeastern
University.

Mr. Felton-Priestner has served the Company as Vice President, Information
Systems and Product Planning since December 1998 and as Director of IS/Planning
from September 1997 through December 1998. From June 1994 to September 1997, he
was IS Manager for the Company. From October 1993 to June 1994 he was a
programmer analyst for the Company. From January 1990 to October 1993 he served
as MIS Administrator of The Lutz Snyder Company, a real estate sales company.

Mr. Gay has served the Company as Vice President, Finance and
Administration, and Chief Financial Officer since May 1998. From August 1997 to
May 1998 he was Controller of Wireless Access, Inc., a communications device
manufacturing company. From April 1993 to May 1994, he was Controller for the
Company and from July 1994 to November 1996 he was a contract accountant for the
Company. From July 1988 to July 1992, he was controller of Sanmina Corporation,
a contract manufacturing company. Mr. Gay holds a B.S. in Accounting from San
Diego State University.

-19-
<PAGE> 24
Mr. Khoury has served the Company as Vice President, Marketing since March
1998. From April 1997 to March 1998, Mr. Khoury served the Company as Director
of Marketing, from July 1995 to March 1997, as Product Line Director of EEPROMs
and as Director of Product Engineering from May 1994 when he joined the Company
until July 1995. From 1991 to 1994, Mr. Khoury held the position of product
engineering manager at Cypress Semiconductor. From 1987 to 1991, he held the
position of product engineering manager at Seeq Technology, Inc. Mr. Khoury
holds a B.S. in Electrical and Electronic Engineering from University of
Virginia Tech.

Mr. Kovalik has served the Company as Vice President, Sales since
December 1998 after joining the Company in November 1998. From January 1998 to
November 1998, he was Director of Strategic Sales for Alliance Semiconductor,
Inc., a semiconductor company. From January 1997 to January 1998, he was Vice
President of Sales for Nova Web Technologies, Inc., a modem manufacturer. From
September 1995 to January 1997, he was Director of Strategic Sales for Sequel,
Inc., a semiconductor company. From June 1992 to June 1995, he was Vice
President, Sales of the Company.

Mr. Mogri has served the Company as Vice President, Mixed Signal Products
since December 1998 after joining the Company in November 1998. From June 1997
to present, he has served as President of Gigahertz Microcircuits, a
semiconductor design consulting company. From March 1995 to June 1997, he was
Staff Circuit Design Engineer for Integrated Circuit Systems, Inc., a
semiconductor company. From July 1994 to February 1995, he was Engineering
Manager for Chaplet Communications, a communications systems developer. From
July 1992 to June 1994, he was Staff Circuit Design Engineer of Motorola-Indala
Corp., a security system manufacturer.

Mr. Reynolds has served the Company as Vice President, Distribution Sales
since December 1998 when he joined the Company. From October 1997 to December
1998, he was Director of Distributor Sales for Xicor Inc., a semiconductor
manufacturer. From January 1995 to July 1997, he was General Manager for Nu
Horizons Inc., a semiconductor distributor. From December 1989 to December
1994, he was Director of Distributor Sales for Cirrus Logic, Inc., a
semiconductor company.

Mr. Voicu has served the Company as Vice President, Product Engineering
and Manufacturing since April 1998. From July 1995 to April 1998 he was Director
of Flash Product Line for the Company. From October 1993 to July 1995 he was
Manager of Product Engineering of the Company. From June 1991 to October 1993 he
served with Cypress Semiconductor, Inc., a semiconductor company, most recently
as Senior Product Engineer. Mr. Voicu holds his M.S. in Electrical Engineering
from the Polytechnical Institute, Bucharest, Romania.

EXECUTIVE COMPENSATION

The following table shows the compensation paid by the Company in fiscal
1998, 1997 and 1996 to (i) the Company's Chief Executive Officer and his
predecessor who left the Company in March 1998, (ii) the four most highly
compensated officers other than the Chief Executive Officer who served as
executive officers at April 30, 1998 and (iii) one highly compensated individual
who would have qualified under (ii) above except he was not serving as an
executive officer as of April 30, 1998 (collectively, the "Named Officers").

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------- ---------------------------------------------
Awards Payouts
---------- -----------------------
Other
Annual Restricted Securities All Other
Name and Principal Fiscal Compen- Stock Underlying LTIP Compensa-
Position Year Salary($) Bonus($) sation($) Awards($) Options(#) Payouts($) tion($)(4)
----------------- ------ -------- -------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C. Michael Powell (1) ............ 1998 $292,500 $ 80,658 -- -- 549,000(2) -- $702,957(5)
Former Chairman, President 1997 $337,500 $ 77,459 -- -- 250,000(3) -- $ 14,028
and Chief Executive Officer 1996 $331,501 $ 38,210 -- -- 150,000 -- $ 13,577

Radu M. Vanco .................... 1998 $225,000 $ 69,391 -- -- 313,166(2) -- $ 609
President and Chief 1997 $231,879 $ 95,441 -- -- 227,500(3) -- $ 609
Executive Officer 1996 $222,270 $ 9,334 -- -- 142,500 -- $ 513

Marc H. Cremer ................... 1998 $203,418 -- -- -- 75,000(2) -- $ 288
Vice President of Sales 1997 $ 24,000 $ 15,540 -- -- 25,000 -- --
1996 -- -- -- -- -- -- --

Bassam Khoury .................... 1998 $140,732 -- -- -- 74,746(2) -- $ 106
Vice President of 1997 $147,574 -- -- -- 41,430(3) -- $ 87
Marketing 1996 $141,886 $ 20,000 -- -- 25,000 -- $ 73

Gelu Voicu ....................... 1998 $126,523 -- -- -- 83,000(2) -- $ 183
Vice President of 1997 $131,323 -- -- -- 64,500(3) -- $ 174
Product Engineering and 1996 $ 98,288 -- -- -- 34,500 -- $ 153
Manufacturing

Daryl E. Stemm (1) ............... 1998 $125,000 -- -- -- 125,000(2) -- $ 91
Former Vice President, 1997 $108,654 -- -- -- 114,900(3) -- $ 66
Finance and Administration, 1996 $ 96,463 -- -- -- 33,000 -- $ 42
and Chief Financial Officer
</TABLE>
-20-
<PAGE> 25

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chris P. Carstens (1) ............ 1998 $168,596 -- -- -- 150,000(2) -- $ 47,427(6)
Former Vice President, 1997 $129,808 -- -- -- 75,000(3) -- $ 261
Quality and Reliability 1996 $134,770 -- -- -- 50,000 -- $ 261
</TABLE>

- ----------

(1) Mr. Powell's employment with the Company terminated March 19, 1998 on
which date Mr. Vanco became President and Chief Executive Officer. Mr.
Stemm's employment with the Company terminated May 29, 1998. Mr. Carstens
employment with the Company terminated April 13, 1998.

(2) Options listed for fiscal 1998 long-term compensation awards reflect
options granted as a result of repricings (and consequent cancellation of
previously granted options) on January 15, 1998. See "Ten-Year Option
Repricings." Options to purchase the following number of shares granted to
the following persons in fiscal 1998 were issued as a result of the
repricing on January 15, 1998 of previously granted options: Mr. Powell -
549,000; Mr. Vanco - 313,166; Mr. Cremer - 75,000; Mr. Khoury - 74,746;
Mr. Voicu - 83,000; Mr. Stemm - 125,000; Mr. Carstens - 150,000. Such
repriced options have been reflected as grants in prior fiscal year
long-term compensation awards to the extent applicable, however, the
75,000 shares granted to Mr. Cremer do not include 50,000 share previously
granted in fiscal 1998 to Mr. Cremer, and the 83,000 shares granted to Mr.
Voicu do not include 15,000 shares previously granted in fiscal 1998 to
Mr. Voicu. The repriced options retain the same vesting schedule as the
options that were replaced but may be exercised for a period of ten years
following the date of the repricing.

Does not include options granted to the following individuals prior to the
end of fiscal 1998 which options remain subject to stockholder approval of
an increase in the number of shares available under the Company's stock
option plan: Mr. Vanco - 100,000; Mr. Cremer - 25,000; Mr. Khoury -
20,000; Mr. Voicu - 20,000; Mr. Stemm - 25,000. Also does not include
options proposed to be granted to the following individuals for which
stockholder approval is being sought in Proposal 5 above: Mr. Vanco -
1,000,000; Mr. Cremer - 200,000; Mr. Khoury - 200,000; and Mr. Voicu -
200,000.

(3) Options listed for fiscal 1997 long-term compensation awards reflect
options granted as a result of repricings (and consequent cancellation of
previously granted options) on December 3, 1996. See Option Repricing
Table. Options to purchase the following number of shares granted to the
following persons in fiscal 1997 were issued as a result of the repricing
on December 3, 1996 of previously granted options: Mr. Powell - 150,000;
Mr. Vanco - 167,500; Mr. Khoury - 31,430; Mr. Voicu - 44,500; Mr. Stemm -
33,000; Mr. Carstens - 50,000. Such repriced options have been reflected
as grants in prior fiscal year long-term compensation awards to the extent
applicable. The repriced options retain the same vesting schedule as the
options that were replaced but may be exercised for a period of ten years
following the date of the repricing.

(4) The amount included under "All Other Compensation" for each Named Officer
other than Messrs. Powell and Carstens represents the assigned dollar
value of group term life insurance premiums paid by the Company for the
benefit of such Named Officer.

(5) $422,500 represents Mr. Powell's severance and benefits accrued upon his
termination of employment and $263,429 represents the forgiveness of a
loan owed to the Company upon termination of his employment with the
Company, plus a tax gross-up for such payment pursuant to a loan
forgiveness agreement with the Company. The remainder represents life
insurance premiums and the assigned value of group term life insurance
premiums paid by the Company for the benefit of such Named Officer. See
"Certain Relationships and Related Transactions."

(6) $47,125 represents Mr. Carstens' severance and benefits accrued upon his
termination of employment. The remainder represents the assigned value of
group term life insurance premiums paid by the Company for the benefit of
such Named Officer. See "Certain Relationships and Related Transactions."

EMPLOYEE BENEFIT PLANS

Each current Named Officer is entitled to participate in the Option Plan.
The Option Plan provides for the grant of options, stock purchase rights, SARs
and long-term performance awards.

The following table sets forth certain information with respect to stock
options granted during fiscal 1998 to the Named Officers. No SARs were granted
in fiscal 1998. In accordance with the rules of the Securities and Exchange
Commission, also shown below is the potential realizable value over the term of
the option (the period from the grant date to the expiration date) based on
assumed rates of stock appreciation from the option exercise price of 5% and
10%, compounded annually. These amounts are based on certain assumed rates of
appreciation and do not represent the Company's estimate of future stock price.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of the Common Stock.

