SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the Fiscal Year ended September 29, 1996
                         Commission File Number 2-23128

                           QUALITY SEMICONDUCTOR, INC.
             (Exact name of registrant as specified in its charter)

             California                                        77-0199189
       (State of incorporation)                             (I.R.S. Employer
                             Identification Number)

                                851 Martin Avenue
                              Santa Clara, CA 95050
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (408) 450-8000

        Securities registered pursuant to Section 12(b) of the Act: None

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


       Title of Class                                     Name of Exchange
-----------------------------                      -----------------------------
Common Stock, $.001 par value                      NASDAQ/National Market System

         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 the  registrant's  knowledge,  in definitive proxy or information
statement  incorporated  by  reference  in  Part  III of this  Form  10-K or any
amendment to this Form 10-K.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  (based  on the  closing  price as  reported  on the  NASDAQ/NMS  for
November 21, 1996 was $33,695,021. Shares of Common Stock held by each executive
officer and director  and by each person who owns 5% or more of the  outstanding
Common  Stock  have  been  excluded  in that  such  persons  may be deemed to be
affiliates.  This  determination  of  affiliate  status  is  not  necessarily  a
conclusive determination for other purposes. The number of outstanding shares of
the registrant's Common Stock as of November 21, 1996 was 5,536,207.


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                                     PART I

Item 1.           Business

     Quality Semiconductor,  Inc. ("QSI" or the "Company") designs, develops and
markets  high-performance  logic  as well as  logic-intensive  specialty  memory
products and advanced  networking  semiconductor  products.  The Company targets
systems  manufactures  principally  in the  networking,  personal  computer  and
workstation,  and  telecommunications  markets. QSI's logic products include the
3.3-volt and 5-volt QSFCT family and 3.3-volt LCX family, high-speed,  low-noise
interface   logic   devices   that   interconnect    various   elements   in   a
microprocessor-based  system,  and the  QuickSwitch  family of  high-speed,  low
resistance  bus  switches,  which  can be used  for many  applications,  such as
facilitating the use of mixed voltages in a  microprocessor-based  system. QSI's
specialty  memory  products  include a family of dual port RAMs, and some of the
fastest FIFO (First-In,  First-Out) devices currently available.  QSI networking
products include an ATM multiplexer/demultiplex and 10/100 Base TX Fast Ethernet
transceivers for symbol and MII interface.

Industry Background

    Higher System Performance Requirements

         The worldwide  demand for  processing and  transmitting  information is
growing  rapidly.  This has  created  major  challenges  and  opportunities  for
manufacturers  of  electronic  systems  that must  continue to  increase  system
performance   to   meet   these   demands.   Historically,   the   markets   for
high-performance  electronic  systems  were  limited to  advanced,  small volume
applications.  However,  recent trends in the networking,  personal computer and
workstation,  telecommunication,  and portable systems markets have dramatically
increased the demand for high-performance systems.

         Networking

         The  proliferation  of LANs (Local Area  Networks)  and WANs (Wide Area
Networks)  is  increasing  the  demand  for   high-performance   networking  and
internetworking  products.  In order to enhance  the  performance  of  networks,
network managers are demanding higher performance networking products,  which in
turn increase the demand for higher performance logic and memory components.

         Personal Computer and Workstation

         Demand for higher performance  computers and workstations is increasing
as  graphical  user  interfaces  are  more  universally  adopted,  desktop  data
processing requirements are growing and new performance-intensive  applications,
such as multimedia and image processing,  are consuming more  microprocessor and
video  bandwidth.   To  meet  this  need,   personal  computer  and  workstation
manufactures  are  demanding   increasingly   higher  performance   controllers,
subsystems and peripheral devices that operate in tandem with these systems.

         Telecommunications

         Telecommunications companies are increasingly installing advanced fiber
optic  networks  capable of  transmitting  hundreds of times more voice and data
information,  at much higher  transmission  speeds, than was possible just a few
years ago. The demand for higher performance  systems is expected to continue to
grow as the industry moves towards mixing text,  voice,  image,  video and other
data types.  In order for these  companies  to transmit  and switch data at such
high speeds, telecommunications equipment

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manufactures are demanding higher performance logic and memory devices for their
increasingly advanced systems products.

         Portable Systems

     The emerging  demand for  portability  in computing and  communication  has
created  a market  for  lightweight,  battery-operated  portable  computers  and
personal  communication  systems.  Certain  of  these   communications-intensive
products are becoming  widely  available due to recent  developments in wireless
communications and the availability of low power  dissipation,  high performance
microprocessors.   These  products  also  require  logic  and  memory   circuits
characterized  by low power  dissipation  to  conserve  battery  life and reduce
weight,  small  packaging  to reduce the size of the portable  system,  and high
performance  to support  applications  similar to those  implemented  in desktop
systems.

         Demand for Higher Performance Integrated Circuits

     The increasing demand for higher performance  microprocessor-based  systems
in  applications   such  as  networking,   personal   computers,   workstations,
telecommunications   and  mobile   computing  has  created  a  need  for  higher
performance  system  components.  During the last ten years,  system speeds have
increased from less than 10 MHz  (megahertz) to more than 150 MHz and bus widths
(the  number of signals  handled in parallel  between  system  components)  have
expanded  from 8 bits to 64 bits or more.  In order to realize  the  benefits of
faster  microprocessors  and avoid bottlenecks  elsewhere in the system,  system
designers are demanding higher performance interface logic and memory integrated
circuits.

The QSI Solution

         QSI  develops  and  markets  semiconductor  products  for  the  growing
high-performance  logic, memory, and networking markets by exploiting its design
expertise  and  packaging  innovations.  QSI also  works with its  customers  to
anticipate  and solve speed,  functionality  and size  problems  encountered  as
systems designers continuously strive to enhance the performance of their system
products.

    Networking Products

     QSI  offers two  advanced  CMOS Fast  Ethernet  devices  that offer  design
engineers  enhancements  which can become a seamless  additions to their printed
circuit  board-design,   thereby  reducing  the  number  and  type  of  external
components as well as the overall board space required to implement the enhanced
design.

    High Performance Interface Logic Devices

     The Company  believes  that its high  performance  interface  logic family,
consisting of the QSFCT,  LCX,  QuickSwitch and clock management  product lines,
are positioned to meet the needs of designers of high-performance  systems.  The
Company's  3.3-volt and 5-volt QSFCT product line offers not only high speed and
low power dissipation, but also offers reduced noise generation through improved
design,  integration  of  resistors  into  the  logic  device  and  reduced-size
packaging.  The new LCX family is  designed  for  operation  with 3.3 volt power
supplies and has the ability to interface  with both 3.3 and 5 volt  components,
allowing system  designers the maximum  flexibility on a "mixed voltage" circuit
board.  QSI's QuickSwitch family of high-speed,  low resistance  switches can be
used to  isolate  and  couple  sections  of systems  logic  without  introducing
performance  penalties.  QSI has  introduced  two new devices using  proprietary
QuickScanTM  technology,  to  provide  JTAG  access  to a data bus  while  being
virtually  transparent to the system during normal, non JTAG,  operation.  QSI's
clock  management  products  enable system  designers to achieve  low-skew clock
signal  distribution,  which can eliminate the need for higher-cost,  high-speed
logic devices. These QSFCT, QuickSwitch, QuickScanTM

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and clock  management  products also feature  several  innovative  semiconductor
packaging  improvements such as the new  follow-through  MillipaQTM  package for
32-bit logic functions.

    High Performance Specialty Memory Devices

     QSI believes that it offers some of the  industry's  fastest FIFO and other
specialized  memory  devices in the  high-performance  segment of the  specialty
memory  market.  These high  performance  specialty  memory devices offer speeds
comparable  to that  achieved by more  complex  BiCMOS  processes,  but at finer
geometries  thus  requiring  less power  reducing  temperature  sensitivity  and
improving radiation-immunity characteristics.

QSI Strategy

         The Company's objective is to be a leading provider of high-performance
logic and  logic-intensive  specialty memory devices to the growing  networking,
personal  computer and  workstation,  telecommunications  and  portable  systems
markets.  The Company seeks to position  itself in these  markets  through broad
product offerings,  customer  interaction in the development of new products and
strategic  relationships with its fabrication suppliers.  The Company's strategy
includes the following key elements:

    Target Key Systems Manufacturers in High-Growth Markets

         The Company focuses its product  development  and marketing  efforts to
increase sales of high performance  logic and  logic-intensive  specialty memory
products to systems  manufactures in the growing  networking,  personal computer
and workstation,  telecommunications  and portable systems markets.  The Company
seeks to target new and existing  system  manufacturer  in these fields that are
the system performance or volume sales leaders in their respective markets.  The
Company believes that the high performance logic and memory  components  adopted
by these leading system  manufacturerr  are likely to be adopted by other system
manufacturers,  which may create  opportunities  for higher  volume sales of the
Company's products.

    Develop New Products based Upon Customer Input

     QSI  seeks to expand  its  interface  logic,  ultra-fast  specialty  memory
product,  and  networking  families  by  continuing  to work  closely  with  its
customers to anticipate and develop high performance solutions to improve system
performance. Through these relationships with systems manufacturers, the Company
has developed  QSFCT logic  circuits  with reduced noise level,  switch time and
propagation  delay;  the QuickSwitch  family of high-speed bus connection  logic
devices  that  offer  higher  performance  than  traditional  TTL  buffers;  and
packaging innovations offering significant design advantages through board space
savings and  resulting  in  cost-reductions.  The Company  also  intends to work
closely  with  system  manufacturers  to  develop  integrated  logic and  memory
products.  The  newly  introduced  Fast  Ethernet  products  represent  a  close
relationship   with  our  customers,   and  an  understanding  of  their  system
requirements.

