8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):

September 7, 2006

Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)

Delaware	000-23084	77-0199971
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

2231 Lawson Lane

Santa Clara, California

95054

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (408) 969-6600

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

Standstill Agreement

As of September 7, 2006, Integrated Silicon Solution Inc., a Delaware corporation (“ISSI”), entered into a Standstill Agreement with Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc. (the “Riley Parties”). The parties entered into the Standstill Agreement as contemplated by that certain letter agreement entered into by ISSI with the Riley Parties on August 28, 2006 (the “Letter Agreement”), as previously reported by ISSI in its Current Report on Form 8-K filed with the Securities and Exchange Commission on August 30, 2006.

Pursuant to the Standstill Agreement, the Riley Parties have agreed, until the date on which proxies for ISSI’s 2008 annual meeting of stockholders are first solicited, not to, among other things:

• acquire (or offer or agree to acquire) any material amount of assets of ISSI, or encourage any third party to do so;

• encourage any third party that they acquire (or offer or agree to acquire) 15% or more of any voting securities of ISSI (including any such securities already held by such third party);

• participate (or encourage any third party to participate) in any “solicitation” of “proxies” to vote (as such terms are used in the rules of the Securities and Exchange Commission), or seek to advise or influence any person or entity with respect to the voting of any voting securities of ISSI, with respect to the foregoing or, among other things, (i) any extraordinary transaction, such as a merger, reorganization or liquidation involving ISSI, certain changes in the present structure or membership of the board of directors or management of ISSI, except as provided in the Letter Agreement, or any change to any material term of the employment contract of any executive officer of ISSI, (ii) the opposition of any person nominated by ISSI’s nominating committee, or (iii) any material change in ISSI’s capital structure or business; or

• take any action that could require ISSI to make a public announcement regarding the possibility of the foregoing or take certain other actions in connection with the foregoing, including making a public announcement or forming or participating in a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.

Bryant Riley, a party to the Standstill Agreement and an affiliate of the other Riley Parties, is a member of the Board of Directors of ISSI and its Nominating Committee and Compensation Committee.

The foregoing description of the Standstill Agreement is qualified in its entirety by reference to the text of such agreement which is attached hereto as Exhibit 10.1 and incorporated herein by reference.

Amendment to Director Stock Option Plan

In 2005, ISSI changed the term of new option grants to employees from ten (10) years to seven (7) years. In February 2006, the automatic option grants made to non-employee directors at the time of the ISSI annual meeting of stockholders had a term of seven (7) years, although the ISSI

1995 Director Stock Option Plan was not formally amended at such time. On September 7, 2006, the ISSI Board of Directors approved an amendment to the 1995 Director Stock Option Plan to change the term of the automatic option grants for non-employee directors from ten (10) years to seven (7) years.

The foregoing description of the amendment to the 1995 Director Stock Option Plan is qualified in its entirety by reference to the text of such amendment which is attached hereto as Exhibit 10.2 and incorporated herein by reference.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Partner Officers.

On September 7, 2006, the Board of Directors of ISSI approved an amendment to Article III, Section 3.2 of ISSI’s Bylaws to expand the size of its Board of Directors from seven members to nine members and appointed each of Bryant Riley and Melvin Keating to the Board of Directors to fill the vacancies created by such increase, each effective as of such approval thereof. The Board of Directors also appointed Mr. Riley to its Nominating Committee and Compensation Committee and appointed Mr. Keating to its Audit Committee.

The amendment to the Bylaws and appointments described herein were approved by the Board of Directors in accordance with ISSI’s obligations under that certain letter agreement entered into by ISSI on August 28, 2006 with Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc., as previously reported by ISSI in its Current Report on Form 8-K filed with the Securities and Exchange Commission on August 30, 2006.

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

On September 7, 2006, the Board of Directors of ISSI approved an amendment to Article III, Section 3.2 of ISSI’s Bylaws to expand the size of its Board of Directors from seven members to nine members, effective as of such approval thereof.

The foregoing description of such amendment is qualified in its entirety by reference to the text of the Certificate of Amendment of the Bylaws of Integrated Silicon Solution, Inc. attached hereto as Exhibit 3.1 and incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

3.1	Certificate of Amendment of the Bylaws of Integrated Silicon Solution, Inc., dated September 7, 2006.
10.1	Standstill Agreement dated as of September 7, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc.
10.2	1995 Director Stock Option Plan, as amended.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	INTEGRATED SILICON SOLUTION, INC.
Date: September 12, 2006	/s/ SCOTT D. HOWARTH
	Scott D. Howarth
	Vice President and Chief Financial Officer

INDEX TO EXHIBITS

3.1	Certificate of Amendment of the Bylaws of Integrated Silicon Solution, Inc. dated September 7, 2006.
10.1	Standstill Agreement dated as of September 7, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc.
10.2	1995 Director Stock Option Plan, as amended.