-21-
<PAGE> 26

OPTION GRANTS IN FISCAL 1998

<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
------------------------------------------------- ------------------------------------------
Percent of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees in or Base Expiration
Name Granted(#)(1) Fiscal Year(5) Price($/SH) Date 5%($) 10%($)
- ----------------- ------------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
C. Michael Powell ....... 230,770(2) N/A $ 1.0625 01/14/08 $154,200 $390,775
68,230(2) N/A $ 1.0625 01/14/08 $ 45,591 $115,537
50,000(2) N/A $ 1.0625 01/14/08 $ 33,410 $ 84,668
100,000(2) N/A $ 1.0625 01/14/08 $ 66,820 $169,355
100,000(2) N/A $ 1.0625 01/14/08 $ 66,820 $169,335

Radu M. Vanco ........... 22,315(2) N/A $ 1.0625 01/14/08 $ 14,910 $ 37,787
10,185(2) N/A $ 1.0625 01/14/08 $ 6,806 $ 17,247
30,000(2) N/A $ 1.0625 01/14/08 $ 20,046 $ 50,801
35,666(2) N/A $ 1.0625 01/14/08 $ 23,832 $ 60,395
50,000(2) N/A $ 1.0625 01/14/08 $ 33,410 $ 84,668
50,000(2) N/A $ 1.0625 01/14/08 $ 33,410 $ 84,668
55,000(2) N/A $ 1.0625 01/14/08 $ 36,751 $ 93,134
60,000(2) N/A $ 1.0625 01/14/08 $ 40,092 $101,601

Marc H. Cremer .......... 50,000(3) 8.5% $ 1.6250 06/17/07 N/A N/A
50,000(4) N/A $ 1.0625 01/14/08 $ 33,410 $ 84,668
25,000(2) N/A $ 1.0625 01/14/08 $ 16,705 $ 42,334

Bassam Khoury ........... 25,000(3) 4.2% $ 1.6250 06/17/07 N/A N/A
25,000(4) N/A $ 1.0625 01/14/08 $ 16,705 $ 42,334
2,482(2) N/A $ 1.0625 01/14/08 $ 1,658 $ 2,447
3,834(2) N/A $ 1.0625 01/14/08 $ 2,562 $ 6,492
2,000(2) N/A $ 1.0625 01/14/08 $ 1,336 $ 1,756
11,430(2) N/A $ 1.0625 01/14/08 $ 7,638 $ 19,355
10,000(2) N/A $ 1.0625 01/14/08 $ 6,682 $ 16,934
10,000(2) N/A $ 1.0625 01/14/08 $ 6,682 $ 16,934
10,000(2) N/A $ 1.0625 01/14/08 $ 6,682 $ 16,934

Gelu Voicu .............. 15,000(3) 2.5% $2.28125 10/16/07 N/A N/A
15,000(4) N/A $ 1.0625 01/14/08 $ 10,023 $ 25,400
6,000(2) N/A $ 1.0625 01/14/08 $ 4,009 $ 10,160
7,500(2) N/A $ 1.0625 01/14/08 $ 5,012 $ 12,700
24,500(2) N/A $ 1.0625 01/14/08 $ 16,371 $ 41,487
10,000(2) N/A $ 1.0625 01/14/08 $ 6,682 $ 16,934
10,000(2) N/A $ 1.0625 01/14/08 $ 6,682 $ 16,934
10,000(2) N/A $ 1.0625 01/14/08 $ 6,682 $ 16,934

Daryl E. Stemm .......... 1,373(2) N/A $ 1.0625 01/14/08 $ 917 $ 2,325
8,727(2) N/A $ 1.0625 01/14/08 $ 5,831 $ 14,778
33,000(2) N/A $ 1.0625 01/14/08 $ 22,051 $ 55,881
56,900(2) N/A $ 1.0625 01/14/08 $ 38,021 $ 96,352
25,000(2) N/A $ 1.0625 01/14/08 $ 16,705 $ 42,334

Chris P. Carstens ....... 30,000(2) N/A $ 1.0625 01/14/08 $ 20,046 $ 50,801
10,000(2) N/A $ 1.0625 01/14/08 $ 6,682 $ 16,934
35,000(2) N/A $ 1.0625 01/14/08 $ 23,387 $ 59,267
25,000(2) N/A $ 1.0625 01/14/08 $ 16,705 $ 42,334
25,000(2) N/A $ 1.0625 01/14/08 $ 16,705 $ 42,334
25,000(2) N/A $ 1.0625 01/14/08 $ 16,705 $ 42,334
</TABLE>

- ----------

(1) Does not include options granted by the Board of Directors to the
following Named Officers in fiscal 1998 which options remain subject to
stockholder approval of the Board's increase in the number of shares
available under the Company's stock option plan: Mr. Vanco - 100,000; Mr.
Cremer - 25,000; Mr. Khoury - 20,000; Mr. Voicu - 20,000; Mr. Stemm -
25,000. Also does not include options expected to be granted by the Board
of Directors to the following Named Officers which grants remain subject
to stockholder approval of the 1998 Plan and such grants: Mr. Vanco -
1,000,000; Mr. Cremer - 200,000; Mr. Gay - 200,000; Mr. Khoury - 200,000;
and Mr. Voicu - 200,000.

-22-
<PAGE> 27

(2) Represents an option granted in December 1998 in replacement of a
previously outstanding option with an exercise price above $1.0625 in
connection with the repricing of such option.

(3) The referenced options were originally granted in fiscal 1998 and were
subsequently repriced in the same fiscal year on January 15, 1998. The
grant constituting the repricing is reflected in the next entry in the
table. See Note 4 below and "Ten-Year Option Repricings" below. The 5% and
10% "Potential Realizable Value at Assumed Annual Rates of Stock Price
Appreciation for Option Term" have not been included since such options
were replaced by such repricing in the same fiscal year.

(4) This option constitutes the repricing of the option originally granted
during fiscal 1998 as reported in the preceding entry in this table. See
Note 2 above and "Ten-Year Option Repricings" below.

(5) The "Percent of Total Options Granted to Employees in Fiscal Year" has
been provided only as to options originally granted during fiscal 1998 and
not as to repricings.

The following table sets forth information with respect to options
exercised in fiscal 1998 by the Named Officers and the value of unexercised
options at April 30, 1998.

AGGREGATE OPTION EXERCISES IN FISCAL 1998
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
April 30, 1998(#)(1) April 30, 1998($)(2)
Shares Acquired Value --------------------------- ---------------------------
Name on Exercise(#) Received($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. Michael Powell.......... 0 0 549,000 -- 0 0
Radu M. Vanco.............. 0 0 101,298 211,864 0 0
Marc H. Cremer............. 0 0 22,395 52,604 0 0
Bassam Khoury.............. 0 0 30,231 44,511 0 0
Gelu Voicu................. 0 0 43,959 39,037 0 0
Daryl E. Stemm............. 0 0 50,403 74,597 0 0
Chris P. Carstens.......... 0 0 96,415 -- 0 0
</TABLE>

- ----------

(2) Represents the market price at fiscal year end ($0.8125) less the exercise
price. For purposes of this calculation, the fiscal year end market price
of the shares is deemed to be the closing sale price of the Company's
Common Stock as reported on the NASDAQ Stock Market on April 30, 1998.

DIRECTOR COMPENSATION

In addition to options granted pursuant to the Company's stock option
plans, nonemployee directors (including directors who are consultants) receive
quarterly fees in an amount equal to $3,600 for each quarter in which such
director attends a Board meeting. See "Certain Relationships and Related
Transactions" for other payments and arrangements with directors.

Notwithstanding anything to the contrary set forth in any of the Company's
filings under the Securities Act of 1933 or the Securities Exchange Act of 1934
that might incorporate future filings, including this Proxy Statement, in whole
or in part, the following Report on Compensation of Executive Officers, Report
on Repricings of Options and Performance Graph shall not be deemed to be
incorporated by reference into any such filings.

-23-
<PAGE> 28

REPORT ON COMPENSATION OF EXECUTIVE OFFICERS

The following is a report of the Compensation Committee of the Board of
Directors of the Company (the "Committee") describing the compensation
philosophy and parameters applicable to the Company's executive officers with
respect to the compensation paid to such officers during fiscal 1998. The actual
compensation paid to the Named Officers during fiscal 1998 is shown in the
"Summary Compensation Table."

The Committee is responsible for reviewing the Company's compensation
policies and the actual compensation paid to the Company's executive officers.
At the end of fiscal 1998, the Committee was comprised of two (2) of the
non-employee directors, Hideyuki Tanigami and Patrick Verderico. All policies
and actual compensation were submitted to the full Board for final approval.

Compensation Philosophy. The general philosophy of the Company's
compensation program is to offer the Company's Chief Executive Officer and other
executive officers competitive compensation packages based upon both the
Company's performance as well as the individual's performance and contributions.
The Company's compensation policies are intended to motivate and reward highly
qualified executives for long-term strategic management and the enhancement of
stockholder value, to support a performance-oriented environment that rewards
achievement of specific internal Company goals and to attract and retain
executives whose abilities are critical to the long-term success and
competitiveness of the Company. This is further subject to the Company's
financial condition and results of operations. The Company's compensation
program is comprised of three main components, Base Salary, Bonus Plan and Stock
Options.

Base Salary. Base salary for executive officers is set annually by
reviewing the competitive pay practices of comparable companies, the skills and
performance level of the individual executives and the needs of the Company.

Bonus Plan. The Company's officers are eligible for bonuses under the
terms of individual bonus arrangements. When bonuses are given, they are based
upon the individual's achievement of specific corporate goals as well as the
individual's experience and contributions to the success of the Company.

During fiscal 1998, Messrs. Powell and Vanco received bonuses. See
"Compensation of Chief Executive Officer" in this Report on Compensation and
"Certain Relationships and Related Transactions." No other executive officer
received a bonus during fiscal 1998.

Stock Options. The Committee believes that stock options provide
additional incentives to officers to work toward maximizing stockholder value.
The Committee views stock options as one of the more important components of the
Company's long-term, performance-based compensation philosophy. These options
are provided through initial grants at or near the date of hire and through
subsequent periodic grants based upon performance and promotions, as well as
additional grants to provide continuing motivation as earlier grants vest in
full. Options granted by the Company to its executive officers and other
employees have exercise prices equal to fair market value at the time of grant
and, generally, vest over a four-year period. In addition, on January 15, 1998
the Company repriced its outstanding options to $1.0625 per share, the then
current fair market value of the Company's Common Stock.

Severance Arrangements. See "Certain Relationships and Related
Transactions" for a description of severance arrangements for the executive
officers.

Compensation for the Chief Executive Officer. Mr. Vanco's base salary was
established at a level which the Committee determined to be similar to the
amounts paid by comparably sized companies similarly situated. He also received
a bonus of $69,391 in fiscal 1998 which equaled the principal and accrued
interest due and payable on a loan owed to the Company, plus a tax gross-up for
such payment pursuant to a loan forgiveness agreement with the Company. While
Mr. Powell was Chief Executive Officer his base salary was established at a
level which the Committee determined to be similar to the amounts paid by
comparably sized companies. He also received a bonus of $80,658 in fiscal 1998
which equaled the principal and accrued interest due and payable on a loan owed
to the

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<PAGE> 29

Company, plus a tax gross-up for such payment pursuant to a loan forgiveness
agreement with the Company. See "Certain Relationships and Related
Transactions."

The Committee considers equity based compensation, in the form of stock
options, to be an important component of a Chief Executive Officer's
compensation. These grants are intended to motivate leadership for long-term
Company growth and profitability. During fiscal 1998, Mr. Vanco was granted
options to purchase 100,000 shares of the Company's Common Stock at the exercise
price of $0.6875, however, such options are not effective unless and until an
increase in the number of shares available under the Company's option plan is
approved by the Company's stockholders.

Tax Deductibility of Executive Compensation. The Committee has considered
the potential impact of Section 162(m) of the Internal Revenue Code adopted
under the federal Revenue Reconciliation Act of 1993. This Section disallows a
tax deduction for any publicly-held corporation for individual compensation
exceeding $1,000,000 in any taxable year for any of the executive officers named
in the Proxy Statement, unless compensation is performance-based. The Committee
has studied the impact of Section 162(m) on the Company's Option Plan.

THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

Hideyuki Tanigami
Patrick Verderico

REPORT ON REPRICING OF OPTIONS

On January 15, 1998, the Board of Directors of the Company unanimously
approved resolutions authorizing the repricing of certain outstanding stock
options held by all then employees, including officers, and certain consultants
of the Company on the terms described below. The overall purpose of the
Company's stock option plan had been to attract and retain the services of the
Company's employees and to provide incentives to such persons to exert
exceptional efforts for the Company's success. The Committee concluded that the
decline in the market value of the Company's Common Stock had diminished the
value of the Company's stock option program as an element of the Company's
compensation arrangements. Accordingly, the Board approved the repricing program
described below.