    Achieve Design Wins in New Product Areas

     The Company intends to offer new products with applications beyond those of
the Company's current QSFCT,  specialty memory, and networking product families.
The Company has recently developed and is shipping high-performance products for
applications in system clock management,  including  low-skew fanout buffers and
phase  lock  loop  devices.  QSI  also  intends  to  continue  expansion  of the
QuickSwitch  product  family,   particularly  for  specialized   networking  and
telecommunications systems

<PAGE>



applications,  and to add new  QuickSwitch  products  such as  QuickScanTM  with
specialized  functions that  facilitate the testing of certain  elements  within
systems.

    Broaden Wafer Fabrication Capabilities

     The Company has  completed  the  purchase of a complete  wafer  fabrication
facility  in  Sydney,  Australia.  With  this  acquisition,  QSI now has its own
dedicated wafer design,  engineering,  and fabrication  capability.  The Company
also intends to utilize its current wafer foundry  partners;  Seiko,  Ricoh, and
Taiwan Semiconductor Manufacturing Corporation ("TSMC"). All of these facilities
have been  qualified  and are currently  producing a variety of standard  logic,
memory and networking products.

    Expand International Sales

         The Company believes there are significant  opportunities for increased
international sales of its products, particularly in European and Asian markets.
The Company intends to invest  additional  resources,  including the addition of
new foreign  sales  offices and  personnel,  in order to increase its  worldwide
customer base and international product revenues.

     Products

         The  Company  offers a wide  range  of high  performance  logic,  logic
intensive specialty memory, and networking products for systems manufacturers in
a  variety  of  markets,   including  the  networking,   personal  computer  and
workstation,  peripherals,  I/O  subsystems,   telecommunications  and  portable
systems industries.

     High Performance Networking Products

     The Company  introduced three new networking  products during the year. The
QS6810  ATM  4:1  Multiplexer/Demultiplexer   will  serve  the  ATM  Switch  and
Transmission  Market.  The QS6611 10/100 TX/Fast Ethernet Symbol Transceiver and
the QS6612 10/100 Base TX Ethernet MII  Transceivers  are the first members of a
family of  networking  products to serve the LAN and WAN markets.  The Company's
product   development  in  the  networking  market  is  directed  to  multimedia
applications and interoperability.

     High Performance Logic Products

         The  Company  offers  more than 100  interface  logic  products,  which
support bus interfaces,  memory interfaces and other logic support  applications
where high speed is critical.  QSI's family of logic  products is available in a
variety of small packages,  enabling  efficient use of board area. Many of these
products are designed for fast growing  applications,  such as mobile  computing
and  communications,  in which  small size and low power  consumption  may be as
important as high speed.

     QSFCT Interface Logic Devices

     FCT logic  devices  address the  high-performance  segment of the interface
logic  market.  Demand for these  products  comes  primarily  from bus interface
applications   where  low  propagation   delays,   low  power   consumption  and
space-efficient packaging are principal concerns. QSI's QSOP and QVSOP packaging
technology  can reduce  required  board  space by up to 75% as  compared to SOIC
(Small Outline Integrated Circuit) packaging.  QSI believes that its 2000 Series
logic was the first FCT logic family to include on-chip series termination

<PAGE>



resistors  that  further  reduce  ground  bounce.  The Company has  continued to
address common system design problems with  value-added  new product  solutions,
including double-width logic, which satisfies the need for logic applications of
more than 8-bits,  and 3.3 volt logic, which addresses the need for lower power,
lower noise components.

         QuickSwitch Devices

         The Company's  innovative  QuickSwitch  family of products  consists of
high-speed  switches  for direct bus  connection  with  virtually  no delay (250
picoseconds,  or 0.25  nanosecond),  no added  ground  bounce,  no  added  power
dissipation,  and requiring no directional control.  QuickSwitch devices provide
higher  performance  alternatives  to FCT and other families of interface  logic
where high current drive capability is not required, and can replace traditional
TTL buffers and  transceivers  (components  that can both  transmit  and receive
signals) to reduce overall  propagation  delay,  noise,  control  complexity and
power  consumption.   The  Company  has  experienced  growth  in  sales  of  the
QuickSwitch  product  family  in  the  data  communication,   telecommunication,
workstation and peripheral  interface  markets  because of the products'  signal
switching and routing capabilities.  QSI's current QuickSwitch offering includes
28  different  products  designed  for  applications  such as digital and analog
switching,   5.0-to-3.3-volt  conversion,  signal  swapping,  multiplexing,  and
pin-for-pin replacement of standard logic components.  The Company is developing
new  products  in  the  QuickSwitch  family  by  incorporating  features  of the
QuickSwitch  design  into  higher  integration  products,  such as a  series  of
crossbar switches and QuickScan devices for boundary scan test applications.

         Clock Management Devices

         As clock  speeds of  microprocessors  increase,  previously  acceptable
levels of clock signal skew (timing  variance of clock signals  within a system)
can cause  fatal  timing  errors.  QSI's  product  solutions  for  clock  signal
distribution  are intended to enable system  designers to achieve low-skew clock
signal  distribution,  which can eliminate the need for  higher-cost  high-speed
logic  devices.  The clock buffer  family of products  allows single or multiple
clock inputs to be distributed  across up to 22 output pins with  guaranteed low
skew.  The  Company's  PLL  (Phase-Locked-Loop)  clock  driver was  designed  to
duplicate an input clock while also providing various output options.

    High Performance Specialty Memory Products

         The Company's specialty memory products include FIFO, Dual-Port RAM and
Shared-Port   RAM   products   for   networking,    peripheral   interface   and
telecommunications   products  including  hubs,  bridges,   routers,  and  other
performance-driven  applications.  The  market  for  specialty  memory  has been
historically  driven by  telecommunications  and DSP (Digital Signal Processing)
applications  that typically  require large amounts of high performance  digital
data buffering.

         FIFO Memory Products

     FIFO products are used as rate buffers to transfer large amounts of data at
high  speeds  between  separate  devices  or pieces of  equipment  operating  at
different speeds within a system. QSI offers  asynchronous FIFO memory products,
featuring  depths of up to 4kb and access times of below 10ns,  with fast flags.
QSI's FIFO  products use only two master read and write  counters as compared to
six internal counters in typical FIFO products, thereby decreasing ground bounce
and the  potential  for flag and data  corruption.  Unlike most other  currently
available  FIFO  products,  which  use only  six-transistor  memory  cells  with
polysilicon load resistors, QSI's FIFO products use eight CMOS transistor memory
cells  to  provide  greater  speed,  soft-error  resistance,   and  process  and
temperature  stability.  QSI's FIFO products. The Company is developing a 36-bit
family of FIFO products intended to satisfy the increasing demand for 36-bit and
wider memory buffers in high bandwidth digital systems.

<PAGE>



also have noise filter  circuitry  to reduce data errors  caused by noise on the
clock  and  enable  inputs.  The  Company's  FIFO  products  currently  are used
primarily in networking products.

         Dual-Port RAM Products

         Dual-Port RAM products are used in multi-processor systems, where there
is a need for  interprocessor  communication.  QSI is  developing  a  family  of
Dual-Port RAM devices with  densities up to 256K bits.  These devices have built
in facilities to allow full  arbitration  between ports, via the fast busy flags
and semaphore cells. QSI Dual-Port RAM products are built using eight transistor
cell memory  technology  which provides  greater  stability than  prevailing six
transistor cell  architecture,  soft error  resistance,  and reduced process and
temperature sensitivity.

         Shared-Port RAM Product

         Shared-Port RAM products are used for  interprocessor  communication at
high speed  (3.66G  bits/second)  and are suited to  networking  and  multimedia
applications. Using the Company's proprietary memory compiling and logic routing
design tools, QSI has integrated 288k of memory and 20k gates of logic into this
single-chip  solution.  By using a more cost effective  shared SRAM memory core,
the  proprietary  Shared-Port  RAM  provides  higher  performance  and a greater
density than traditional Dual-Port RAM architectures.

         Packaging

         The increasing  complexity and  portability of electronics  systems has
resulted  in an  increasing  demand for  smaller  sized  packaged  semiconductor
components.  To address this demand QSI has  innovated and  implemented  several
semiconductor packaging improvements.

         In 1990,  QSI  introduced  the surface mount QSOP (Quarter Size Outline
Package),  which  has been  adopted  as an  industry  standard  by JEDEC  (Joint
Electronic  Device  Engineering  Council),  and is used by some of the Company's
competitors.  QSI's QSFCT logic,  QuickSwitch and clock management  products are
offered in the QSOP package. The QSOP package reduces the board area occupied by
the packaged  component by  approximately  75% over the standard SOIC package by
halving the width,  length and the lead pitch (the distance between the exterior
pins) of the package.

         QSI also has introduced its QVSOP package,  which uses the same plastic
body as the QSOP but adds more pins, and thus  additional  functionality.  QVSOP
package  yields  16 to  20-bit  "double-width"  products  that are  increasingly
demanded for high performance  systems  applications.  QSI also offers the HQSOP
package,  a  hermetic  SOP,  intended  for  military,  aerospace  and other high
reliability applications. The Company was also the first to offer logic products
in the industry standard ZIP (Zig-zag In Line Package), thereby providing small,
high-performance  logic-devices to system manufacturers having only through-hole
assembly capabilities.

         QSI's latest  32-bit  flowthrough  package,  the  MillipaQTM,  provides
design  engineers with the industries  smallest and easiest to use  high-density
package.


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Customers and Applications

         QSI's  customers  are  performance-oriented  systems  manufacturers  in
industries such as networking,  personal  computers and workstations.  QSI ships
products to more than 10 customers on an OEM (Original  Equipment  Manufacturer)
basis and to more than 1,400 customers through the Company's distributors.

         A relatively small number of customers have accounted for a significant
portion of the Company's  revenue in each of the past several  fiscal years.  In
fiscal  1995 and  1994,  sales to the  Company's  top ten  systems  manufacturer
customers  accounted  for more than half of total product  revenues.  No systems
manufacturer  customer  accounted  for sales in  excess of 10% of the  Company's
total  product  revenues in fiscal  1995;  sales to Compaq  Computer and Silicon
Graphics accounted for approximately 13% and 10%,  respectively of the Company's
total  product  revenues in fiscal 1994;  and no systems  manufacturer  customer
accounted for sales in excess of 10% of the Company's total product  revenues in
fiscal  1993.  There can be no  assurance  that  QSI's  current  customers  will
continue to place  orders with the  Company,  that orders by existing  customers
will continue at levels of previous periods, or that the Company will be able to
obtain orders from new customers.  Loss of one or more of the Company's  current
customers  could  materially  and  adversely  affect  the  Company's   business,
operating  results  and  financial  condition.  In  addition,  the  Company  has
experienced and may continue to experience lower margins on sales to significant
customers as a result of volume pricing arrangements.

