TELCOM SEMICONDUCTOR INC
8-K, EX-2, 2000-10-30
SEMICONDUCTORS & RELATED DEVICES
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                                                                     Exhibit 2.2

                                                                  EXECUTION COPY



                             STOCK OPTION AGREEMENT

     THIS STOCK OPTION AGREEMENT (this  "Agreement") is made and entered into as
of  October  26,  2000,  among  MICROCHIP  TECHNOLOGY  INCORPORATED,  a Delaware
corporation ("Parent"),  and TELCOM SEMICONDUCTOR,  INC., a Delaware corporation
(the "Company").  Capitalized  terms used but not otherwise  defined herein will
have the meanings ascribed to them in the  Reorganization  Agreement (as defined
below).

                                    RECITALS

     A. The Company,  Merger Sub (as defined below) and Parent have entered into
an Agreement and Plan of Reorganization (the  "Reorganization  Agreement") which
provides for the merger (the  "Merger") of a  wholly-owned  subsidiary of Parent
("Merger  Sub")  with  and  into  the  Company.  Pursuant  to  the  Merger,  all
outstanding  capital  stock of the Company will be  converted  into the right to
receive Parent Common Stock.

     B. As a condition to Parent's  willingness to enter into the Reorganization
Agreement,  Parent has requested that Company agree,  and Company has so agreed,
to grant to Parent an option to acquire shares of Company's Common Stock, $0.001
par value per share (the  "Company  Shares"),  upon the terms and subject to the
conditions set forth herein.

     NOW,  THEREFORE,  in  consideration  of the  foregoing  and  of the  mutual
covenants and  agreements set forth herein and in the  Reorganization  Agreement
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto agree as follows:

     1. Grant of Option.  Subject to the terms and  conditions set forth herein,
the Company  hereby  grants to Parent an  irrevocable  option (the  "Option") to
acquire  up to a number  of  Company  Shares  equal to 19.9% of the  issued  and
outstanding  shares as of the date of this Agreement (the "Option  Shares"),  in
the manner set forth  below by paying  cash at a price per share of $15.00  (the
"Exercise  Price").  The Exercise  Price and the number of Option Shares granted
hereunder shall be subject to adjustment as set forth herein.

     2. Exercise of Option.

          (a) The Option may be exercised by Parent, in whole or in part, at any
     time or from  time to time  (i)  after  termination  of the  Reorganization
     Agreement  pursuant to Section  7.01(g) thereof or (ii) upon the occurrence
     of any event  causing the  Termination  Fee to become  payable  pursuant to
     Section  7.03(b)(ii)  of the  Reorganization  Agreement  (any of the events
     described in clause (i) and (ii) of this sentence  being referred to herein
     as an "Exercise Event"). In the event Parent wishes to exercise the Option,


<PAGE>

     Parent will  deliver to the  Company a written  notice  (each an  "Exercise
     Notice") specifying the total number of Option Shares it wishes to acquire.
     Each closing of a purchase of Option Shares (a  "Closing")  will occur on a
     date and at a time prior to the  termination  of the Option  designated  by
     Parent in an Exercise Notice delivered at least two (2) business days prior
     to the date of such  Closing,  which  Closing will be held at the principal
     offices of the Company.

          (b) The Option will  terminate  upon the earliest of (i) the Effective
     Time,   (ii)  twelve  (12)   months   following   the  date  on  which  the
     Reorganization  Agreement  is  terminated  pursuant  to Section  7.01(b) or
     7.01(d)(i)  thereof,  if no event  causing  the  Termination  Fee to become
     payable pursuant to Section 7.03(b)(ii) of the Reorganization Agreement has
     occurred,  (iii)  twelve  (12)  months  following  the  date on  which  the
     Reorganization  Agreement is terminated pursuant to Section 7.1(g) thereof,
     (iv) in the event the Reorganization Agreement has been terminated pursuant
     to Section  7.01(b) or 7.01(d)(i)  thereof and the  Termination  Fee became
     payable pursuant to Section 7.03(b)(ii)  thereof,  twelve (12) months after
     payment  of  the   Termination   Fee;   and  (v)  the  date  on  which  the
     Reorganization  Agreement  is  terminated  other than  pursuant to Sections
     7.01(b),  7.01(d)(i)  or  7.01(g);  provided,  however,  that if the Option
     cannot be exercised by reason of any applicable government order or because
     the waiting  period  related to the issuance of the Option Shares under the
     HSR Act will not have expired or been terminated,  then the Option will not
     terminate  until the tenth  business day after such  impediment to exercise
     will have been removed or will have become final and not subject to appeal.