All outstanding and unexercised options granted prior to January 15, 1998
with an exercise price above $1.0625 per share, the closing price on January 15,
2008, held by employees of the Company, including officers, and certain
consultants were repriced to the new price of $1.0625. The expiration date of
the new repriced options is January 15, 2008.

THE BOARD OF DIRECTORS

Lionel M. Allan
Hideyuki Tanigami
Radu M. Vanco
Patrick Verderico

-25-
<PAGE> 30

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors.
During fiscal 1998, Messrs. Tanigami and Verderico served as the members of the
Compensation Committee of the Board of Directors. Mr. Tanigami, Chairman of the
Board of Directors was employed by the Company in various capacities from
October 1985 to April 1994 including the most recent position as Vice President
of Corporate Development. Messrs. Powell and Vanco participated in the Board's
final approval of executive compensation matters.

TEN-YEAR OPTION REPRICINGS

The Named Officers of the Company received repriced stock options on
January 19, 1998, May 14, 1994, December 3, 1996 and January 15, 1998 as set
forth below. This does not include a repricing of outstanding options that were
approved by the Board on September 22, 1998 to $0.125:

<TABLE>
<CAPTION>
Length of
Original
Number of Market Option Term
Securities Price Exercise Remaining
Underlying of Stock Price at New at Date of
Option at Time of Time of Exercise Repricing
Name and Position Date Repriced(#) Repricing($) Repricing($) Price($) (Months)
----------------- ---------------- ----------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
C. Michael Powell ............ January 15, 1998 230,770 $1.0625 $ 1.9375 $1.0625 76
Former Chairman, President January 15, 1998 68,230 $1.0625 $ 1.9375 $1.0625 76
and Chief Executive January 15, 1998 50,000 $1.0625 $ 2.6875 $1.0625 107
Officer January 15, 1998 100,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 100,000 $1.0625 $ 1.5625 $1.0625 111
December 3, 1996 50,000 $2.6875 $ 5.2500 $2.6875 104
December 3, 1996 100,000 $2.6875 $ 6.0000 $2.6875 111
May 14, 1994 250,000 $1.9375 $ 5.7500 $1.9375 117
January 19, 1994 250,000 $5.7500 $13.0000 $5.7500 117

Radu M. Vanco................. January 15, 1998 22,315 $1.0625 $ 1.9375 $1.0625 76
President and Chief January 15, 1998 10,185 $1.0625 $ 1.9375 $1.0625 76
Executive Officer January 15, 1998 30,000 $1.0625 $ 1.9375 $1.0625 76
January 15, 1998 35,666 $1.0625 $ 1.9370 $1.0625 76
January 15, 1998 50,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 50,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 55,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 60,000 $1.0625 $ 1.5625 $1.0625 111
December 3, 1996 50,000 $2.6875 $ 5.2500 $2.6875 104
December 3, 1996 62,500 $2.6875 $ 7.2500 $2.6875 107
December 3, 1996 55,000 $2.6875 $ 6.0000 $2.6875 111
May 14, 1994 52,221 $1.9375 $ 6.3000 $1.9375 116
May 14, 1994 19,445 $1.9375 $ 5.7500 $1.9375 116
May 14, 1994 50,000 $1.9375 $ 5.7500 $1.9375 117
January 19, 1994 52,221 $5.7500 $ 6.3000 $5.7500 95
January 19, 1994 19,445 $5.7500 $15.5000 $5.7500 103
January 19, 1994 50,000 $5.7500 $13.0000 $5.7500 105

Marc H. Cremer................ January 15, 1998 25,000 $1.0625 $ 2.3125 $1.0625 110
Vice President of Sales January 15, 1998 50,000 $1.0625 $ 1.6250 $1.0625 113

Bassam Khoury................. January 15, 1998 2,482 $1.0625 $ 1.9375 $1.0625 76
Vice President of January 15, 1998 3,834 $1.0625 $ 1.9375 $1.0625 76
Marketing January 15, 1998 2,000 $1.0625 $ 1.9375 $1.0625 76
January 15, 1998 11,430 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 10,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 10,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 10,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 25,000 $1.0625 $ 1.6250 $1.0625 115
December 3, 1996 11,430 $2.6875 $ 4.1250 $2.6875 114
</TABLE>

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<PAGE> 31

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 3, 1996 10,000 $2.6875 $ 7.2500 $2.6875 107
December 3, 1996 10,000 $2.6875 $ 5.0000 $2.6875 112
May 14, 1994 10,000 $1.9375 $ 5.7500 $1.9375 103
May 14, 1994 6,666 $1.9375 $ 5.7500 $1.9375 117
May 14, 1994 4,444 $1.9375 $ 5.7500 $1.9375 117
January 19, 1994 6,666 $5.7500 $ 7.2000 $5.7500 109
January 19, 1994 4,444 $5.7500 $ 9.0000 $5.7500 111

Gelu Voicu.................... January 15, 1998 15,000 $1.0625 $2.28125 $1.0625 117
Vice President of Product January 15, 1998 6,000 $1.0625 $ 1.9375 $1.0625 76
Engineering and January 15, 1998 7,500 $1.0625 $ 1.9370 $1.0625 76
Manufacturing January 15, 1998 24,500 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 10,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 10,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 10,000 $1.0625 $ 2.6875 $1.0625 107
December 3, 1996 24,500 $2.6875 $ 5.2500 $2.6875 104
December 3, 1996 10,000 $2.6875 $ 7.2500 $2.6875 107
December 3, 1996 10,000 $2.6875 $ 5.0000 $2.6875 112
May 14, 1994 8,000 $1.9375 $ 5.7500 $1.9375 115

Daryl E. Stemm.............. January 15, 1998 1,373 $1.0625 $ 1.9375 $1.0625 76
Former Vice President, January 15, 1998 8,727 $1.0625 $ 1.9375 $1.0625 76
Finance and January 15, 1998 33,000 $1.0625 $ 2.6875 $1.0625 107
Administration, and January 15, 1998 56,900 $1.0625 $ 2.7500 $1.0625 109
Chief Financial Officer January 15, 1998 25,000 $1.0625 $ 1.5625 $1.0625 111
December 3, 1996 33,000 $2.6875 $ 6.0000 $2.6875 111
May 14, 1994 4,333 $1.9375 $ 5.7500 $1.9375 117
January 19, 1994 4,333 $5.7500 $ 6.3000 $5.7500 109

Chris P. Carstens........... January 15, 1998 30,000 $1.0625 $ 1.9375 $1.0625 76
Former Vice President, January 15, 1998 10,000 $1.0625 $ 1.9375 $1.0625 76
Quality and Reliability January 15, 1998 35,000 $1.0625 $ 2.5000 $1.0625 70
January 15, 1998 25,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 25,000 $1.0625 $ 2.6875 $1.0625 107
January 15, 1998 25,000 $1.0625 $ 1.5625 $1.0625 111
December 3, 1996 25,000 $2.6875 $ 5.2500 $2.6875 104
December 3, 1996 25,000 $2.6875 $ 6.0000 $2.6875 111
May 14, 1994 30,000 $1.9375 $ 5.7500 $1.9375 115
</TABLE>

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<PAGE> 32

PERFORMANCE GRAPH

The following line graph compares the annual percentage change in the
cumulative total stockholder return for the Company's Common Stock with the S&P
500 Index and the S&P Electronics (Semi/Components) Index for the period
commencing May 11, 1993 (the date the Company's Common Stock first traded on The
Nasdaq National Market) and ending on April 30, 1998. The graph assumes that
$100 was invested on May 11, 1993, the date of the Company's initial public
offering, and that all dividends are reinvested. Historic stock price
performance should not necessarily be considered indicative of future stock
price performance.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CATALYST SEMICONDUCTOR, INC., THE S & P 500 INDEX
AND THE S & P ELECTRONICS (SEMICONDUCTORS) INDEX

[GRAPH]

<TABLE>
<CAPTION>
Cumulative Total Return
----------------------------------------------------------------------
5/11/93 3/31/94 3/31/95 4/30/96 4/30/97 4/30/98
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Catalyst Semiconductor, Inc. $100 $ 40.74 $ 37.04 $ 50.00 $ 12.50 $ 6.02
S & P 500 $100 $103.99 $120.18 $161.10 $201.59 $284.37
S & P Electronics (Semiconductors) $100 $139.63 $167.68 $216.52 $427.04 $451.84
</TABLE>

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, which might incorporate future filings made by
the Company under those statutes, the preceding Report of the Compensation
Committee of the Board of Directors on Executive Compensation, the Report of the
Board of Directors on Option Repricing and the Performance Graph are not to be
incorporated by reference into any of those previous filings; nor is such report
or graph to be incorporated by reference into any future filings which the
Company may make under those statutes.

-28-
<PAGE> 33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
December 8, 1998 by (i) each beneficial owner of more than 5% of the Company's
Common Stock, (ii) each director, (iii) each Named Officer and (iv) all current
directors and executive officers as a group. Except as otherwise indicated, each
person has sole voting and investment power with respect to all shares shown as
beneficially owned, subject to community property laws where applicable.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
-----------------------
NUMBER PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OF TOTAL
- ------------------------------------ --------- --------
<S> <C> <C>
Elex N.V ......................................... 5,500,000 39.4%
Transportstraat 1
B 3980
Tessenderlo, Belgium

United Microelectronics Corp. .................... 650,000 4.7%
No. 13, Innovation Road I
Science-Based Industrial Park
Hsin-Chei City, Taiwan R.O.C.

C. Michael Powell(1) ............................. 549,000 3.8%

Radu M. Vanco(1) ................................. 249,535 1.8%

Lionel M. Allan(1) ............................... 75,833 *

Hideyuki Tanigami(1) ............................. 82,082 *

Patrick Verderico(1) ............................. 15,832 *

Marc H. Cremer(1) ................................ 44,770 *

William Felton-Priestner.......................... 17,462 *

Bassam Khoury(1) ................................. 61,013 *

Irv Kovalik....................................... 0 *

Juzer Mogri....................................... 0 *

Frank Reynolds.................................... 0 *

Gelu Voicu(1) .................................... 74,085 *

Thomas E. Gay III ................................ 10,000 *

Daryl E. Stemm(1) ................................ 150,000 1.1%

Chris P. Carstens(1) ............................. 96,415 *

All current directors and executive officers
as a group (12 persons)(2) .................... 630,612 4.3%
</TABLE>

- ----------
* Percentage of shares beneficially owned is less than one percent of total.

-29-
<PAGE> 34

(1) Includes shares issuable upon exercise of stock options as of December 8,
1998 or within 60 days thereafter as follows:

<TABLE>
<S> <C>
C. Michael Powell........... 549,000 shares at $1.0625

Radu M. Vanco............... 249,535 shares at $0.1250

Lionel M Allan.............. 20,000 shares at $5.1250
5,000 shares at $5.0000
2,500 shares at $1.6875
48,333 shares at $0.1250

Hideyuki Tanigami........... 66,250 shares at $0.1250
2,500 shares at $1.6875
13,332 shares at $6.0000

Patrick Verderico........... 13,332 shares at $5.0000
2,500 shares at $1.6875

Marc H. Cremer.............. 31,770 shares at $0.1250

William Felton-Priestner.... 17,462 shares at $0.1250

Thomas E. Gay III........... 10,000 shares at $0.1250

Bassam Khoury............... 48,865 shares at $0.1250

Gelu Voicu.................. 60,039 shares at $0.1250

Daryl E. Stemm.............. 150,000 shares at $1.0625

Chris P. Carstens........... 96,415 shares at $1.0625
</TABLE>

(2) Includes 591,418 shares issuable upon exercise of stock options as of
December 8, 1998 or within 60 days thereafter, held by Messrs. Vanco,
Allan, Tanigami, Verderico, Cremer, Gay, Khoury and Voicu as described in
Note 1 above.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During fiscal 1998, the Company recorded approximately $413,000 of
consulting fees to Essex S.A., a Romanian corporation ("Essex"), and to certain
parties affiliated with Essex, for engineering services. Radu M. Vanco, the
Company's President and Chief Executive Officer indirectly owns 91% of the
capital stock of Essex. Negotiations with Essex to determine the fee for such
services were conducted as an arms length commercial negotiation and did not
include any participation by Mr. Vanco.

