UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K


(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 1997

                                       or

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

                         Commission file number 0-21504


                            QUAD SYSTEMS CORPORATION
             (Exact name of registrant as specified in its charter)


           DELAWARE                                    23-2180139
---------------------------------      -----------------------------------------
 (State or other jurisdiction          (I. R. S. Employer Identification Number)
of incorporation or organization)


2405 MARYLAND ROAD, WILLOW GROVE, PENNSYLVANIA           19090
----------------------------------------------         ----------
(Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code:  (215)  657-6202

Securities registered pursuant to Section 12(b) of the Act:

                                      None

Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.03 PAR VALUE
          SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
          -------------------------------------------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes __X__ No____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of December 22, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $22,457,304*

As of December 22, 1997, 4,354,491 shares of common stock, $.03 par value, were
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

----------

*    Calculated by excluding all shares that may be deemed to be beneficially
     owned by executive officers and directors of the Registrant, without
     conceding that all such persons are "affiliates" of the Registrant for
     purposes of the federal securities laws.

<PAGE>

                                     PART I

ITEM 1.   BUSINESS

GENERAL

Quad Systems Corporation (the "Company" or "Quad") designs, manufactures,
markets and supports surface mount technology ("SMT") and advanced packaging
equipment used in the assembly of SMT printed circuit boards and advanced
packages and other semiconductor assembly processes, primarily in low to medium
volume production environments. The Company's assembly equipment facilitates and
controls the handling and positioning of printed circuit boards and other
substrates, and the precision placement of a broad range of electronic
components and semiconductor dies. In conjunction with the Company's assembly
equipment, the Company also offers component feeders, machine vision systems,
and other peripherals. In addition, the Company sells turnkey systems
incorporating the major elements of a complete surface mount production line:
namely, a screen printer, an assembly system or systems, a reflow oven and
material handling conveyors. The Company designs and manufactures its own
assembly systems, reflow ovens and screen printers and supplies material
handling conveyors purchased from third party sources. The Company also
purchases an assembly system, the QSA-30, from Samsung Aerospace Industries,
Ltd. ("Samsung"). From time to time, the Company examines the products it
manufactures and those produced by third parties to determine whether the mix of
products to be offered by the Company and those to be purchased from third party
sources should be changed.

In SMT, printed circuit boards ("PCB") are prepared by screen-printing small
quantities of solder paste on the numerous contact pads at the termination of
each printed circuit board trace. Components are added to the printed circuit
board by an assembly system that picks a component and precisely places it on
trace terminations that have been so prepared with solder paste. Leads from each
component, of which there may be as few as two or as many as several hundred,
must be aligned with the contact pad to assure proper electrical connection.
After the components are placed, the entire printed circuit board is heated to a
temperature just above the melting point of the solder in the solder paste. The
resulting reflow of the solder provides a permanent physical and electrical bond
between each lead of each component and the pads and traces of the printed
circuit board.

Advanced packaging combines semiconductor assembly processes and SMT assembly 
processes with a wide range of substrate materials to produce products that
are significantly smaller, faster, lighter and occasionally more cost effective
than those produced using older processes. The advanced packaging marketplace
is emerging and customer requirements are not yet known with certainty.
Advanced packaging includes processes such as "chip on board", "flip chip" 
and "chip scale" assembly. While this list of processes is not exhaustive,
it includes those the Company believes are some of the most commercially
feasible processes currently being utilized. The Company also believes that 
many yet-to-be developed advanced packaging processes eventually will be
introduced which may require equipment functionality that the Company's
products do not provide. In addition, the Company's products do not address all
functionality requirements for all such existing processes. The Company is
continuing to develop and market additional features for its assemblers,
to attempt to respond to demands and needs of this emerging market. There can
be no assurance that the Company will be successful in doing so. Additionally,
new technologies may be introduced in the future which could cause
advanced packaging to become obsolete.

The Company was incorporated in Pennsylvania in 1980 and changed its state of
incorporation to Delaware in 1987.

PRODUCTS AND SERVICES

The Company offers a line of SMT process equipment and related services for the
electronics manufacturing market. The products offered by the Company are sold
as part of a turnkey system marketed by the Company under the "QuadLine" name or
are sold separately and integrated with products offered by third parties into
an SMT production line. Most of the Company's currently marketed SMT equipment
is compatible with the Company's software and component handling subsystems and
the Company attempts to provide suitable upgrade paths for its products.

<PAGE>

Primary Surface Mount Assembly Equipment

<TABLE>
<CAPTION>
                                                                                              FISCAL YEAR
        PRODUCT                            CAPABILITIES                MARKET FOCUS           INTRODUCED
----------------------------------------------------------------------------------------------------------

<S>                     <C>                                            <C>                      <C> 
Quad QSP-2 (part of     Full range of fine pitch capability            Medium to                1994
the "Q" Series)         "QuadAlign" component centering                high volume
                        Placement rates of up to 14,000                SMT assembly
                        components per hour (CPH)                      market


Quad QSV-1 (part of     Full range of fine pitch capability            Medium to high           1997
the "Q" Series)         "QuadAlign" component centering                volume SMT
                        Placement rates of up to 7,000 CPH             assembly market
                                                                 
Quad APS-1 (part of     Suitable for advanced packaging processes      Ultra-high               1997
the "Q" Series)         including: Chip On Board, Flip Chip            precision SMT
                        and Chip Scale Packaging                       and semiconductor
                                                                       packaging market
                        
Quad QSA-30             Limited range of fine pitch capability         Medium to high           1997
                         "QuadAlign" component centering               volume market
                        Placement rates of up to 13,300 CPH

Quad IVcMk2 (part       Full range of fine pitch capability            Low to medium            1994
of the "C" Series)      High accuracy placement                        volume market
                        "QuadAlign" component centering
                        Placement rates of up to 3,600 CPH per
                        head

Quad IIc                Limited range of fine pitch capability         Low to medium            1994
(part of the "C"        "QuadAlign" component centering                volume market
Series)                 Placement rates of up to 3,600 CPH
                        Entry level system

</TABLE>

"Q" SERIES OF PRODUCTS

The "Q" Series multi-functional SMT assemblers offer a range of throughput
rates, precision and capabilities. "Q" Series assemblers share several common
technologies, including patented QuadAlign(TM), a component processing alignment
system that allows the assembler to process fine pitch components "on-the-fly,"
the P4 (Pick-Pick-Place-Place) head and QSOFT(TM), Quad's proprietary software
for electronic assembly machine programming and operation. QSOFT enables
assemblers of the "Q" Series to be combined efficiently to form higher capacity
production lines. In addition, all standard Quad component feeder systems and
accessories are compatible with the "Q" Series assemblers and can be used in
combination with the Company's docking feeder carts. Approximately 41% of the
Company's fiscal 1997 net sales were attributable to sales of the "Q" Series
including accessories.

Quad QSP-2

The QSP-2 is a high speed multi-functional "Q" Series assembler with fine pitch
capabilities. The QSP-2 was the first Quad production assembler to utilize
QuadAlign. Its ability to place a large range of components at high throughput
rates provides flexibility in production line balancing, allowing easy
optimization of production. The Quad QSP-2 is designed for applications with
placement rates, depending upon customer applications, of up to 14,000
components per hour.

QSV-1

The QSV-1 is a medium volume multi-functional "Q" Series assembler with fine
pitch capabilities. The QSV-1 is designed for applications with placement rates,
depending upon customer application, of up to 7,000 components per hour.

APS-1

During fiscal 1997, the Company introduced the APS-1 (Advanced Packaging System)
to address the emerging requirements of both the advanced SMT and the
semiconductor packaging markets. The APS-1 utilizes patented QuadAlign, linear
direct-drive servo motors and ultra-high resolution vision cameras to sustain
fast, accurate placement of a broad range of both SMT components and
semiconductor die. The APS-1 is designed 

2


<PAGE>

to place semiconductor die, including flip chip on a variety of substrates, in
addition to placing a broad range of SMT components at throughput rates of up to
5,000 components per hour, depending upon customer applications. The APS-1 has
been designed to be flexible with optional modular subsystems to meet a variety
of customer applications. Options currently available include the Multiple Wafer
Presentation Systems, Waffle Pack Die and Component Presentation System and a
Flux option to support flip chip processes.

Although the APS-1 was introduced in 1997, the product is still in the early
stages of development. The Company's current version of the APS-1 includes
features to address some requirements of advanced packaging systems. The
Company is continuing to develop and markets certain additional features of the
APS-1 that currently do not have complete functionality or meet some customers
requirements. The Company continually attempts to improve its products to expand
and increase the functionality of the product, although there can be no
assurance the Company will do so. Several APS-1 systems have been sold and
installed at various locations throughout the world. Customer applications
including "flip chip" and "chip on board" processes are currently meeting
customer expectations. However, one specific application for "chip scale"
packaging, which required adding heat to the bond head, has not met customer
requirements, and accordingly, the customer has returned this system to Quad for
additional testing, analysis and redesign.

QSA-30

During fiscal 1997, the company introduced the QSA-30 High Volume SMT Assembler,
developed in partnership with and purchased from Samsung. The QSA-30 utilizes
QuadAlign, Quad tape feeders and docking feeder carts. The Quad QSA-30 is
designed for applications with placement rates, depending upon customer
applications, of up to 13,300 components per hour, while placing components
ranging in size from very small passive components to medium-sized non-fine
pitch components.

Quad QSX-1

The Quad QSX-1 is a high-speed fine pitch component assembler, capable of
placing ultra-fine pitch components. This precision system combines an advanced
mechanical platform, direct linear drive motor system, coupled with an
easy-to-use Windows(TM) based graphical user interface. Advanced features of the
Quad QSX-1 include adaptive process control and QuadAlign. The Company began
full production and shipments of the QSX-1 during the fourth fiscal quarter of
1996.


"C" SERIES OF PRODUCTS

Quad IVcMk2

The Quad IVcMk2 is a high-accuracy assembler, providing a full range of fine
pitch capability, which incorporates QuadAlign. The Quad IVcMk2 is a modular
assembly system that can be configured with a wide variety of accessories,
designed to meet the specific processing requirements of Quad's customers. The
Company believes that this modular design is also attractive to many SMT
customers, who prefer an initial high capability system that can be upgraded as
their production requirements change. The Quad IVcMk2 replaced the Quad IVc and
the Quad IIIc (which were formerly part of the "C" Series). Approximately 13% of
the Company's fiscal 1997 net sales were attributable to sales of the current
"C" Series and its predecessors, including accessories.

The Quad IVcMk2 is designed to be configured as a single unit, with placement
rates of up to 3,600 components per hour, or as a multiple headed system
(usually with up to two heads), with placement rates increasing up to 9,600
components per hour, depending upon customer applications. The Company markets
its two-headed system under the name Quad IVcMk2/136. The Quad IVcMk2 is
compatible with all accessories offered by the Company, including vision
systems, software and a variety of feeders. The Company believes that the Quad
IVcMk2 provides advantages from the standpoint of accuracy of its component
positioning system and its superior vision system, as well as its ease and speed
of programming, setup and changeover.

3
<PAGE>

Quad IIc

The Quad IIc is an entry level system, providing a limited range of fine pitch
capability. The Quad IIc is based on the original Quad IVc and uses QuadAlign.
The Quad IIc includes a belt-driven system for positioning of the X and Y axes,
while it maintains the precision advantage of linear glass scale encoders for
positional accuracy.

The Quad IIc is a modular, mid-range assembly system, which can be configured
with a wide variety of accessories designed to meet the specific processing
requirements of Quad's customers. Components placed by the Quad IIc range from
very small passive components, to multi-leaded, fine pitch component parts with
lead spacing down to 15 mil. All of the Company's standard accessories and
QuadVu vision systems are available as options for the Quad IIc. The Quad IIc
offers large board capacity that may be configured in a standard workholder, an
in-line board transport or a side shuttle configuration.

Reflow Ovens

The Company also sells convection dominant reflow ovens manufactured by its
wholly-owned subsidiary Quad Europe Limited (QEL), acquired in 1993 and located
in High Wycombe, England. These reflow ovens incorporate forced hot air, and
convection heat, utilizing recirculated hot air. Oven features include a passive
pre-heat section and an integrated thermal profiling system. Based on a modular
frame design, Quad's convection reflow ovens are available in several models.
Approximately 5% of the Company's fiscal 1997 net sales were attributable to
sales of reflow ovens.

Profile Series of Ovens

The Company's high performance Profile Series reflow ovens feature what the
Company believes is an advanced airflow and thermal dynamics technology to offer
high production throughputs. Quad Profile Ovens feature QuadTherm(TM) heating
modules, designed to generate highly accurate thermal profiles. Carefully
balanced airflow velocity and volume uniformity are used to maintain a
repeatable and stable process. The resulting thermal stability allows for the
high speed reflow of advanced multi-layer printed circuit boards that
incorporate ball grid arrays, multi-chip-modules and fine pitch technology. The
Profile Series production rates match up to the current highest pick and place
placement rates, equating to a 60% increase in thermal transfer rates over
conventional forced air reflow ovens. Each oven in the Profile Series offers a
modular, expandable design intended to respond to customers' continually
changing production needs. Plug-in heating modules can be configured and
re-configured to accommodate up to 14 independently controlled heating zones
within an oven enclosure. The oven's flexibility is further increased through
each heating module's built-in exhaust capability. Ease of operation is further
enhanced by the adoption of a light pen operator interface.

During fiscal 1997, the Company introduced the Thermal Imaging option for the
Profile Series reflow ovens. The Thermal Imaging option utilizes a computerized
thermal camera inside the oven and an independent computer system to monitor and
report the temperature at user selected points on each circuit board processed.
The system monitors the temperature of board components, leads and solder paste
and identifies temperature variations. Variations are then reported to the
operator to aid in quality control.

QCR Series Ovens

The QCR Series reflow ovens are designed for low to medium volume production
environments and for highly consistent reflow of assembled PCB. QCR ovens
feature high mass heating modules, automatic start up with zonal power up,
closed loop conveyor speed control, four channel PCB thermal profiling,
automatic data logging, pneumatic powered hood lift, powered exhaust system,
signal light tower, computer system with easy-to-use graphic display operating
software, multi-level password protection, computer controlled rail width
adjustment for edge rail and combination belt/rail oven configurations.
Additional process enhancing options, such as nitrogen atmosphere, fume
extractor, conveyor battery backup, top side cooling module and off load
annunciator, are available. QCR ovens are available in two models with 4 or 8
independently controlled convection zones, and belt, rail or combination
transport systems.


4
<PAGE>

Screen Printers

The Company sells screen printers manufactured by SMTech Limited ("SMTech"), a
subsidiary of Quad, acquired in 1995 and located in Dorchester, England. These
screen printers offer high precision, repeatable application of solder paste
onto printed circuit boards. The Company offers screen printers in a range of
products, starting with a basic, benchtop screen printer for use in small
contract manufacturing. Quad also offers semi-automatic screen printers that
have motorized conveyer rails, programmable stencil cleaners, and other options.
In fiscal 1996, Quad introduced a new in-line screen printer, the AVX 400(TM),
which utilizes vision robotic roving cameras, under-screen cleaners, automatic
paste dispensers and a Windows(TM) control system. Approximately 17% of the
Company's fiscal 1997 net sales were attributable to sales of screen printers.

Material Handling Conveyors

Quad sells material handling conveyors manufactured by third parties. Such
conveyors include circuit board loaders and unloaders, manual inspection
stations and other conveyor systems. Conveyor systems automate the material
transfer steps throughout the SMT assembly processing system.

QuadLine

The Company provides its customers with the major elements of turnkey SMT
production lines, under the name "QuadLine," a service that integrates its full
line of assembly equipment. The Company believes that offering the major
elements of a turnkey production line system complements the Company's primary
business of selling surface mount assemblers. The Company also believes that
QuadLine enhances the Company's overall market position by providing customers a
sole source of responsibility and service for, and increased compatibility
among, the equipment in customers' assembly production lines. During fiscal
1997, net sales of such systems accounted for approximately 33% of net sales.