Backlog

         As of September 30, 1996, the Company's backlog was approximately $13.0
million,  as compared to approximately  $12.1 million at September 30, 1995. The
Company's  backlog includes OEM and distributor  purchase orders accepted by the
Company for products  scheduled  for shipment  within the  following six months.
Orders constituting the Company's backlog are subject to delivery  rescheduling,
price  renegotiations  and  cancellation  at the  option  of the  buyer  without
significant  penalty.  The Company's business,  in line with that of much of the
semiconductor  industry,  is  characterized  by short lead-time orders and quick
delivery schedules.  In addition, the Company's actual shipments depend upon the
manufacturing  capacity and timely delivery of the Company's  wafer  fabrication
suppliers. Although useful for the purposes of short-term scheduling, backlog as
of any  particular  date may not be a  reliable  measure of sales for any future
period.

Sales and Distribution

         The Company markets its products primarily to systems  manufacturers in
North  America   through  its   distributors   and   independent   manufacturers
representatives,  and internationally through foreign distributors.  The Company
has three principal  North American  distributors,  Arrow,  Nu-Horizons and Bell
Industries.  Domestic  distributors  accounted  for  approximately  26%  of  the
Company's total product sales during fiscal 1996.  Arrow  Electronics  accounted
for more than half of such sales in each period.  The Company defers recognition
of revenue and related gross profit from sales of products to these distributors
until after the distributors  have resold these products to their customers.  In
addition,  QSI's independent  manufacturers' sales representatives in the United
States and Canada  generally  assist the  Company in  achieving  design wins and
procuring purchase orders from systems manufacturers.

         To   assist   the   Company's   distributor   and   independent   sales
representative,   the  Company  has  as  of  September  30,  1996,   nine  sales
professionals  located at the  Company's  sales offices in northern and southern
California,  Georgia,  Massachusetts  and the United  Kingdom.  The Company also
employs six

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field application engineers who work directly with Company's customers to assist
them in designing systems incorporating the Company's products.

         Sales outside of the United States accounted for approximately 43%, 29%
and 21% of net product sales for fiscal years ended  September  30, 1996,  1995,
and 1994,  respectively.  The Company expects that export sales will continue to
represent a significant  portion of its product sales.  Export sales are subject
to certain risks, including currency controls and fluctuations, changes in local
economic conditions, import and export controls and changes in tax laws, tariffs
and freight rates.

         The Company's  manufacturers'  representatives and distributors are not
subject to minimum purchase  requirements  and can discontinue  marketing any of
the Company's products at any time. The Company's  distributors  typically offer
competing products.  Although the Company believes that, to date it has provided
adequate  allowances  for exchanges and returns,  there can be no assurance that
actual   returns  or  exchanges   will  not  exceed  the  Company's   allowance,
particularly in connection with the introduction of new products or enhancements
or existing products. In addition there can be no assurance that future sales by
distributors or representatives will continue at present levels. The loss of one
or more manufacturers'  representatives or distributors,  or the decision by one
or more  distributors to reduce the number of the Company's  products offered by
such  distributor  or to carry the product lines of the  Company's  competitors,
could have a material adverse effect on the Company's operating results.

Competition

         The company competes in different product areas, to varying degrees, on
the basis of technical  innovation and  performance  of its products,  including
their  speed,  density,  power  usage,  reliability,  and  space-saving  package
options, as well as on price,  quality and product  availability.  The Company's
competitive strategy is to offer high-performance, small packaged products.

     The semiconductor industry is intensely competitive and is characterized by
price  erosion,  declining  gross margins,  rapid  technology  changes,  product
obsolescence  and  heightened  international  competition  in many markets.  The
Company's competitors include large semiconductor companies,  such as Integrated
Device Technology,  Inc., Texas Instruments  Incorporated National Semiconductor
Corporation  and  Cypress  Semiconductor  Corporation,  that have  substantially
greater  financial,  technical,  marketing,  distribution  and other  resources,
broader product lines and longer standing  relationships with customers than the
Company,  as  well  as  emerging  companies   attempting  to  sell  products  to
specialized  markets such as those  addressed by the Company.  In the event of a
downturn  in the market for  interface  logic or  specialty  memory  components,
companies  that  have  broader  product  lines  and  longer  standing   customer
relationships  may be in a  stronger  competitive  position  that  the  Company.
Competitors with greater  financial  resources or broader product lines also may
have more resources than the Company to engage in sustained price  reductions in
the Company's primary markets to gain market share.

         The Company is  continually  in the process of  designing  new improved
products to maintain its competitive position. Because of continual improvements
in semiconductor design and processing technology, the Company believes that its
future  success  will depend on its ability to continue to improve its  products
and  processes  and develop  new  technologies  and  products in order to remain
competitive.  Many of the Company's competitors have had internal  manufacturing
capacity for the fabrication and assembly of semiconductor  products,  which may
provide such  companies  with more reliable  manufacturing  capability,  shorter
development and manufacturing cycles and time-to-market  advantages. The Company
is only  now  developing  this  capacity  since  the  acquisition  of the  wafer
fabrication  facility  in  February  1996.  Competitors  having  their own wafer
fabrication facilities, or access to suppliers having such facilities, with

<PAGE>



smaller geometries or superior process technologies at the same geometries could
manufacture and sell competitive,  higher performance products at a lower price.
Introduction  of products by  competitors  that are  manufactured  with improved
process technology could materially and adversely affect the Company's operating
results.

         As is typical in the semiconductor industry, competitors of the Company
have  developed  and market  products  having  similar or  identical  design and
functionality as the Company's products,  and the Company expects that this will
continue in the future. For example,  products that are pin-compatible with many
of the Company's  QSFCT products are available from  competitors.  To the extent
the Company's products do not achieve performance, size or other advantages over
products  offered by  competitors,  the Company will  experience  greater  price
competition  with respect to such products.  The Company also faces  competition
from the makers of  microprocessors  or other system devices,  including  ASICs,
that  have been and may be  developed  for  particular  systems.  These  devices
increasingly  include  interface logic and specialty  memory  functions and as a
result may  eliminate  the need or sharply  reduce the demand for the  Company's
products in particular applications.

         The Company believes that its ability to compete  successfully  depends
on a number of factors both within and outside of its control,  including price,
product  quality,  performance,  success in developing  new  products,  adequate
fabrication  capacity and sources of raw  materials,  efficiency of  production,
timing of new  product  introductions  by  competitors,  protection  of  Company
products by effective  utilization  of  intellectual  property laws, and general
market and economic conditions.  There can be no assurance that the Company will
be able to compete successfully in the future.

Manufacturing

    Wafer Fabrication

         The Company's  semiconductor products are primarily fabricated in Japan
by Seiko  Instruments Inc.  ("Seiko") and Ricoh Corporation  ("Ricoh"),  and the
remainder of the Company's  products,  including the  Company's  more  advanced,
smaller geometry circuits,  are fabricated by Yamaha Corporation  ("Yamaha") and
Taiwan Semiconductor  Manufacturing  Company ("TSMC").  The Company's agreements
with Seiko contain  capacity  commitments  to manufacture  specified  numbers of
wafers for the  Company on a  most-favored  customer  price  basis.  The Company
believes that this commitment, which continues through 1998, is adequate to meet
the Company's currently foreseeable manufacturing needs during such periods.

         Currently,   approximately   85%  of  the  wafers  for  the   Company's
semiconductor products, including substantially all of the Company's high volume
QSFCT  products,  are  fabricated by Seiko and Ricoh.  In connection  with these
fabrication  arrangements,  the Company has granted Seiko and Yamaha  perpetual,
non-exclusive  licenses  to  use  the  Company's  QCMOS  process  technology  to
manufacture  integrated  circuits at their  facilities  in Japan,  including for
their own use and, for the purpose of fabricating  integrated circuits for third
parties,  subject to certain  competitive  restrictions.  In exchange  for these
licenses,  the  Company  received  an  aggregate  of more  than $13  million  in
technology development and license fees, and the Company also has certain rights
to use process  improvements that may be developed by Seiko. The Company also is
entitled to receive additional royalties upon the sale of products  manufactured
by Seiko or Yamaha for third  parties using the  Company's  process  technology,
although  no such  products  have been  manufactured  to date or  currently  are
proposed to be manufactured. The license agreements contain certain restrictions
an the right of Seiko and  Yamaha to use the  Company's  process  technology  to
manufacture and sell certain products,  including those within the fields of the
Company's primary logic and memory

<PAGE>



markets.   Subject  to  certain  royalty  payment  requirements,   Seiko  has  a
non-exclusive  license  to use the  Company's  designs  to  manufacture  certain
products for sale in Japan,  although  they have not done so to date. As part of
their relationship with the Company, in 1989 and 1991, Seiko purchased Preferred
Stock of the Company for a total investment of $1.1 million and in 1989,  Yamaha
purchased Preferred Stock of the Company for a total investment of $625,000.