In March 1994, the Company loaned Radu M. Vanco, then Vice President
Engineering and, from October 1995 to March 1998, Executive Vice President of
Engineering and since then President and Chief Executive Officer, $100,000
payable in two years with interest at 6% per annum. The loan proceeds were used
by Mr. Vanco for his home. On March 12, 1996, the Company and Mr. Vanco agreed
to a bonus arrangement which has the effect of (a) forgiving the principal and
accrued interest on the note on a monthly basis over two years commencing March
16, 1996 as long as he remains employed by the Company and (b) forgiving the
principal and accrued interest immediately upon his termination without cause or
upon a change in control. All principal and accrued interest on the note is
immediately due and payable upon his voluntarily resignation or termination for
cause. Pursuant to this arrangement, payment of the principal and accrued
interest was satisfied in full in March 1998.

In September 1995, the Company loaned C. Michael Powell, Chairman, Chief
Executive Officer, President and Chief Financial Officer of the Company,
$200,000 payable in five years with interest at 7% per annum. The loan proceeds
were used by Mr. Powell for his home. The agreement between the parties contains
a bonus

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<PAGE> 35

arrangement which has the effect of (a) forgiving the principal and accrued
interest on the note over five years on a monthly basis commencing October 7,
1995 for so long as he remains employed by the Company, (b) forgiving the
principal and accrued interest immediately upon his termination without cause or
upon a change of control, (c) an additional amount equal to any federal or state
taxes payable with respect to such bonuses. All principal and accrued interest
on the note is immediately due and payable upon his voluntarily resignation or
termination for cause. Upon his termination in March 1998, the Company accrued
an aggregate of $263,429 in satisfaction of such loan, all accrued interest
thereon and the tax payment. In addition, the vesting of all options was
accelerated.

The Company entered into agreements with Messrs. Vanco, Cremer, Gay,
Georgescu, Khoury, Voicu and Stemm dated May 1998, April 1998, June 1998, April
1998, April 1998, April 1998 and September 1995, respectively, which entitle
such officers to certain severance payments in the event of an involuntary
termination as a result of a merger, sale or change in ownership of the Company
(a "Change of Control") and certain other benefits upon any involuntary
termination by the Company without cause (an "Involuntary Termination").
Pursuant to the terms and conditions of said agreements, such individuals will
receive the following benefits: (a) Mr. Vanco - for Involuntary Termination as a
result of a Change of Control he shall receive severance payments equal to 2,
1-1/2, 1 and 1 times his annual salary if terminated within one, two, three, or
four (or more) years, respectively, following his agreement payable over one
year plus benefits for six months and all stock options shall be immediately
vested and be exercisable for a period of three years; for any other Involuntary
Termination he shall receive a severance payment equal to his annual salary
payable over one year and all stock options shall be immediately vested and be
exercisable for a period of three years; (b) each of Messrs. Cremer, Gay,
Georgescu, Khoury and Voicu for Involuntary Termination as a result of a Change
of Control he shall receive a severance payment equal to one-half his annual
salary payable over six months and all unvested options shall immediately vest
and be exercisable for one year; for any other Involuntary Termination he shall
receive a severance payment equal to one-quarter of his annual salary payable
over six months and all vested options shall be exercisable for a period of one
year; and (c) Mr. Stemm - for an Involuntary Termination he would receive a
severance payment equal to one-half of his annual salary and benefits payable
over six months plus vesting of all outstanding options over such six-month
period which options shall be exercisable for a period of one year; Mr.
Stemm's employment terminated in May 1998.

The Company entered into agreements with Messrs. Powell and Carstens dated
August 1995 and April 1995, respectively, which entitle such officers to certain
severance payments in the event of an involuntary termination as a result of a
merger, sale or change in ownership of the Company (a "Change of Control") and
certain other benefits upon any involuntary termination by the Company without
cause (an "Involuntary Termination"). Pursuant to the terms and conditions of
said agreements, such individuals will receive the following benefits: (a) Mr.
Powell - for Involuntary Termination as a result of a Change of Control he would
receive severance payments equal to 2, 1-1/2, 1 and -1/2 times his annual salary
if terminated within one, two, three, or four (or more) years, respectively,
following his agreement plus benefits for six months ; for an Involuntary
Termination he would receive a severance payment equal to his annual salary;
upon a Change of Control or his death or Involuntary Termination, all stock
options would be immediately vested and be exercisable for a period of three
years following any such death or Involuntary Termination; Mr. Powell's
employment terminated in March 1998 and the Company accrued expenses aggregating
$422,520 for such severance and benefits; subsequent thereto the Company and Mr.
Powell entered into a Severance Agreement and Mutual Release dated October 23,
1998 which modified such agreement to reduce amounts payable thereunder by
$121,875; and (b) Mr. Carstens - for Involuntary Termination as a result of a
Change of Control he would receive a severance payment equal to one-half his
annual salary and benefits; for any other Involuntary Termination he would
receive a severance payment equal to one-quarter of his annual salary payable
over one year; Mr. Carstens' employment terminated in April 1998 and the Company
accrued expenses aggregating $47,125 for such severance and benefits; subsequent
thereto the Company and Mr. Carstens entered into a Settlement Agreement and
Release dated April 22, 1998 which was amended November 12, 1998 which modified
such agreement to reduce amounts payable thereunder by $5,577.

Messrs. Allan and Tanigami serve as consultants to the Company. During
fiscal 1998 Mr. Allan's company, Allan Advisors, Inc., received consulting fees
of $5,000 per month plus a fixed allowance for reimbursement of office expenses
of $1,000 per month. Mr. Allan's agreement has been extended through August
2001. Mr. Tanigami receives $6,000 per month for consulting services pursuant to
an at-will arrangement.

-31-
<PAGE> 36

The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by the Delaware General Corporation
Law. The Company's Bylaws also provide that the Company shall indemnify its
directors, officers, employees and agents in such circumstances. In addition,
the Company has entered into separate indemnification agreements with its
officers and directors that may require the Company, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors or officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.

Hideyuki Tanigami, a director of the Company, is President of Marubun USA
Corporation, a wholly owned subsidiary of Marubun Japan. During fiscal 1998,
Marubun Japan was a distributor of the Company's products in Japan and accounted
for approximately 21% of the Company's net revenues in fiscal 1998. In December
1997, Marubun resigned as a distributor effective in or about March 1998.

In connection with the sale by the Company and the purchase by United
Microelectronics Corporation, a corporation organized and existing under the
laws of the Republic of China ("UMC"), of 650,000 shares of Common Stock in
February 1996, UMC agreed to provide the Company with specified levels of wafer
supplies and UMC and the Company entered into certain mutual licensing
arrangements. UMC also obtained certain registration rights relating to the
Common Stock purchased.

In September 1998, the Company issued to Elex n.v., a corporation
organized and existing under the laws of Belgium ("Elex"), an aggregate of
4,000,000 shares of Common Stock in exchange for $0.25 per share for an
aggregate cash consideration of $1,000,000. Elex already held 1,500,000 shares
purchased in May 1998 at a purchase price of $1.00 per share for an aggregate
cash consideration of $1,500,000. As a part of both purchases the Company was
granted certain rights to repurchase the stock at fixed prices above the
original purchase price. In addition, Elex has executed a standstill agreement
under which it agreed it would not acquire additional stock, enter into other
voting arrangements, seek to control the Company, solicit proxies or take other
similar actions, and under which it would execute or vote for all proxies
solicited by the management or board of the Company.

The terms of the transactions described above were negotiated at arms
length such that the terms were as favorable to the Company as could have been
obtained from an unaffiliated third party.

SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file an initial report of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Securities and Exchange Commission (the
"SEC") and the National Association of Securities Dealers, Inc. Executive
officers, directors and greater than ten percent stockholders are also required
by SEC rules to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of copies of such forms received by it, the
Company believes that during fiscal 1998, all such reports were timely filed
except for late filings of a Form 3 by each of Messrs. Cremer, Georgescu,
Khoury, and Voicu. Again based solely on its review of copies of such forms
received by it, the Company believes that all filing requirements applicable to
its officers, directors and ten percent stockholders have been complied with.

1934 EXCHANGE ACT REPORTS

The Company hereby undertakes to mail, without charge, to any stockholder
of the Company upon written request, copies of reports it files with the
Securities and Exchange Commission, including financial statements, schedules
and exhibit lists contained therein. Requests should be sent to the Chief
Financial Officer of the Company at its principal executive offices at 1250
Borregas Avenue, Sunnyvale, California 94089. Such documents are also available
on EDGAR at the website of the Securities and Exchange Commission at
www.sec.gov.

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<PAGE> 37
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS TO BE
PRESENTED AT NEXT ANNUAL MEETING

Proposals to be presented by stockholders of the Company at the Company's
1999 Annual Meeting must be received by the Company at its principal executive
offices no later than April 21, 1999. Such proposals may be included in next
year's proxy statement if they comply with the applicable rules and regulations
promulgated by the United States Securities and Exchange Commission.

OTHER MATTERS

The Company knows of no other matters to be submitted at the meeting. If
any other matters properly come before the meeting or any adjournment or
postponement thereof, it is the intention of the persons named in the enclosed
form of Proxy to vote the shares they represent as the Board of Directors may
recommend.

FOR THE BOARD OF DIRECTORS

PETER COHN
Secretary

Dated: December 17, 1998

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<PAGE> 38

APPENDIX I

RESTATED CERTIFICATE OF INCORPORATION

CATALYST SEMICONDUCTOR, INC.

CATALYST SEMICONDUCTOR, INC. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:

FIRST: The original Certificate of Incorporation of Catalyst
Semiconductor, Inc. was filed with the Secretary of State of the State of
Delaware on March 19, l993.

SECOND: This Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by the Board of Directors of the
Corporation.

THIRD: This Restated Certificate of Incorporation was approved by the
stockholders pursuant to Sections 211 and 216 of the General Corporation Law of
the State of Delaware.

FOURTH: The Certificate of Incorporation of this Corporation is amended
and restated in its entirety to read as follows:

The name of the corporation (hereinafter called the "Corporation") is
CATALYST SEMICONDUCTOR, INC.

The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, Delaware 19801. The name of its registered agent at such address
is The Corporation Trust Company.

III

The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.

<PAGE> 39

This corporation is authorized to issue two classes of stock,
denominated Common Stock and Preferred Stock. The Common Stock shall have a par
value of $0.001 per share, and the Preferred Stock shall have a par value of
$0.001 per share. The total number of shares of Common Stock shall have a par
value of $0.001 per share. The total number of shares of Common Stock which this
corporation is authorized to issue is forty-five million (45,000,000), and the
number of shares o f Preferred Stock which this corporation is authorized to
issue is two million (2,000,000) which shares shall be undesignated as to
series.

Any Preferred Stock not previously designated as to series may be
issued from time to time in one or more series pursuant to a resolution or
resolutions providing for such issue duly adopted by the Board of Directors
(authority to do so being hereby expressly vested in the Board), and such
resolution or resolutions shall also set forth the voting powers, full or
limited or none, of each such series of Preferred Stock and shall fix the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions of each such series of
Preferred Stock. The Board of Directors is authorized to alter the designation,
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series of Preferred
Stock, to increase or decrease (but not below the number of shares of any such
series then outstanding) the number of shares of any such series subsequent to
the issue of shares of that series.