PERIPHERALS AND SERVICE

Component Feeders and Adhesive Dispensers

The Company manufactures a variety of tape, vibratory and waffle tray feeders.
The Company also has an agreement with Samsung for Samsung to become the
Company's sole supplier of component tape feeders. The contact covers six years
and deliveries under the contract will commence in fiscal 1998. The Company's
electronic tape feeders are available in 8mm, 12mm, 16mm, 24mm, 32mm, 44mm and
56mm formats and are compatible with all Quad assemblers. In addition, the
Company offers a docking feeder cart that can be loaded with tape feeders
off-line and rolled into place at the assembler when ready to use. This feature
can greatly reduce the time involved in changing over the assembler from
assembling one printed circuit board to another.

The Company's waffle tray handler can present up to twenty different waffle
trays to the assembler and is compatible with the Quad QSP-2, QSV-1, QSA-30 and
the Quad IVcMk2 and the Quad IIc. The Company's vibratory feeders are compatible
with all of its assembly systems.

The Company also markets adhesive dispensers for the Quad IVcMk2. These
dispensers enable components to be held in place prior to soldering.

QuadCare

QuadCare is the Company's integrated service and support program, offering
complete coverage for preventive and unscheduled maintenance, including parts
and labor, software and firmware upgrades, telephone consultations, application
engineering support and periodic retraining. The provision of software and
firmware upgrades under QuadCare permits existing customers to benefit from the
Company's development activities both to improve the operation of the assembler
and to provide support for additional peripheral equipment and modular
enhancements.


5
<PAGE>

MANUFACTURING

The Company's principal manufacturing activities consist of sub-assembly, final
assembly and testing of the Company's products in Willow Grove, Pennsylvania, of
reflow ovens in High Wycombe, England and of screen printers in Dorchester,
England. Virtually all of the Company's printed circuit board and machine parts,
an increasing number of tape feeders and some of the Company's sub-assemblies
are manufactured by third parties. Logistical and sourcing assistance, technical
training for testing and debugging and quality and assurance coordination is
provided to the Company's subcontractors on an ongoing basis to ensure quality
and low cost production.

The Company believes it is advantageous to use multiple sources for printed
circuit boards, fabricated parts and other essential components and generally
attempts to maintain more than one qualified vendor for the manufacture of each
fabricated part used in production of the Company's products. Certain parts,
however, currently are available from or have been subcontracted out to only one
source. The Company purchases components from suppliers pursuant to standard
purchase orders. Should the Company experience interruptions in any of these
supplies, or increases in costs of essential components, production delays or
cost increases could result, which might have a materially adverse effect on the
Company's business. On occasion, the Company has experienced delays due to
supply shortages, but such delays have not had a material adverse effect on the
Company.

The Company provides its customers with a one year warranty on parts and labor
on all products.

SALES AND MARKETING

The Company markets its products and services through a combination of a direct
sales force, regional sales managers and manufacturers' representatives in the
United States. At the end of fiscal 1997, the Company employed 29 people in
sales and marketing, including 10 in direct sales and 14 manufacturers'
representatives in the United States. In addition to the sales and service
personnel located at the Company's headquarters in Willow Grove, Pennsylvania,
the Company has sales or service personnel at 29 other locations in the United
States and Canada.

Outside of the United States and Canada, the Company has a direct sales force in
the United Kingdom and has sales representative arrangements with firms located
in Brazil, India, Indonesia, Taiwan, Korea, Singapore (also covering Malaysia
and Thailand), Hong Kong, China, Philippines, Australia and New Zealand, Israel
and in several Western European countries. In connection with the SMTech
acquisition, the Company also entered into a five-year consulting agreement with
Mr. Dominique Henry, under which Mr. Henry advises the Company about prospective
customers for the Company's products, principally in countries that comprised
the former USSR or former member countries of the Warsaw Pact, which agreement
expires in 1999.

Sales to customers outside of the United States represented approximately 44%,
43% and 39% of net sales in fiscal 1997, 1996 and 1995, respectively. The
acquisition of QEL in fiscal 1993 enhanced the Company's presence in Europe,
since QEL's manufacturing facilities are in England. The Company further
expanded its activities in Europe with the acquisition of SMTech in 1995. The
Company continues to increase its international selling efforts. During fiscal
1996, the Company penetrated the Japanese market with sales of the AVX 400
screen printer. For financial information on the Company's foreign operations,
see Note 8 of Notes to Consolidated Financial Statements, included herein.

BACKLOG

Backlog of orders as of September 30, 1997, totaled $11.3 million compared to
$12.5 million as of September 30, 1996. Backlog includes $6.7 million of
assemblers, $1.5 million of screen printers and $.8 million of reflow ovens
compared with $9.0 million of assemblers, $1.1 million of screen printers and
$.8 million of reflow ovens as of September 30, 1996. The remainder of backlog
consists of other products. The Company expects to ship all backlog orders
outstanding at September 30, 1997 during fiscal 1998. It has been the 


6

<PAGE>

Company's experience that purchasers of capital equipment have not issued
purchase orders calling for delivery of products over an extended period.
Therefore, backlog may not necessarily be indicative of future sales.

ENGINEERING, RESEARCH AND DEVELOPMENT

The Company's product development activities focus on improving system features,
including accuracy, reliability and flexibility, while increasing placement
rates and yield. These efforts include improvement of manufacturing techniques
and enhancement and development of software used in the Company's products. In
addition, the Company seeks to develop process systems that support advances in
component packaging and device design technologies. These efforts produced
QuadAlign, a component processing alignment system used in many of the Company's
products; new products such as the APS-1, an advanced packaging system assembler
and the QSV-1 (a "Q" Series product, both of which commenced shipment during
1997); enhanced software functionality in "Q" Series products and third party
product integration software. These efforts may include obtaining additional
research and development support from third parties.

Engineering, research and development is currently conducted at the Company's
headquarters in Willow Grove, Pennsylvania, at QEL's headquarters in High
Wycombe, England and SMTech's headquarters in Dorchester, England. Engineering,
research and development expenses for fiscal 1997, 1996 and 1995 were
approximately $6.8 million, $6.2 million and $4.8 million, respectively. This
represented approximately 8.3%, 8.6% and 7.7% of net sales, for fiscal 1997,
1996 and 1995, respectively.

COMPETITION

The markets in which the Company competes are characterized by intense
competition, rapid technological and product changes, changing market
requirements and significant expenditures for product and market development.
The Company has a number of present and potential competitors in its markets,
many of whom have more diverse product lines and greater financial, marketing
and other resources than the Company. The Company's major domestic competitors
are Amistar Corp., BTU International, Inc., Conceptronic, Inc., Contact Systems,
Inc., Heller Industries, Kulicke & Soffa Industries, Inc., MPM Corporation,
MRSI, Palomar Products., Inc., Universal Instruments, Inc. and Vitronics Corp.
The Company's principal foreign competitors are DeK Printing Machines, Inc.,
Fuji Heavy Machinery Company, Hitachi, Ltd., Mydata Automation, Inc., Panasonic
Factory Automation Division of Matsushita Electric Corporation of America,
Phillips SMD Technology, Inc., Sanyo High Technology Co., Ltd., Shinkawa Ltd.,
Siemens Factory Automation Inc., Toshiba Corp. and Zevatech, Inc.

The Company believes that the principal competitive factors in the segments of
the surface mount assembly market in which it competes are price, performance,
accuracy, flexibility, reliability, enabling technology, throughput and the
ability to meet demand in a timely manner. The Company believes that it
addresses these issues through its emphasis on quality control and investments
in product development and production capacity.

PATENTS AND LICENSES

The Company holds two United States patents and expects to apply for additional
patents for protection of technology under development by the Company, although
there can be no assurance that any such patents will be issued or will be
sufficient to protect the Company's competitive position. One patent, which
expires in 2008, covers the Company's component centering system utilized on the
Quad IIIc and the Quad 1000. The other patent, which was granted in 1996, covers
the Company's non-contact component alignment subsystems, such as that used in
most of the "C" Series and all of the "Q" Series products. Although the current
patents and any other patents that may be obtained are considered valuable
intellectual property, the Company 


7

<PAGE>

believes that they are not determinative of any success the Company enjoys,
which the Company believes depends principally upon engineering, marketing,
service and manufacturing skills.

The Company enters into technology licensing arrangements with others when it
believes it is appropriate to do so. In July 1997, the Company reached an
agreement with Samsung for the sale and distribution of the QSA-30 assembler.
Under the terms of the agreement, the Company has an exclusive right to
distribute and sell the QSA-30 assembler in North America, Europe and South
America and a non-exclusive right to sell in Asia, except in Korea. The contract
covers a term of two years, subject to extension, and has a targeted goal for
Quad to purchase a minimum of 150 assemblers at a pre-determined price per unit
during the first year of the contract, although Samsung's remedy if Quad fails
to meet the target is to terminate the agreement. The number of assemblers to be
purchased and their purchase price during the remainder of the contract is to be
negotiated.

In June 1996, the Company also reached an agreement with Samsung. Under the
terms of this agreement, the Company granted an exclusive license (subject to
certain exceptions as to the Company) to Samsung for Samsung to become the
Company's sole supplier of component tape feeders, which are currently used on
all of the Company's placement systems. The contract covers a six year period
and requires Quad to purchase a minimum of 40,000 component tape feeders with a
value of at least $6.8 million during the first two years of the contract
although Samsung's remedy if Quad fails to meet the target is to terminate the
agreement. The number of tape feeders to be purchased during the remainder of
the contract term is to be negotiated. Samsung is required to pay to Quad a
total of $300,000, representing a combination of licensing fees and a
reimbursement for expenses incurred in transferring technology to Samsung for
use in production of the component tape feeders. The Company expects Samsung to
begin to supply component tape feeders to the Company during fiscal 1998.

The Company believes that much of its important technology resides in its
proprietary software and trade secrets. Insofar as the Company relies on trade
secrets and unpatented knowledge to maintain its competitive position, there is
no assurance that others may not independently develop similar technologies. In
addition, although the Company executes non-disclosure agreements with its
employees, selected vendors and others, there can be no assurance that secrecy
obligations will not be breached. Any loss of such know-how or breach of such
agreements could have a material adverse effect on the Company.

The Company owns a registered trademark for the name "Quad" in both the United
States and Canada.


8
<PAGE>

EMPLOYEES

At the end of fiscal 1997, the Company employed 363 persons on a full-time basis
of which 269 were domestic and 94 were foreign based. None of the Company's
employees are represented by a labor union, and the Company has experienced no
labor actions, although the Company has laid off personnel from time to time.
Management considers its relations with its employees to be good.

ITEM 2.   PROPERTIES

The Company maintains its headquarters and principal manufacturing facility in a
leased 106,000 square foot facility in Willow Grove, Pennsylvania. The facility
is leased for a term ending December 2006, and the monthly rental for the space
is approximately $66,000 plus taxes, insurance and maintenance costs.

QEL occupies a 9,600 square foot facility in High Wycombe, England, for a term
of 25 years with a current monthly rental of approximately $7,600 (at current
exchange rates), plus taxes, insurance, maintenance and utilities. SMTech
occupies a 19,000 square foot facility in Dorchester, England, for a term of 15
years with a current monthly rental of approximately $8,400 (at current exchange
rates), plus taxes, insurance and maintenance costs. The Company believes that
its existing facilities are adequate to meet its current needs.


ITEM 3.   LEGAL PROCEEDINGS

In July 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in Munich, Germany. The complaint alleges that the
Company infringed on the plaintiff's German patents relating to pick and place
assemblers. The Company has responded with an action against the plaintiff in
Munich, Germany seeking to have such plaintiff's patents invalidated. Management
believes the lawsuit to be without merit or that the Company has meritorious
defenses and intends to vigorously defend itself against the lawsuit.
Accordingly, no provision for this lawsuit has been recorded during fiscal 1996
or 1997.

In March 1995, a shareholder of the Company filed a complaint in the United
States District Court for the Eastern District of Pennsylvania (the "Action")
against the Company, two of its executive officers and two of its directors (one
of which was also sued as an executive officer) alleging that, during the period
December 23, 1994 through March 7, 1995, the defendants knowingly or recklessly
misrepresented or omitted material information about the Company, its prospects
and earnings, and knowingly or recklessly misrepresented or omitted information
about the status and operation of certain software used in the Company's
products in violation of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended, and common law. During fiscal 1996, the Company, to avoid
the uncertainties of litigation and without admitting any wrongdoing with
respect to any of the claims alleged in the Action, entered into a final
settlement agreement and related documents, which has received court approval.
Under this agreement, the Company, together with its directors and officers
liability insurer, paid an aggregate of $2,450,000 in settlement of all claims.
Total cost (including legal fees) to the Company, net of the amount paid by such
insurer, was $1,467,000.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None.


9
<PAGE>


          EXECUTIVE OFFICERS, OTHER OFFICERS AND DIRECTORS

The executive officers, other officers and directors of the Company are as
follows:

<TABLE>
<CAPTION>

           NAME                 AGE                                POSITION
           ----                 ---                                --------
<S>                             <C>     <C>
David W. Smith                  55      President, Chief Executive Officer and Director
Anthony R. Drury                55      Senior Vice President, Finance and Chief Financial Officer
Joseph L. Gasper                50      Senior Vice President, Operations
Ian H. Henderson                41      Senior Vice President, European Operations
John D. Dreibelbis              43      Vice President and Chief Technology Officer
Terry D. Ellis                  37      Vice President, North American Sales & Customer Support
Craig C. Ramsey                 44      Vice President, Product Assurance and Marketing
James R. Bergman                55      Director
Vahram V. Erdekian              49      Director
Robert P. Pinkas                44      Director
Lorin J. Randall                54      Director
David H. Young                  50      Director

</TABLE>

Directors hold office until the next annual meeting of the stockholders, or
until their successors are duly elected and qualified. Officers are elected by
and serve at the pleasure of the Board of Directors.

Mr. Smith has been President and Chief Executive Officer of the Company since
May 1992.

Mr. Drury has been Senior Vice President, Finance of the Company since December
1993. From January 1990 until December 1993, he was Vice President, Finance of
the Company. Mr. Drury has also been Chief Financial Officer of the Company
since January 1990.

Mr. Gasper has been Senior Vice President, Operations of the Company since
October 1992.

Mr. Henderson has been the Company's Senior Vice President, European Operations
since November 1996. Prior to November 1996, he was the Managing Director of
Quad Europe Limited, a subsidiary of the Company.

Mr. Dreibelbis has been Vice President and Chief Technology Officer of the
Company since March 1997. From September 1995 until March 1997, he was an
engineering fellow at Kulicke & Soffa Industries, Inc. and from January 1989 to
September 1995 he was founder and President of Blue Ridge Technologies.

Mr. Ellis has been Vice President, North American Sales and Customer Support
since June 1997. From February 1997 until June 1997 he was Vice President,
Customer Service Support. From June 1996 to February 1997, he served as the
Company's Director of Customer Support. From April 1995 to June 1996, Mr. Ellis
was the acting Director of Customer Support for MPM Corporation ("MPM"), a
leading manufacturer of screen printers used in the SMT industry and a
competitor of the Company. From February 1994 to April 1995, he was the manager
of MPM's Technical Support Center in Rolling Meadows, IL. From July 1991 to
February 1994, he was Manager, Customer Service Automation Support Center for
Advanced Technology Laboratories, Inc.

Mr. Ramsey has been Vice President, Product Assurance and Marketing since
January 1996. From November 1994 until January 1996, he was the Company's Vice
President, Product Assurance. From July 1993 until November 1994, he was the
Company's Vice President, Engineering. Prior to July 1993, he was the Company's
Director of Engineering.