     3. Conditions to Closing.  The obligation of Company to issue Option Shares
to Parent  hereunder is subject to the  conditions  that (A) any waiting  period
under the HSR Act applicable to the issuance of the Option Shares hereunder will
have expired or been terminated; (B) all material consents, approvals, orders or
authorizations of, or registrations,  declarations or filings with, any Federal,
state or local  administrative  agency or  commission  or other Federal state or
local governmental authority or instrumentality,  if any, required in connection
with the  issuance of the Option  Shares  hereunder  will have been  obtained or
made,  as the case may be; and (C) no  preliminary  or permanent  injunction  or
other order by any court of  competent  jurisdiction  prohibiting  or  otherwise
restraining such issuance will be in effect. It is understood and agreed that at
any time during  which the Option is  exercisable,  the  parties  will use their
respective best efforts to satisfy all conditions to Closing,  so that a Closing
may take place as promptly as practicable.

     4. Closing. At any Closing, (A) the Company will deliver to Parent a single
certificate  in  definitive  form  representing  the  number of  Company  Shares
designated by Parent in its Exercise  Notice,  such certificate to be registered
in the name of Parent  and to bear the  legend  set forth in  Section 10 hereof,
against  delivery  of (B)  payment  by Parent to the  Company  of the  aggregate
purchase  price for the Company  Shares so  designated  and being  purchased  by
delivery of a certified check or bank check.

     5.  Representations  and Warranties of the Company.  Company represents and
warrants to Parent that (A) Company is a  corporation  duly  organized,  validly
existing  and in good  standing  under the laws of the State of Delaware and has
the corporate  power and authority to enter into this Agreement and to carry out
its obligations  hereunder;  (B) the execution and delivery of this Agreement by
the Company and  consummation  by the Company of the  transactions  contemplated
hereby have been duly authorized by all necessary  corporate  action on the part


                                      -2-

<PAGE>

of the Company and no other corporate proceedings on the part of the Company are
necessary to authorize  this Agreement or any of the  transactions  contemplated
hereby;  (C) this  Agreement has been duly executed and delivered by the Company
and  constitutes  a legal,  valid and binding  obligation  of the  Company  and,
assuming this  Agreement  constitutes a legal,  valid and binding  obligation of
Parent,  is enforceable  against the Company in accordance  with its terms;  (D)
except for any  filings  required  under the HSR Act,  the Company has taken all
necessary  corporate  and other action to authorize and reserve for issuance and
to permit it to issue upon  exercise  of the  Option,  and at all times from the
date hereof until the termination of the Option will have reserved for issuance,
a sufficient number of unissued Company Shares for Parent to exercise the Option
in full and will take all  necessary  corporate or other action to authorize and
reserve for issuance all additional Company Shares or other securities which may
be issuable pursuant to Section 8(a) upon exercise of the Option,  all of which,
upon their issuance and delivery in accordance with the terms of this Agreement,
will be validly issued,  fully paid and nonassessable;  (E) upon delivery of the
Company  Shares and any other  securities to Parent upon exercise of the Option,
Parent will acquire such Company  Shares or other  securities  free and clear of
all material claims, liens, charges,  encumbrances and security interests of any
kind or nature whatsoever,  excluding those imposed by Parent; (F) the execution
and delivery of this  Agreement by the Company do not,  and the  performance  of
this  Agreement  by the  Company  will not,  (i)  conflict  with or violate  the
Certificate of Incorporation or Bylaws or equivalent organizational documents of
the Company or any of its  subsidiaries,  (ii) conflict with or violate any law,
rule, regulation,  order, judgment or decree applicable to the Company or any of
its subsidiaries or by which its or any of their respective  properties is bound
or  affected  or (iii)  result in any breach of or  constitute  a default (or an
event that with notice or lapse of time or both would  become a default)  under,
or impair the Company's or any of its  subsidiaries'  rights or alter the rights
or  obligations  of any  third  party  under,  or give to others  any  rights of
termination,  amendment,  acceleration  or  cancellation  of,  or  result in the
creation  of a lien or  encumbrance  on any of the  properties  or assets of the
Company  or any of its  subsidiaries  pursuant  to,  any  material  note,  bond,
mortgage,  indenture,  contract, agreement, lease, license, permit, franchise or
other  instrument or obligation to which the Company or any of its  subsidiaries
is a party or by which the Company or any of its  subsidiaries  or its or any of
their  respective  properties  are bound or affected;  and (G) the execution and
delivery of this Agreement by the Company does not, and the  performance of this
Agreement by the Company will not, require any consent, approval,  authorization
or permit of, or filing with, or notification to, any Governmental Entity except
pursuant to the HSR Act.