The Corporation is to have perpetual existence.

The selection of directors need not be by written ballot unless a
stockholder demands election by written ballot at a meeting of stockholders and
before voting begins or unless the Bylaws of the Corporation shall so provide.

VII

The number of directors which constitute the whole Board of Directors
of the Corporation shall be designated in the Bylaws of the Corporation.

VIII

In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, amend or
repeal the Bylaws of the Corporation.

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<PAGE> 40

To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.

Neither any amendment nor repeal of this Article, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article in respect of any
matter occurring, or any cause of action, suit or claim that, but for this
Article, would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.

At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, and until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the Delaware
General Corporation Law. The directors of the Corporation shall be divided into
three classes as nearly equal in size as is practicable, hereby designated Class
I, Claus II and Class III. The term of office of the initial Class I directors
shall expire at the next succeeding annual meeting of stockholders, the term of
office of the initial Class II directors shall expire at the second succeeding
annual meeting of stockholders and the term of office of the initial Class III
directors shall expire at the third succeeding annual meeting of the
stockholders. For the purposes hereof, the initial Class I, Class II and Class
III directors shall be those directors so designated and elected at the first
annual meeting of stockholders scheduled to be held after such time as shares of
capital stock of the Corporation are designated as qualified for trading as
National Market System securities on the National Association of Securities
Dealers, Inc. Automated Quotation System (or any successor national market
system) (the "First Public Company Annual Meeting"). At each annual meeting
after the First Public Company Annual Meeting, directors to replace those of a
Class whose terms expire at such annual meeting shall be elected to hold office
until the third succeeding annual meeting and until their respective successors
hall have been duly elected and qualified. If the number of directors is
hereafter changed, any newly created directorships or decrease in directorships
shall be so apportioned among the classes as to make all classes as nearly equal
in number as is practicable.

Notwithstanding the foregoing, and except as otherwise required by law,
whenever the holders or any one or more series of Preferred Stock shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the provisions of the first paragraph of this Article shall not
apply with respect to the director or directors elected by such holders of
Preferred Stock.

Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a

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<PAGE> 41

vacancy shall hold office until the next succeeding annual meeting of
stockholders of the Corporation and until his or her successor shall have been
duly elected and qualified.

Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.

XII

At the election of directors of the Corporation, each holder of stock
of any class of series shall be entitled to as many votes as shall equal the
number of votes which (except for such provision as to cumulative voting) he
would be entitled to cast for the election of directors with respect to his
shares of stocks multiplied by the number or directors to be elected by him, and
he may cast all of such votes for a single director or may distribute them among
the number to be voted for, or for any two or more of them as he may see fit, so
long as the name of the candidate for director shall have been placed in
nomination prior to the voting and the stockholder, or any other holder of the
same class or series of stock, had given notice at the meeting prior to the
voting of the intention to cumulate votes; provided that, notwithstanding the
above and any provision contained in this Restated Certificate of Incorporation
to the contrary, effective upon such time as shares of capital stock of the
Corporation are first designated as qualified for trading as National Market
System securities on the National Association of Securities Dealers, Inc.
Automated Quotation System (or any successor national market system), the
holders of stock of any class or series shall no longer be entitled to such
cumulative voting rights.

XIII

Effective upon such time as shares of capital stock of the Corporation
are first designated as qualified for trading as National Market System
securities on the National Association of Securities Dealers, Inc. Automated
Quotation System (or any successor national market system), stockholders of the
Corporation may not take action by written consent in lieu of a meeting but must
take any actions at a duly called annual or special meeting.

XIV

Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then-outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal Articles XII, XIII, XIV or
XV or any provision thereof, unless such amendment shall be approved by a
majority of the directors of the Corporation not affiliated or associated with
any

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<PAGE> 42

person or entity holding (or which has announced an intention to obtain) 25% or
more of the voting power of the Corporation's outstanding capital stock.

The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.

IN WITNESS WHEREOF, Catalyst Semiconductor, Inc. has caused this
Restated Certificate of Incorporation to be signed by its Chief Executive
Officer and attested to by its Assistant Secretary this __ day of January 1999.

-------------------------------------
Radu M. Vanco

President and Chief Executive Officer

Acknowledged and attested this
__ day of January 1999

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

Peter Cohn
Secretary

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<PAGE> 43

APPENDIX II

CATALYST SEMICONDUCTOR, INC.

STOCK OPTION PLAN

AS AMENDED AND RESTATED ON DECEMBER 3, 1998

This Stock Option Plan is an amendment and restatement of the Catalyst
Semiconductor, Inc., Founders' Stock Option Plan.

1. Purpose of the Plan. The purpose of this Stock Option Plan is to
enable the Company to provide incentive to eligible employees, consultants and
officers whose present and potential contributions are important to the
continued success of the Company, to afford these individuals the opportunity to
acquire a proprietary interest in the Company, and to enable the Company to
enlist and retain in its employment qualified personnel for the successful
conduct of its business. It is intended that this purpose will be effected
through the granting of (a) stock options, (b) stock purchase rights, and
(c) stock appreciation rights.

2. Definitions. As used herein, the following definitions shall apply:

(a) "Administrator" means the Board or such of its Committees
as shall be administering the Plan, in accordance with Section 8 of the Plan.

(b) "Applicable Laws" means the legal requirements relating to
the administration of stock option plans under applicable securities laws,
Delaware corporate law and the Code.

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

(e) "Committee" means a Committee appointed by the Board in
accordance with Section 8 of the Plan.

(f) "Common Stock" means the Common Stock, $.001 par value, of
the Company.

(g) "Company" means Catalyst Semiconductor, Inc., a Delaware
corporation, and its predecessor Catalyst Semiconductor, Inc., a California
corporation.

(h) "Consultant" means any person, including an advisor,
engaged by the Company or a Parent or Subsidiary to render 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.

<PAGE> 44

(i) "Continuous Status as an Employee or Consultant" means
that the employment or consulting relationship is not interrupted or terminated
by the Company, or any Parent or Subsidiary. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of: (i) any leave of
absence approved by the Administrator, including sick leave, military leave, or
any other personal leave; provided, however, that for purposes of Continuous
Status as an Employee or Consultant, no such leave may exceed ninety (90) days,
unless reemployment upon the expiration of such leave is guaranteed by contract
(including written Company policies) or statute or unless (in the case of
Options and Rights other than Incentive Stock Options) the Administrator has
expressly designated a longer leave period during which (for purposes of such
Options or Rights) Continuous Status as an Employee or Consultant shall
continue; or (ii) transfers between locations of the Company or between the
Company, its Parent, its Subsidiaries or its successor; and provided further
that any vesting or lapsing of the Company's right to repurchase Shares at their
original purchase price shall cease on the ninety-first (91st) consecutive day
of any leave of absence approved by the Administrator and shall not recommence
until such date, if any, upon which the Consultant or Optionee resumes his or
her service with the Company.

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

(k) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.

(l) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary 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.

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

(n) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:

(i) 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 Administrator deems reliable;

(ii) 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 high bid
and low asked prices for the Common Stock on the last market

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<PAGE> 45

trading day prior to the day of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;

(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.

(o) "Listed Security" means any security of the Company which
is listed or approved for listing on a national security exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.

(p) "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.

(q) "Nonstatutory Stock Option" means any Option that is not
an Incentive Stock Option.

(r) "Notice of Grant" means a written notice evidencing
certain terms and conditions of an individual Option, Stock Purchase Right, SAR
or Long-Term Performance Award grant. The Notice of Grant is part of the Option
Agreement, the SAR Agreement and the Long-Term Performance Award Agreement.

(s) "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.

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

(u) "Option Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.

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<PAGE> 46

(v) "Option Exchange Program" means a program whereby
outstanding options are surrendered in exchange for options with a lower
exercise price.

(w) "Optioned Stock" means the Common Stock subject to an
Option or Right.

(x) "Optionee" means an Employee or Consultant who holds an
outstanding Option or Right.

(y) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.

(z) "Plan" means this Stock Option Plan, formerly the
Founders' Stock Option Plan.

(aa) "Restricted Stock" means shares of Common Stock subject
to a Restricted Stock Purchase Agreement acquired pursuant to a grant of Stock
Purchase Rights under Section 6 below.

(bb) "Restricted Stock Purchase Agreement" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.

(cc) "Right" means and includes SARs, Long-Term Performance
Awards and Stock Purchase Rights granted pursuant to the Plan.

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

(ee) "SAR" means a stock appreciation right granted pursuant
to Section 5 of the Plan.

(ff) "SAR Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual SAR
grant. The SAR Agreement is subject to the terms and conditions of the Plan.

(gg) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.

(hh) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 7 of the Plan, as evidenced by a Notice of Grant.

(ii) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.

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<PAGE> 47

(jj) "10% Stockholder" means the owner of Common Stock (as
determined under Section 424(d) of the Code) possessing more than 10% of the
total combined voting power of all classes of stock of the company or any Parent
or Subsidiary of the Company.

3. Shares Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the total number of Shares reserved and available for distribution
under the Plan is 5,130,000 Shares. Subject to Section 10 of the Plan, if any
Shares that have been optioned under an Option cease to be subject to such
Option (other than through exercise of the Option), or if any Option or Right
granted hereunder is forfeited or any such award otherwise terminates prior to
the issuance of Common Stock to the participant, the shares that were subject to
such Option or Right shall again be available for distribution in connection
with future Option or right grants under the Plan; provided, however, that
Shares that have actually been issued under the Plan, whether upon exercise of
an Option or Right, shall not in any event be returned to the Plan and shall not
become available for future distribution under the Plan.

4. Eligibility. Nonstatutory Stock Options and Rights may be granted to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. If otherwise eligible, an Employee or Consultant who has been granted
an Option or Right may be granted additional Options or Rights.

5. Limitation on Grants to Employees. Subject to adjustment as provided
in this Plan, the maximum number of Shares which may be subject to Options or
Rights granted to any one Employee under this Plan for any fiscal year of the
Company shall be 1,000,000. In connection with his or her initial employment, an
Employee may be granted up to an additional 250,000 Shares, which Shares do not
count against the 1,000,000 limitation.

6. Options and SARs.

(a) Options. The Administrator, in its discretion, may grant
Options to eligible participants and shall determine whether such Options shall
be Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be
evidenced by a Notice of Grant which shall expressly identify the Options as
Incentive Stock Options or as Nonstatutory Stock Options, and be in such form
and contain such provisions as the Administrator shall from time to time deem
appropriate. Without limiting the foregoing, the Administrator may at any time
authorize the Company, with the consent of the respective recipients, to issue
new Options or Rights in exchange for the surrender and cancellation of
outstanding Options or Rights. Option agreements shall contain the following
terms and conditions:

(i) Exercise Price; Number of Shares. The per Share
exercise price for the Shares issuable pursuant to an Option shall be such price
as is determined by the Administrator; provided that in the case of an
Incentive Stock Option, the price shall be no less than 100% of the Fair Market
Value of the Common Stock on the date the Option is granted, subject to any
additional conditions set out in Section 6(a)(iv) below; provided, further,
that in the case of any Option (A) granted to any person, who at the time of
the grant of such Option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the price shall be no less than 110% of the Fair Market Value of
the Common Stock on the date the Option is granted, or (B) granted to any
person the price shall be no less than 85% of the Fair Market Value of the
Common Stock on the date the Option is granted.

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<PAGE> 48

The Notice of Grant shall specify the number of
Shares to which it pertains.