         The   Company's   reliance   on  Seiko  and  Ricoh   (which   fabricate
approximately 85% of the of the Company's products,  including substantially all
of  the  Company's   high-volume  QSFCT  products)  and  TSMC  (which  currently
fabricates the Company's more advanced,  smaller geometry circuits) to fabricate
its wafers involves  significant risks,  including reduced control over delivery
schedules,  potential  lack of adequate  capacity,  technical  difficulties  and
events  limiting  production,  such as  fires  or  other  damage  to  production
facilities.  The Company has from time to time experienced significant delays in
receiving  fabricated  wafers from its providers,  and there can be no assurance
that the  Company  will not  experience  similar  or more  severe  delays in the
future.  Any inability or unwillingness of the Company's  fabrication  providers
generally,  and Seiko in particular,  to provide adequate quantities of finished
wafers to meet the  Company's  needs could delay  shipments  and have a material
adverse effect on the Company's operating results. The Company also depends upon
its fabrication suppliers to participate in process improvement efforts, such as
the transition to finer  geometries,  and any inability or unwillingness of such
suppliers  to do  so  could  adversely  affect  the  Company's  development  and
introduction  of new products.  Competitors  having their own wafer  fabrication
facilities,  or access to  suppliers  having  such  facilities,  using  superior
process technologies at the same geometries or manufacturing products at smaller
geometries, could manufacture and sell competitive,  higher performance products
at a lower  price.  The  introduction  of such  products  by  competitors  could
materially and adversely  affect the Company's  operating  results.  The Company
acquired a wafer  fabrication  facility  on  February  16,  1996 which  involves
significant risks inherent in any manufacturing  endeavor,  including production
yields,  technical  difficulties  with  process  control,  and  events  limiting
production, such as fires or other damage.

     Although the Company has historically  experienced good  relationships with
Seiko and Yamaha,  the Company has recently  qualified a local  manufacturer for
quick-turn  fabrication of prototype products, and the Company has established a
second  source  for the  production  of  standard  products  that are  currently
manufactured  primarily  by Seiko.  The  Company  also  established  a  separate
supplier,  as an alternative to Yamaha,  for the fabrication of smaller geometry
circuits.

     The manufacture of  semiconductor  products is highly complex and sensitive
to a wide  variety  of  factors,  including  the  level of  contaminants  in the
manufacturing  environment,  impurities in materials used and the performance of
personnel  and  equipment.  While  the  Company  believes  that it will  have an
adequate  wafer  supply to meet its needs,  there can be no  assurance  that the
Company will receive  sufficient  quantities of wafers at favorable  prices on a
timely  basis,  if at all.  As is typical  in the  semiconductor  industry,  the
Company's  wafer  fabricators  have from  time to time  experienced  lower  than
anticipated  production  yields.  There can be no assurance  that  manufacturing
problems  will not occur in the  future.  The loss of Seiko as a  supplier,  any
prolonged  inability to obtain adequate yields or deliveries from such suppliers
or other  subcontractors or manufacturer,  or any other  circumstance that would
require the Company to seek alternative sources of supply, could delay shipments
and have a material adverse effect on the Company's operating results.

     Assembly

         The  Company   performs   circuit   assembly   through  four   overseas
subcontractors.  In the assembly process, silicon wafers are cut into individual
die that are then assembled into packages in accordance with

<PAGE>



procedures developed by the Company. While the timeliness and quality of product
deliveries from the Company's subcontractors have been acceptable to date, there
can be no  assurance  that  difficulties  will  not  occur  in the  future.  Any
significant  disruption in adequate supplies from, or degradation in the quality
of components supplied by, these subcontractors,  or any other circumstance that
would require the Company to qualify alternative sources of supply,  could delay
shipment  of  products  and have a  material  adverse  effect  on the  Company's
operating  results.   Although  the  Company  believes  it  has  gained  certain
competitive advantages through reduced-size  packaging innovations,  The Company
does not have exclusive rights to use such designs or related  packaging methods
and  many of the  Company's  packaging  designs,  such  as the  QSOP  and  QVSOP
packages,   are   currently   available  for  products  sold  by  the  Company's
competitors.  Also,  there  can be no  assurance  that  the  Company's  assembly
subcontractors,  who have gained significant expertise in the application of the
Company's packaging designs and methods,  such as QSOP, QVSOP or HQSOP, will not
use such expertise in providing product assembly for the Company's  competitors,
which could have an adverse effect on the Company's competitive position and its
results of operations.

     Test

     Following assembly, the packaged devices currently are tested and inspected
by the Company or its domestic test contractor or overseas assembly  contractors
in accordance with the Company's  quality  assurance  program before shipment to
customers.  The Company  recently  increased  its  reliance on overseas  testing
houses  for  product  testing.  While the  timeliness  and  quality  of  product
deliveries from the Company's subcontractors have been acceptable to date, there
can be no assurance that assembly or testing  difficulties will not occur in the
future.   Any   significant   disruption   in  adequate   supplies   from  these
subcontractors,  or any other  circumstance  that would  require  the Company to
qualify  alternative  sources of supply,  could delay shipment and result in the
loss of customers,  limitations  or reductions  in the Company's  revenues,  and
other adverse  effects on the Company's  operating  results.  As a result of the
dependence of the Company on foreign  subcontractors  and test  facilities,  the
Company's  business  is subject  to the risks  generally  associated  with doing
business abroad,  such as foreign  governmental  regulations,  political unrest,
disruptions  or delays and  shipments  and  changes in  economic  conditions  in
countries in which the Company's  manufacturing  and test  assembly  sources are
located.

     Research and Development

         The  Company's  research  and  development  efforts  are focused on the
design  of  new  networking,  interface  logic  and  specialty  memory  devices,
improvements in the Company's process and design  technologies,  the development
of  integrated  logic  and  memory  devices,   improvement  of  existing  device
performance,  cost  reductions  in the  manufacturing  and assembly  process and
improvements in device  packaging.  As of September 30, 1996, the Company had 57
employees involved in research and product development activities.

         The Company's  research,  development and  engineering  expenses in the
fiscal years ended  September 30, 1996,  1995 and 1994 were  approximately  $7.0
million, $6.3 million and $4.7 million,  respectively.  The Company expects that
it will continue to spend substantial funds on research and development.

         Although the Company  believes that in certain  product lines it may be
desirable  to apply its QCMOS  process at smaller  geometry's  than it currently
uses and that it will be  technologically  possible  to do so,  there  can be no
assurance that  technological or other  difficulties will not prevent or delay a
successful  transition to smaller geometries.  Also, given the Company's limited
financial and operational

<PAGE>



resources,  The Company will depend substantially upon its fabrication suppliers
for research and development assistance in completing this transition. There can
be no assurance that any supplier will be willing or financially able to provide
such development  assistance,  or to make the significant financial commitments,
including investments in new fabrication  facilities,  that will be necessary to
implement production using QCMOS process at smaller geometries.

     The Company's future success is highly dependent upon the timely completion
and introduction of new products at competitive  price/performance  levels.  The
success  of new  products  depends on a variety of  factors,  including  product
selection,   successful  and  timely  completion  of  product  development,  the
Company's ability to secure sufficient wafer fabrication  capacity,  achievement
of acceptable wafer fabrication  yields (the proportion of good die on a silicon
wafer) by the Company's recently acquired  fabrication  facility and independent
wafer  suppliers,  and the  Company's  ability  to offer  such new  products  at
competitive  prices.  There can be no assurance that the Company will be able to
successfully  identify new product opportunities and develop and bring to market
such new products or that the Company will be able to respond effectively to new
technological changes or new product  announcements by others. In addition,  the
Company may  experience  delays,  difficulty in procuring  adequate  fabrication
capacity  for the  development  and  manufacture  of such new  products or other
difficulties in achieving volume  production of these new products.  The failure
of the Company to complete and  introduce new products in a timely manner and at
competitive  price/performance  levels would materially and adversely affect the
Company's operating results.

     Licenses, Patents and Trademarks

         The  Company  aggressively  seeks the  issuance  of  patents to protect
inventions and technology  which are important to its business.  The Company has
been awarded six United States  patents in the area of circuit  design and wafer
processing,  with various expiration dates, none earlier than 2010. In addition,
the Company has four United States patent applications pending. The Company also
has six  current  foreign  patent  applications  pending.  The  Company has four
registered  U.S.  trademarks.  The  Company  has also  routinely  protected  its
numerous  original mask sets under the U.S.  Semiconductor  Chip Protection Act.
There  can be no  assurance  that the  Company's  pending  patent  or  trademark
applications  will be allowed or that the issued or pending  patents will not be
challenged or circumvented by competitors.

         Notwithstanding the Company's pursuit of patent protection, the Company
believes  that its future  success  will  depend  primarily  upon the  technical
expertise,  creative  skills and  management  abilities  of its officers and key
employees  rather  than  on  a  patent   ownership.   The  Company  also  relies
substantially  on  trade  secrets  and  propriety   technology  to  protect  its
technology and manufacturing  know-how,  and works actively to foster continuing
technological innovation to maintain and protect its competitive position. There
can be no  assurance  that the  Company's  competitors  will  not  independently
develop  or  patent  substantially  equivalent  or  superior  technologies.   In
addition,  in connection with its fabrication supply  arrangements,  the Company
has granted Seiko and Yamaha non-exclusive licenses to the Company's fabrication
process  technology  and certain of the Company's  product  designs,  subject to
certain  competitive  restrictions  and  royalty  requirements.  There can be no
assurance that Seiko and Yamaha will not employ such  technology to compete with
the Company.

         The semiconductor  industry is characterized by substantial  litigation
regarding  patent  and  other  intellectual  property  rights.  There  can be no
assurance  that third  parties will not assert  claims  against the Company that
result in litigation. Any such litigation, whether or not determined in favor of
the  Company,  could  result in  significant  expense  and divert the  Company's
attention  from other  matters.  If any of the Company's  products were found to
infringe any third party  patent,  and such patent were  determined to be valid,
the third party would be entitled to injunctive relief,  which would prevent the
Company from selling

<PAGE>



any such infringing products. In addition, depending on the number of infringing
products  and the extent of sales of such  products,  the Company  could  suffer
significant  monetary  damages,  which  could  include  treble  damages  for any
infringement that is determined to be willful. Although QSI could seek a license
to sell products determined to infringe any third party patent,  there can be no
assurance that a license would be available on terms  acceptable to the Company,
if at all. The Company could also attempt to redesign any infringing products so
as to avoid  infringement,  although any effort to do so could be expensive  and
time consuming, and there is no assurance the effort would be successful.