     6. Put Right.

          (a) Parent  Put. At the request of and upon notice by Parent (the "Put
     Notice"),  at any time  during  the  period  during  which  the  Option  is
     exercisable pursuant to Section 2 (the "Purchase Period"),  the Company (or
     any successor  entity thereof) will purchase from Parent all or any portion
     of the Option,  to the extent not  previously  exercised,  at the price set
     forth below at:

     The  difference  between the  "Market/Tender  Offer  Price" for the Company
Shares as of the date Parent  gives  notice of its intent to exercise its rights
under this  Section  6(a)  (defined as the higher of (A) the  highest  price per
share offered as of such date  pursuant to any  Acquisition  Proposal  which was
made prior to such date and (B) the average closing sale price of Company Shares
then on the Nasdaq  National  Market  during the five (5) trading days ending on
the  trading  day  immediately  preceding  such  date) and the  Exercise  Price,

                                      -3-

<PAGE>


multiplied by the number of Company Shares  purchasable  pursuant to the Option,
but only if the  Market/Tender  Offer Price is greater than the Exercise  Price.
For  purposes  of  determining  the  highest  price  offered   pursuant  to  any
Acquisition Proposal which involves  consideration other than cash, the value of
such  consideration will be equal to the higher of (x) if securities of the same
class  of the  proponent  as  such  consideration  are  traded  on any  national
securities exchange or by any registered securities  association,  a value based
on the closing sale price or asked price for such  securities on their principal
trading market on such date and (y) the value ascribed to such  consideration by
the proponent of such Acquisition  Proposal,  or if no such value is ascribed, a
value determined in good faith by the Board of Directors of the Company.

          (b) Payment and  Redelivery  of Option or Shares.  In the event Parent
     exercises  its rights under  Section 6(a) by delivery of a Put Notice,  the
     Company will,  within twenty (20) business days after Parent  delivers such
     notice,  pay the required  amount to Parent in immediately  available funds
     and Parent will  surrender to the Company all or such portion of the Option
     with  respect  to  which  the  Put  Notice  relates  and  the  certificates
     evidencing  the Company  Shares  purchased  by Parent  pursuant to such Put
     Notice.

     7. Registration Rights.

          (a) Following the termination of the Reorganization Agreement,  Parent
     (sometimes  referred to herein as the  "Holder")  may by written  notice (a
     "Registration  Notice")  to the  Company  (the  "Registrant")  request  the
     Registrant  to  register  under the  Securities  Act all or any part of the
     shares  acquired by the Holder  pursuant  to this  Agreement  (such  shares
     requested  to be  registered,  the  "Registrable  Securities")  in order to
     permit  the  sale  or  other  disposition  of  any  or  all  shares  of the
     Registrable Securities that have been acquired by or are issuable to Holder
     upon exercise of the Option in accordance  with the intended method of sale
     or other  disposition  stated by Holder,  including a "shelf"  registration
     statement  under  Rule  415  under  the  Securities  Act or  any  successor
     provision.  Holder agrees to cause,  and to cause any  underwriters  of any
     sale or other disposition to cause, any sale or other disposition  pursuant
     to such registration statement to be effected on a widely distributed basis
     so that upon  consummation  thereof no  purchaser  or  transferee  will own
     beneficially  more  than  5.0%  of the  then-outstanding  voting  power  of
     Registrant.  Upon a request for registration,  the Registrant will have the
     option  exercisable  by written  notice  delivered to the Holder within ten
     (10)  business  days  after  the  receipt  of  the   Registration   Notice,
     irrevocably  to  agree  to  purchase  all or any  part  of the  Registrable
     Securities for cash at a price (the "Option Price") equal to the product of
     (i) the number of  Registrable  Securities  so  purchased  and (ii) the per
     share average of the closing sale prices of the  Registrant's  Common Stock
     on the Nasdaq  National  Market for the ten (10) trading  days  immediately
     preceding  the  date of the  Registration  Notice.  Any  such  purchase  of
     Registrable  Securities by the  Registrant  hereunder  will take place at a
     closing to be held at the principle  executive offices of the Registrant or
     its counsel at any reasonable date and time designated by the Registrant in
     such notice  within ten business  days after  delivery of such notice.  The
     payment for the shares to be purchased will be made by delivery at the time
     of such closing of the Option Price in immediately available funds.