(ii) Vesting Period and Exercise Dates. At the time
an Option is granted, the Administrator will determine the terms and conditions
to be satisfied before Shares may be purchased, including the dates on which
Shares subject to the Option may first be purchased. As to any Option the
Administrator may specify vesting requirements and/or performance criteria with
respect to the Company and/or the Optionee; provided that such Option shall
become exercisable at the rate of at least 20% per year over five years from the
date the Option is granted. In the event that any of the Shares issued upon
exercise of an Option should be subject to a right of repurchase in the
Company's favor, such repurchase right shall lapse at the rate of at least 20%
per year over five years from the date the Option is granted. At the time an
Option is granted, the Administrator shall fix the period within which the
Option may be exercised, which shall not be earlier than the end of the vesting
period, if any, nor, in the case of an Incentive Stock Option, later than ten
(10) years, from the date of grant.

(iii) Form of Payment. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of:

(1) cash;

(2) check;

(3) promissory note;

(4) other Shares which (1) in the case of
Shares acquired upon exercise of an option, have been owned by the Optionee for
more than six months on the date of surrender, and (2) have a Fair Market Value
on the date of surrender not greater than the aggregate exercise price of the
Shares as to which said Option shall be exercised;

(5) delivery of a properly executed exercise
notice together with such other documentation as the Administrator and any
broker approved by the Company, if applicable, shall require to effect an
exercise of the Option and delivery to the Company of the sale or loan proceeds
required to pay the exercise price;

(6) any combination of the foregoing methods
of payment; or

(7) such other consideration and method of
payment for the issuance of Shares to the extent permitted by Applicable Laws.

(iv) Special Incentive Stock Option Provisions. In
addition to the foregoing, Options granted under the Plan which are intended to
be Incentive Stock Options under Section 422 of the Code shall be subject to the
following terms and conditions:

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<PAGE> 49

(1) Dollar Limitation. To the extent that
the aggregate Fair Market Value of (a) the Shares with respect to which Options
designated as Incentive Stock Options plus (b) the shares of stock of the
Company, Parent and any Subsidiary with respect to which other incentive stock
options are exercisable for the first time by an Optionee during any calendar
year under all plans of the Company and any Parent and Subsidiary exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of the preceding sentence, (a) Options shall be taken into account in
the order in which they were granted, and (b) the Fair Market Value of the
Shares shall be determined as of the time the Option or other incentive stock
option is granted.

(2) 10% Stockholder. If any Optionee to
whom an Incentive Stock Option is to be granted pursuant to the provisions of
the Plan is, on the date of grant, a 10% Stockholder, then the following special
provisions shall be applicable to the Option granted to such individual:

(a) The per Share Option price of

Shares subject to such Incentive Stock Option shall not be less than 110% of the
Fair Market Value of Common Stock on the date of grant; and

(b) The Option shall not have a term
in excess of five (5) years from the date of grant.

Except as modified by the preceding provisions of this subsection 6(a) (iv) and
except as otherwise limited by Section 422 of the Code, all of the provisions of
the Plan shall be applicable to the Incentive Stock Options granted hereunder.

(v) Other Provisions. Each Option granted under the
Plan may contain such other terms, provisions, and conditions not inconsistent
with the Plan as may be determined by the Administrator.

(vi) Buyout Provisions. The Administrator may at any
time offer to buy out for a payment in cash or Shares, an Option previously
granted, based on such terms and conditions as the Administrator shall establish
and communicate to the Optionee at the time that such offer is made.

(b) SARs.

(i) In Connection with Options. At the sole
discretion of the Administrator, SARs may be granted in connection with all or
any part of an Option, either concurrently with the grant of the Option or at
any time thereafter during the term of the Option. The following provisions
apply to SARs that are granted in connection with Options:

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<PAGE> 50

portion of the related Option over (2) the exercise price of the Common Stock
covered by the surrendered portion of the related Option. As to any SAR granted
prior to the date, if ever, upon which the Common Stock becomes a Listed
Security the exercise price shall be no less than is required by any applicable
law, rule or regulation (including the California Corporate Securities Law).
Notwithstanding the foregoing, the Administrator may place limits on the amount
that may be paid upon exercise of an SAR; provided, however, that such limit
shall not restrict the exercisability of the related Option.

(2) When an SAR is exercised, the related
Option, to the extent surrendered, shall cease to be exercisable.

(3) An SAR shall be exercisable only when
and to the extent that the related Option is exercisable and shall expire no
later than the date on which the related Option expires.

(4) An SAR may only be exercised at a time
when the Fair Market Value of the Common Stock covered by the related Option
exceeds the exercise price of the Common Stock covered by the related Option.

(ii) Independent of Options. At the sole discretion
of the Administrator, SARs may be granted without related Options. The following
provisions apply to SARs that are not granted in connection with Options:

(1) The SAR shall entitle the Optionee, by
exercising the SAR, to receive from the Company an amount equal to the excess of
(1) the Fair Market Value of the Common Stock covered by the exercised portion
of the SAR, as of the date of such exercise, over (2) the Fair Market Value of
the Common Stock covered by the exercised portion of the SAR, as of the last
market trading date prior to the date on which the SAR was granted; provided,
however, that the Administrator may place limits on the aggregate amount that
may be paid upon exercise of an SAR.

(2) SARs shall be exercisable, in whole or
in part, at such times as the Administrator shall specify in the Optionee's SAR
agreement.

(iii) Form of Payment. The Company's obligation
arising upon the exercise of an SAR may be paid in Common Stock or in cash, or
in any combination of Common Stock and cash, as the Administrator, in its sole
discretion, may determine. Shares issued upon the exercise of an SAR shall be
valued at their Fair Market Value as of the date of exercise.

(i) Procedure for Exercise; Rights as a Stockholder.
Any Option or SAR granted hereunder shall be exercisable at such times and under
such conditions as determined by the Administrator and as shall be permissible
under the terms of the Plan.

An Option may not be exercised for a fraction of a
Share.

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<PAGE> 51

An Option or SAR shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option or SAR by the person entitled to exercise the Option or
SAR and full payment for the Shares with respect to which the Option is
exercised has been received by the Company. Full payment may, as authorized by
the Administrator (and, in the case of an Incentive Stock Option, determined at
the time of grant) and permitted by the Option Agreement consist of any
consideration and method of payment allowable under subsection 6(a)(iii) of the
Plan. Until the issuance (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 9 of the Plan.

Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter shall be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised. Exercise of an SAR in any manner shall, to the
extent the SAR is exercised, result in a decrease in the number of Shares which
thereafter shall be available for purposes of the Plan, and the SAR shall cease
to be exercisable to the extent it has been exercised.

(ii) Rule 16b-3. Options and SARs granted to

individuals subject to Section 16 of the Exchange Act ("Insiders") must comply
with the applicable provisions of Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.

(iii) Termination of Employment or Consulting
Relationship. In the event an Optionee's Continuous Status as an Employee or
Consultant terminates (other than upon the Optionee's death or Disability), the
Optionee may exercise his or her Option or SAR, but only within such period of
time as is determined by the Administrator at the time of grant, not to exceed
six (6) months (three (3) months in the case of an Incentive Stock Option) but
not less than thirty (30) days from the date of such termination, and only to
the extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option or SAR as set forth in the Option or SAR Agreement). To the extent that
Optionee was not entitled to exercise an Option or SAR at the date of such
termination, and to the extent that the Optionee does not exercise such Option
or SAR (to the extent otherwise so entitled) within the time specified herein,
the Option or SAR shall terminate.

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<PAGE> 52

exercise an Option or SAR at the date of such termination, and to the extent
that the Optionee does not exercise such Option or SAR (to the extent otherwise
so entitled) within the time specified herein, the Option or SAR shall
terminate.

(v) Death of Optionee. Notwithstanding Sections
5(c)(iii) and 5(c)(iv) above, in the event of an Optionee's death during
Optionee's Continuous Status as an Employee or Consultant, the Optionee's estate
or a person who acquired the right to exercise the deceased Optionee's Option or
SAR by bequest or inheritance may exercise the Option or SAR, but only within
six (6) months (or such longer period, not to exceed twelve (12) months, as the
Option or SAR Agreement may provide) following the date of death, and only to
the extent that the Optionee was entitled to exercise it at the date of death
(but in no event later than the expiration of the full term of such Option or
SAR as set forth in the Option or SAR Agreement). To the extent that Optionee
was not entitled to exercise an Option or SAR at the date of death, and to the
extent that the Optionee's estate or a person who acquired the right to exercise
such Option does not exercise such Option or SAR (to the extent otherwise so
entitled) within the time specified herein, the Option or SAR shall terminate.

7. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that the offeree shall be entitled
to purchase, the price to be paid, and the time within which the offeree must
accept such offer, which shall in no event exceed thirty (30) days from the date
upon which the Administrator made the determination to grant the Stock Purchase
Right. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator. As to any Stock Purchase
Right, the price shall be no less than 85% of the Fair Market Value on the date
the Administrator made the determination to grant the Stock Purchase Right or,
in the case of a Stock Purchase Right granted to any person, who at the time of
the grant of such Stock Purchase Right, owns stock representing more than 10%
of the total combined voting power of all classes of stock of the Company or
any Parent or Subsidiary, the price shall be no less than 100% of the Fair
market Value of the Common Stock on the date the Administrator made the
determination to grant the Stock Purchase Right.

(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided that with respect to an Optionee who is
not an Officer, Director or Consultant of the Company or of any Parent or
Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year.

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<PAGE> 53

(c) Other Provisions. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.

(d) Rule 16b-3. Stock Purchase Rights granted to Insiders, and
Shares purchased by Insiders in connection with Stock Purchase Rights, shall be
subject to any restrictions applicable thereto in compliance with Rule 16b-3. An
Insider may only purchase Shares pursuant to the grant of a Stock Purchase
Right, and may only sell Shares purchased pursuant to the grant of a Stock
Purchase Right, during such time or times as are permitted by Rule 16b-3.

(e) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 10
of the Plan.

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<PAGE> 54

8. Administration.

(a) Composition of Administrator.

(i) Multiple Administrative Bodies. If permitted by
Rule 16b-3 and Applicable Laws, the Plan may (but need not) be administered by
different administrative bodies with respect to (A) Directors who are employees,
(B) Officers who are not Directors and (C) Employees who are neither Directors
nor Officers.

(ii) Administration with respect to Directors and
Officers. With respect to grants of Options and Rights to eligible participants
who are Officers or Directors of the Company, the Plan shall be administered by
(A) the Board, if the Board may make grants under the Plan in compliance with
Rule 16b-3, or (B) a Committee designated by the Board to administer the Plan,
which Committee shall be constituted (1) in such a manner as to permit grants
under the Plan to comply with Rule 16b-3 and (2) in such a manner as to satisfy
the Applicable Laws.

(iii) Administration with Respect to Other Persons.
With respect to grants of Options to eligible participants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws.

(iv) General. Once a Committee has been appointed
pursuant to subsection (ii) or (iii) of this Section 8(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies (however caused)
and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws and, in the case of a
Committee appointed under subsection (ii), to the extent permitted by Rule
16b-3.

(b) Powers of the Administrator. Subject to the provisions of
the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:

(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(n) of the Plan;

(ii) to select the Consultants and Employees to whom
Options and Rights may be granted hereunder;

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<PAGE> 55

(iii) to determine whether and to what extent
Options and Rights or any combination thereof, are granted hereunder;

(iv) to determine the number of shares of Common
Stock to be covered by each Option and Right granted hereunder;

(v) to approve forms of agreement for use under the
Plan;

(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options or Rights may be exercised (which may be based on
performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or Right or
the shares of Common Stock relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall determine;

(vii) to construe and interpret the terms of the
Plan;

(viii) to prescribe, amend and rescind rules and
regulations relating to the Plan;

(ix) to determine whether and under what
circumstances an Option or Right may be settled in cash instead of Common Stock
or Common Stock instead of cash;

(x) to reduce the exercise price of any Option or
Right;

(xi) to modify or amend each Option or Right
(subject to Section 15 of the Plan);

(xii) to authorize any person to execute on behalf
of the Company any instrument required to effect the grant of an Option or Right
previously granted by the Administrator;

(xiii) to institute an Option Exchange Program;

(xiv) to determine the terms and restrictions
applicable to Options and Rights and any Restricted Stock; and

(xv) to make all other determinations deemed
necessary or advisable for administering the Plan.