     Subsidiary

     On  February  16,  1996  the  Company   acquired   certain  assets  of  AMA
MicroElectronics  Pty.  Ltd.  ("AWAM"),  a  subsidiary  of AWA Limited  based in
Sydney, Australia. The AWAM assets that were acquired by a new subsidiary of the
Company, Quality Semiconductor Australia, Pty. Ltd. foundry business and product
design center. QSA did not provide a significant amount of production wafers for
its parent's (QSI) product lines during fiscal 1996.

     Employees

         At September  30, 1996,  the Company had  approximately  197  full-time
employees,  including  34  in  sales,  marketing  and  customer  support,  90 in
manufacturing, assembly and testing, 57 in research and product development, and
16 in finance and administration.

         The  Company's  future  success  will  depend to a large  extent on the
continued  contributions  of Chun P.  Chiu  and R.  Paul  Gupta,  who  would  be
difficult to replace.  The future success of the Company also will depend on its
ability to attract and retain  qualified  marketing,  technical  and  management
personnel,  particularly highly skilled design, process and test engineers,  for
whom  competition  is intense.  The loss of or failure to attract and retain any
such persons could delay product development cycles or otherwise have a material
adverse  effect on the  Company's  business.  The  Company  has never had a work
stoppage and no employee is  represented  by a labor  organization.  The Company
considers its employees relations to be good.

<PAGE>

     Officers and Directors of the Registrant

         The  officers  and  directors  of the  Company  and  their  ages  as of
September 30, 1996 are as follows:

Name                         Age                 Position

Chun P. Chiu                 55      Chairman of the Board of Directors and
                                     Chief Technical Officer
R. Paul Gupta                59      President and Chief Executive Officer
Stephen H. Vonderach         62      Vice President of Finance,
                                     Chief Financial Officer and Secretary
Jacob Foraker                45      Vice President Logic and Memory Products
Albert Enamait               57      Vice President of Sales and Marketing
Edward J. Bradley, Jr.       53      Vice President of Manufacturing Operations
Andrew J. S. Kang            45      Director
Manohar L. Malwah            49      Director
Robert L. Puette             55      Director
Masaharu Shinya              53      Director
David D. Tsang               54      Director

     Mr.  Chiu,  one of the  Company's  founders,  has  served as the  Company's
Chairman of the Board since it's inception in 1988, Chief Executive Officer from
inception  until March 1996 and  President  from  inception  until June 1994. In
March of 1996 he also became the company's Chief Technical Officer. In 1980, Mr.
Chiu co-founded  Integrated Device  Technology,  Inc.  ("IDT"),  a semiconductor
manufacturer,  and served in various  management  positions at IDT through 1988,
most recently as Director,  Business Development for Japan and Far East. Mr.Chiu
holds an MSEE degree from Oregon State  University and a BSEE degree from Waseda
University, Tokyo, Japan.

     Mr. Gupta has served as Chief  Executive  Officer  since March 1996,  Chief
Operating  Officer  from  February  1993 to March 1996 and as a director  of the
Company since August 1995. He served as Vice President of Operations from August
1992  until June 1994.  From 1988 to 1992,  Mr.  Gupta  served as  President  of
Blackship Computers, a system integration company. Mr. Gupta holds a BSEE degree
from California State University-San Luis Obispo.

     Dr. Malwah has served as a director since the Company's  inception in 1988.
Dr. Malwah has been an independent  consultant  since October 1995. He served as
Senior Vice  President from 1989 to June 1994,  and as Chief  Technical  Officer
from 1989 to 1995. Dr. Malwah holds a Ph.D. In electrical  engineering  from the
University of Texas at Austin and an MS degree from Punjab University, India.

     Mr.  Vonderach has served as Vice President and Chief Financial  Officer of
the Company  since 1993.  Mr.  Vonderach  has served as Secretary of the Company
since May 1995.  From 1983 to 1993,  Mr.  Vonderach  served as Vice President of
Finance and Chief  Financial  Officer of Appian  Technology,  a manufacturer  of
application  specific  integrated  circuits  and high end graphics  boards.  Mr.
Vonderach  holds a BBA degree from  University of  Pittsburgh  and an MBA degree
from Pepperdine University.

<PAGE>

     Mr. Jacob  Foraker has served as the  Company's  Vice  President  Logic and
Memory Products since February 1996 and as Director of Business Development from
September 1995 to February 1996. Before joining the Company,  Mr. Foraker worked
as a management  consultant  specializing  in operations with his own consulting
firm and with Leemak. Mr. Foraker holds a B.A. degree from Widener University.

     Mr. Albert  Enamait has served as the Company's Vice President of Sales and
Marketing  since July 1, 1996. From 1991 until 1996 Mr. Enamait was a consultant
with BJE  Associates,  an executive  training and consulting  firm. From 1989 to
1991, Mr. Enamait was Director,  Worldwide Sales and Standard Product  Marketing
for Raytheon Semiconductor, a semiconductor manufacturer.

     Mr. Edward J. Bradley,  Jr. joined the Company in January 1993.  Before his
appointment to Vice President  Marketing in February 1996, Mr. Bradley served as
Director,  Manufacturing  Operations.  Prior to joining the Company, Mr. Bradley
was employed with Harris Semiconductor (formerly  GE/Intersil),  a semiconductor
manufacturer,  where  he held  various  positions  in  manufacturing  management
including  Operations Manager,  Plant Manager and Director of Production Control
and Test Operations.

     Mr. Kang has served as a director of the Company  since 1992.  Mr. Kang has
been President of Polytronix, Inc., a manufacturer of LCD devices in Richardson,
Texas,  since 1992.  In  addition,  Mr. Kang has been  President  of  Technology
Associates  Corporation,  a Taiwanese venture capital management company,  since
September  1990.

     Mr. Puette has served as a director of the Company  since 1992.  Mr. Puette
has been the President and Chief Executive Officer of NetFRAME Systems,  Inc., a
computer company,  since 1994. From 1990 to 1993, Mr. Puette served as president
of Apple USA, a computer  manufacturer.  Prior to 1990,  Mr.  Puette served as a
group general  manager of  Hewlett-Packard  Company,  an electronics and systems
company.  Mr.  Puette  also  serves as a  director  of Cisco  Systems,  Inc.,  a
networking company and NetFRAME Systems, Inc., a computer company.

     Mr.  Shinya has served as a director of the Company  since its inception in
1988. Mr. Shinya has served as President of Kanematsu Semiconductor Corporation,
a distributor of electronics  products in Tokyo,  Japan,  since 1990.  Kanematsu
Semiconductor  Corporation  is a subsidiary  of Kanematsu  Corporation,  a large
Japanese trading house.

     Mr. Tsang has been President and Chief Executive Officer of Oak Technology,
Inc.  ("Oak")  since he founded  the  company in July 1987 and a director of Oak
since  October 1987. He has also served as Chairman of the Board of Directors of
Oak since January 1991. Mr. Tsang has also held the position of Chief  Financial
Officer and  Secretary  of Oak.  Mr.  Tsang  holds a BSEE  degree in  electrical
engineering  from  Brigham  Young  University  and an MS  degree  in  electrical
engineering from the University of Santa Clara.

<PAGE>

Item 2.  Properties

     The Company's  headquarters  and research and  development  activities  are
located in Santa Clara,  California,  in a 50,000  square foot  facility  leased
through   January  1998  (with  certain   renewal   options),   which   includes
approximately 3,000 square feet of facilities for the Company's test operations.

     The Company also leases a 41,000 square foot facility in Sydney,  Australia
as a result of its  acquisition  of the wafer  fabrication  facility in February
1996.  Included  in  this  facility  is a class  10  wafer  fabrication  area of
approximately  5,000 square feet, an assembly area of approximately 4,000 square
feet and a test area of  approximately  3,000  square  feet.  In  addition,  the
Company  has  short-term  leases for its four sales  offices  located in Irvine,
California;  Atlanta, Georgia;  Framingham,  Massachusetts and Plano, Texas. The
Company believes that its existing facilities are adequate to meet its currently
foreseeable requirements.

Item 3.  Legal Proceedings

         Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year covered by this report.



<PAGE>



                                     PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         Market for Common Stock

                  Quality Semiconductor, Inc.'s common stock is listed on NASDAQ
and is traded under the symbol "QUAL." The following  table  represents the high
and low sales prices for the  Company's  common stock for each quarter of fiscal
1996 and 1995.


                                               ---------------------------------
                                                   High                  Low
                                               ---------------------------------
1996
First Quarter                                     $16.25                $5.50
--------------------------------------------------------------------------------
Second Quarter                                      7.38                 5.00
--------------------------------------------------------------------------------
Third Quarter                                       9.00                 5.00
--------------------------------------------------------------------------------
Fourth Quarter                                      7.38                 4.00
--------------------------------------------------------------------------------

1995
First Quarter                                     $13.50               $10.50
--------------------------------------------------------------------------------
Second Quarter                                     13.50                 10.00
--------------------------------------------------------------------------------
Third Quarter                                      14.50                10.50
--------------------------------------------------------------------------------
Fourth Quarter                                     18.50                12.25
--------------------------------------------------------------------------------

     The Company has never paid cash  dividends and has no present  intention to
pay cash dividends.

     Holders of Record

     As of September  30,  1996,  there were 163  shareholders  of record of the
Company's Common Stock.