Mr. Bergman has served on the Board of Directors of the Company since 1982. He
has been a general partner responsible for venture capital investments of DSV
Partners III, L.P. and DSV Partners IV, L.P., venture 


10

<PAGE>

capital firms, for more than five years. Since August 1996, Mr. Bergman has been
a limited partner of Brantley Venture Management, L.P. Since November 1996, he
has also been a Vice President of Brantley Capital Corporation. Mr. Bergman is
also a director of Maxim Integrated Products, Inc. and DeCrane Aircraft
Holdings, Inc., both of which are traded on NASDAQ.

Mr. Erdekian has served on the Board of Directors of the Company since July
1996. Since October 1996, he has been Vice President, Worldwide Manufacturing
Operations of Bay Networks, Inc. ("Bay Networks"), a leader in the computer
network industry. From October 1994 until October 1996, he was Vice President,
Manufacturing Product Operations of Bay Networks. From September 1993 until
October 1994, Mr. Erdekian was the Vice President, Manufacturing Operations of
Wellfleet Communications, which merged with Synoptics Corporation to form Bay
Networks in August 1994. Prior to September 1993, he was an operations
consultant to private and public corporations.

Mr. Pinkas has served on the Board of Directors of the Company since 1982. Mr.
Pinkas has been a general partner of Brantley Venture Partners, L.P. a venture
capital firm, for more than five years. Since August 1996, Mr. Pinkas has also
been a general partner of Brantley Venture Management, L.P. Mr. Pinkas is also a
director of Gliatech, Inc., Pediatric Services of America, Inc., Medirisk, Inc.
and Waterlink, Inc. Since November 1996, Mr. Pinkas has also been the Chairman
of the Board, Chief Executive Officer, Treasurer and Director of Brantley
Capital Corporation. Mr. Pinkas was the Company's Treasurer from March 1982
until October 1987.

Mr. Randall has served on the Board of Directors of the Company since January
1988. Since January 1995, he has been the Vice President, Finance and Chief
Financial Officer of CFM Technologies, Inc. From May 1994 until June 1995, Mr.
Randall was the President and Chief Executive Officer of Greenwich
Pharmaceuticals Incorporated ("GPI") (now known as Boston Life Sciences, Inc.).
From September 1991 until May 1994, he was the Chief Financial Officer and Vice
President of GPI. Mr. Randall was the Company's President and Chief Executive
Officer from August 1988 until January 1990 and was the Company's Vice
President, Operations and Chief Financial Officer from May 1985 until July 1988.

Mr. Young is the founder of the Company and has served on the Company's Board of
Directors since its inception. Mr. Young has been the President of Two
Technologies, Inc., a company which manufactures hand-held computers, for more
than five years. Mr. Young served as the Company's President from its inception
until October 1985.


11
<PAGE>


                                     PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company's Common Stock trades on The Nasdaq Stock Market under the symbol
"QSYS." The quarterly range of high and low sales prices for fiscal 1997 and
1996 are set forth below:

FISCAL 1997                           HIGH               LOW
-----------                           ----               ---
First Quarter                        $ 12.25           $ 9.00
Second Quarter                       $ 14.50           $ 9.50
Third Quarter                        $ 11.00           $ 8.63
Fourth Quarter                       $ 10.38           $ 7.00
                                                       
FISCAL 1996 
-----------                                           
First Quarter                        $  9.75           $ 6.50
Second Quarter                       $  8.00           $ 5.88
Third Quarter                        $  9.88           $ 6.38
Fourth Quarter                       $ 10.00           $ 7.00
                                              
NUMBER OF HOLDERS OF COMMON STOCK

At December 22, 1997, there were approximately 103 stockholders of record of the
Company's Common Stock. Based on information obtained from the Company's
transfer agent, the Company believes that the number of beneficial owners of its
Common Stock is approximately 2,200.

DIVIDENDS

The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and, therefore,
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. Payment of dividends is restricted under terms of the Company's credit
agreements.

12

<PAGE>


ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                                           Year Ended September 30, (1)
                                                          -----------------------------------------------------------------
                                                            1997          1996          1995          1994          1993
                                                            ----          ----          ----          ----          ----

STATEMENT OF OPERATIONS DATA:                                           (In Thousands, Except Per Share Amounts)

<S>                                                       <C>           <C>           <C>           <C>            <C>     
Net sales                                                 $ 81,723      $ 71,591      $ 62,591      $ 50,776       $ 34,773
Cost of products sold                                       51,417        43,912        39,537        29,721         19,964
                                                          --------      --------      --------      --------      ---------
     Gross profit                                           30,306        27,679        23,054        21,055         14,809

Operating expenses:
     Engineering, research and development                   6,759         6,153         4,844         4,300          2,966
     Selling and marketing                                  14,197        12,076        10,276         8,313          5,947
     Administrative and general                              5,912         5,561         3,997         3,026          2,182
                                                          --------      --------      --------      --------      ---------
        Total operating expenses                            26,868        23,790        19,117        15,639         11,095
                                                          --------      --------      --------      --------      ---------
          Income from operations                             3,438         3,889         3,937         5,416          3,714
Interest (income) expense, net                                 381           195           124          (103)            22
Settlement of securities litigation                           --           1,287           180          --             --
                                                          --------      --------      --------      --------      ---------
Income before income taxes                                   3,057         2,407         3,633         5,519          3,692
Income tax expense (benefit)                                 1,070           915           945         1,336           (399)
                                                          --------      --------      --------      --------      ---------
     Net income                                           $  1,987      $  1,492      $  2,688      $  4,183       $  4,091
                                                          ========      ========      ========      ========      =========

Net income per share (2)                                  $   0.45      $   0.35      $   0.62      $   0.98       $   1.23
                                                          ========      ========      ========      ========      =========
Weighted average common and
     common equivalent shares (2)                            4,464         4,321         4,329         4,269          3,313

BALANCE SHEET DATA:

Working capital                                           $ 25,954      $ 23,317      $ 22,229      $ 19,074       $ 15,035
Total assets                                                50,037        43,823        41,175        29,919         23,969
Line of credit and current portion of long-term debt         5,540           700           700           200              6
Long-term debt                                               2,325         1,750         2,450           300            502
Stockholders' equity                                        30,778        28,091        26,380        22,171         17,647

</TABLE>
----------

(1)  For ease of presentation, the Company has indicated its fiscal year as
     ending on September 30; whereas, in fact, the Company reports on a 52-53
     week fiscal year ending on the last Sunday in September. Fiscal 1997, which
     ended on September 28, 1997, and fiscal 1995 through 1993 which ended on
     September 24, 1995, September 25, 1994 and September 26, 1993,
     respectively, each included 52 weeks. Fiscal 1996, which ended on September
     29, 1996, included 53 weeks.

(2)  Net income per share and weighted average common and common equivalent
     shares were calculated assuming that the Preferred Stock and accrued
     dividends were converted into Common Stock for all periods presented prior
     to the Company's initial public offering in May 1993. All outstanding
     Preferred Stock and accrued dividends in fact were converted into Common
     Stock on May 19, 1993.

13

<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

For ease of presentation, the Company has indicated its fiscal year as ending on
September 30; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September. Fiscal 1997, which ended on September
28, 1997, and fiscal 1995, which ended on September 24, 1995, each included 52
weeks. Fiscal 1996, which ended on September 29, 1996, included 53 weeks.

The following table sets forth for the years indicated certain financial data as
a percentage of net sales:

                                               YEAR ENDED SEPTEMBER 30,
                                           -------------------------------
                                            1997         1996        1995
                                            ----         ----        ----

Net sales                                   100.0%      100.0%      100.0%
Gross margin                                 37.1        38.7        36.8
Engineering, research and development         8.3         8.6         7.7
Selling and marketing                        17.4        16.9        16.4
Administrative and general                    7.2         7.8         6.4
Income from operations                        4.2         5.4         6.3
Income before income taxes                    3.7         3.4         5.8
Net income                                    2.4         2.1         4.3
                                                  
Net Sales. The Company derives net sales from the sale of its assembly products
and peripherals, screen printers, reflow ovens, the resale of products
manufactured by third-parties and services. Sales are recorded upon shipment of
products configured to meet customer application requirements. Net sales
increased $10,132,000 or 14.2% in 1997 and $9,000,000 or 14.4% in 1996 over net
sales in the respective preceding years. The increase in net sales in 1997 was
primarily attributable to commencement of sales of newly introduced products and
to increased sales of recently introduced products. Net sales for 1997 included
$16,200,000 of sales for the QSV-1 assembler, the QSA-30 assembler and the APS-1
assembler, for which no sales were recognized during the prior year.
Additionally, net sales of products first introduced in 1996 contributed an
incremental $7,700,000 to net sales in 1997.

Sales of the "Q" series of products, excluding the Q1000 and QSA-30, which do
not incorporate "Q-Soft" software, represented 40.7% and 34.4% of net sales in
1997 and 1996, respectively. The increase of the "Q" series to 40.7% of net
sales primarily reflects commencement of shipment of the QSV-1 assembler. Sales
of the "C" series of products represented 13.1% and 30.0% of net sales in 1997
and 1996, respectively. The Company believes that sales of the "C" series will
continue to decrease.

Net sales also included increased sales of screen printers and reflow ovens as
sales under "Quadline" have continued to expand. "Quadline" is the Company's
marketing program offering the major elements of SMT production lines on a
turnkey basis, including assemblers, screen printers and reflow ovens. During
1997 and 1996, sales of such systems accounted for approximately 33% and 30% of
net sales, respectively.

The Company continues to experience international growth. The Company derives
its international sales from two wholly-owned foreign subsidiaries in England
that both manufacture and sell products, as well as from international sales
shipped from its U.S. operations. International sales increased to $35.7 million
in 1997 from $30.6 million in 1996, an increase of 16.7%. International sales
accounted for


14

<PAGE>

43.7%, 42.8% and 38.6% of the Company's net sales for the years 1997, 1996 and
1995, respectively. The Company believes that international sales will continue
to be a significant percentage of net sales.

In 1996, net sales increased $9,000,000 or 14.4% over 1995. The growth in net
sales during 1996 was primarily due to the inclusion in sales for a full year of
the QSP-2 assembler and commencement of sales of the AVX-400 screen printer, the
QSX-1 assembler and the "Profile" series of reflow ovens. Sales of "Q" series
products represented 34.4% and 16.6% of net sales in 1996 and 1995,
respectively. The increase in "Q" series sales reflected increased market
penetration and market acceptance of the QSP-2 and, as previously noted,
commencement of shipment of the QSX-1. Sales of the "C" series of products
represented 30.0% and 43.4% of net sales in 1996 and 1995, respectively. The
Company believes that the decrease in sales of the "C" series was due to sales
of the QSP-2 product and increased competition. 1996 sales also included
increased sales of screen printers as 1996 was the first full year of inclusion
of sales from SMTech Limited, which was acquired in early 1995. In addition,
sales of screen printers and reflow ovens also increased as sales under
"Quadline" expanded.

Sales results for any particular year may not be indicative of results for
future years. The rate of technological change in the SMT industry, including
advances in component packaging, device design technologies and required
software development, together with intense competition, represent continuous
pressures on the Company. The Company believes that the SMT industry is entering
the initial stages of a transition period with respect to certain aspects of the
technology and marketing of SMT products, with a focus on advanced packaging
technology. Failure by the Company to successfully respond in a timely fashion
to such changes and competition or to customers' requirements, with enhanced
products and marketing, would have a material adverse effect on the Company.
There can be no assurance that the Company will be successful in responding to
such changes or in meeting such requirements. In addition, the nature and extent
of such changes and requirements and the Company's ability to respond to such
changes and requirements cannot be predicted. With respect to the Company's
near-term expectations, order bookings activity to date in the first quarter of
fiscal 1998 has been below prior expectations. This rate of order bookings could
adversely affect net sales and gross margins as competition increases for those
orders.

Gross Margin. Gross margin (gross profit as a percentage of net sales) decreased
to 37.1% in 1997 from 38.7% in 1996 and decreased to 36.3% in the fourth quarter
of 1997 from 39.8% in the third quarter of 1997. Gross profit during these
comparative periods was negatively affected by lower margins in all major
product lines as a result of competitive pricing pressures and from commencement
of sales of the QSA-30, which contributes lower margins as a result of it being
manufactured by a third party. Gross margin for 1997 was also adversely affected
by a continuing shift in product mix from the "C" series to the "Q" series. The
Company expects that competitive pressures and product mix will cause gross
margin for the first half of fiscal 1998 to decline further from the 36.3% level
achieved in the fourth quarter of 1997. However, the Company believes that if it
is successful in increasing sales of the recently introduced APS-1 assembler,
which is expected to have higher margins, and also achieves success in the
second half of 1998 with other new products and product enhancements, gross
margin improvement could commence during the second half of fiscal 1998. There
can be no assurance, however, that the Company will be successful in these
efforts, especially in view of the rate of technological change and issues that
ordinarily arise in the introduction of a new advanced technology product.
Several APS-1 systems have been sold and installed at various locations
throughout the world. Customer applications including Flip Chip and Chip on
Board processes are currently meeting customer expectations. However, one
specific application for Chip Scale packaging, which required adding heat to
the bond head, has not met customer requirements, and accordingly, the
customer has returned this system to Quad for additional testing, analysis
and redesign.

In 1996, gross margin increased to 38.7% from 36.8% in 1995. Gross margin
improved as a result of higher margins from sales of the "C" series, screen
printers and the absence of a provision for product returns and allowances
relating to the "Q" series, partially off-set by lower margins on the "Q"
series.


15
<PAGE>

The Company believes that the "C" series gross margin improvement was due to
fewer sales of higher discounted multiple-headed "C" series products. Gross
margins on screen printer sales also improved as the Company was no longer a
reseller of screen printers subsequent to the acquisition of SMTech. "Q" series
gross margins decreased as a result of expanded sales to contract manufacturers,
which in turn resulted in lower average selling prices, and with low margins on
the then recently introduced QSX-1.

Engineering, Research and Development Expenses. Engineering, research and
development expenses increased $606,000 or 9.8% in 1997 over 1996 due to
increased spending to support product development activities related to the
APS-1 assembler, a new screen printer to be introduced in 1998 and continuing
enhancements to the "Profile" series of reflow ovens. The APS-1 assembler is an
advanced packaging assembler product that is being developed to meet new market
opportunities taking place in semiconductor packaging technologies, such as chip
scale packaging and flip chip assembly. However, there can be no assurance that
the Company will successfully market and sell the APS-1 assembler.

During 1996, engineering, research and development expenses increased $1,309,000
and were 27.0% higher than the preceding year, supporting product development
activities related to an expanded "Q" series product line, the AVX-400 screen
printer and the new "Profile" series of reflow ovens.

Selling and Marketing Expenses. Selling and marketing expenses increased
$2,121,000 or 17.6% in 1997 as compared to last year. This increase was
primarily due to expenses associated with higher sales volume, higher commission
rates associated with changes to the Company's sales incentive programs,
increased promotion and trade show costs and higher field service customer
support costs.

During 1996, selling and marketing expenses increased $1,800,000 or 17.5%
compared to the prior year. This increase was primarily due to expenses
associated with higher sales volume, higher advertising and trade show costs, a
change in the Company's sales and service management structure, increased hiring
of personnel in support of international sales and higher spending in support of
customer demonstrations.

Administrative and General Expenses. Administrative and general expenses
increased $351,000 or 6.3% over last year, primarily reflecting an increased
provision for doubtful accounts associated with a higher accounts receivable
balance partially attributable to timing of sales within the fourth quarter of
fiscal 1997.

In 1996, administrative and general expenses increased $1,564,000 or 39.1% over
the preceding year reflecting increased employee compensation, a full year of
expenses after the acquisition of SMTech, costs incurred in connection with the
Company's planned relocation and consolidation to a new operating and
manufacturing facility, increased operating costs associated with the expansion
of SMTech into larger facilities and legal costs associated with the patent
litigation discussed below.