(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Rights.

9. Non-Transferability of Options. Options and Rights may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the

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<PAGE> 56

laws of descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.

10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.

(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Right, and the number of shares of Common Stock
which have been authorized for issuance under the Plan but as to which no
Options or Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Right, the maximum number of
Shares of Common Stock for which Options and Rights to any Employee under
Section 5 of the Plan as well as the price per share of Common Stock covered by
each such outstanding Option or Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Right.

(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option or Right
has not been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its sole
discretion in such instances, declare that any Option or Right shall terminate
as of a date fixed by the Board and give each Optionee the right to exercise his
or her Option or Right as to all or any part of the Optioned Stock, including
Shares as to which the Option or Right would not otherwise be exercisable.

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<PAGE> 57

merger or sale of assets, the Option or Right confers the right to purchase, for
each Share of Optioned Stock subject to the Option or Right immediately prior to
the merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets was
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation and the
participant, provide for the consideration to be received upon the exercise of
the Option or Right, for each Share of Optioned Stock subject to the Option or
Right, to be solely common stock of the successor corporation or its Parent
equal in Fair Market Value to the per share consideration received by holders of
Common Stock in the merger or sale of assets.

11. Date of Grant. The date of grant of an Option or Right shall be,
for all purposes, the date on which the Administrator makes the determination
granting such Option or Right, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each Optionee
within a reasonable time after the date of such grant.

12. Conditions Upon Issuance of Shares.

(a) Legal Compliance. Shares shall not be issued pursuant to
the exercise of an Option or Right unless the exercise of such Option or Right
and the issuance and delivery of such Shares shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder,
Applicable Laws, and the requirements of any stock exchange or quotation system
upon which the Shares may then be listed or quoted, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise
of an Option or Right, the Company may require the person exercising such Option
or Right to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required.

13. Liability of Company.

(a) Inability to Obtain Authority. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.

(b) Grants Exceeding Allotted Shares. If the Optioned Stock
covered by an Option or Right exceeds, as of the date of grant, the number of
Shares which may be issued under the Plan without additional stockholder
approval, such Option or Right shall be void with respect to such excess
Optioned Stock, unless stockholder approval of an amendment sufficiently

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<PAGE> 58

increasing the number of Shares subject to the Plan is timely obtained in
accordance with Section 15(b) of the Plan.

14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

15. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the manner and to the degree required under applicable federal and state law.

16. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.

(b) Stockholder Approval. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 162(m) or 422 of the Code (or any successor rule
or statute or other applicable law, rule or regulation, including the
requirements of any exchange or quotation system on which the Common Stock is
listed or quoted). At such time as the Company has a Listed Security, the
further proviso in Section 6(a)(i) and the last sentence of Section 7(a) may be
deleted without shareholder approval. Such stockholder approval, if required,
shall be obtained in such a manner and to such a degree as is required by the
applicable law, rule or regulation.

(c) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee and
the Company.

17. Taxation Upon Exercise of Option or Right. At the discretion of the
Administrator, Optionees may satisfy withholding obligations as provided in this
Section 18. When an Optionee incurs tax liability in connection with an Option
or Right, which tax liability is subject to withholding under applicable tax
laws, the Optionee may satisfy the tax withholding obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, or (c) by surrendering to the Company Shares
which (i) in the case of Shares previously acquired from the Company, have been
owned by the Optionee for more than six months on the date of surrender, and
(ii) have a fair market value on the date of surrender equal to or less than the
amount required to be withheld, or (d) by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option or Right that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").

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<PAGE> 59

be required thereunder to qualify for the maximum exemption from Section 16 of
the Exchange Act with respect to Plan transactions.

All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:

(a) the election must be made on or prior to the applicable
Tax Date;

(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;

(d) if the Optionee is an Insider, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.

18. Term of the Plan. The Plan shall expire, and no further Options
shall be granted pursuant to the Plan, on December 31, 2002.

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<PAGE> 60

APPENDIX III

CATALYST SEMICONDUCTOR, INC.

1998 SPECIAL EQUITY INCENTIVE PLAN

1. Purpose of the Plan. The purpose of this 1998 Special Equity
Incentive Plan is to enable the Company to provide incentive to eligible
employees, consultants, officers and directors whose present and potential
contributions are important to the continued success of the Company, to afford
these individuals the opportunity to acquire a proprietary interest in the
Company, and to enable the Company to enlist and retain in its employment
qualified personnel for the successful conduct of its business. It is intended
that this purpose will be effected through the granting of (a) stock options,
(b) stock purchase rights, (c) stock appreciation rights, and (d) long-term
performance awards.

2. Definitions. As used herein, the following definitions shall apply:

(a) "Administrator" means the Board or such of its Committees
as shall be administering the Plan, in accordance with Section 8 of the Plan.

(b) "Applicable Laws" means the legal requirements relating to
the administration of stock option plans under applicable securities laws,
Delaware corporate law and the Code.

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

(e) "Committee" means a Committee appointed by the Board in
accordance with Section 9 of the Plan.

(f) "Common Stock" means the Common Stock, $.001 par value, of
the Company.

(g) "Company" means Catalyst Semiconductor, Inc., a Delaware
corporation, and its predecessor Catalyst Semiconductor, Inc., a California
corporation.

(h) "Consultant" means any person, including an advisor, (i)
engaged by the Company or a Parent or Subsidiary to render services or perform
under a contract and who is compensated for such services or performance or (ii)
who serves the Company as a Director.

<PAGE> 61

unless reemployment upon the expiration of such leave is guaranteed by contract
(including written Company policies) or statute or unless (in the case of
Options and Rights other than Incentive Stock Options) the Administrator has
expressly designated a longer leave period during which (for purposes of such
Options or Rights) Continuous Status as an Employee or Consultant shall
continue; or (ii) transfers between locations of the Company or between the
Company, its Parent, its Subsidiaries or its successor; and provided further
that any vesting or lapsing of the Company's right to repurchase Shares at their
original purchase price shall cease on the ninety-first (91st) consecutive day
of any leave of absence approved by the Administrator and shall not recommence
until such date, if any, upon which the Consultant or Optionee resumes his or
her service with the Company.

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

(k) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.

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

(n) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:

(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.

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<PAGE> 62

(p) "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.

(p) "Long-Term Performance Award" means an award under Section
8 below. A Long-Term Performance Award shall permit the recipient to receive a
cash or stock bonus (as determined by the Administrator) upon satisfaction of
such performance factors as are set out in the recipient's individual grant.
Long-term Performance Awards will be based upon the achievement of Company,
Subsidiary and/or individual performance factors or upon such other criteria as
the Administrator may deem appropriate.

(r) "Long-Term Performance Award Agreement" means a written
agreement between the Company and an Optionee evidencing the terms and
conditions of an individual Long-Term Performance Award grant. The Long-Term
Performance Award Agreement is subject to the terms and conditions of the Plan.

(s) "Nonstatutory Stock Option" means any Option that is not
an Incentive Stock Option.

(t) "Notice of Grant" means a written notice evidencing
certain terms and conditions of an individual Option, Stock Purchase Right, SAR
or Long-Term Performance Award grant. The Notice of Grant is part of the Option
Agreement, the SAR Agreement and the Long-Term Performance Award Agreement.

(u) "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.

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

(w) "Option Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.

(x) "Option Exchange Program" means a program whereby
outstanding options are surrendered in exchange for options with a lower
exercise price.

(y) "Optioned Stock" means the Common Stock subject to an
Option or Right.

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(z) "Optionee" means an Employee or Consultant who holds an
outstanding Option or Right.

(aa) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.

(bb) "Plan" means this 1998 Special Equity Incentive Plan.

(cc) "Restricted Stock" means shares of Common Stock subject
to a Restricted Stock Purchase Agreement acquired pursuant to a grant of Stock
Purchase Rights under Section 6 below.

(dd) "Restricted Stock Purchase Agreement" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.

(ee) "Right" means and includes SARs, Long-Term Performance
Awards and Stock Purchase Rights granted pursuant to the Plan.

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

(gg) "SAR" means a stock appreciation right granted pursuant
to Section 5 of the Plan.

(hh) "SAR Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual SAR
grant. The SAR Agreement is subject to the terms and conditions of the Plan.

(ii) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.

(jj) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 7 of the Plan, as evidenced by a Notice of Grant.

(kk) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.

(ll) "10% Stockholder" means the owner of Common Stock (as
determined under Section 424(d) of the Code) possessing more than 10% of the
total combined voting power of all classes of stock of the company or any Parent
or Subsidiary of the Company.

3. Shares Subject to the Plan. Subject to the provisions of Section 11
of the Plan, the total number of Shares reserved and available for distribution
under the Plan is 3,500,000 Shares. Subject to Section 11 of the Plan, if any
Shares that have been optioned under an Option cease to be subject to such
Option (other than through exercise of the Option), or if any Option or Right

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<PAGE> 64

granted hereunder is forfeited or any such award otherwise terminates prior to
the issuance of Common Stock to the participant, the shares that were subject to
such Option or Right shall again be available for distribution in connection
with future Option or right grants under the Plan; provided, however, that
Shares that have actually been issued under the Plan, whether upon exercise of
an Option or Right, shall not in any event be returned to the Plan and shall not
become available for future distribution under the Plan.

5. Limitation on Grants to Employees. Subject to adjustment as provided
in this Plan, the maximum number of Shares which may be subject to Options or
Rights granted to any one Employee under this Plan for any fiscal year of the
Company shall be 2,000,000. In connection with his or her initial employment, an
Employee may be granted up to an additional 250,000 Shares, which Shares do not
count against the 2,000,000 limitation.

6. Options and SARs.

The Notice of Grant shall specify the number of
Shares to which it pertains.

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<PAGE> 65

required by any applicable law, rule or regulation (including the California
Corporate Securities Law). At the time an Option is granted, the Administrator
shall fix the period within which the Option may be exercised, which shall not
be earlier than the end of the waiting period, if any, nor, in the case of an
Incentive Stock Option, later than ten (10) years, from the date of grant.

(1) cash;

(2) check;

(3) promissory note;

(6) any combination of the foregoing methods
of payment; or

(7) such other consideration and method of
payment for the issuance of Shares to the extent permitted by Applicable Laws.

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<PAGE> 66

(2) 10% Stockholder. If any Optionee to whom
an Incentive Stock Option is to be granted pursuant to the provisions of the
Plan is, on the date of grant, a 10% Stockholder, then the following special
provisions shall be applicable to the Option granted to such individual:

(a) The per Share Option price of
Shares subject to such Incentive Stock Option shall not be less than 110% of the
Fair Market Value of Common Stock on the date of grant; and

(b) The Option shall not have a
term in excess of five (5) years from the date of grant.

(v) Other Provisions. Each Option granted under the
Plan may contain such other terms, provisions, and conditions not inconsistent
with the Plan as may be determined by the Administrator.

(b) SARs.

(1) The SAR shall entitle the Optionee to
exercise the SAR by surrendering to the Company unexercised a portion of the
related Option. The Optionee shall receive in Exchange from the Company an
amount equal to the excess of (1) the Fair Market Value on the date of exercise
of the SAR of the Common Stock covered by the surrendered portion of the related
Option over (2) the exercise price of the Common Stock covered by the
surrendered portion of the related Option. As to any SAR granted prior to the
date, if ever, upon which the Common Stock becomes a Listed Security the
exercise price shall be no less than is required by any applicable law, rule or
regulation (including the California Corporate Securities Law). Notwithstanding
the foregoing, the Administrator may place limits on the amount that may be paid
upon exercise of an SAR; provided, however, that such limit shall not restrict
the exercisability of the related Option.