EX-3.1

EXHIBIT 3.1

CERTIFICATE OF AMENDMENT

OF THE BYLAWS OF

INTEGRATED SILICON SOLUTION, INC.

The undersigned, being the Secretary of Integrated Silicon Solution, Inc., a Delaware corporation (the “Company”), hereby certifies that Article III, Section 3.2 of the Bylaws of the Company was amended effective September 7, 2006 by the Board of Directors of the Corporation to provide in its entirety as follows:

“ 3.2 NUMBER AND TERM OF OFFICE

The authorized number of directors shall be not less than five (5) nor more than nine (9). The exact number of directors shall be nine (9) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the stockholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the Certificate of Incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote or by resolution of a majority of the board of directors.

No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws.”

Dated September 7, 2006

By:	/s/ Scott Howarth
	Scott Howarth, Secretary

EX-10.1

EXHIBIT 10.1

STANDSTILL AGREEMENT

This STANDSTILL AGREEMENT (this “Agreement”) is made as of September 7, 2006, by and among Integrated Silicon Solution, Inc., a Delaware corporation (“Company”), Riley Investment Management, LLC, a Delaware limited liability company, SACC Partners, LP, a Delaware limited partnership, Bryant R. Riley, B. Riley & Co. Retirement Trust, a California trust, and B. Riley & Co., Inc., a Delaware corporation (collectively, the “Holders”).

For and in consideration of the covenants and agreements set forth in that certain letter dated August 28, 2006 from the Company, and countersigned by each of the Holders (the “Letter Agreement”), the Holders agree, on each of their behalf, and on behalf of each of their “affiliates” (as that term is defined in Rule 12b-2 of the rules and regulations promulgated under the Exchange Act (as defined below)) (an “Affiliate”) to take or abstain from taking certain actions, as described in this Agreement.

1. Standstill. Each Holder agrees that for a period (“Restricted Period”) commencing with the date of this Agreement and ending on the date that proxies for the Company’s 2008 annual meeting of stockholders are first solicited, neither such Holder nor any Affiliate of such Holder shall, without the prior written consent of the Company:

(a) acquire, offer to acquire, or agree to acquire, or encourage or suggest to any third party that they acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any material amount of assets of the Company or any subsidiary or division thereof or of any such successor or controlling person;

(b) encourage or suggest to any third party that such party (including any of its Affiliates) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, an aggregate of 15% or more (including any such securities held prior to the contact by such Holder or Affiliate of a Holder) of any voting securities or direct or indirect rights to acquire any voting securities of the Company or any subsidiary thereof;

(c) make, or in any way participate, directly or indirectly, or encourage or suggest to any third party that they make, or in any way participate, in any “solicitation” of “proxies” to vote (as such terms are used in the rules of the Securities and Exchange Commission (“SEC”)), or seek to advise or influence any person or entity with respect to the voting of any voting securities of the Company with respect to (i) a transaction described in (a) or (b) above, (ii) any extraordinary transaction, such as a merger, reorganization or liquidation involving the Company or any subsidiary or division thereof, (iii) any material change in the present board of directors or management of the Company or any subsidiary or division thereof, including, but not limited to, any plans or proposals to change the number or the term of directors, to remove any director or to fill any existing vacancies on the board, except as provided in the Letter Agreement, or to change any material term of the employment contract of any executive officer, (iv) the opposition of any person nominated by the Company’s nominating committee, or (v) any material change in the Company’s capital structure or business;

(d) make any public announcement with respect to any matter described in subparagraphs (a) and (c) above;

(e) form, join or in any way participate in a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with any of the foregoing; or

(f) take any action (other than an action to terminate this Agreement as provided in Section 3 below) that could reasonably be expected to require the Company to make a public announcement regarding the possibility of any of the events described in clauses (a) through (c) above.

2. No Restrictions on Actions as a Director or Providing Research Reports.

(a) Nothing in this Agreement shall restrict, or be construed to limit, the statements which may be made, the votes which may be cast, or the actions which may be taken, by a Holder or any affiliate of a Holder in his or her capacity as a member of the Company’s Board of Directors or any committee thereof.

(b) Nothing in this Agreement shall restrict, or be construed to limit, the statements which may be made, or the actions which may be taken, by a Holder or any affiliate of a Holder in his or her capacity as an investment manager with respect to investment advisory clients of Riley Investment Management LLC, provided that so long as Bryant Riley is a member of the Company’s Board of Directors any actions he takes in this regard shall be consistent with his duties as a member of the Company’s Board of Directors including maintaining the confidentiality of Company information, and with due consideration of the Company’s trading policy and trading windows.