          (b) If the  Registrant  does  not  elect to  exercise  its  option  to
     purchase   pursuant  to  Section  7(a)  with  respect  to  all  Registrable
     Securities,  the Registrant will use all reasonable  efforts to effect,  as
     promptly as practicable,  the registration  under the Securities Act of the


                                      -4-

<PAGE>

     unpurchased  Registrable  Securities  requested  to be  registered  in  the
     Registration  Notice and to keep such registration  statement effective for
     such  period  not  in  excess  of  90  calendar  days  from  the  day  such
     registration  statement  first  becomes  effective  as  may  be  reasonably
     necessary to effect such sale or other disposition; provided, however, that
     the  Holder  will not be  entitled  to more  than an  aggregate  of two (2)
     effective registration statements hereunder.  The obligations of Registrant
     hereunder   to  file  a   registration   statement   and  to  maintain  its
     effectiveness may be suspended for up to 120 calendar days in the aggregate
     if the Board of  Directors of  Registrant  shall have  determined  that the
     filing  of  such   registration   statement  or  the   maintenance  of  its
     effectiveness  would require  premature  disclosure  of material  nonpublic
     information  that would  materially  and  adversely  affect  Registrant  or
     otherwise  interfere  with or  adversely  affect any  pending  or  proposed
     offering of  securities of  Registrant  or any other  material  transaction
     involving  Registrant.  If  consummation  of the  sale  of any  Registrable
     Securities  pursuant to a  registration  hereunder does not occur within 90
     days after the filing  with the SEC of the initial  registration  statement
     therefor,  the provisions of this Section 7 will again be applicable to any
     proposed  registration.  The Registrant will use all reasonable  efforts to
     cause any Registrable  Securities  registered pursuant to this Section 7 to
     be  qualified  for  sale  under  the  securities  or blue  sky laws of such
     jurisdictions  as the Holder may reasonably  request and will continue such
     registration or  qualification in effect in such  jurisdictions;  provided,
     however, that the Registrant will not be required to qualify to do business
     in, or consent to general service of process in, any jurisdiction by reason
     of  this  provision.   If  Registrant  effects  a  registration  under  the
     Securities Act of Company Common Stock for its own account or for any other
     stockholders  of  Registrant  (other  than on Form S-4 or Form S-8,  or any
     successor  form),  it will allow  Holder the right to  participate  in such
     registration by selling its Registrable Securities,  and such participation
     will not affect the obligation of Registrant to effect demand  registration
     statements  for Holder under this Section 7; provided that, if the managing
     underwriters  of such offering  advise  Registrant in writing that in their
     opinion  the  number of shares of  Company  Common  Stock  requested  to be
     included in such  registration  exceeds the reasonable  number which can be
     sold in such offering,  Registrant will include the shares  requested to be
     included therein by Holder pro rata with the shares intended to be included
     therein by Registrant.

          (c) The registration rights set forth in this Section 7 are subject to
     the  condition  that the  Holder  will  provide  the  Registrant  with such
     information with respect to the Holder's Registrable  Securities,  the plan
     for distribution  thereof,  and such other  information with respect to the
     Holder as, in the  reasonable  judgment of counsel for the  Registrant,  is
     necessary to enable the Registrant to include in a  registration  statement
     all  facts  required  to  be  disclosed  with  respect  to  a  registration
     thereunder.