<PAGE>



Item 6. Selected Financial Data


                            Years Ended September 30,
                      (In thousands, except per share data)

                          ------------------------------------------------------
                            1996        1995        1994        1993        1992
                          ------------------------------------------------------
REVENUES:


Net product revenues     $44,688     $46,189     $36,247     $26,723     $14,200
--------------------------------------------------------------------------------
Technology revenue            __          __         719         958       3,620
--------------------------------------------------------------------------------
Total revenues              ,688      46,189      36,966      27,681      17,820
--------------------------------------------------------------------------------
Operating income (loss)  (3,350)       6,386       5,189       3,122     (4,953)
--------------------------------------------------------------------------------
Interest, net                 77         520       (192)       (377)       (290)
--------------------------------------------------------------------------------
Income (loss) benefit    (2,015)       6,906       4,997       2,745     (5,243)
provision (benefit)
for taxes
--------------------------------------------------------------------------------
Net income (loss)        (1,310)       4,766       3,243       2,513     (5,404)
--------------------------------------------------------------------------------
Net income (loss)       $ (0.24)      $ 0.84      $ 0.79      $   __      $   __
per share (1)
--------------------------------------------------------------------------------
Weighted average           5,524       5,649       4,104          __          __
shares outstanding
--------------------------------------------------------------------------------
Working capital          $14,103     $27,379       8,460       5,857       3,277
--------------------------------------------------------------------------------
Total assets              52,521      42,779      23,146      19,371      13,905
--------------------------------------------------------------------------------
Long-term obligations      2,804           5         493       1,919       2,884
(less current portion)
--------------------------------------------------------------------------------
Shareholders' equity      30,345      31,221      11,888       8,495       5,204
--------------------------------------------------------------------------------
Dividends               $     __      $   __      $   __      $   __      $   __
================================================================================


     (1) Prior to 1994,  statements of operations omit the historical net income
per share as it was not presented in the initial  public  offering  registration
statement. Proforma net income is presented for 1994.


<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

Results of Operations

     The following  discussion  should be read in conjunction with the five year
summary at selected  financial  data and the  Company's  Consolidated  Financial
Statements and notes thereto.

ANNUAL RESULTS

The following  table sets forth  certain  financial  data from the  Consolidated
Statements  of  Operations  as a  percentage  of total  revenues for the periods
indicated.

                           Years Ending September 30,
--------------------------------------------------------------------------------
                                              1996          1995            1994
--------------------------------------------------------------------------------
Total revenues                                100%          100%            100%
--------------------------------------------------------------------------------
Cost of revenues                              67.6          50.9            49.3
--------------------------------------------------------------------------------
Gross margin                                  32.4          49.1
 50.7
--------------------------------------------------------------------------------
Operating expenses
--------------------------------------------------------------------------------
Research and development                      15.7          13.7            12.8
--------------------------------------------------------------------------------
Sales and marketing                           15.6          14.8            16.5
General and administrative                     9.0           6.8             7.4
Total operating expenses                      40.3          35.3            36.7
--------------------------------------------------------------------------------
Operating income (loss)                      (7.9)          13.8            14.0
--------------------------------------------------------------------------------
Other income                                   3.2            --              --
--------------------------------------------------------------------------------
Interest, net                                  0.2           1.1           (0.5)
--------------------------------------------------------------------------------
Income (loss) before provision               (4.5)          14.9            13.5
  (benefit) for taxes
--------------------------------------------------------------------------------
Provision (benefit) for taxes                (1.6)           4.6             4.7
--------------------------------------------------------------------------------
Net income (loss)                           (2.9)%         10.3%            8.8%
================================================================================

     The Company has derived  revenues  principally  from  product  revenues and
technology development and license revenues, as illustrated in the table below:

                           Years Ending September 30,
--------------------------------------------------------------------------------
                                             1996          1995            1994
--------------------------------------------------------------------------------
                                 (in thousands)
--------------------------------------------------------------------------------
Net product revenues                       $44,688       $46,189         $36,247
--------------------------------------------------------------------------------
Technology development and
   license revenues from related parties        --            --             719
--------------------------------------------------------------------------------
Total revenues                             $44,688       $46,189         $36,966
================================================================================

     Acquisition of Business

     On  February  16,  1996  the  Company   acquired   certain  assets  of  AWA
MicroelEctronics  Pty.  Ltd.  ("AWAM"),  a subsidiary  of AWA Limited,  based in
Sydney, Australia. The AWAM assets that were acquired by a new subsidiary of the
Company,  Quality Semiconductor Australia,  Pty. Ltd. ("QSA"),  included a fully
operational  wafer foundry  business and product  design  center.  In a separate
agreement,  the Company has also signed a strategic  alliance agreement with AWA
Limited,  to jointly develop new products and technologies.  The acquisition was
accounted for using the purchase method.


<PAGE>



     The net purchase price of the AWAM facility was $11.8  million,  consisting
of $5.0  million  cash,  $6.3 million  present  value of  redeemable  preference
shares,  of QSA fair value of  warrants  of $65,000,  and  acquisition  costs of
approximately  $400,000.  The  allocation of the purchase  price,  based upon an
independent valuation, consisted of $8.8 million of net tangible assets and $3.0
million of  intangible  assets  which  were  related  to  assembled  workiforce,
customer base, and goodwill,  which are being  amortized over five years.  As of
September  30,  1996,  the  Company  had  incurred   approximately  $375,000  of
amortization  expense.  AWA Limited was issued 1,000 redeemable preferred shares
at an issue price of $1,125 per share. The shares may be put by AWA Limited back
to QSA  beginning  July,  1997  pursuant to the terms of a put option deed dated
January  12,  1996.  These  redeemable   preference  shares  of  QSA  have  been
categorized  as debt on the balance sheet and  discounted to the present  value.
Between July 1997 and July 1999,  the Company  will make the final  payment of a
minimum of  approximately  $7.0  million up to a maximum of  approximately  $7.8
million.  QSA's  results of operations  have been  included in the  consolidated
results  of  operations  since the date of  acquisition.  See Note 3 of Notes to
Consolidated Financial Statements.

     Total Revenues

     Total  revenues in fiscal 1996 were $44.7  million,  decreasing  by 3% over
total revenues in fiscal 1995.  This compares with an increase of total revenues
of 25% in fiscal 1995 over fiscal 1994.  Net product  revenues were up by 27% in
fiscal 1995 over fiscal 1994. The decrease in year-over-year  total revenues was
mainly  due to a  substantial  decline in the  overall  average  selling  prices
partially offset by sales for QSA. The Company expects that the average selling
prices of its products generally will continue to decline over the lives of such
products.  Sales of interface  logic devices are expected to continue to account
for a significant majority of net product revenues in the foreseeable future. To
increase  revenues,  the  Company  seeks to  increase  unit  sales  of  existing
products,  principally  by  reducing  prices,  and to  introduce  and  sell  new
products. No assurance can be given that these efforts will be successful.

     As is common in the semiconductor industry, the Company sells a significant
portion of its products through distributors.  Domestic  distributors  accounted
for  approximately,  26%, 21% and 30% of the Company's  total  product  revenues
during fiscal 1996, 1995 and 1994, respectively. Sales by Arrow Electronics Inc.
accounted for  approximately,  19%, 16% and 21% of total product revenues during
fiscal  1996,  1995  and  1994,  respectively,  and the  remainder  of  domestic
distributor sales were made primarily through Bell  Microproducts  Inc. ("Bell")
and Nu-Horizons  Electronics  Corp. The relationship with Bell was terminated in
fiscal 1995 and the Company replaced Bell with Bell Industries, Inc. late in the
year.  Recognition  of sales to  distributors  and the related  cost of sales is
deferred until such distributors  resell the products to their customers.  There
can be no  assurance  that future  sales by  distributors  will  continue at the
present  levels.  The loss of one or more  distributors  could  have a  material
adverse effect on the Company's operating results.

     The Company has received  technology  development and license revenues from
it's  wafer  fabrication  suppliers  in  connection  with  certain  new  product
development  projects  and  licenses for QCMOS  process  technology  and certain
product designs.  Technology  development and license  revenues,  which included
cash  payments  and the market  value of free wafers  provided  to the  Company,
constituted  2% of the net  revenues  in fiscal  1994.  There was no  technology
development  and license  revenue in fiscal 1996 and 1995.  Although the Company
may accept business involving technology  development and license revenues,  the
Company does not expect these  revenues to constitute a  significant  portion of
net revenues in future periods.

     Export sales,  primarily consisting of sales to countries in Europe and the
Far East,  constituted 38%, 29% and 21% of net product revenues for fiscal 1996,
1995 and 1994, respectively.



<PAGE>



     Gross Margin on Product Revenue

     The  following  table sets forth the  Company's  net product  revenues  and
product gross margin:

                            Years Ended September 30,
--------------------------------------------------------------------------------
                                          1996          1995            1994
--------------------------------------------------------------------------------
                     (In thousands, except percentage data)
--------------------------------------------------------------------------------
Net product revenues                      $44,688       $46,189         $36,247
--------------------------------------------------------------------------------
Cost of product revenues                   30,226        23,524          18,192
--------------------------------------------------------------------------------
Product gross margin                      $14,462       $22,665         $18,055
--------------------------------------------------------------------------------
Product gross margin a
 percentage of net product revenues         32.4%         49.1%           49.8%
================================================================================

     The  Company's  cost  of  product  revenues  includes  the  cost  of  wafer
fabrication,  assembly performed by third party vendors,  testing by third party
vendors and direct and indirect costs associated with the testing,  procurement,
scheduling and quality assurance functions performed by the Company.

     Gross margin in fiscal 1996 was 32% of net product revenues,  compared with
49% of net product  revenues in fiscal 1995, and 50% of net product  revenues in
1994. The decline from fiscal 1996 to 1995 in gross margin resulted  principally
from the recording of $2,840,000 in inventory write-downs resulting from changes
in the  product  mix and reduced  OEM  demand.  Additionally,  gross  margin was
impacted by lower  average  selling  prices,  changes in product mix,  lower OEM
demand and  absorption of fixed costs at QSA. This margin  erosion was offset in
part by the Company's cost reduction programs.  The decline in gross margin from
fiscal  1994 to 1995  primarily  reflects  increased  costs  resulting  from the
unfavorable  exchange rate on yen-based wafer purchases,  changes in product mix
and lower average selling prices which were partially offset by cost reductions.
The Company purchases some of its wafers in yen-denominated  transactions and is
subject to exchange  rate risk.  The Company  attempts to manage its exposure to
this  risk  by  entering   into   forward   exchange   contracts  to  hedge  its
yen-denominated firm purchase commitments.