Income Tax Expense. The Company's effective income tax rate was 35.0%, amounting
to $1,070,000 in 1997, 38.0%, amounting to $915,000 in 1996 and 26.0%, amounting
to $945,000 in 1995. Income tax expense differs from the amount that would
result from applying the Federal statutory tax rate to pretax income primarily
due to permanent differences in taxable income versus book income, partially
offset by benefits realized from the Company's foreign sales corporation. The
decrease in the 1997 effective tax rate is principally due to a non-recurring
benefit from research and development tax credit claims associated with prior
years. The Company expects an effective tax rate in the 37%-38% range for fiscal
1998.


16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital increased to $26.0 million as of September 30,
1997, including cash balances of $2.0 million, compared to working capital of
$23.3 million as of September 30, 1996, including cash balances of $2.6 million.
The most significant change to working capital from the prior year was an
increase in accounts receivable of $5.4 million financed principally by $4.9
million of incremental borrowings under the Company's unsecured revolving line
of credit. The primary reason for the increase in accounts receivable was the
timing of sales within the fourth quarter of fiscal 1997 compared to the same
period last year.

The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 and bears interest at the bank's base rate of
interest (6.9% as of September 30, 1997) or at the Company's option, the bank's
prime rate or LIBOR plus 1.30% when the outstanding balance is greater than
$500,000. This line of credit is secured by a pledge by the Company's United
Kingdom holding company, Quad Systems Holdings Limited, of 65% of the
outstanding shares of its two wholly-owned United Kingdom operating
subsidiaries. The Company pays a fee of .25% on the unused portion of the line
of credit. This credit agreement expires in April 2000. The line of credit
agreement restricts the payment or declaration of any dividends on an annual
basis in excess of 50% of such year's pre-tax income. This line of credit
agreement also contains various operating and reporting covenants and requires
maintenance of certain financial ratios. As of September 30, 1997, total
borrowings under this line of credit were $4,920,000. Prior to April 1997, the
Company had a revolving line of credit that permitted borrowings up to a maximum
of $8,000,000 with similar terms as in the $10,000,000 credit agreement.

Subsequent to September 30, 1997, the Company obtained an increase to its
existing line of credit whereby an additional $2,500,000 is available. This
$2,500,000 increase expires on April 30, 1998.

The Company invested $2,099,000 in equipment and leasehold improvements in 1997
as compared to $1,559,000 in 1996 and $1,077,000 in 1995. During January 1997,
the Company relocated its corporate headquarters and U.S. manufacturing facility
to a leased facility in Willow Grove, Pennsylvania. This new facility is being
leased for a period of ten years and provides the Company with additional
capacity to allow for continued growth and the opportunity for increased
efficiencies in its manufacturing operations. Capital spending for 1997 included
significant costs associated with site preparation and internal furnishings for
the new facility in addition to significant expenditures supporting upgrades to
computer hardware and software. Most of these expenditures are not expected to
repeat next year, and therefore, the Company expects that 1998 capital additions
will be lower than the 1997 level, although there can be no assurance that the
Company will achieve this objective.

In 1995, the Company obtained a $3,500,000 term loan to finance the acquisition
of SMTech. During 1997, the Company obtained a new $3,100,000 term loan, the
proceeds of which were used to pay off the outstanding balance of the then
existing term loan in the amount of $2,100,000 and to finance leasehold
improvements and furniture and fixtures purchased in connection with the
Company's move to the new facility noted above.

The Company believes that existing cash balances and borrowing capacity will be
sufficient for the Company to meet its working capital needs through fiscal
1998.

BACKLOG

Backlog of orders as of September 30, 1997, totaled $11.3 million compared to
$12.5 million as of September 30, 1996. Backlog includes $6.7 million of
assemblers, $1.5 million of screen printers and $.8 million of reflow ovens
compared with $9.0 million of assemblers, $1.1 million of screen printers and
$.8 


17

<PAGE>

million of reflow ovens as of September 30, 1996. The remainder of backlog
consists of other products. The Company expects to ship all backlog orders
outstanding at September 30, 1997 during fiscal 1998. It has been the Company's
experience that purchasers of capital equipment have not issued purchase orders
calling for delivery of products over an extended period. Therefore, backlog may
not necessarily be indicative of future sales.

SAMSUNG AGREEMENTS

In July 1997, the Company reached an agreement with Samsung Aerospace
Industries, Ltd. ("Samsung") for the sale and distribution of the QSA-30
assembler. Under the terms of the agreement, the Company has an exclusive right
to distribute and sell the QSA-30 assembler in North America, Europe and South
America and a non-exclusive right to sell in Asia, except in Korea. The contract
covers a term of two years, subject to extension, and has a targeted goal for
Quad to purchase a minimum of 150 assemblers at a pre-determined price per unit
during the first year of the contract, although Samsung's remedy if this target
is not met is to terminate the agreement. The number of assemblers to be
purchased and their purchase price during the remainder of the contract is to be
negotiated.

In June 1996, the Company reached an agreement with Samsung for the supply of
component tape feeders. Under the terms of this agreement, the Company granted
an exclusive license (subject to certain exceptions in favor of the Company) to
Samsung for Samsung to become the Company's sole supplier of component tape
feeders, which are currently used on all of the Company's placement systems. The
contract covers a six year period and requires Quad to purchase a minimum of
40,000 component tape feeders with the value of at least $6.8 million during the
first two years of the contract, although Samsung's remedy if this target is not
met is to terminate the agreement. The number of tape feeders to be purchased
during the remainder of the contract term will be negotiated. Samsung is
required to pay to Quad a total of $300,000 representing a combination of
licensing fees and a reimbursement for expenses incurred in transferring the
Company's technology to Samsung for use in the production of the component tape
feeders. The Company expects Samsung to begin to supply component tape feeders
to the Company during fiscal 1998.

PATENT INFRINGEMENT LAWSUIT

In July 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in the federal district court in Munich, Germany.
The complaint alleges that the Company infringed on the plaintiff's German
patents relating to pick and place assemblers. The Company has responded with an
action against the plaintiff in Munich, Germany seeking to have such plaintiff's
patents invalidated. Management believes the lawsuit to be without merit or the
Company has meritorious defenses and intends to vigorously defend itself against
the lawsuit. Accordingly, no provision for this lawsuit has been recorded during
1996 or 1997.

SETTLEMENT OF SECURITIES LITIGATION

In March 1995, a shareholder of the Company filed a complaint in the United
States District Court for the Eastern District of Pennsylvania (the "Action")
against the Company, two of its executive officers and two of its directors (one
of which was also sued as an executive officer) alleging that, during the period
December 23, 1994 through March 7, 1995, the defendants knowingly or recklessly
misrepresented or omitted material information about the Company, its prospects
and earnings, and knowingly or recklessly misrepresented or omitted information
about the status and operation of certain software used in the Company's
products in violation of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended, and common law. During the year ended September 30, 1996,
the Company, to avoid the 


18

<PAGE>

uncertainties of litigation and without admitting any wrongdoing of any of the
claims alleged in the Action, entered into a final settlement agreement and
related documents, which has received court approval. Under this agreement, the
Company, together with its directors and officers liability insurer, paid an
aggregate of $2,450,000 in settlement of all claims. Total cost (including legal
fees) to the Company, net of the amount paid by such insurer, was $1,467,000


IMPACT OF YEAR 2000 SOFTWARE ISSUES

The Company believes that the advent of the Year 2000 will not cause material
issues in regard to either its internal business operating systems or its
internal engineering research and development systems. However, the Company has
not determined the impact, if any, on software that either is currently being or
previously was provided to its customers.

Accordingly, the Company is undertaking a study to determine the extent, if any,
that software currently or previously supplied by the Company needs to be
modified to accommodate customer requirements. The cost of this study and any
resulting modifications required, if any, can not be reasonably estimated at
this time but may be material.

The Company also plans to initiate formal communications with all of its
significant suppliers in an effort to determine the extent to which the Company
may be vulnerable to those third parties who fail to remediate their own year
2000 issues. However, upon completion of this project, there can be no assurance
that the systems of other companies on which the Company relies will be timely
converted, or that such failure to convert by another company would not have an
adverse effect on the Company.


FORWARD LOOKING STATEMENTS

The discussions above regarding the Company's expectations of future sales,
gross margins, operating expenses, facilities relocation, scheduling of new
product introductions, quote activity, order bookings, expected shipment dates,
and supply of tape feeders and assemblers manufactured by a third party include
certain forward-looking statements on these subjects. As such, actual results
may vary materially from such expectations. Among the meaningful factors that
may affect the realization of such expectations are variations in the level of
order bookings, which can be affected by general economic conditions and growth
rates in the SMT manufacturing industry and the intensity of competition,
product development delays or performance problems or difficulties in
penetrating the advanced packaging market, difficulties or delays in software
functionality and performance, the timing of future software releases, failure
to respond adequately either to changes in technology or to customer
preferences, failures in the source of supply for tape feeders or assemblers
manufactured by a third party, failure to successfully defend itself against the
patent infringement litigation, risks of nonpayment of accounts receivable or
changes in forecasted costs, including unexpected required additional
engineering costs.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly results of operations for the years
ended September 30, 1997 and 1996. This information is derived from unaudited
financial statements of the Company that include, in the opinion of the Company,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation when read in conjunction with the consolidated financial
statements and footnotes of the Company.



19
<PAGE>


<TABLE>
<CAPTION>

                                              Fiscal 1997 Quarter Ended                            Fiscal 1996 Quarter Ended
                                -------------------------------------------------   ------------------------------------------------

                                Sept. 30,     June 30,      Mar. 31,     Dec. 31,   Sept. 30,     June 30,      Mar. 31,    Dec. 31,
                                  1997         1997          1997         1996        1996         1996          1996        1995
                                  ----         ----          ----         ----        ----         ----          ----        ----
                                                              (In thousands, except per share amounts)

<S>                              <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>    
Net sales                        $21,071      $16,975      $21,712      $21,965      $20,491      $18,382      $15,834      $16,884
Gross profit                       7,639        6,762        7,905        8,000        7,991        7,328        6,472        5,888
Engineering, research and
  development                      1,642        1,651        1,905        1,561        1,645        1,565        1,528        1,415
Selling and marketing              3,695        3,383        3,426        3,693        3,310        3,102        2,930        2,734
Administrative and general         1,464        1,420        1,409        1,619        1,750        1,365        1,283        1,163
Income from operations               838          308        1,165        1,127        1,286        1,296          731          576
Net income                           448          127          707          705          786           84          354          268

Net income per share             $  0.10      $  0.03      $  0.16      $  0.16      $  0.18      $  0.02      $  0.08      $  0.06
Weighted average common and
   common equivalent shares        4,435        4,462        4,520        4,446        4,362        4,328        4,289        4,310


</TABLE>

The following table sets forth for the quarters indicated the percentage of net
sales represented by the indicated items:

<TABLE>
<CAPTION>


                                             Fiscal 1997 Quarter Ended                     Fiscal 1996 Quarter Ended
                                 --------------------------------------------   -------------------------------------------------
                                 Sept. 30,    June 30,    Mar. 31,   Dec. 31,   Sept. 30,    June 30,     Mar. 31,    Dec. 31,
                                   1997        1997        1997       1996        1996        1996         1996        1995
                                   ----        ----        ----       ----        ----        ----         ----        ----

<S>                               <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>   
Net sales                         100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%
Gross margin                       36.3%       39.8%       36.4%       36.4%       39.0%       39.9%       40.9%       34.9%
Engineering, research and
   development                      7.8%        9.7%        8.8%        7.1%        8.0%        8.5%        9.7%        8.4%
Selling and marketing              17.5%       19.9%       15.8%       16.8%       16.2%       16.9%       18.5%       16.2%
Administrative and general          6.9%        8.4%        6.5%        7.4%        8.5%        7.4%        8.1%        6.9%
Income from operations              4.0%        1.8%        5.4%        5.1%        6.3%        7.1%        4.6%        3.4%
Net income                          2.1%        0.7%        3.3%        3.2%        3.8%        0.5%        2.2%        1.6%

</TABLE>


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The report of independent auditors and consolidated financial statements and
financial statement schedule of the Company required by this item are filed as
exhibits hereto, are listed under Item 14(a)(1) and (2).


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE

None.



20
<PAGE>


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information is contained in Part I of the Form 10-K, and is hereby
incorporated by reference thereto.

SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the 1934 Act requires the Company's officers and directors and
persons who own more than ten percent of its Common Stock to file reports with
the Securities and Exchange Commission disclosing their ownership of stock in
the Company and changes in such ownership. Copies of such reports are also
required to be furnished to the Company. Based solely on a review of the copies
of such reports received by it, the Company believes that, during fiscal 1997,
all such filing requirements were complied with, except that Mr.
Smith filed one late Form 4 to report a sale of 351 shares of Common Stock..

ITEM 11.   EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information regarding compensation paid
and accrued during each of the last three fiscal years to the Company's Chief
Executive Officer and each of the other persons serving as the Company's four
other executive officers as of the end of the Company's last fiscal year.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                                                       LONG-TERM
                                                                                     COMPENSATION
                                                          ANNUAL COMPENSATION            AWARDS
                                                      --------------------------     ------------
                                                                                      SECURITIES         ALL OTHER
                                                        SALARY           BONUS        UNDERLYING        COMPENSATION
NAME AND PRINCIPAL POSITION                YEAR           ($)             ($)         OPTIONS (#)         ($) (1)
---------------------------                ----           ---             ---         -----------         -------

<S>                                        <C>          <C>              <C>             <C>              <C>  
David W. Smith                             1997         195,700          45,000          10,000           1,000
    President and Chief Executive          1996         190,000         154,875          20,000           1,000
    Officer                                1995         169,731          22,500          10,000           1,000

Joseph L. Gasper                           1997         133,900          15,000           5,000           1,000
    Senior Vice President,                 1996         130,000          88,500          10,000           1,000
    Operations                             1995         119,885          20,000           5,000           1,000

Anthony R. Drury                           1997         128,750          20,000           5,000           1,000
    Senior Vice President, Finance         1996         125,000          88,500          10,000           1,000
    and Chief Financial Officer            1995         113,885          11,000           5,000           1,000

Ian H. Henderson                           1997          98,980          18,588           4,000           6,124
    Senior Vice President,                 1996          80,828          12,507           7,000             674
    European Operations                    1995          73,480          31,268           5,000            --

Terry D. Ellis(2)                          1997          90,000          12,000          21,000            --
    Vice President,                        1996          25,309           5,000           5,000            --
    North American Sales and
    Customer Support

</TABLE>


21
<PAGE>
(1)  Consists of the Company's matching payments under its 401(k) Plan, except
     for Mr. Henderson for whom the amounts shown represent the Company's
     contribution under an English personal pension plan.

(2)  Mr. Ellis joined the Company in June 1996, and his annualized base salary
     was then expected to be approximately $80,000.

STOCK OPTION GRANTS

The following table sets forth certain information with respect to individual
grants of stock options during the year ended September 30, 1997 to the
Company's Chief Executive Officer and each of the Company's four other executive
officers.