          (d) A  registration  effected under this Section 7 will be effected at
     the Registrant's expense, except for underwriting discounts and commissions
     and the fees and expenses of counsel to the Holder, and the Registrant will
     provide to the underwriters  such  documentation  (including  certificates,
     opinions of counsel and "comfort"  letters from  auditors) as are customary
     in connection with  underwritten  public offerings and as such underwriters
     may reasonably require. In connection with any registration, the Holder and
     the Registrant  agree to enter into an  underwriting  agreement  reasonably
     acceptable  to  each  such  party,  in form  and  substance  customary  for
     transactions  of this  type  with the  underwriters  participating  in such
     offering.


                                      -5-

<PAGE>

          (e) Indemnification.

               (i)  The  Registrant  will  indemnify  the  Holder,  each  of its
          directors  and officers and each person who controls the Holder within
          the meaning of Section 15 of the Securities Act, and each  underwriter
          of the  Registrant's  securities,  with  respect to any  registration,
          qualification or compliance  which has been effected  pursuant to this
          Agreement,   against  all  expenses,   claims,   losses,   damages  or
          liabilities  (or  actions in respect  thereof),  including  any of the
          foregoing  incurred in  settlement  of any  litigation,  commenced  or
          threatened,  arising  out of or  based  on any  untrue  statement  (or
          alleged  untrue  statement)  of  a  material  fact  contained  in  any
          registration  statement,   prospectus,   offering  circular  or  other
          document, or any amendment or supplement thereto, incident to any such
          registration,  qualification  or compliance,  or based on any omission
          (or alleged  omission) to state therein a material fact required to be
          stated therein or necessary to make the statements  therein,  in light
          of the  circumstances in which they were made, not misleading,  or any
          violation  by the  Registrant  of any rule or  regulation  promulgated
          under the  Securities  Act  applicable to the Registrant in connection
          with any  such  registration,  qualification  or  compliance,  and the
          Registrant  will  reimburse  the Holder and, each of its directors and
          officers and each person who controls the Holder within the meaning of
          Section 15 of the Securities  Act, and each  underwriter for any legal
          and  any  other  expenses   reasonably  incurred  in  connection  with
          investigating,  preparing or defending any such claim,  loss,  damage,
          liability or action;  provided, that the Registrant will not be liable
          in any such case to the  extent  that any such  claim,  loss,  damage,
          liability or expense arises out of or is based on any untrue statement
          or omission or alleged untrue statement or omission,  made in reliance
          upon and in  conformity  with  written  information  furnished  to the
          Registrant by such Holder or director or officer or controlling person
          or underwriter seeking indemnification.

               (ii)  The  Holder  will  indemnify  the  Registrant,  each of its
          directors  and  officers  and  each  underwriter  of the  Registrant's
          securities covered by such registration  statement and each person who
          controls  the  Registrant  within  the  meaning  of  Section 15 of the
          Securities  Act,  against all expenses,  claims,  losses,  damages and
          liabilities  (or  actions in respect  thereof),  including  any of the
          foregoing  incurred in  settlement  of any  litigation,  commenced  or
          threatened,  arising  out of or  based  on any  untrue  statement  (or
          alleged  untrue  statement) of a material  fact  contained in any such
          registration  statement,   prospectus,   offering  circular  or  other
          document,  or any  omission (or alleged  omission) to state  therein a
          material fact  required to be stated  therein or necessary to make the
          statements  therein not misleading,  or any violation by the Holder of
          any rule or regulation promulgated under the Securities Act applicable
          to the Holder in connection with any such registration,  qualification
          or compliance,  and will  reimburse the  Registrant,  such  directors,
          officers or control persons or underwriters for any legal or any other
          expenses   reasonably   incurred  in  connection  with  investigating,
          preparing  or defending  any such claim,  loss,  damage,  liability or
          action, in each case to the extent, but only to the extent,  that such
          untrue statement (or alleged untrue statement) or omission (or alleged
          omission) is made in such registration statement, prospectus, offering
          circular or other  document in reliance  upon and in  conformity  with
          written information  furnished to the Registrant by the Holder for use
          therein;  provided,  that in no event  will any  indemnity  under this
          Section 7(e) exceed the net  proceeds of the offering  received by the
          Holder.