(c) Nothing in this Agreement shall restrict, or be construed to limit, the statements which may be made in research reports (or addendums or communications related thereto) of B. Riley & Company, Inc. so long as Bryant Riley does not prepare or otherwise participate in the preparation of such research reports or communications.

3. Effectiveness of Agreement; Right to Terminate.

(a) This Agreement shall become effective immediately following the initial appointment or election of Bryant R. Riley and Melvin L. Keating to the Company’s Board of Directors, and the naming of Bryant R. Riley to the Nominating Committee of the Company’s Board of Directors.

(b) The Holders may terminate this Agreement by giving written notice to the Company in the event that the Company fails to fulfill one or more of its commitments to the Holders in the Letter Agreement, provided that the written notice shall specify the failure and the Company shall have a reasonable opportunity to cure such failure, if curable. In the event this Agreement is terminated pursuant to this Section 3(b), this Agreement shall be reinstated at such time as the Holders agree the Company has subsequently fulfilled its commitments.

4. Successors and Assigns; Waiver and Amendment. The provisions of this Agreement shall inure to the benefit of and be binding upon the Company, each of the Holders and their respective Affiliates, successors and assigns, including any successor to any Holder or the Company or substantially all of the Company’s assets or business, by merger, consolidation, purchase of assets, purchase of stock or otherwise. No failure or delay by any party in exercising

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any right, power or privilege under this Agreement will operate as a waiver thereof, and no single or partial exercise of any such right, power or privilege will preclude any other or future exercise thereof or the exercise of any other right, power or privilege under this Agreement. No provision of this Agreement can be waived or amended except by means of a written instrument that is validly executed on behalf of each of the parties and that refers specifically to the particular provision or provisions being waived or amended. Any such amendment or waiver by or on behalf of the Company, and any other action that may be taken by or on behalf of the Company pursuant to this Agreement, shall require the approval of a majority of the authorized members of the Company’s Board of Directors.

5. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, and shall be binding upon the parties hereto in the United States and worldwide.

6. Remedies. Each Holder agrees that its obligations hereunder are necessary and reasonable in order to protect the Company and its business, and expressly agrees that monetary damages may be inadequate to compensate the Company for any breach by any of the Holders of any their respective covenants and agreements set forth herein. Accordingly, each Holder agrees and acknowledges that any such violation or threatened violation may cause irreparable injury to the Company and that, in addition to any other remedies that may be available, in law, in equity or otherwise, the Company shall be entitled to seek injunctive relief against the threatened breach of this Agreement or the continuation of any such breach, without the necessity of proving actual damages.

7. Entire Agreement. This Agreement and the Letter Agreement constitute the entire agreement between the parties hereto and supersede all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof.

8. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

INTEGRATED SILICON SOLUTION, INC.
By:	/s/ Jimmy S. M. Lee
Name:	Jimmy S. M. Lee
Title:	Chairman and Chief Executive Officer
RILEY INVESTMENT MANAGEMENT, LLC
By:	/s/ Bryant R. Riley
	Bryant R. Riley, Managing Member
SACC PARTNERS, LP
By:	Riley Investment Management, LLC, its General Partner
By:	/s/ Bryant R. Riley
	Bryant R. Riley, Managing Member
/s/ Bryant R. Riley
Bryant R. Riley
B. RILEY & CO. RETIREMENT TRUST
By:	/s/ Bryant R. Riley
	Bryant R. Riley, Trustee
B. RILEY & CO., INC.
By:	/s/ Bryant R. Riley
	Bryant R. Riley, President

EX-10.2

Exhibit 10.2

INTEGRATED SILICON SOLUTION, INC.

1995 DIRECTOR STOCK OPTION PLAN

(AS AMENDED THROUGH SEPTEMBER 7, 2006)

1. Purposes of the Plan. The purposes of this 1995 Director Stock Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options.

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

(a) “Board” means the Board of Directors of the Company.

(b) “Code” means the Internal Revenue Code of 1986, as amended.

(c) “Common Stock” means the Common Stock of the Company.

(d) “Company” means Integrated Silicon Solution, Inc., a Delaware corporation.

(e) “Continuous Status as a Director” means the absence of any interruption or termination of service as a Director.

(f) “Director” means a member of the Board.

(g) “Employee” means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director’s fee by the Company shall not be sufficient in and of itself to constitute “employment” by the Company.

(h) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(i) “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 Nasdaq National Market 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 date of grant, as reported in The Wall Street Journal or such other source as the Board deems reliable;

(ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or 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 day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or;

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

(j) “Option” means a stock option granted pursuant to the Plan.