     The  Company's   quarterly  revenues  and  operating  results  have  varied
significantly in the past and are likely to vary  substantially  from quarter to
quarter in the future.  The Company's  operating  results are affected by a wide
variety  of  factors,  many of  which  are  outside  of the  Company's  control,
including but not limited to,  economic  conditions and overall market demand in
the United States and worldwide, the Company's ability to introduce new products
and  technologies  on a timely basis,  changes in product mix,  fluctuations  in
manufacturing costs which affect the Company's gross margins, declines in market
demand for the Company's and its customers' products, sales timing, the level of
orders which are received and can be shipped in a quarter,  the cyclical  nature
of both the  semiconductor  industry and the markets  addressed by the Company's
products,  product  obsolescence,  price erosion,  and competitive  factors. The
Company's  operating  results in fiscal  1997 are likely to be affected by these
factors as well as others.

     The  Company  must  order  wafers  and build  inventory  well in advance of
product  shipments.  Because the  Company's  markets are volatile and subject to
rapid  technology  and  price  changes,  there is a risk that the  Company  will
forecast   incorrectly  and  produce  excess  or  insufficient   inventories  of
particular  products.  This  inventory  risk is  heightened  because many of the
Company's  customers place orders with short lead times. In the third quarter of
fiscal 1996 these  factors  caused the Company to have a $2.8 million  inventory
writedown.  These  factors  increase  not only the  inventory  risk but also the
difficulty of forecasting quarterly operating results. Moreover, as is common in
the  semiconductor  industry,  the Company  frequently ships more product in the
third  month of each  quarter  than in either  of the  first  two  months of the
quarter,  and  shipments in the third month are higher at the end of that month.
The  concentration of sales in the last month of the quarter  contributes to the
difficulty  in  predicting  the  Company's  quarterly  revenues  and  results of
operations.


<PAGE>



     The Company's  products are in various stages of their product life cycles.
The Company's  success is highly  dependent upon its ability to develop  complex
new products, to introduce them to the marketplace ahead of the competition, and
to have them selected for design into products of leading system  manufacturers.
These factors have become  increasingly  important to the  Company's  results of
operations  because  the rate of change  in the  markets  served by the  Company
continues to  accelerate.  Since  product life cycles are  continually  becoming
shorter,  revenues  may be  affected  quickly if new product  introductions  are
delayed  or  if  the  Company's   products  are  not  designed  into  successive
generations of products of the Company's customers.

     The Company's  gross  margins also will depend on the Company's  success at
introducing  and ramping  production  of new  products  quickly and  effectively
because  the gross  margins of  semiconductor  products  decline as  competitive
products are  introduced.  Also,  the Company must deliver  product to customers
according  to  customer  schedules.  Delays in new product  introductions  could
affect  revenues  and gross  margins  for  current  and  follow-on  products  if
customers shift to competitors to meet their requirements.

     As a result of the above factors,  gross margin  fluctuations are difficult
to predict,  and there can be no assurance  that the Company will maintain gross
margins at current levels in future periods. To offset this margin pressure, the
Company  seeks to reduce  costs by improving  wafer  yields,  negotiating  price
restrictions with suppliers, and achieving economies of scale by means of higher
production  levels. The Company also seeks to offset margin erosion by selling a
higher  percentage of new products,  which tend to have higher margins than more
mature  products.  No  assurance  can  be  given  that  these  efforts  will  be
successful.

     Research and Development

     The  Company's   research  and  development   activities   include  process
development and new product development.  Research and development  expenditures
in fiscal 1996 were $7.0 million,  or 16% of total revenues,  compared with $6.3
million,  or 14% of total revenues in fiscal 1995,  and $4.7 million,  or 13% of
total  revenues  in fiscal  1994.  This  increase  in fiscal 1996 was mainly the
result of costs  associated  with the  development of new products and processes
and the  added  costs of the  development  group  located  at QSA.  The  Company
believes  that the  continued  development  of its  process  technology  and new
products is essential to its success and is committed to continue its investment
in research and development to maintain a strong  technological  position in the
industry. No research and development expense has been capitalized.  The Company
currently  expects to incur higher research and  development  expenses in fiscal
1997.

     The Company  believes  that future  product  revenue  growth will depend in
substantial  part on the success of new products and the  continued  success and
sales of existing  products.  New products  are  generally  incorporated  into a
customer's  product or system at the design stage.  However,  design wins, which
can often  require  significant  expenditures  by the  Company,  may precede the
generation of volume sales, if any, by a year or more. No assurance can be given
that the Company will achieve  design wins or that any design win will result in
significant future revenues.

     Sales and Marketing

Sales and marketing  expenditures  in fiscal 1996 were $7.0  million,  or 16% of
total revenues,  compared with $6.8 million,  or 15% of total revenues in fiscal
1995,  and $6.1  million,  or 16% of total  revenues in fiscal  1994.  Sales and
marketing expenditures in fiscal 1996 increased slightly from fiscal 1995 due to
increases in advertising and promotional expenses,  payroll related expenses and
travel,  partially  offset by lower sales  commissions.  The sales and marketing
expense  increase  in fiscal  1995 was due  primarily  to  increased  commission
expense  resulting from higher  revenues in fiscal 1995. The Company  expects to
incur  higher  sales and  marketing  expenses  in fiscal  1997,  although  these
expenses

<PAGE>



are expected to decrease as a percentage of revenues.  However,  there can be no
assurance that the revenues will grow at the same rate as expenditures for sales
and marketing are incurred.

     General and Administrative

     General and  administrative  expenditures in fiscal 1996 were $4.0 million,
or 9% of total revenues,  compared with $3.1 million, or 7% of total revenues in
fiscal 1995, and $2.7 million,  or 7% of total revenues in fiscal 1994.  General
and administrative expenditures in fiscal 1996 increased mainly due to the added
costs  of  the  Australian  subsidiary,   and  legal  costs  related  to  patent
prosecution and defense. The increase in general and administrative  expenses in
fiscal 1995 were due mainly to costs  associated with being a public company and
compensation   expenses.  The  Company  expects  to  incur  higher  general  and
administrative  expenses in fiscal 1997, although these expenses are expected to
decrease as a percentage of revenues.  However,  there can be no assurance  that
revenues will continue to grow at the same rate as expenditures  for general and
administrative expenses are incurred.

     Other Income

     Other  income  of $1.4  million  in fiscal  1996 was  earned as a result of
engineering  and  marketing  services  provided  by the  Company  pursuant to an
agreement  with AWA Limited.  The Company has completed  the services  under the
agreement  with AWA Limited  and does  expect  this other  income to continue in
future periods.

     Interest, Net

         Net interest income in fiscal 1996 was $77,000  compared to $520,000 in
fiscal  1995.  The  decrease in fiscal 1996 was mainly due to a decrease in cash
and cash  equivalents and short-term  investments  used for the purchase of AWAM
assets in February 1996 and increased  interest  expense  associated  with notes
payable for the purchase of capital equipment and interest expense incurred with
the  redeemable  preference  shares issued to AWAM.  The net interest  income of
$520,000 in fiscal 1995 was mainly due to interest  earned on the proceeds  from
the  Company's  initial  public  offering  in  November  1994 as compared to net
interest  expense of $192,000 in fiscal 1994 due primarily to interest on leases
and other long-term obligations.

     Provision (Benefit) for Taxes

     The Company  recorded a tax  benefit  for its fiscal  1996 losses  based on
available carryback potential. The Company's effective tax rate was 35%, 31% and
35% for fiscal 1996, 1995 and 1994, respectively.  The decrease in the effective
tax rate in fiscal 1995 was due  primarily  to the  recognition  of deferred tax
assets previously subject to valuation allowances.

     Financial Condition, Liquidity and Capital Resources

     Since its inception, the Company has financed its operations and investment
in  property,   plant  and  equipment  primarily  through  the  sale  of  equity
securities,  debt issuance and technology  development  and license fees.  Total
assets  increased  $9.9 million to a total of $52.5  million at year end.  Cash,
cash equivalents,  and short-term  investments decreased $9.8 million;  accounts
receivable  increased  $778,000;  property and  equipment,  net increased  $14.2
million;  and  goodwill  and  other  assets  increased  $2.8  million;   current
liabilities  increased  $6.1 million;  long-term  obligations to a related party
increased to $2.8 million;  deferred tax liabilities increased $1.7 million; and
shareholders equity decreased $876,000.



<PAGE>



     The decrease in cash,  cash  equivalents  and  short-term  investments  was
primarily due to cash paid for the acquisition of certain assets of Awam of $5.0
million, cash used in operating activities of $502,000 and $7.0 million utilized
for the  purchase  of  wafer  fabrication  equipment  at QSA and  other  capital
equipment purchased during fiscal 1996, compared to $2.2 million in fiscal 1995.
The proceeds  utilized for the purchase of the wafer  fabrication  equipment was
partially  offset by the receipt of $3.7 million from notes payable  issued to a
related party ($2.8 million  recorded as long-term  debt at September 30, 1996).
See Note 3 and 4 of Notes to Consolidated Financial Statements.

     Accounts receivable increased at September 30, 1996 mainly due to a greater
portion of net  revenues  generated  in the last month of the fourth  quarter as
compared to fiscal 1995.

     The increase in other assets was  primarily  due to the  allocation  of the
purchase  price of certain  assets of AWAM  which  included  approximately  $3.0
million  allocated as the value of the  assembled  workforce,  customer base and
goodwill.   This  amount  is  being  amortized  over  a  five  year  period  and
approximately $375,000 was included as amortization expense in fiscal 1996.

     Current liabilities  increased $6.1 million in fiscal 1996 due primarily to
the issuance of $7.0 million in redeemable  preference  shares of QSA which were
issued as partial  consideration for the acquisition of AWAM assets. In December
1996 the Company  negotiated  revised payment terms which would defer payment of
approximately  $4.0 million due for the redemption of the redeemable  preference
shares until January  1998.  The increase in deferred tax  liabilities  resulted
from the  acquisition of certain assets of Awam due to the difference in tax and
financial accounting treatment of certain assets of AWAM.