               (iii) Each party entitled to  indemnification  under this Section
          7(e) (the "Indemnified  Party") will give notice to the party required
          to provide  indemnification (the "Indemnifying  Party") promptly after
          such  Indemnified  Party has actual knowledge of any claim as to which

                                      -6-

<PAGE>

          indemnity  may be sought,  and will permit the  Indemnifying  Party to
          assume  the  defense  of any such  claim or any  litigation  resulting
          therefrom, provided, that counsel for the Indemnifying Party, who will
          conduct the defense of such claim or  litigation,  will be approved by
          the  Indemnified  Party  (whose  approval  will  not  unreasonably  be
          withheld),  and the Indemnified  Party may participate in such defense
          at such party's  expense;  provided,  however,  that the  Indemnifying
          Party will pay such expense if representation of the Indemnified Party
          by counsel retained by the  Indemnifying  Party would be inappropriate
          due to actual or potential differing interests between the Indemnified
          Party  and  any  other  party  represented  by  such  counsel  in such
          proceeding,  and provided  further,  however,  that the failure of any
          Indemnified  Party to give notice as provided  herein will not relieve
          the  Indemnifying  Party of its  obligations  under this  Section 7(e)
          unless the failure to give such notice is materially prejudicial to an
          Indemnifying  Party's  ability to defend such action.  No Indemnifying
          Party,  in the defense of any such claim or  litigation  will,  except
          with the consent of each  Indemnified  Party,  consent to entry of any
          judgment  or enter into any  settlement  which does not  include as an
          unconditional  term thereof the giving by the claimant or plaintiff to
          such  Indemnified  Party of a release from all liability in respect to
          such claim or litigation.  No  Indemnifying  Party will be required to
          indemnify any Indemnified Party with respect to any settlement entered
          into without such  Indemnifying  Party's prior consent (which will not
          be   unreasonably   withheld).

     8. Adjustment Upon Changes in Capitalization.

          (a) In the  event of any  change  in the  Company  Shares by reason of
     stock dividends,  stock splits,  reverse stock splits,  mergers (other than
     the Merger), recapitalizations,  combinations,  exchanges of shares and the
     like,  the type and number of shares or  securities  subject to the Option,
     and the Exercise Price will be adjusted appropriately, and proper provision
     will be made in the agreements  governing  such  transaction so that Parent
     will receive,  upon exercise of the Option,  the number and class of shares
     or other  securities or property that Parent would have received in respect
     of the Company Shares if the Option had been exercised immediately prior to
     such event or the record date therefor, as applicable.

          (b) Without  limiting the  parties'  relative  rights and  obligations
     under the Reorganization  Agreement, if the number of outstanding shares of
     Company Common Stock increases after the date of this Agreement (other than
     pursuant to an event  described in Section  8(a)),  the number of shares of
     Company Common Stock subject to the Option  (including  those Option Shares
     which may have already been  exercised)  will be adjusted so that it equals
     19.9% of the  number of shares of  Company  Common  Stock  then  issued and
     outstanding,  without  giving  effect  to  any  Option  Shares.

     9. Profit Limitation.

          (a)  Notwithstanding  any other  provision  in this  Agreement  or the
     Reorganization  Agreement,  in no event  shall  Parent's  Total  Profit (as
     defined below) exceed  $12,000,000 (the "Maximum  Profit") and, if Parent's
     Total Profit otherwise would exceed the Maximum Profit, Parent, at its sole
     discretion  shall either (i) reduce the number of Option Shares  subject to
     the Option,  (ii) pay cash to the Company, or (iii-) any combination of the
     foregoing,  so that Parent's  actual realized Total Profit shall not exceed
     the Maximum  Profit  after  taking  into  account  the  foregoing  actions;

                                      -7-

<PAGE>


     provided, however, that to the extent the payment by the Company of cash to
     Parent in  satisfaction  of the Termination Fee pursuant to Section 7.03 of
     the  Reorganization  Agreement  would cause Parent's Total Profit to exceed
     the Maximum Profit (after Parent has had an opportunity to reduce  Parent's
     Total Profit pursuant to this Section 9(a)),  then the Company need not pay
     such  cash  portion  of the  Termination  Fee.