<TABLE>
<CAPTION>

                                                                                               POTENTIAL REALIZABLE VALUE
                                                                                                AT ASSUMED ANNUAL RATES
                                                                                              OF STOCK PRICE APPRECIATION
                                              INDIVIDUAL GRANTS                                     FOR OPTION TERM (1)
                         -------------------------------------------------------------        ----------------------------
                          NUMBER OF        % OF TOTAL
                          SECURITIES        OPTIONS
                          UNDERLYING       GRANTED TO        EXERCISE
                           OPTIONS         EMPLOYEES          OR BASE
                           GRANTED         IN FISCAL           PRICE        EXPIRATION
     NAME                  (#) (2)           YEAR             ($/SH)           DATE              5% ($)           10%($)
     ----                  -------           ----             ------           ----              ------           ------

<S>                         <C>                <C>           <C>              <C>                <C>             <C>
David W. Smith              10,000             4.5%          $  8.625         09/11/07          $ 54,242         $137,460
                                                                          
Joseph L. Gasper             5,000             2.2%          $  8.625         09/11/07          $ 27,121         $ 68,730
                                                                          
Anthony R. Drury             5,000             2.2%          $  8.625         09/11/07          $ 27,121         $ 68,730
                                                                          
Ian H. Henderson             4,000             1.8%          $  8.625         09/11/07          $ 21,697         $ 54,984
                                                                          
Terry D. Ellis              15,000             6.7%          $ 10.625         03/05/07          $100,230         $254,003
                             5,000             2.2%          $ 10.000         07/24/07          $ 31,445         $ 79,687
                             1,000             0.4%          $  8.625         09/11/07          $  5,424         $ 13,746
                            ------            ----                                              --------         --------
                            21,000             9.3%                                             $137,099         $347,436
                                                      

</TABLE>

(1)  Potential realizable value is based on the assumed annual growth rates
     compounded annually for the ten-year option term. The dollar amounts set
     forth under this heading are the result of calculations at the 5% and 10%
     assumed rates set by the Securities and Exchange Commission and are not
     intended to forecast possible future appreciation, if any, of the stock
     price of the Company.

(2)  The options granted in September 1997, with terms of 10 years, vest and
     become exercisable on September 11, 2002. The 15,000 options and the 5,000
     options granted to Mr. Ellis in March 1997 and July 1997, respectively,
     vest in five annual installments beginning one year after the date of
     grant.



22

<PAGE>




STOCK OPTION EXERCISES AND HOLDINGS

The following table sets forth information relating to options exercised during
the year ended September 30, 1997 by the Company's Chief Executive Officer and
each of the Company's four other executive officers and presents the value of
unexercised options held by such individuals as of September 30, 1997:


    AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES

<TABLE>
<CAPTION>

                                                            NUMBER OF UNEXERCISED             VALUE OF UNEXERCISED
                                                             OPTIONS AT FISCAL              IN-THE-MONEY OPTIONS AT
                                                                YEAR END (#)                FISCAL YEAR END ($) (2)
                                                         -----------------------------    ------------------------------
                         SHARES             VALUE
                      ACQUIRED ON         REALIZED
     NAME               EXERCISE           ($) (1)       EXERCISABLE     UNEXERCISABLE    EXERCISABLE      UNEXERCISABLE
     ----               --------           -------       -----------     -------------    -----------      -------------

<S>                         <C>           <C>               <C>               <C>            <C>              <C>     
David W. Smith              5,000         $ 35,205          150,000           62,500         $428,750         $ 23,125
Joseph L. Gasper           16,000         $137,996           37,500           29,750         $ 56,188         $  9,875
Anthony R. Drury             --           $   --             56,300           29,750         $152,538         $  9,875
Ian H. Henderson             --           $   --             13,334           21,333         $ 15,001         $  6,250
Terry D. Ellis               --           $   --              1,000           25,000         $    625         $  2,500

</TABLE>

----------

(1)  Value realized is based upon the difference between the last sale price of
     the Company's Common Stock on The Nasdaq Stock Market on the dates of
     exercise and the exercise price of the options, multiplied by the number of
     shares acquired on exercise of the option.

(2)  Total value of "in-the-money" unexercised options is based upon the
     difference between the last sale price of the Company's Common Stock on The
     Nasdaq Stock Market on September 26, 1997 ($8.125 per share) and each
     exercise price of the various "in-the-money options" held by such person,
     multiplied by the number of "in-the-money" option shares.


COMPENSATION OF DIRECTORS

Non-employee directors of the Company are paid a $1,000 fee for attendance at
each meeting and a $250 fee for each telephonic meeting of the Board of
Directors. The directors are also reimbursed for their out-of-pocket expenses
incurred in connection with the meetings. Effective July 24, 1997, each
non-employee director in office on each October 1 commencing October 1, 1998
shall be paid a $5,000 retainer for services provided to the Company for the
prior year or, to the extent such person did not so serve for the entire prior
year, such retainer payment will be made on a pro rata basis for the period
served.

Pursuant to the terms of the Company's 1993 Stock Option Plan (the "Plan"), as
amended on July 24, 1997, each non-employee director, upon first being elected
to the Board of Directors after July 24, 1997, shall be granted an option to
purchase 6,000 shares of Common Stock exercisable in three equal installments on
the first three anniversary dates of the date of grant, at an exercise price
equal to the fair market value of the shares on the date of grant. In addition,
each such director will receive a grant of 2,000 shares with an exercise price
determined on the same basis every year thereafter, which options become
exercisable on the third anniversary of the date of grant. Also on July 24,
1997, each non-employee director was granted an option to purchase an additional
3,000 shares exercisable over three years, so that the optionee shall have the
right to exercise the 



23



<PAGE>

option with respect to one third of the shares covered thereby commencing on the
first anniversary of the date of grant with respect to the initial grant
received upon first being elected to the Board of Directors.

To date, each of Messrs. Bergman, Pinkas, Randall and Young has received, under
the Plan, 10,000 options for their service as directors, at exercise prices
ranging from $7.00 to $11.25 and Mr. Erdekian has received a total of 7,000
options for his services, at exercise prices ranging from $7.50 to $10.00

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

              REPORT OF THE STOCK OPTION AND COMPENSATION COMMITTEE

The Company's compensation policy with respect to its executive officers
reflects two basic principles. First, compensation should, to a significant
extent, reflect the financial performance of the Company. Second, a portion of
an executive officers' compensation should provide long-term incentives that
will tie long-term rewards for the executive officers to increases in
stockholder values. The Company has traditionally attempted to effect its
compensation policy through three separate components: salary, bonus and stock
options.

Annual Compensation

Annual cash compensation is comprised of a base salary and a bonus award. The
Committee establishes annual salaries by evaluating individual performances and
the level of the executive's responsibility and experience. In addition, the
Committee considers marketplace valuations of comparable executives of other
companies in related industries, comparable in size with the Company, although
salary determinations have not been based upon any specific criteria of
compensation. Nevertheless, the members of the Stock Option and Compensation
Committee, who either are affiliated with venture capital firms (Mr. Bergman) or
a NYSE company (Mr. Erdekian) and have experience in setting compensation for
companies in similar stages of development, believe that salaries of the
executive officers in fiscal 1997 were modest, considering the scope of the
Company's operations and the respective responsibilities and achievements of the
executive officers. Annual adjustments in base salaries typically are made
effective at the beginning of the fiscal year for which they are intended to
apply and therefore reflect in large part prior year's business and individual
performance achievements. During fiscal 1997, salary increases for the executive
officers (except for Mr. Ellis and Mr. Henderson) were three percent. The
increases in salary for Mr. Ellis and Mr. Henderson reflect their promotions to
Vice President of North American Sales and Customer Support and Senior Vice
President of European Operations, respectively.

Bonus awards are made pursuant to criteria established toward the beginning of
each fiscal year. A portion of the bonus, which comprised approximately 70% of
the maximum bonus payable during the 1997 fiscal year, is non-discretionary and
in 1997 is based upon the Company's achievement of specified levels of net
income determined by the Committee in the relevant fiscal year. The amount of
bonus is subject to minimum and maximum specified levels of net income. The
Company's net income was less than the minimum net income level previously
determined by the Committee; accordingly, the non-discretionary bonuses were not
paid to any of the executives.

The remaining portion of the bonus is discretionary and is based on the
Committee's judgment concerning the achievement by the executive officer of
certain stated objectives specifically related to that executive's functional
responsibilities. The executive officers received a range from 50% to 86% of the
discretionary bonuses, based upon the Committee's assessment of the level of
achievement with respect to the stated objectives. If maximum bonuses are
awarded, the amounts are reduced by the amount of the Company's contributions to
its 401(k) and profit sharing plans for the employee. The discretionary bonus
for Mr. Smith was based on criteria that included, among others, (i) improvement
of customer satisfaction and reduction in warranty costs; (ii) completion of the
semiconductor strategic plan and (iii) joint venture for development of new
products. 



24

<PAGE>

Long Term Compensation - Stock Options

The stock option component of the executive officers' compensation package is
designed to provide incentive for the enhancement of stockholder value, since
the full benefit of stock option grants will not be realized unless there has
been appreciation in per share values over several years. In this regard,
options have been granted at fair market value on the date of grant and vest in
five years, except for certain options granted to Mr. Ellis which vest in equal
annual installments over five years. The number of shares subject to each grant
is set at a level intended to create an opportunity for stock ownership based on
the officer's current position with the Company and the individual's personal
performance in recent periods. The Committee also takes into account the number
of vested and unvested options held by the executive officer in order to
maintain an appropriate level of equity incentive for that individual. However,
the Committee does not adhere to any specific guidelines as to the relative
option holdings of the Company's executive officers. The options granted to each
executive officer is detailed in the Option Grants in Last Year table.

Deferred Compensation Plan

The Company maintains a deferred compensation plan, pursuant to which certain
executive officers may elect to defer a portion of their annual compensation.
The participant's funds are invested among various investment vehicles
designated by the plan administrators. Upon the death or retirement of a
participant, the funds attributable to the participant (including any earnings
on contributions) are distributed to the participant or the participant's
beneficiary in a lump sum or in annual installments over various selected
periods.

Qualifying Executive Compensation for Deductibility Under Provisions of the
Internal Revenue Code

The Internal Revenue Code of 1986, as amended (the "Code"), provides that a
publicly held corporation generally may not deduct compensation for its chief
executive officer or each of certain other executive officers to the extent that
such compensation exceeds $1,000,000 for the executive. The Committee intends to
take such actions as are possible and appropriate to qualify compensation paid
to executives for deductibility under the Code. In this regard, the Committee
notes, however, that base salary and bonus levels are expected to remain well
below the $1,000,000 limitation in the foreseeable future.


     JAMES R. BERGMAN                         VAHRAM V. ERDEKIAN


PERFORMANCE GRAPH

The chart below compares the cumulative total stockholder return of the Company
with the cumulative total return on the S & P 500 Stock Index and the Hambrecht
& Quist Technology Index. Information relating to the Company begins on May 12,
1993 (the first date on which the Company's Common Stock was publicly traded).

                 COMPARISON OF 51 MONTH CUMULATIVE TOTAL RETURN*
     AMONG QUAD SYSTEMS CORPORATION, THE S & P 500 INDEX AND THE HAMBRECHT &
                             QUIST TECHNOLOGY INDEX


<TABLE>
<CAPTION>

                              5/12/93       9/93       9/94     9/95      9/96      9/97
                              -------       ----       ----     ----      ----      ----
<S>                              <C>         <C>        <C>      <C>       <C>       <C>
Quad Systems Corporation         100         197        200      126       128       113
S & P 500                        100         104        108      140       169       237
H & Q TECHNOLOGY                 100         104        119      199       220       341
</TABLE>

----------

*    $100 invested on 5/12/93 in stock or on 4/30/93 in index-including
     reinvestment of dividends.

25
<PAGE>

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

The table below sets forth certain information as of December 22, 1997 regarding
the beneficial ownership (as defined in regulations of the Securities and
Exchange Commission) of Common Stock of (i) each director and executive officer
of the Company; (ii) each nominee for director; (iii) all directors and
executive officers as a group; and (iv) each person known to the Company to own
beneficially 5% or more of its Common Stock. Unless otherwise specified, the
named beneficial owner has sole voting and investment power. The information in
the table below was furnished by the owners listed. Shares issuable pursuant to
the exercise of stock options are included in the table below if such options
are currently exercisable or exercisable by February 20, 1998 (60 days after the
date above).

                                               NUMBER OF           PERCENT
       NAME                                     SHARES            OF CLASS
       ----                                     ------            --------
                              
James R. Bergman(1)                             53,254                1.2%
Anthony R. Drury(1)                             76,865                1.8%
Terry D. Ellis(1)                                1,000                 *
Vahram V.  Erdekian                              2,000                 *
Joseph L. Gasper(1)                             41,500                1.0%
Ian H. Henderson(1)                             16,667                 *
Lorin J. Randall(1)                             32,338                 *
Robert P. Pinkas(1)                             38,890                 *
David W. Smith(1)                              171,008                3.9%
David H. Young(1)                               36,000                 *
All Directors and Executive                    469,522               10.8%
Officers as a group(1)(10 persons)
FMR Corp.(2,4)                                 421,700                9.7%
   82 Devonshire Street
   Boston, MA 02109
Cowen & Company(3,4)                           259,800                6.0%
  Financial Square
  New York, NY 10005

----------

*    Less than 1%.

1.   The amounts shown include shares covered by options exercisable within 60
     days of December 22, 1997, as follows: 4,000 shares each, Messrs. Bergman,
     Randall, Pinkas and Young; 1,000 shares each, Messrs. Erdekian and Ellis;
     60,300 shares, Mr. Drury; 41,500 shares, Mr. Gasper; 13,334 shares, Mr.
     Henderson; 160,000 shares, Mr. Smith; and 293,134 shares, all directors and
     executive officers as a group.

2.   FMR Corp., as the parent holding company of Fidelity Management and
     Research Company, its wholly-owned subsidiary, owns the shares reported.
     FMR Corp. has sole dispositive power with respect to all of the shares
     reported.

3.   Cowen and Company has both shared dispositive and voting power with respect
     to all of the shares reported.

4.   Based solely on information contained in filings with the Securities and
     Exchange Commission pursuant to Section 13(d) or 13(g) of the 1934 Act.


26
<PAGE>


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During fiscal 1997, the Company purchased from Two Technologies, Inc. ("Two
Technologies") certain hand-held computers used in the Company's products. David
H. Young, a director of the Company, is the President of Two Technologies. The
Company paid a total of $38,837. Also during fiscal 1997, Two Technologies
purchased SMT process equipment from the Company in amounts totaling $243,421.
The Company's transactions with Two Technologies were made at prices and on
terms comparable to other arms'-length purchases and sales by the Company and
the Company believes that such was also the case with respect to Two
Technologies' transactions with the Company.

During fiscal 1997, the Company received general contracting services for
leasehold improvements at its Willow Grove facility from a son of Joseph L.
Gasper, the Senior Vice President, Operations of the Company. The amount paid in
fiscal 1997 totaled $70,855. Mr. Gasper has informed the Company that, other
than his familial relationship with his son, who does not reside in Mr. Gasper's
household, Mr. Gasper has no direct or indirect interest in the services
provided by his son to the Company.



27
<PAGE>

                                     PART IV


ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this report:

1.   CONSOLIDATED FINANCIAL STATEMENTS

     Report of Independent Auditors.

     Consolidated Balance Sheets as of September 30, 1997 and 1996.

     Consolidated Statements of Income for the years ended September 30, 1997,
     1996 and 1995.

     Consolidated Statements of Stockholders' Equity for the years ended
     September 30, 1997, 1996 and 1995.

     Consolidated Statements of Cash Flows for the years ended September 30,
     1997, 1996 and 1995.

     Notes to Consolidated Financial Statements.

2.   CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

     Schedule II - Valuation and Qualifying Accounts.

     All other schedules have been omitted since the required information is not
     present or not present in amounts sufficient to require submission of the
     schedule, or because the information required is included in the
     Consolidated Financial Statements or the Notes thereto.

3.   LISTING OF EXHIBITS

  EXHIBIT       
    NO.         DESCRIPTION
    ---         -----------

        3.1     Certificate of Incorporation of the Registrant, as amended -
                Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
                the Registrant's Registration Statement on Form S-1 (No.
                33-60588) filed with the Securities and Exchange Commission on
                May 7, 1993.

        3.2     By-Laws of the Registrant, as amended - Incorporated by
                reference to Exhibit 3.2 to the Registrant's Registration
                Statement on Form S-1 (No. 33-60588) filed with the Securities
                and Exchange Commission on April 5, 1993.

       *10.1    1986 Stock Option Plan, as amended - Incorporated by reference
                to Exhibit 4.1 to the Registrant's Registration Statement on
                Form S-8 (No. 33-71590) filed with the Securities and Exchange
                Commission on November 12, 1993.

      o*10.2    1993 Stock Option Plan, as amended.