(k) “Optioned Stock” means the Common Stock subject to an Option.

(l) “Optionee” means an Outside Director who receives an Option.

(m) “Outside Director” means a Director who is not an Employee.

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

(o) “Plan” means this 1995 Director Stock Option Plan.

(p) “Share” means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan.

(q) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986.

3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 225,000 Shares of Common Stock (the “Pool”). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan.

4. Administration and Grants of Options under the Plan.

(a) Procedure for Grants. The provisions set forth in this Section 4(a) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions:

(i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors.

(ii) Each Outside Director shall be automatically granted an Option (the “First Option”) to purchase 10,000 Shares (adjusted as provided in Section 10(a) hereof) on the date on which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy; provided, however, that no First Option shall be granted hereunder to a person who was a Director and who has become an Outside Director as a result of such person no longer being employed by the Company.

(iii) Each Outside Director shall be automatically granted an Option (a “Subsequent Option”) to purchase 2,500 shares (adjusted as provided in Section 10(a) hereof) on the date on which such person is re-elected by the stockholders of the Company as an Outside Director; provided, however, that no Option shall be granted hereunder to an Outside Director who is re-elected within six months of being appointed or elected to the Board.

(iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, no Options shall be exercisable before the Company has obtained stockholder approval of the Plan in accordance with Section 16.

(v) The terms of a First Option granted hereunder shall be as follows:

(A) the term of the First Option shall be seven (7) years.

(B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof.

(C) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the First Option.

(D) the First Option shall become exercisable as to one-twelfth of the Shares subject to the First Option one month from its date of grant, and as to an additional one-twelfth of the Shares subject to the First Option each month thereafter, provided that the Optionee remains an Outside Director as of the end of each one month period, so that one year from its date of grant the First Option shall be fully vested.

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(vi) The terms of a Subsequent Option granted hereunder shall be as follows:

(A) the term of a Subsequent Option shall be seven (7) years.

(B) a Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof.

(C) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of a Subsequent Option.

(D) a Subsequent Option shall become exercisable as to one-twelfth of the Shares subject to such Option one month from its date of grant, and as to an additional one-twelfth of the Shares subject to such Option each month thereafter, provided that the Optionee remains an Outside Director as of the end of each one month period, so that one year from its date of grant a Subsequent Option shall be fully vested.

(vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the number of Shares in the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder.

5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time.

6. Term of Plan. The Plan shall become effective upon the date that the Company’s registration statement on Form S-1 for the purpose of effecting the initial public offering of the Common Stock becomes effective under the Securities Act of 1933, as amended (the “Securities Act”). It shall continue in effect until February 2, 2015 unless sooner terminated under Section 11 of the Plan.

7. Form of Consideration. 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 (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (6) by delivering an irrevocable subscription agreement for the Shares which irrevocably obligates the option holder to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (7) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, 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; (8) any combination of the foregoing methods of payment, (9) or such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company (Section 315(b) of the California corporation law).

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8. Exercise of Option.

(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share.

An Option 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 by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 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. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall 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.

Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may 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.

(b) Rule 16b-3. Options granted to Outside Directors must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify Plan transactions, and other transactions by Outside Directors that otherwise could be matched with Plan transactions, for the maximum exemption from Section 16 of the Exchange Act.

(c) Termination of Continuous Status as a Director. In the event an Optionee’s Continuous Status as a Director terminates (other than upon the Optionee’s death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months from the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its seven (7) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

(d) Disability of Optionee. In the event Optionee’s Continuous Status as a Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its seven (7) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

(e) Death of Optionee. In the event of an Optionee’s death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its seven (7) year term). To the extent that the Optionee was not entitled to exercise an Option on 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 (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

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9. Non-Transferability of Options. The Option 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.

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 covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares 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 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.” 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 subject to an Option.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action.

(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, in a transaction or series of transactions whereby the stockholders of the Company hold less than a majority of the outstanding capital stock of the surviving or successor entity, each outstanding Option shall become fully vested and exercisable, including as to Shares that would not otherwise be exercisable. If an Option becomes fully vested and exercisable in the event of a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option shall terminate upon the expiration of such thirty (30) day period.

11. Amendment and Termination of the Plan.

(a) Amendment and Termination. Except as set forth in Section 4, the Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required.

(b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated.

12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof.

13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon

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which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option 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 by any of the aforementioned relevant provisions of law. 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.

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. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve.

16. Stockholder Approval. Continuance of the Plan shall be subject to approval by the stockholders of the Company at or prior to the first annual meeting of stockholders held subsequent to the granting of an Option hereunder. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law.

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