          (b) For purposes of this Agreement, "Total Profit" shall mean: (i) the
     aggregate  amount (before taxes) of (i) (A) any amounts  received by Parent
     on the repurchase of the Option by the Company  pursuant to Section 6, plus
     (B) any Termination Fee paid by the Company and received by Parent pursuant
     to the  Reorganization  Agreement,  minus  (ii)  the  amounts  of any  cash
     previously  paid by Parent to the  Company  pursuant  to Section 2.

          (c) For purposes of Section 9(a) and clause (i) of Section  9(b),  the
     value of any Option Shares  delivered by Parent to the Company shall be the
     Market/Tender Offer Price of such Options Shares.

     10. Restrictive Legends. Each certificate representing Option Shares issued
to Parent hereunder will include a legend in substantially the following form:

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
         UNDER THE SECURITIES  ACT OF 1933, AS AMENDED,  AND MAY BE REOFFERED OR
         SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
         AVAILABLE.  SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS
         ON  TRANSFER  AS SET FORTH IN THE STOCK  OPTION  AGREEMENT  DATED AS OF
         OCTOBER 26, 2000, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.

     It is understood and agreed that (i) the reference to restrictions  arising
under the  Securities  Act in the above  legend  will be removed by  delivery of
substitute certificate(s) without such reference if such Option Shares have been
registered  pursuant to the Securities Act, such Option Shares have been sold in
reliance on and in accordance  with Rule 144 under the  Securities Act or Holder
has  delivered to Registrant a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance  reasonably  satisfactory to Registrant
and its counsel,  to the effect that such legend is not required for purposes of
the  Securities  Act and (ii) the  reference  to  restrictions  pursuant to this
Agreement  in the  above  legend  will be  removed  by  delivery  of  substitute
certificate(s)  without  such  reference  if  the  Option  Shares  evidenced  by
certificate(s)  containing  such  reference  have  been sold or  transferred  in
compliance with the provisions of this Agreement under circumstances that do not
require the retention of such reference.

     11. Listing and HSR Filing. The Company,  upon the request of Parent,  will
promptly  file an  application  to list the Company  Shares to be acquired  upon
exercise of the Option for quotation on the Nasdaq National Market (or any other
national  securities  exchange or quotation  system or which the Company  Common
Stock is then listed) and will use its best  efforts to obtain  approval of such
listing as soon as  practicable.  Promptly  after the date  hereof,  each of the
parties  hereto will  promptly file with the Federal  Trade  Commission  and the
Antitrust  Division of the United  States  Department  of Justice  all  required

                                      -8-

<PAGE>


premerger  notification  and  report  forms and  other  documents  and  exhibits
required to be filed under the HSR Act to permit the  acquisition of the Company
Shares subject to the Option at the earliest possible date.

     12.  Binding  Effect.  This Agreement will be binding upon and inure to the
benefit of the parties  hereto and their  respective  successors  and  permitted
assigns. Nothing contained in this Agreement, express or implied, is intended to
confer  upon any person  other  than the  parties  hereto  and their  respective
successors and permitted assigns any rights or remedies of any nature whatsoever
by reason of this  Agreement.  Any shares sold by a party in compliance with the
provisions  of Section 7 will,  upon  consummation  of such sale, be free of the
restrictions  imposed  with  respect to such  shares by this  Agreement  and any
transferee  of such  shares  will not be  entitled  to the rights of such party.
Certificates  representing  shares sold in a registered public offering pursuant
to Section 7 will not be required to bear the legend set forth in Section 10.

     13. Specific  Performance.  The parties hereto  recognize and agree that if
for any reason any of the  provisions  of this  Agreement  are not  performed in
accordance  with their specific terms or are otherwise  breached,  immediate and
irreparable  harm or injury would be caused for which money damages would not be
an adequate  remedy.  Accordingly,  each party hereto agrees that in addition to
other  remedies  the  other  party  hereto  will be  entitled  to an  injunction
restraining  any  violation or  threatened  violation of the  provisions of this
Agreement or the right to enforce any of the covenants or  agreements  set forth
herein by specific performance.  In the event that any action will be brought in
equity to enforce the  provisions  of the  Agreement,  neither party hereto will
allege,  and each  party  hereto  hereby  waives the  defense,  that there is an
adequate remedy at law.