     *10.3.1    Deferred Compensation Agreement dated September 30, 1994,
                between the Company and David W. Smith - Incorporated by
                references to Exhibit 10.3.1 filed under the Company's Annual
                Report on Form 10-K for the fiscal year ended September 24,
                1995.

     *10.3.2    Deferred Compensation Agreement dated September 30, 1994,
                between the Company and Anthony R. Drury - Incorporated by
                reference to Exhibit 10.3.2 filed under the Company's Annual
                Report on Form 10-K for the fiscal year ended September 24,
                1995.


28
<PAGE>


       10.4.1   Agreement relating to the acquisition of capital shares in
                SMTech Limited, dated January 27, 1995, among the Company,
                Investech SA and Messrs. David Wheatley and Richard Willshere -
                Incorporated by reference to Exhibit 2.1 filed under the
                Company's Current Report on Form 8-K filed with the Securities
                and Exchange Commission on January 27, 1995.

       10.4.2   Consulting agreement dated January 27, 1995, among the Company,
                Mr. Dominique Henry, Quad Europe Limited, Quad Holdings Limited
                and SMTech Limited - Incorporated by reference to Exhibit 2.2
                filed under Current Report on Form 8-K filed with the Securities
                and Exchange Commission on January 27, 1995.

       10.5     Lease dated August 27, 1996, between the Registrant and Marave
                Associates, L.P. - Incorporated by reference to Exhibit 10.5.2
                filed under the Company's Annual Report on Form 10-K for the
                fiscal year ended September 29, 1996.

       10.6     Agreement dated March 19, 1993, among the Registrant, A.S.Z. de
                Ferranti and Ferranti Limited, relating to the Registrant's
                acquisition of ZCR Limited (now Quad Europe Limited)
                Incorporated by reference to Exhibit 10.5.1 to the Registrant's
                Registration Statement on Form S-1 (No. 33-60588) filed with the
                Securities and Exchange Commission on April 5, 1993.

    o10.7.1     Credit Agreement dated April 11, 1997, between the Company and
                CoreStates Bank, N.A.

    o10.7.2     First Amendment to Credit Agreement dated September 11, 1997,
                between the Company and CoreStates Bank, N.A.

      *10.8     401(k) Salary Reduction Plan and Trust dated October 1, 1989, as
                amended - Incorporated by reference to Exhibit 10.8 to the
                Registrant's Registration Statement on Form S-1 (No. 33-60588)
                filed with the Securities and Exchange Commission on April 5,
                1993.

       10.9     Agreement dated November 1, 1993, between the Registrant and
                Samsung Aerospace Industries, Ltd. Incorporated herein by
                reference to Exhibit 10.9 filed under the Company's Annual
                Report on Form 10-K for the fiscal year ended September 26,
                1993.

     *10.10     Agreement dated June 20, 1996 between the Registrant and Samsung
                Aerospace Industries, Ltd.-Incorporated herein by reference to
                Exhibit 10.1 filed under Form 10-Q for the period ended June 23,
                1996 (portions redacted pursuant to SEC order granting
                confidential treatment to certain provisions).

     o10.11     Agreement dated March 19, 1997, between the Registrant and
                Samsung Aerospace Industries, Ltd. (portions redacted pursuant
                to application to SEC for confidential treatment to certain
                provisions).

     *10.12     Quad Systems Corporation Employee Stock Purchase Plan, as
                amended - Incorporated by reference to Exhibit 4.2 to the
                Registrant's Registration Statement on Form S-8 (No. 33-93436)
                filed with the Securities and Exchange Commission on June 20,
                1997.

       o*11     Statement regarding computation of per share earnings.

       o*22     Subsidiaries of the registrant.

       o*23     Consent of Ernst & Young LLP.

       o*27     Financial Data Schedule.


29
<PAGE>


     (b) Reports on Form 8-K.

     No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.


----------

*    Constitutes compensatory plan or arrangement required to be filed as an
     exhibit to this form.

o    Filed herewith



30
<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                  QUAD SYSTEMS CORPORATION

                                  By:   /s/ DAVID W. SMITH
                                        ---------------------------
                                          David W. Smith, President

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>


<S>                                <C>                               <C> 
    /S/ DAVID W. SMITH             Principal Executive               December 29, 1997
--------------------------         Officer and Director
David W. Smith                     


    /S/ ANTHONY R. DRURY           Principal Financial               December 29, 1997
--------------------------         and Accounting Officer
Anthony R. Drury                   


    /S/ JAMES R. BERGMAN           Director                          December 29, 1997
--------------------------
James R. Bergman


    /S/ VAHRAM V. ERDEKIAN         Director                          December 29, 1997
--------------------------
Vahram V. Erdekian


    /S/ ROBERT P. PINKAS           Director                          December 29, 1997
--------------------------
Robert P. Pinkas


    /S/ LORIN J. RANDALL           Director                          December 29, 1997
--------------------------
Lorin J. Randall


    /S/ DAVID H. YOUNG             Director                          December 29, 1997
--------------------------
David H. Young

</TABLE>


31

<PAGE>

                            QUAD SYSTEMS CORPORATION
                          INDEX TO FINANCIAL STATEMENTS



Report of Independent Auditors.............................................F-2

Consolidated Balance Sheets as of September 30,
1997 and 1996..............................................................F-3

Consolidated Statements of Income for the
Years Ended September 30, 1997, 1996 and 1995..............................F-4

Consolidated Statements of Stockholders'
Equity for the Years Ended
September 30, 1997, 1996 and 1995..........................................F-5

Consolidated Statements of Cash Flows for the
Years Ended September 30, 1997, 1996 and 1995..............................F-6

Notes to Consolidated Financial Statements.................................F-7



F-1
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS



Board of Directors and Stockholders
Quad Systems Corporation

We have audited the accompanying consolidated balance sheets of Quad Systems
Corporation as of September 30, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quad
Systems Corporation at September 30, 1997 and 1996, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.


                                                     /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
October 31, 1997



F-2

<PAGE>

                            QUAD SYSTEMS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>

                                                                                                 SEPTEMBER 30,
                                                                                            1997               1996
                                                                                            ----               ----

<S>                                                                                       <C>                <C>     
Current assets:
  Cash and cash equivalents                                                               $  1,981           $  2,636
  Accounts receivable, net of allowance for doubtful accounts-
      $788 and $633 at September 30, 1997 and 1996, respectively                            20,234             15,076
  Inventory:
      Raw materials                                                                          8,478              7,951
      Work in process                                                                        2,017              3,400
      Finished goods                                                                         6,602              4,961
                                                                                          --------           --------
                                                                                            17,097             16,312
  Deferred income taxes                                                                      2,593              2,450
  Prepaid expenses and other current assets                                                    983                825
                                                                                          --------           --------
       Total current assets                                                                 42,888             37,299
Equipment and leasehold improvements:
  Machinery, equipment, and software                                                         5,365              5,333
  Furniture and fixtures                                                                     1,099                964
  Leasehold improvements                                                                       678              1,055
                                                                                          --------           --------
                                                                                             7,142              7,352
  Less accumulated depreciation and amortization                                            (3,937)            (4,865)
                                                                                          --------           --------
                                                                                             3,205              2,487
Deferred income taxes                                                                          699                673
Goodwill, net of accumulated amortization                                                    2,831              3,115
Other assets                                                                                   414                249
                                                                                          --------           --------
Total assets                                                                              $ 50,037           $ 43,823
                                                                                          ========           ========

                                            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Line of credit                                                                         $  4,920           $   --
   Accounts payable                                                                          3,908              4,770
   Accrued commissions                                                                       1,885              1,169
   Accrued warranty                                                                          1,355              1,488
   Accrued expenses                                                                          1,145              1,511
   Employee compensation and related taxes                                                   1,141              1,861
   Deferred service revenue                                                                  1,035                732
   Customer deposits                                                                           696              1,301
   Current portion of long-term debt                                                           620                700
   Income taxes payable                                                                        229                450
                                                                                          --------           --------
        Total current liabilities                                                           16,934             13,982

Long-term debt, less current portion                                                         2,325              1,750

Stockholders' equity:
  Preferred Stock, par value $.01 per share; authorized shares:
      1,000,000; no shares issued at September 30, 1997 and 1996                              --                 --
  Common Stock, par value $.03 per share; authorized shares:
      15,000,000; shares issued: 4,337,467 and 4,255,022 at
      September 30, 1997 and 1996, respectively                                                130                128
  Additional paid-in-capital                                                                24,345             23,713
  Retained earnings                                                                          6,445              4,458
  Foreign currency translation                                                                  34                (32)
  Less treasury stock, at cost, 13,908 shares at September 30, 1997
    and 1996                                                                                  (176)              (176)
                                                                                          --------           --------
       Total  stockholders' equity                                                          30,778             28,091
                                                                                          --------           --------
Total liabilities and stockholders' equity                                                $ 50,037           $ 43,823
                                                                                          ========           ========

</TABLE>

See accompanying notes.

F-3

<PAGE>
                            QUAD SYSTEMS CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>


                                                       YEAR ENDED SEPTEMBER 30,
                                             -------------------------------------------
                                               1997             1996              1995
                                               ----             ----              ----

<S>                                          <C>               <C>               <C>    
Net sales                                    $81,723           $71,591           $62,591
Cost of products sold                         51,417            43,912            39,537
                                             -------           -------           -------
          Gross profit                        30,306            27,679            23,054

Operating expenses:
     Engineering, research and
       development                             6,759             6,153             4,844
     Selling and marketing                    14,197            12,076            10,276
     Administrative and general                5,912             5,561             3,997
                                             -------           -------           -------
                                              26,868            23,790            19,117
                                             -------           -------           -------
     Income from operations                    3,438             3,889             3,937
Interest expense                                 484               304               234
Interest income                                 (103)             (109)             (110)
Settlement of securities litigation             --               1,287               180
                                             -------           -------           -------
Income before income taxes                     3,057             2,407             3,633
Income tax expense                             1,070               915               945
                                             -------           -------           -------
     Net income                              $ 1,987           $ 1,492           $ 2,688
                                             =======           =======           =======

     Net income per share                    $  0.45           $  0.35           $  0.62
                                             =======           =======           =======

Weighted average common and
  common equivalent shares                 4,463,813         4,321,177         4,328,974
                                           =========         =========         =========


</TABLE>

See accompanying notes.

F-4

<PAGE>
                            QUAD SYSTEMS CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>



                                               COMMON STOCK                                 
                                         -----------------------    ADDITIONAL                 FOREIGN
                                            SHARES                  PAID-IN     RETAINED      CURRENCY     TREASURY    STOCKHOLDERS'
                                         OUTSTANDING     AMOUNT     CAPITAL     EARNINGS    TRANSLATION      STOCK        EQUITY
                                         -----------     ------     -------     --------    -----------      -----        ------


<S>                                        <C>         <C>         <C>         <C>             <C>             <C>       <C>      
Balance at September 30, 1994              4,012,301   $     121   $  21,899   $     278       $   49       $    (176)    $  22,171
                                                                                                           
Net income                                      --          --          --         2,688          --             --          2,688
Compensation expense related                                                                               
  to the issuance of stock options              --          --            20        --            --             --             20
Restricted Common Stock issued                                                                             
  in purchase of SMTech Limited               50,372           1         566        --            --             --            567
Restricted Common Stock issued upon                                                                        
  conversion of convertible notes issued                                                                   
  in purchase of Quad Europe Limited          83,333           2         498        --            --             --            500
Common Stock issued under                                                                                  
  employee benefit plans                      50,944           2         187        --            --             --            189
Tax benefit related to stock                                                                               
  options exercised                             --          --           265        --            --             --            265
Foreign currency translation adjustment         --          --          --          --             (20)          --            (20)
                                           ---------   ---------   ---------   ---------     ---------      ---------    ---------
Balance at September 30, 1995              4,196,950         126      23,435       2,966            29           (176)      26,380
                                                                                                           
Net income                                      --          --          --         1,492          --             --          1,492
Compensation expense related                                                                               
  to the issuance of stock options              --          --            11        --            --             --             11
Common Stock issued under                                                                                  
  employee benefit plans                      44,164           2         259        --            --             --            261
Tax benefit related to stock                                                                               
  options exercised                             --          --             8        --            --             --              8
Foreign currency translation adjustment         --          --          --          --             (61)          --            (61)
                                           ---------   ---------   ---------   ---------     ---------      ---------    ---------
Balance at September 30, 1996              4,241,114         128      23,713       4,458           (32)          (176)      28,091
                                                                                                           
Net income                                      --          --          --         1,987          --             --          1,987
Compensation expense related                                                                               
  to the issuance of stock options              --          --             5        --            --             --              5
Common Stock issued under                                                                                  
  employee benefit plans                      82,445           2         528        --            --             --            530
Tax benefit related to stock                                                                               
  options exercised                             --          --            99        --            --             --             99
Foreign currency translation adjustment         --          --          --          --              66           --             66
                                           ---------   ---------   ---------   ---------     ---------      ---------    ---------
Balance at September 30, 1997              4,323,559   $     130   $  24,345   $   6,445     $      34      $    (176)   $  30,778
                                           =========   =========   =========   =========     =========      =========    =========
                                                                                                           
</TABLE>

See accompanying notes.

F-5
<PAGE>
                                          QUAD SYSTEMS CORPORATION
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                               (IN THOUSANDS)

<TABLE>
<CAPTION>


                                                                             YEAR ENDED SEPTEMBER 30,
                                                                             ------------------------
                                                                       1997            1996             1995
                                                                       ----            ----             ----
<S>                                                                  <C>              <C>              <C>    
OPERATING ACTIVITIES
Net income                                                           $ 1,987          $ 1,492          $ 2,688

Adjustments to reconcile net income to net
  cash provided by (used in) operating
  activities:

      Depreciation and amortization                                    1,800            1,643            1,078      
                                                                             
      Provision (recovery) for losses on accounts receivable             204             (153)             260              
      Provision (recovery) for sales returns and allowances             (288)            (288)             643             
      Provision for deferred income taxes                               (169)            (163)          (1,065)            
      Stock option compensation                                            5               11               20                
      Changes in operating assets and liabilities, net:

           Accounts receivable                                        (5,362)           2,419           (3,561)          
           Inventory                                                    (785)          (3,350)          (2,686)            
           Other assets                                                 (392)            (364)              84             
           Accounts payable                                             (862)            (376)           2,031            
           Accrued expenses                                              503              451             (224)             
           Employee compensation and related taxes                      (718)             743              175             
           Deferred service revenue                                      303              455               (1)             
           Customer deposits                                            (605)             814               54             
           Income taxes payable                                         (122)            (154)             411            
                                                                     -------          -------          -------
Net cash (used in) provided by operating activities                   (4,501)           3,180              (93)

INVESTING ACTIVITIES

Net purchases of equipment and leasehold improvements                 (2,099)          (1,559)          (1,077)          
Purchase of SMTech Limited, net of cash acquired                        --                --            (3,307)           
                                                                     -------          -------          -------
Net cash used in investing activities                                 (2,099)          (1,559)          (4,384)          

FINANCING ACTIVITIES
Proceeds from line of credit                                           4,920              --               --              
Proceeds from term loan                                                3,100              --               --              
Principal payments on long-term debt                                  (2,605)            (700)            (350)          
Common Stock issued under employee benefit plans                         530              261              189              
Proceeds from term loan incurred to purchase
  SMTech Limited                                                        --                --             3,500            
                                                                     -------          -------          -------
Net cash provided by (used in) financing activities                    5,945             (439)           3,339           


(Decrease) increase in cash and cash equivalents                        (655)           1,182           (1,138)            
Cash and cash equivalents at beginning of year                         2,636            1,454            2,592            
                                                                     -------          -------          -------
Cash and cash equivalents at end of year                             $ 1,981          $ 2,636          $ 1,454
                                                                     =======          =======          =======

</TABLE>
See accompanying notes.