(2) When an SAR is exercised, the related
Option, to the extent surrendered, shall cease to be exercisable.

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(3) An SAR shall be exercisable only when
and to the extent that the related Option is exercisable and shall expire no
later than the date on which the related Option expires.

(4) An SAR may only be exercised at a time
when the Fair Market Value of the Common Stock covered by the related Option
exceeds the exercise price of the Common Stock covered by the related Option.

(2) SARs shall be exercisable, in whole or
in part, at such times as the Administrator shall specify in the Optionee's SAR
agreement.

An Option may not be exercised for a fraction of a
Share.

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<PAGE> 68

notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 10 of the Plan.

(ii) Rule 16b-3. Options and SARs granted to
individuals subject to Section 16 of the Exchange Act ("Insiders") must comply
with the applicable provisions of Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.

(iii) Termination of Employment or Consulting
Relationship. In the event an Optionee's Continuous Status as an Employee or
Consultant terminates (other than upon the Optionee's death or Disability), the
Optionee may exercise his or her Option or SAR, but only within such period of
time as is determined by the Administrator at the time of grant, not to exceed
six (6) months (three (3) months in the case of an Incentive Stock Option) from
the date of such termination, and only to the extent that the Optionee was
entitled to exercise it at the date of such termination (but in no event later
than the expiration of the term of such Option or SAR as set forth in the Option
or SAR Agreement). To the extent that Optionee was not entitled to exercise an
Option or SAR at the date of such termination, and to the extent that the
Optionee does not exercise such Option or SAR (to the extent otherwise so
entitled) within the time specified herein, the Option or SAR shall terminate.

(iv) Disability of Optionee. In the event an
Optionee's Continuous Status as an Employee or Consultant terminates as a result
of the Optionee's Disability, the Optionee may exercise his or her Option or
SAR, but only within six (6) months from the date of such termination, and only
to the extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option or SAR as set forth in the Option or SAR Agreement). To the extent that
Optionee was not entitled to exercise an Option or SAR at the date of such
termination, and to the extent that the Optionee does not exercise such Option
or SAR (to the extent otherwise so entitled) within the time specified herein,
the Option or SAR shall terminate.

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provide) following the date of death, and only to the extent that the Optionee
was entitled to exercise it at the date of death (but in no event later than the
expiration of the full term of such Option or SAR as set forth in the Option or
SAR Agreement). To the extent that Optionee was not entitled to exercise an
Option or SAR at the date of death, and to the extent that the Optionee's estate
or a person who acquired the right to exercise such Option does not exercise
such Option or SAR (to the extent otherwise so entitled) within the time
specified herein, the Option or SAR shall terminate.

7. Stock Purchase Rights.

(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. As to any grant made prior to the date, if ever,
upon which the Common Stock becomes a Listed Security the repurchase option
shall lapse no more slowly than required by any applicable law (including the
California Corporate Securities Law).

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Company. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the Stock Purchase Right is exercised, except
as provided in Section 10 of the Plan.

8. Long-Term Performance Awards.

(a) Administration. Long-Term Performance Awards are cash or
stock bonus awards that may be granted either alone or in addition to other
awards granted under the Plan. Such awards shall be granted for no cash
consideration. The Administrator shall determine the nature, length and starting
date of any performance period (the "Performance Period") for each Long-Term
Performance Award, and shall determine the performance or employment factors, if
any, to be used in the determination of Long-Term Performance Awards and the
extent to which such Long-Term Performance Awards are valued or have been
earned. Long-Term Performance Awards may vary from participant to participant
and between groups of participants and shall be based upon the achievement of
Company, Subsidiary, Parent and/or individual performance factors or upon such
other criteria as the Administrator may deem appropriate. Performance Periods
may overlap and participants may participate simultaneously with respect to
Long-Term Performance Awards that are subject to different Performance Periods
and different performance factors and criteria. Long-Term Performance Awards
shall be confirmed by, and be subject to the terms of, a Long-Term Performance
Award agreement. The terms of such awards need not be the same with respect to
each participant.

At the beginning of each Performance Period, the Administrator
may determine for each Long-Term Performance Award subject to such Performance
Period the range of dollar values or number of shares of Common Stock to be
awarded to the participant at the end of the Performance Period if and to the
extent that the relevant measures of performance for such Long-Term Performance
Award are met. Such dollar values or number of shares of Common Stock may be
fixed or may vary in accordance with such performance or other criteria as may
be determined by the Administrator.

(b) Adjustment of Awards. The Administrator may adjust the
performance factors applicable to the Long-Term Performance Awards to take into
account changes in legal, accounting and tax rules and to make such adjustments
as the Administrator deems necessary or appropriate to reflect the inclusion or
exclusion of the impact of extraordinary or unusual items, events or
circumstances in order to avoid windfalls or hardships.

9. Administration.

(a) Composition of Administrator.

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(iv) General. Once a Committee has been appointed
pursuant to subsection (ii) or (iii) of this Section 9(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies (however caused)
and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws and, in the case of a
Committee appointed under subsection (ii), to the extent permitted by Rule
16b-3.

(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(n) of the Plan;

(ii) to select the Consultants and Employees to whom
Options and Rights may be granted hereunder;

(iii) to determine whether and to what extent Options
and Rights or any combination thereof, are granted hereunder;

(iv) to determine the number of shares of Common
Stock to be covered by each Option and Right granted hereunder;

(v) to approve forms of agreement for use under the
Plan;

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<PAGE> 72

Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;

(vii) to construe and interpret the terms of the
Plan;

(viii) to prescribe, amend and rescind rules and
regulations relating to the Plan;

(ix) to determine whether and under what
circumstances an Option or Right may be settled in cash instead of Common Stock
or Common Stock instead of cash;

(x) to reduce the exercise price of any Option or
Right;

(xi) to modify or amend each Option or Right (subject
to Section 16 of the Plan);

(xii) to authorize any person to execute on behalf of
the Company any instrument required to effect the grant of an Option or Right
previously granted by the Administrator;

(xiii) to institute an Option Exchange Program;

(xiv) to determine the terms and restrictions
applicable to Options and Rights and any Restricted Stock; and

(xv) to make all other determinations deemed
necessary or advisable for administering the Plan.

(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Rights.

10. Non-Transferability of Options. Options and Rights may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.

11. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.

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<PAGE> 73

decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Right.

(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company, each outstanding Option and Right shall be assumed or
an equivalent Option or Right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation does not agree to assume the Option or to substitute an
equivalent option, the Administrator shall, in lieu of such assumption or
substitution, provide for the Optionee to have the right to exercise the Option
or Right as to all or a portion of the Optioned Stock, including Shares as to
which it would not otherwise be exercisable. If the Administrator makes an
Option or Right exercisable in lieu of assumption or substitution in the event
of a merger or sale of assets, the Administrator shall notify the Optionee that
the Option or Right shall be exercisable for a period of not less than fifteen
(15) days from the date of such notice, and the Option or Right will terminate
upon the expiration of such period. For the purposes of this paragraph, the
Option or Right shall be considered assumed if, immediately following the merger
or sale of assets, the Option or Right confers the right to purchase, for each
Share of Optioned Stock subject to the Option or Right immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets was
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation and the
participant, provide for the consideration to be received upon the exercise of
the Option or Right, for each Share of Optioned Stock subject to the Option or
Right, to be solely common stock of the successor corporation or its Parent
equal in Fair Market Value to the per share consideration received by holders of
Common Stock in the merger or sale of assets.

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<PAGE> 74

12. Date of Grant. The date of grant of an Option or Right shall be,
for all purposes, the date on which the Administrator makes the determination
granting such Option or Right, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each Optionee
within a reasonable time after the date of such grant.

13. Conditions Upon Issuance of Shares.

14. Liability of Company.

15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

16. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the manner and to the degree required under applicable federal and state law.

17. Amendment and Termination of the Plan.

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<PAGE> 75

(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.

(b) Stockholder Approval. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 162(m) or 422 of the Code (or any successor rule
or statute or other applicable law, rule or regulation, including the
requirements of any exchange or quotation system on which the Common Stock is
listed or quoted). Such stockholder approval, if required, shall be obtained in
such a manner and to such a degree as is required by the applicable law, rule or
regulation.

18. Taxation Upon Exercise of Option or Right. At the discretion of the
Administrator, Optionees may satisfy withholding obligations as provided in this
Section 18. When an Optionee incurs tax liability in connection with an Option
or Right, which tax liability is subject to withholding under applicable tax
laws, the Optionee may satisfy the tax withholding obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, or (c) by surrendering to the Company Shares
which (i) in the case of Shares previously acquired from the Company, have been
owned by the Optionee for more than six months on the date of surrender, and
(ii) have a fair market value on the date of surrender equal to or less than the
amount required to be withheld, or (d) by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option or Right that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").

If the Optionee is an Insider, any surrender of previously owned Shares
to satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

(a) the election must be made on or prior to the applicable
Tax Date;

(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;

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19. Term of the Plan. The Plan shall expire, and no further Options
shall be granted pursuant to the Plan, on September 22, 2008.

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CATALYST SEMICONDUCTOR, INC.

PROXY FOR ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JANUARY 14, 1999

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

PROXY

The undersigned stockholder of CATALYST SEMICONDUCTOR, INC., a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, each dated December 17, 1998, and hereby
appoints Radu M. Vanco and Thomas E. Gay III, and each of them, with full power
of substitution, as proxies and attorneys-in-fact, on behalf and in the name of
the undersigned, to represent the undersigned at the Annual Meeting of
Stockholders of Catalyst Semiconductor, Inc. to be held on January 14, 1999 at
10:00 a.m. local time, at the offices of the Company at 1250 Borregas Avenue,
Sunnyvale, California 94089, and at any adjournment or postponement thereof, and
to vote all shares of Common Stock which the undersigned would be entitled to
vote if then and there personally present, on the matters set forth below or on
the reverse side.

THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED AS FOLLOWS: (1) FOR THE ELECTION OF ONE CLASS II
DIRECTOR AND ONE CLASS III DIRECTOR IN THE MANNER DESCRIBED IN THE PROXY
STATEMENT; (2) FOR AN AMENDMENT AND RESTATEMENT OF THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK FROM 25,000,000 SHARES TO 45,000,000 SHARES; (3) FOR AMENDMENTS TO
THE COMPANY'S STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE THEREUNDER BY 1,800,000 SHARES, TO INCREASE THE MAXIMUM
NUMBER OF SHARES SUBJECT TO OPTIONS THAT MAY BE ISSUED TO ANY ONE EMPLOYEE
DURING A FISCAL YEAR TO 1,000,000 SHARES AND TO MAKE CHANGES IN THE PLAN
NECESSARY TO COMPLY WITH APPLICABLE STATE SECURITIES LAW; (4) FOR APPROVAL OF
THE ADOPTION OF THE 1998 SPECIAL EQUITY INCENTIVE PLAN AND THE RESERVATION OF
3,500,000 SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER; (5) FOR APPROVAL OF
CERTAIN OPTION GRANTS TO THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS; (6) FOR
THE PROPOSAL TO RATIFY THE SELECTION OF PRICEWATERHOUSE COOPERS LLP AS THE
COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING APRIL 30, 1999.

[X] PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE

This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder(s). The Board of Directors unanimously recommends
a vote FOR the Class II Director nominee and the Class III Director nominee and
proposals 2, 3, 4, 5 and 6.

1. Election of one Class II Director and one Class III Director

Nominee: Patrick Verderico [ ] FOR [ ] WITHHELD

Lionel M. Allan [ ] FOR [ ] WITHHELD

2. To approve an amendment and restatement of the Company's Restated
Certificate of Incorporation to increase the number of authorized shares
of Common Stock from 25,000,000 shares to 45,000,000 shares.