     14.  Entire  Agreement.  This  Agreement and the  Reorganization  Agreement
(including the appendices  thereto)  constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and supersede all other
prior agreements and understandings,  both written and oral, between the parties
hereto with respect to the subject matter hereof.

     15. Further Assurances. Each party hereto will execute and deliver all such
further  documents and  instruments  and take all such further  action as may be
necessary in order to  consummate  the  transactions  contemplated  hereby.

     16. Validity.  The invalidity or  unenforceability of any provision of this
Agreement will not affect the validity or enforceability of the other provisions
of this Agreement,  which will remain in full force and effect. In the event any
Governmental  Entity  of  competent  jurisdiction  holds any  provision  of this
Agreement to be null, void or  unenforceable,  the parties hereto will negotiate
in good faith and will  execute and deliver an  amendment  to this  Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision.

     17.  Notices.  All  notices  and  other  communications  pursuant  to  this
Agreement  shall be in writing and deemed to be  sufficient  if  contained  in a
written   instrument  and  shall  be  deemed  given  if  delivered   personally,
telecopied,  sent  by  nationally-recognized  overnight  courier  or  mailed  by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following  address (or at such other address for a party as shall
be specified by like notice):

                                      -9-

<PAGE>


          (a) if to Parent, to:


                           Microchip Technology Incorporated
                           Microchip Technology Incorporated
                           2355 West Chandler Boulevard
                           Chandler, Arizona 85224
                           Attention:  General Counsel
                           Telecopy No.:  (480) 899-9210

                           with a copy to:

                           Wilson, Sonsini, Goodrich & Rosati,
                           Professional Corporation
                           One Market, Spear Tower
                           Suite 3300
                           San Francisco, CA 94105
                           Attention:       Michael J. Kennedy, Esq.
                           Telecopy No.: (415) 947-2099

          (b) if to the Company, to:

                           Telcom Semiconductor, Inc.
                           1300 Terra Bella Avenue
                           Mountain View, California 94043
                           Attention: Chief Executive Officer
                           Telecopy No.: (650) 940-9633

                           with a copy to:

                           Jenkens & Gilchrist, a Professional Corporation
                           1445 Ross Avenue
                           Suite 3200
                           Dallas, TX 75202
                           Attention:       John R. Holzgraefe, Esq.
                                            Gregory J. Schmitt, Esq.
                           Telecopy No.: (214) 885-4300

     18.  Governing  Law.  This  Agreement  will be governed by and construed in
accordance with the laws of the State of Delaware  applicable to agreements made
and to be performed entirely within such State.

     19.  Expenses.  Except as  otherwise  expressly  provided  herein or in the
Reorganization Agreement, all costs and expenses incurred in connection with the
transactions  contemplated by this Agreement will be paid by the party incurring
such expenses.

                                      -10-

<PAGE>

     20. Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and  conditions  hereof  may be waived  only by an  instrument  in
writing  signed on behalf of each of the  parties  hereto,  or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.

     21. Assignment. Neither of the parties hereto may sell, transfer, assign or
otherwise  dispose of any of its rights or  obligations  under this Agreement or
the Option created  hereunder to any other person,  without the express  written
consent of the other  party,  except that the rights and  obligations  hereunder
will  inure to the  benefit  of and be  binding  upon any  successor  of a party
hereto.

     22. Counterparts.  This Agreement may be executed in counterparts,  each of
which will be deemed to be an original, but both of which, taken together,  will
constitute one and the same instrument.



         [The remainder of this page has been intentionally left blank]


                                      -11-


<PAGE>



         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.

                             MICROCHIP TECHNOLOGY INCORPORATED



                             By:      /s/ Steve Sanghi
                                      ------------------------------------------
                             Name:    Steve Sanghi
                             Title:   President and Chief Executive Officer



                             TELCOM SEMICONDUCTOR, INC.



                             By:      /s/ Robert G. Gargus
                                      ------------------------------------------
                             Name:    Robert G. Gargus
                             Title:   President

                   [Signature Page to Stock Option Agreement]







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