F-6

<PAGE>
                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995


1.  DESCRIPTION OF THE BUSINESS

The Company designs, manufactures, markets and supports surface mount technology
("SMT") and advanced packaging equipment used in the assembly of SMT printed
circuit boards and advanced packages and other semiconductor assembly processes,
primarily in low to medium volume production environments.

2.  SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Quad Systems
Corporation and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 1996 and 1995 financial statements to
conform with the 1997 financial statements.

FISCAL YEAR

For ease of presentation, the Company has indicated its fiscal year as ending on
September 30; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September. Fiscal 1997, which ended on September
28, 1997, and fiscal 1995, which ended on September 24, 1995, each included 52
weeks. Fiscal 1996, which ended on September 29, 1996, included 53 weeks.

CASH FLOWS

The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.

Supplemental disclosure of cash flow information (in thousands):

<TABLE>
<CAPTION>


                                                                  YEAR ENDED SEPTEMBER 30,
                                                            -------------------------------------
                                                              1997          1996           1995
                                                              ----          ----           ----

<S>                                                         <C>            <C>            <C>   
Schedule of noncash activity:

Tax benefit related to employee stock benefit plans         $   99         $    8         $  265
                                                            ======         ======         ======
Restricted Common Stock issued in purchase of
  SMTech Limited                                            $ --           $ --           $  567
                                                            ======         ======         ======
Restricted Common Stock issued upon conversion
  of convertible notes issued in purchase of
  Quad Europe Limited -- 83,333 shares                      $ --           $ --           $  500
                                                            ======         ======         ======

Cash paid during the year for:

Interest                                                    $  483         $  316         $  152
                                                            ======         ======         ======

Income taxes                                                $1,678         $1,183         $1,600
                                                            ======         ======         ======

</TABLE>

F-7

<PAGE>

                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995

INVENTORY

The Company values its inventory at the lower of cost (first-in, first-out
method) or market.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost. Depreciation on assets
is provided using the straight-line method over the estimated useful lives of
the related assets.

GOODWILL

Goodwill is amortized on a straight-line basis over ten years. The carrying
value of goodwill is evaluated whenever changes in circumstances indicate the
carrying amount of goodwill may not be recoverable. In performing such review
for recoverability, the Company compares the expected future cash flows to the
carrying value of goodwill. If the anticipated undiscounted future cash flows
are less than the carrying amount of such goodwill, the Company recognizes an
impairment loss for the difference between the carrying amount of the goodwill
and its estimated fair value. Accumulated amortization was $1,207,000, $828,000
and $438,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.

PRODUCT WARRANTY

The financial statements reflect accruals for potential product warranty claims
based on the Company's claim experience. Such costs are accrued at the time
sales are recognized.

REVENUE RECOGNITION

Revenue from the sale of products is generally recognized upon shipment. Service
and support revenues are recognized over the life of the relevant contract on a
straight-line basis. Such revenues were $1,522,000, $1,276,000 and $934,000 for
the years ended September 30, 1997, 1996 and 1995, respectively.

INCOME TAXES

The Company accounts for income taxes under the liability method, whereby,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse. No provision is made for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations.

FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's United Kingdom subsidiaries are
translated into U. S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Net assets are translated at the exchange rate at the end of the
fiscal year. Income and expense items are translated at the average exchange
rate during the year. The resulting translation adjustments are recorded
directly into a separate component of shareholders' equity. Gains and losses
resulting from foreign currency 



F-8


<PAGE>

                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995


transactions are included in the income statement. Net foreign currency
transaction gains or losses are not material in any of the years presented.

NET INCOME PER SHARE

Net income per share is calculated by dividing net income by the weighted
average number of common and common equivalent shares (stock options and stock
purchase plan shares) outstanding during the period.

In February 1997, the FASB issued Statement No. 128, "Earnings Per Share,"("SFAS
128") which is required to be adopted for annual and quarterly periods ended
after December 15, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share
(referred to as basic earnings per share under SFAS 128), the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the years ended September 30, 1997 and 1995 of
$.01 and $.03 per share, respectively. There was no impact on earnings per share
for the year ended September 30, 1996. The impact of SFAS 128 on the calculation
of fully diluted earnings per share for these years is not expected to be
material.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.

STOCK BASED COMPENSATION

The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25") and related interpretations in accounting for
its stock-based compensation plans. Note 7 of these notes includes the required
disclosures and pro forma information provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation,"("SFAS 123"). Under APB 25, because
the exercise price of the Company's stock options equals the market price of the
underlying common stock on the date of grant, no compensation expense is
recognized.



F-9
<PAGE>

                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995


3. DEBT OBLIGATIONS

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                     SEPTEMBER 30,
                                                                 --------------------

                                                                 1997            1996
                                                                 ----            ----
 
<S>                                                              <C>            <C> 
Term loan, requiring quarterly principal payments of
  $155,000, bearing interest at 7.95% per annum and
  maturing in April 2002. The term loan contains various
  covenants and requires maintenance of certain ratios
  as defined in the loan agreement                               $2,945         $ --

Term loan which required quarterly principal payments of
  $175,000, bearing interest at the bank's prime rate or
  an applicable margin above LIBOR or the bank's CD
  rate.  This loan was repaid in April 1997                        --            2,450
                                                                 ------         ------
                                                                  2,945          2,450
Less current portion                                                620            700
                                                                 ------         ------
                                                                 $2,325         $1,750
                                                                 ======         ======

</TABLE>


Maturities of long-term debt outstanding at September 30, 1997 are as follows:
$620,000-1998; $620,000-1999; $620,000-2000; $620,000-2001; $465,000-2002.

The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 and bears interest at the bank's base rate of
interest (6.9% as of September 30, 1997) or at the Company's option, the bank's
prime rate or LIBOR plus 1.30% when the outstanding balance is greater than
$500,000. This line of credit is secured by a pledge by the Company's United
Kingdom holding company, Quad Systems Holdings Limited, of 65% of the
outstanding shares of its two wholly-owned United Kingdom operating
subsidiaries. The Company pays a fee of .25% on the unused portion of the line
of credit. This credit agreement expires in April 2000. The line of credit
agreement restricts the payment or declaration of any dividends on an annual
basis in excess of 50% of such year's pre-tax income. This line of credit
agreement also contains various operating and reporting covenants and requires
maintenance of certain financial ratios. As of September 30, 1997, total
borrowings under this line of credit were $4,920,000. Prior to April 1997, the
Company had a revolving line of credit that permitted borrowings up to a maximum
of $8,000,000 with similar terms as in the $10,000,000 credit agreement. The
weighted average interest rates on short-term borrowings for the years ended
September 30, 1997 and 1996 were 7.47% and 8.69%, respectively.



F-10

<PAGE>

                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995


4.  COMMITMENTS

As of September 30, 1997, the Company has the following commitments for future
minimum lease payments under various operating leases for real estate and
equipment (in thousands):

        1998                          $    1,144
        1999                               1,060
        2000                               1,054
        2001                               1,030
        2002 and thereafter                4,980

Rent expense was $980,000, $692,000 and $497,000 for the years ended September
30, 1997, 1996 and 1995, respectively.

In July 1997, the Company reached an agreement with Samsung Aerospace
Industries, Ltd. ("Samsung") for the sale and distribution of the QSA-30
assembler. Under the terms of the agreement, the Company has an exclusive right
to distribute and sell the QSA-30 assembler in North America, Europe and South
America and a non-exclusive right to sell in Asia, except in Korea. The contract
covers a term of two years, subject to extension, and has a targeted goal for
Quad to purchase a minimum of 150 assemblers at a predetermined price per unit
during the first year of the contract, although if the target is not met
Samsung's remedy is limited to terminating the agreement. The number of
assemblers to be purchased and their purchase price during the remainder of the
contract is to be negotiated.

In June 1996, the Company also reached an agreement with Samsung for the supply
of component tape feeders. Under the terms of this agreement, the Company
granted an exclusive license (subject to certain exceptions in favor of the
Company) to Samsung for Samsung to become the Company's sole supplier of
component tape feeders, which are currently used on all of the Company's
placement systems. The contract covers a six year period and requires Quad to
purchase a minimum of 40,000 component tape feeders with the value of at least
$6.8 million during the first two years of the contract, although if the target
is not met Samsung's remedy is limited to terminating the agreement The number
of tape feeders to be purchased during the remainder of the contract term will
be negotiated. Samsung is required to pay to Quad a total of $300,000,
representing a combination of licensing fees and a reimbursement for expenses
incurred in transferring the Company's technology to Samsung for use in the
production of the component tape feeders. The Company expects Samsung to begin
to supply component tape feeders to the Company during fiscal 1998.

5.  INCOME TAXES

For financial reporting purposes, income before income taxes includes the
following components (in thousands):


                             YEAR ENDED SEPTEMBER 30,
                             ------------------------
                       1997            1996           1995
                       ----            ----           ----
Pretax income:

United States         $2,942         $2,279         $2,817
Foreign                  115            128            816
                      ------         ------         ------
                      $3,057         $2,407         $3,633
                      ======         ======         ======

F-11

<PAGE>

                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995


Income tax expense for the fiscal years ended September 30, 1997, 1996 and 1995
consists of (in thousands):

                                      YEAR ENDED SEPTEMBER 30,
                                      ------------------------

                             1997             1996             1995
                             ----             ----             ----

Current:
  Federal                  $   887          $   688          $ 1,619
  State                         19             --                211
  Foreign                      333              358              389
                           -------          -------          -------
                             1,239            1,046            2,219
Deferred:
  Federal                      (73)             (57)          (1,106)
  State                        (47)              19             (135)
  Foreign                      (49)             (93)             (33)
                           -------          -------          -------
                              (169)            (131)          (1,274)
                           -------          -------          -------
Income tax expense         $ 1,070          $   915          $   945
                           =======          =======          =======

A reconciliation of the Company's effective income tax rate to the federal
statutory rate is as follows:


                                                 YEAR ENDED SEPTEMBER 30,
                                                 ------------------------
                                           1997           1996            1995
                                           ----           ----            ----

Federal statutory rate                     34.0%          34.0%          34.0%
Change in valuation allowance for
   deferred tax assets                       --            2.1%         (14.6%)
State taxes, net of federal benefit          --           (1.0%)          1.8%
Permanent -- goodwill                       4.0%           5.5%           2.7%
Permanent -- other                          1.5%           2.0%           1.3%
Foreign sales corporation benefit          (3.9%)         (5.8%)         (1.3%)
Research and development tax credit        (6.7%)         (2.1%)           --
Other                                       6.1%           3.3%           2.1%
                                           ----           ----           ---- 
Effective tax rate                         35.0%          38.0%          26.0%
                                           ====           ====           ==== 


F-12

<PAGE>
                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995

Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30,
                                                                    -------------
                                                                1997            1996
                                                                ----            ----
<S>                                                           <C>              <C>    
Deferred tax assets:
    Research and development tax credit carryforwards         $   552          $   407
    Net operating loss carryforwards                               50              372
    Tax credit carryforwards                                       84               84
    Inventory and accounts receivable reserves                  1,553            1,447
    Warranty and other accruals                                   301              386
    Deferred service and other unearned revenue                   542              331
    Deferred compensation                                          96               84
    Other                                                         220              133
                                                              -------          -------
Total deferred tax assets                                       3,398            3,244
Valuation allowance for deferred tax assets                       (50)             (50)
                                                              -------          -------
Deferred tax assets, net                                        3,348            3,194
Deferred tax liability:
    Prepaid expenses                                               56               71
                                                              -------          -------
Net deferred tax assets                                       $ 3,292          $ 3,123
                                                              =======          =======

</TABLE>


At September 30, 1997, the Company has the following net operating loss and tax
credit carryforwards (in thousands):

                                                AMOUNT        EXPIRATION DATE
                                                ------        ---------------
                                                         
      State net operating loss                   $760         1998
      Research and development tax credit         552         2002 to 2005
      Investment tax credit                        55         1998 to 2001
      Alternative minimum tax credit               29         indefinite
                                          

6. STOCKHOLDERS' EQUITY

Under the Company's Certificate of Incorporation, the Board of Directors, at its
discretion, may issue up to 1,000,000 shares of preferred stock and establish
the voting, dividend, liquidation, and other rights, designations and
preferences of the preferred shares. At September 30, 1997, no shares of
preferred stock were outstanding.

Subsequent to September 30, 1997, the Company adopted a Stockholder Rights Plan
(the "Plan") designed to protect the Company's stockholders in the event of an
attempt to acquire control of the Company on terms which do not deal fairly with
all of the Company's stockholders. Under the Plan, the Company distributed one
right per Common Stock on the stated record date, which becomes exercisable in
certain events involving the acquisition of 15% or more of the Company's Common
Stock. Upon the occurrence of such an event, each right entitles its holder to
purchase one one-hundredth of a share of a new series of preferred stock at a
price of $45.00. In addition, upon the occurrence of certain events, holders of
the rights will be entitled to purchase either the Company's stock or shares in
an "acquiring entity" at half of market value.


F-13
<PAGE>
                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995


7.  STOCK PLANS AND EMPLOYEE BENEFITS

Stock Option Plans

The Company has adopted stock option plans, as amended (the "Plans"), under
which incentive stock options and non-incentive stock options may be granted to
employees and other qualified individuals. The Plans provide that the option
price shall not be less than the fair market value of the shares on the date of
grant and that no portion of the option may be exercised beyond ten years from
that date. Options vest as determined by the Stock Option and Compensation
Committee of the Board of Directors (the "Committee"). The Plans provide for
full vesting of the option in the event there is a Change of Control (as defined
in the Plans). The Committee has the authority to determine the number, terms
and type of stock options to be granted. No additional options may be granted
under the 1986 Stock Option Plan. The 1993 Stock Option Plan provides for the
issuance of up to 900,000 shares of Common Stock pursuant to the exercise of
options.

Changes in the number of outstanding options and number of available shares for
grant under the Plans are summarized as follows:


<TABLE>
<CAPTION>

                                                       NUMBER OF SHARES
                                                    -----------------------
                                                                                  WEIGHTED 
                                                                                  AVERAGE
                                                                     UNDER        EXERCISE
                                                    AVAILABLE        OPTION        PRICE
                                                    ---------        ------        -----

<S>                                                 <C>            <C>           <C>   
Outstanding, September 30, 1994                      260,313        583,821       $ 6.58
  Granted                                           (147,250)       147,250        12.46
  Exercised                                             --          (50,944)        3.69
  Canceled                                            35,580        (35,580)       10.44
                                                    --------       --------       ------
Outstanding, September 30, 1995                      148,643        644,547         7.94
  Additional shares reserved for issuance            300,000           --           --
  Granted                                           (232,000)       232,000         7.94
  Exercised                                             --          (11,064)        3.05
  Canceled                                            81,213        (81,213)        9.79
  Shares expired from 1986 plan                      (32,331)          --           --
                                                    --------       --------       ------
Outstanding, September 30, 1996                      265,525        784,270         7.81
  Granted                                           (243,400)       243,400         9.77
  Exercised                                             --          (54,797)        5.72
  Canceled                                           129,821       (129,821)        9.17
  Shares expired from 1986 plan                       (5,638)          --           --
                                                    --------       --------       ------
Outstanding, September 30, 1997                      146,308        843,052       $ 8.31
                                                    ========       ========       ======
</TABLE>

At September 30, 1997, options to purchase 341,248 at prices ranging from $3.00
to $14.00 per share were exercisable.



F-14

<PAGE>
                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995

The following table summarizes information about options outstanding at
September 30, 1997:

<TABLE>
<CAPTION>

                                                          Weighted
                                        Weighted       Avg. Remaining                        Weighted
    Range of           Options       Avg. Exercise   Contractual Life        Options      Avg. Exercise
 Exercise Prices     Outstanding         Price            (Years)          Exercisable        Price
 ---------------     -----------         -----            -------          -----------        -----
                    
<S>                    <C>              <C>                <C>               <C>              <C>      
       $3.00            95,642           $ 3.00            4.80               94,901           $ 3.00
       $7.00           215,370             7.00            5.51              183,267             7.00
   $7.25-$9.00         238,750             8.27            9.05               10,910             7.81
  $9.25-$14.00         293,290            11.03            8.09               52,170            10.72
                       -------           ------            ----              -------           ------
                       843,052           $ 8.31            7.33              341,248           $ 6.48
                       =======           ======            ====              =======           ======
                                                                                        
</TABLE>

Employee Stock Purchase Plan

The Company has adopted an employee stock purchase plan under which the sale of
150,000 shares of its Common Stock has been authorized. The stock purchase plan
is based on six-month offering periods and no more than 30,000 shares of Common
Stock are available for purchase during each offering period. Shares are
purchased at the end of each offering period at 85% of the fair market value of
the shares on the first or last day of the offering period, whichever is lower.
Eligible employees may authorize payroll deductions not to exceed the lesser of
25% of their compensation or $6,250 during each six-month offering period. Under
the plan, 27,648 and 33,100 shares were issued at an average price of $7.86 and
$6.85 during the years ended September 30, 1997 and 1996, respectively. Shares
available for future grant were approximately 89,252 shares at September 30,
1997.

The Company has elected to follow APB 25 for these plans, under which no
compensation cost has been recognized. For the purposes of pro forma disclosure
under SFAS 123, the estimated fair value of the Company's options is amortized
to expense over the options' vesting period. The Company's pro forma information
follows (in thousands except earnings per share):

                                               Year Ended September 30,
                                               ------------------------
                                                 1997           1996
                                                 ----           ----

Net income             As reported              $1,987         $1,492
                       Pro forma                 1,577          1,256

Earnings per share     As reported               $0.45          $0.35
                       Pro forma                  0.35           0.29

Pro forma compensation costs were estimated using the Black-Scholes option
valuation model using the following weighted average assumptions for grants in
1997 and 1996, respectively: a dividend yield rate of 0 for each year; expected
lives of 5.2 and 5.4 years; expected volatility of 60.93% and 73.29%; and risk
free interest rates of 6.22% and 6.13%. The Black-Scholes valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of trade options, and because
changes in subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not necessarily
provide a reliable single measure of fair value of the Company's stock options.


F-15

<PAGE>
                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995


The weighted average fair value of options granted during fiscal 1997 and 1996
was $5.63 and $4.69, respectively. The weighted average fair value of options
associated with the Company's Employee Stock Purchase Plan for fiscal 1997 and
1996 was $3.13 and $2.77, respectively.

Savings Plan

The Company sponsors an employee savings plan that provides for eligible
employees to make pre-tax contributions up to 15% of eligible compensation,
subject to certain limitations imposed by Section 401(k) of the Internal Revenue
Code. The Company matches 50% of the first 4% of the employee's compensation, up
to a maximum of $1,000 per year. In addition, the Company made discretionary
contributions representing 2% of net income to the plan in each of the three
years in the period ended September 30, 1997. The Company's total contributions
were approximately $189,000, $184,000 and $168,000 for the years ended September
30, 1997, 1996 and 1995 respectively.

8.  SEGMENT REPORTING

The Company, operating in a single industry segment, designs, manufactures,
markets and supports SMT assembly equipment and related peripherals. The
Company's operations by geographic area are as follows (in thousands):

<TABLE>
<CAPTION>
                                        UNITED
                                        STATES           EUROPE        ELIMINATIONS     CONSOLIDATED
                                        ------           ------        ------------     ------------
<S>                                    <C>              <C>              <C>               <C>     
Year ended September 30, 1997
Total net sales:
      Unaffiliated customers           $ 56,435         $ 25,288         $   --            $ 81,723
      Interarea transfers                14,154            8,940          (23,094)             --
                                       --------         --------         --------          --------
            Total                      $ 70,589         $ 34,228         $(23,094)         $ 81,723
                                       ========         ========         ========          ========
Income from operations                 $  2,874         $    487         $     77          $  3,438
                                       ========         ========         ========          ========
Total assets                           $ 51,265         $ 11,846         $(13,074)         $ 50,037
                                       ========         ========         ========          ========

Year ended September 30, 1996:
Total net sales:
      Unaffiliated customers           $ 50,448         $ 21,143         $   --            $ 71,591
      Interarea transfers                12,541            5,780          (18,321)             --
                                       --------         --------         --------          --------
            Total                      $ 62,989         $ 26,923         $(18,321)         $ 71,591
                                       ========         ========         ========          ========
Income from operations                 $  5,048         $    329         $ (1,488)         $  3,889
                                       ========         ========         ========          ========
Total assets                           $ 44,925         $ 10,355         $(11,457)         $ 43,823
                                       ========         ========         ========          ========

Year ended September 30, 1995:
Total net sales:
      Unaffiliated customers           $ 48,301         $ 14,290         $    --           $ 62,591
      Interarea transfers                 8,780            3,734          (12,514)             --
                                       --------         --------         --------          --------
            Total                      $ 57,081         $ 18,024         $(12,514)         $ 62,591
                                       ========         ========         ========          ========
Income from operations                 $  3,232         $    889         $   (184)         $  3,937
                                       ========         ========         ========          ========
Total assets                           $ 41,746         $  9,423         $ (9,994)         $ 41,175
                                       ========         ========         ========          ========
</TABLE>

Interarea transfers primarily represent sales to and from the Company's United
Kingdom subsidiaries. These transfers are made at prices to recover cost, plus
an appropriate markup for profit, and have been eliminated from consolidated net
sales.


F-16

<PAGE>
                            QUAD SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995

Sales by geographic area made by the Company's United States operations are as
follows (in thousands):

                                     YEAR ENDED SEPTEMBER 30,
                                     ------------------------
                               1997            1996            1995
                               ----            ----            ----
                                           
United States                $45,981         $40,944         $38,433
Pacific                        7,034           5,644           5,043
Canada and Latin America       3,420           3,860           4,568
Other                           --              --               257
                             -------         -------         -------
                             $56,435         $50,448         $48,301
                             =======         =======         =======
      
9.  LITIGATION

In July 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in the federal district court in Munich, Germany.
The complaint alleges that the Company infringed on the plaintiff's German
patents relating to pick and place assemblers. The Company has responded with an
action against the plaintiff in Munich, Germany seeking to have such plaintiff's
patents invalidated. Management believes the lawsuit to be without merit or the
Company has meritorious defenses and intends to vigorously defend itself against
the lawsuit. Accordingly, no provision for this lawsuit has been recorded during
1996 or 1997.

In March 1995, a shareholder of the Company filed a complaint in the United
States District Court for the Eastern District of Pennsylvania (the "Action")
against the Company, two of its executive officers and two of its directors (one
of which was also sued as an executive officer) alleging that, during the period
December 23, 1994 through March 7, 1995, the defendants knowingly or recklessly
misrepresented or omitted material information about the Company, its prospects
and earnings, and knowingly or recklessly misrepresented or omitted information
about the status and operation of certain software used in the Company's
products in violation of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended, and common law. During the year ended September 30, 1996,
the Company, to avoid the uncertainties of litigation and without admitting any
wrongdoing with respect to any of the claims alleged in the Action, entered into
a final settlement agreement and related documents, which has received court
approval. Under this agreement, the Company, together with its directors and
officers liability insurer, paid an aggregate of $2,450,000 in settlement of all
claims. Total cost (including legal fees) to the Company, net of the amount paid
by such insurer, was $1,467,000. During the years ended September 30, 1996 and
1995, the Company recorded $1,287,000 and $180,000 of expenses, relating to the
settlement of this litigation, respectively.

10. SUBSEQUENT EVENT

Subsequent to September 30, 1997, the Company obtained an increase to its
existing line of credit, whereby an additional $2,500,000 is available. This
$2,500,000 increase expires on April 30, 1998.


F-17

<PAGE>
                            QUAD SYSTEMS CORPORATION
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

          COL. A                              COL. B                       COL. C                  COL. D               COL. E
          ------                              ------                       ------                  ------               ------

                                                                         ADDITIONS
                                                                 --------------------------
                                                                                 CHARGED TO
                                             BALANCE AT          CHARGED TO         OTHER                               BALANCE AT
                                             BEGINNING           COSTS AND        ACCOUNTS        DEDUCTIONS              END OF
DESCRIPTION                                  OF PERIOD            EXPENSES       -DESCRIBE         DESCRIBE               PERIOD
-----------                                  ---------            --------       ---------         --------               ------

<S>                                         <C>                 <C>                  <C>         <C>                    <C>        
Year ended September 30, 1995:                                                                                    
 Deducted from asset accounts:
    Allowance for doubtful accounts         $   558,000         $   260,000     $      --         $      --              $   818,000
    Reserves for inventory                    1,481,000             855,000            --              20,000(2)           2,316,000
                                            -----------         -----------     ---------         -----------            -----------
          Total                             $ 2,039,000         $ 1,115,000     $      --         $    20,000            $ 3,134,000
                                            ===========         ===========     =========         ===========            ===========
Product Warranty Liability                  $   636,000         $ 2,508,000     $      --         $ 2,011,000(3)         $ 1,133,000
                                            ===========         ===========     =========         ===========            ===========
Reserve for product returns and
     allowances                             $   120,000         $   643,000     $      --         $      --              $   763,000
                                            ===========         ===========     =========         ===========            ===========

Year ended September 30, 1996:
 Deducted from asset accounts:
    Allowance for doubtful accounts         $   818,000         $  (153,000)    $      --         $    32,000(1)         $   633,000
    Reserves for inventory                    2,316,000           1,104,000            --             886,000(2)           2,534,000
                                            -----------         -----------     ---------         -----------            -----------
          Total                             $ 3,134,000         $   951,000     $      --         $   918,000            $ 3,167,000
                                            ===========         ===========     =========         ===========            ===========
Product Warranty Liability                  $ 1,133,000         $ 2,866,000     $      --         $ 2,511,000(3)         $ 1,488,000
                                            ===========         ===========     =========         ===========            ===========
Reserve for product returns and
     allowances                             $   763,000         $  (288,000)    $      --         $      --              $   475,000
                                            ===========         ===========     =========         ===========            ===========

Year ended September 30, 1997:
 Deducted from asset accounts:
    Allowance for doubtful accounts         $   633,000         $   204,000     $      --        $    49,000(1)         $   788,000
    Reserves for inventory                    2,534,000             898,000            --            764,000(2)           2,668,000
                                            -----------         -----------     ---------        -----------            -----------
          Total                             $ 3,167,000         $ 1,102,000     $      --        $   813,000            $ 3,456,000
                                            ===========         ===========     =========        ===========            ===========
Product Warranty Liability                  $ 1,488,000         $ 2,123,000     $      --        $ 2,256,000(3)         $ 1,355,000
                                            ===========         ===========     =========        ===========            ===========
Reserve for product returns and
     allowances                             $   475,000         $  (288,000)    $      --        $      --              $   187,000
                                            ===========         ===========     =========        ===========            ===========
</TABLE>
----------

(1) Uncollectible accounts written off, net of recoveries.

(2) Disposals of obsolete inventory.

(3) Warranty costs paid during the year.



<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
<S>             <C>                                                                     <C>
EXHIBIT                                                                                 PAGE
  NO.                                                                                    NO.
  ---                                                                                    ---

        3.1     Certificate of Incorporation of the Registrant, as amended -
                Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
                the Registrant's Registration Statement on Form S-1 (No.
                33-60588) filed with the Securities and Exchange Commission on
                May 7, 1993.

        3.2     By-Laws of the Registrant, as amended - Incorporated by
                reference to Exhibit 3.2 to the Registrant's Registration
                Statement on Form S-1 (No. 33-60588) filed with the Securities
                and Exchange Commission on April 5, 1993.

      *10.1     1986 Stock Option Plan, as amended - Incorporated by reference
                to Exhibit 4.1 to the Registrant's Registration Statement on
                Form S-8 (No. 33-71590) filed with the Securities and Exchange
                Commission on November 12, 1993.

     o*10.2     1993 Stock Option Plan, as amended.

    *10.3.1     Deferred Compensation Agreement dated September 30, 1994,
                between the Company and David W. Smith - Incorporated by
                references to Exhibit 10.3.1 filed under the Company's Annual
                Report on Form 10-K for the fiscal year ended September 24,
                1995.

    *10.3.2     Deferred Compensation Agreement dated September 30, 1994,
                between the Company and Anthony R. Drury - Incorporated by
                reference to Exhibit 10.3.2 filed under the Company's Annual
                Report on Form 10-K for the fiscal year ended September 24,
                1995.

     10.4.1     Agreement relating to the acquisition of capital shares in
                SMTech Limited, dated January 27, 1995, among the Company,
                Investech SA and Messrs. David Wheatley and Richard Willshere
                Incorporated by reference to Exhibit 2.1 filed under the
                Company's Current Report on Form 8-K filed with the Securities
                and Exchange Commission on January 27, 1995.

     10.4.2     Consulting agreement dated January 27, 1995, among the Company,
                Mr. Dominique Henry, Quad Europe Limited, Quad Holdings Limited
                and SMTech Limited - Incorporated by reference to Exhibit 2.2
                filed under Current Report on Form 8-K filed with the Securities
                and Exchange Commission on January 27, 1995.

     10.5       Lease dated August 27, 1996, between the Registrant and Marave
                Associates, L.P. Incorporated by reference to Exhibit 10.5.2
                filed under the Company's Annual Report on Form 10-K for the
                fiscal year ended September 29, 1996.

     10.6       Agreement dated March 19, 1993, among the Registrant, A.S.Z. de
                Ferranti and Ferranti Limited, relating to the Registrant's
                acquisition of ZCR Limited (now Quad Europe Limited)
                Incorporated by reference to Exhibit 10.5.1 to the Registrant's
                Registration Statement on Form S-1 (No. 33-60588) filed with the
                Securities and Exchange Commission on April 5, 1993.



<PAGE>



EXHIBIT                                                                             PAGE
  NO.                                                                               NO.
  ---                                                                               ---

    o10.7.1     Credit Agreement dated April 11, 1997, between the Company and
                CoreStates Bank, N.A.
  
   
    o10.7.2     First Amendment to Credit Agreement dated September 11, 1997,
                between the Company and CoreStates Bank, N.A.

      *10.8     401(k) Salary Reduction Plan and Trust dated October 1, 1989, as
                amended - Incorporated by reference to Exhibit 10.8 to the
                Registrant's Registration Statement on Form S-1 (No. 33-60588)
                filed with the Securities and Exchange Commission on April 5,
                1993.

       10.9     Agreement dated November 1, 1993, between the Registrant and
                Samsung Aerospace Industries, Ltd. - Incorporated herein by
                reference to Exhibit 10.9 filed under the Company's Annual
                Report on Form 10-K for the fiscal year ended September 26,
                1993.

      10.10     Agreement dated June 20, 1996 between the Registrant and Samsung
                Aerospace Industries, Ltd.-Incorporated herein by reference to
                Exhibit 10.1 filed under Form 10-Q for the period ended June 23,
                1996 (portions redacted pursuant to SEC order granting
                confidential treatment to certain provisions).

     o10.11     Agreement dated March 19, 1997, between the Registrant and
                Samsung Aerospace Industries, Ltd. (portions redacted pursuant
                to application to SEC for confidential treatment to certain
                provisions).

     *10.12     Quad Systems Corporation Employee Stock Purchase Plan, as
                amended - Incorporated by reference to Exhibit 4.2 to the
                Registrant's Registration Statement on Form S-8 (No. 33-93436)
                filed with the Securities and Exchange Commission on June 20,
                1997.

     o11        Statement regarding computation of per share earnings.

     o22        Subsidiaries of the registrant.

     o23        Consent of Ernst & Young LLP.

     o27        Financial Data Schedule.

</TABLE>
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*    Constitutes compensatory plan or arrangement required to be filed as an
     exhibit to this form.

o    Filed herewith