     In November 1996, the Company  negotiated a private placement of unsecured,
convertible  promissory notes in the principal amount of $5 million, of QSA. The
Company  received  $3 million of the total  financing,  by  December  1996,  and
anticipates receiving the remaining balance no later than February 28, 1997. The
Company  intends  to use the  proceeds  for  payment  on the  debt  incurred  in
connection  with the  acquisition of certain assets of Awam,  general  corporate
purposes and working  capital.  See Note 10 of Notes to  Consolidated  Financial
Statements.

     The Company believes that current available cash,  short-term  investments,
cash generated from operations,  and credit  arrangements  will be sufficient to
finance the Company's anticipated  operations and capital equipment requirements
through at least the next twelve months. However, there can be no assurance that
events in the future will not require  the  Company to seek  additional  capital
sooner or, if so  required,  that  adequate  capital  will be available on terms
acceptable to the Company.

     Employees

     The number of Company  employees  grew 44% during fiscal 1996 mainly due to
the  acquisition of QSA. The Company had 197 employees at the end of fiscal 1996
as compared to 137 at the end of the prior fiscal year.

     Impact on Currency and Inflation

     The  Company  makes  yen-denominated  purchases  of  wafers  from  Japanese
suppliers.  In fiscal year 1995 this  resulted in material  unfavorable  foreign
exchange transactions included in cost of product revenues.  The Company entered
into forward exchange  contracts  beginning in the fourth quarter of fiscal 1995
primarily  to  hedge  against  the   short-term   impact  of  foreign   currency
fluctuations on purchases denominated in yen. The maturities of forward exchange
contracts are short-term in nature.  Notwithstanding  these precautions however,
the Company remains subject to the transaction exposures that arise from foreign
exchange   movements  between  the  dates  of  when  foreign  currency  purchase
transactions  are  recorded  and the dates  cash  payments  are made in  foreign
currencies. Inflation has not had a significant impact on the Company.



<PAGE>



     Additional Factors That May Affect Results

     The Company's quarterly and annual operating results are affected by a wide
variety of factors  that could  materially  and  adversely  affect  revenues and
profitability,  including,  among others, factors pertaining to (i) competition,
such as  competitive  pressures  on  average  selling  prices  of the  Company's
products and the  introduction of new products by competitors;  (ii) the current
and anticipated future dependence on the Company's existing product lines; (iii)
new product development,  such as increased research,  development and marketing
expenses  associated with new product  introductions,  the Company's  ability to
introduce  new  products and  technologies  on a timely basis and the amount and
timing of recognition on non-recurring  development revenue;  (iv) manufacturing
and  operations,   such  as  fluctuations  in  manufacturing  yields,  inventory
management, raw materials, and production and assembly capacity; (v) the Company
operates a wafer fabrication facility which involves significant risks typically
inherent in any manufacturing  endeavor,  as well as additional risks associated
with production yields,  technical  difficulties with process control,  expenses
associated with responding to increases in environmental  polution regulation or
disposal of environmentally hazardous waste and events limiting production, such
as fires or other  damage;  (vi)  expenses  that may be incurred  in  obtaining,
enforcing and defending  claims with respect to  intellectual  property  rights;
(vii)  sales  and   marketing,   such  as  loss  of   significant   distributor,
concentration  of  customers,  and  volume  discounts  that  may be  granted  to
significant  customers;  (viii) customer  demand,  such as market  acceptance of
products,  the  timing,  cancellation  or delay of  customer  orders and general
economic conditions in the semiconductor and electronic systems  industries,  as
well as other factors,  such as risks  associated  with doing  business  abroad,
retention  of key  personnel  and  management  of growth and  volatility  in the
Company's revenues and stock price.

     The  Company's  earnings  and stock price have been,  and may be subject to
significant  volatility,  particularly  on a quarterly  basis.  Any shortfall in
revenue,  gross margins or earnings from expected levels could have an immediate
and  significant  adverse effect on the trading price of the Company's  stock in
any given period.  The Company may not learn of, or be able to confirm  revenue,
gross margin or earnings  shortfalls until late in the quarter, or following the
end of the quarter,  because a significant portion of the Company's revenue in a
quarter typically is shipped in the last few weeks of that quarter. In addition,
future  announcements  concerning  the  Company  or its  competitors,  including
technological innovations, new product introductions,  governmental regulations,
litigation,  or changes in earnings estimates by analysts,  may cause the market
price of the Company's stock to fluctuate  substantially.  Stock prices for many
technology  companies  fluctuate  widely for reasons  that may be  unrelated  to
operating results, such as general economic, political and market conditions.

     Cautionary Statement Concerning Forward Looking Statements

     This report contains certain forward-looking statements that are subject to
risks and  uncertainties.  For such statements the Company claims the protection
of the safe harbor for forward  looking  statements  contained  in the Rule 3b-6
under the Securities Exchange Act of 1934, Securities Act Release No. 6084 (June
25,  1979)  and the  Private  Securities  Litigation  Reform  Act of  1995.  The
following  important  factors,  in addition to those discussed  elsewhere in the
report,  could cause the results to differ  materially  from those  expressed in
such forward looking statements. The Company's products are in various stages of
their product life cycles.  The Company's  success is highly  dependent upon its
ability to develop new products,  to introduce them to the marketplace  ahead of
the  competition,  and to have them selected for design into products of leading
systems  manufacturers.  These factors have become increasingly important to the
Company's  results  of  operations  because  the rate of change  in the  dynamic
markets served by the Company continues to accelerate. Since product life cycles
are continually becoming shorter, revenue may be affected quickly if new product
introductions  are delayed.  Since the gross margins of  semiconductor  products
typically  decline as  competitive  products  are  introduced,  both revenue and
profitability  are impacted by the Company's success in introducing new products
quickly.  Also,  the Company  must  deliver  product to  customers  according to
customer schedules.  If delays occur, then revenue and gross margins for current
and follow-on  products may be affected as customers may shift to competitors to
meet  their  requirements.  There  can be no  assurance  that the  Company  will
continue to compete successfully because of these factors.


<PAGE>



Item 8.  Financial Statements and Supplementary Data

Index to Consolidated financial Statements
                                                                  Page

Financial Statements:

Consolidated Balance Sheets as of September 30, 1996               28
     and September 30, 1995

Consolidated Statements of Operations for Fiscal Years             29
     Ended September 30, 1996, September 30, 1995,
     and September 30, 1994

Consolidated Statements of Cash Flows for Fiscal Years             30
     Ended September 30, 1996, September 30, 1995,
     and September 30, 1994

Consolidated Statements of Shareholders' Equity                    31
     for Fiscal Years Ended

Notes to Consolidated Financial Statements                         32

Report of Independent Accountants                                  44



<PAGE>


                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)
                                  September 30,
--------------------------------------------------------------------------------
                                                        1996              1995
--------------------------------------------------------------------------------
Assets - Current Assets:
--------------------------------------------------------------------------------
  Cash and cash equivalents                            $4,930            $7,637
  Short-term investments                                2,403             9,480
  Accounts receivable, net of allowances of $173
    and $123 at September 30, 1996 and 1995             5,940             5,851
--------------------------------------------------------------------------------
  Accounts receivable from related parties                689                --
  Other receivables                                       719               996
--------------------------------------------------------------------------------
  Inventories                                          13,984            12,610
--------------------------------------------------------------------------------
  Prepaid expenses                                        532               466
  Deferred tax assets                                   2,239             1,609
================================================================================
  Total current assets                                 31,436            38,649
--------------------------------------------------------------------------------
Property and equipment, net                            18,079             3,886
Goodwill and other assets                               3,006               244
  Total assets                                        $52,521           $42,779
================================================================================
Liabilities and Shareholders' Equity - Current liabilities:
--------------------------------------------------------------------------------
  Accounts payable                                     $2,749            $2,892
  Accounts payable to related parties                     747             2,011
  Accrued compensation                                  1,212             1,167
  Other accrued liabilities                             1,039               424
  Income taxes payable                                  1,707             2,070
  Deferred rent                                           201               303
  Deferred income on shipments to distributors          2,018             1,898
  Capital lease obligations due within one year            --               194
  Long-term obligations to related party due              667               311
    within one year
  Redeemable preference shares of subsidiary            6,993                --
Total current liabilities                              17,333            11,270
--------------------------------------------------------------------------------
Capital lease obligations                                  --                 5
--------------------------------------------------------------------------------
Long-term obligations to related party                  2,840                 --
Deferred tax liabilities                                2,003               283
Commitments and Contingencies - Shareholders' equity:
--------------------------------------------------------------------------------
Preferred stock, $.001 par value: Authorized--1,000,000;
Issued and outstanding--none                              --                 --
--------------------------------------------------------------------------------
Common stock, $.001 par value: Authorized--25,500,000;
  Issued and outstanding--5,536,000 and 5,475,000           5                 5
--------------------------------------------------------------------------------
  Additional paid in capital                           28,348            28,386
  Retained earnings                                     2,412             3,478
  Deferred compensation                                 (420)             (648)
================================================================================
Total shareholders' equity                             30,345            31,221
================================================================================
Total liabilities and shareholders' equity            $52,521           $42,779
================================================================================
See accompanying notes to consolidated financial statements.


<PAGE>





                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

                            Years Ended September 30,
--------------------------------------------------------------------------------
                                                  1996         1995         1994
Revenues:
  Net product revenues                         $44,688      $46,189      $36,247
--------------------------------------------------------------------------------
  Technology development and license revenues
     from related parties                           --           --          719
================================================================================
Total revenues                                  44,688       46,189       36,966
--------------------------------------------------------------------------------
Cost of revenues:
--------------------------------------------------------------------------------
  Cost of product revenues                      30,226       23,524       18,192
  Cost of technology development                    --           --           40
     license revenues
================================================================================
Total cost of revenues                          30,226       23,524       18,232
--------------------------------------------------------------------------------
  Gross margin                                  14,462       22,665       18,734
Operating expenses:
--------------------------------------------------------------------------------
  Research and development                       6,982        6,326        4,722
  Sales and marketing                            6,986        6,808        6,096
  General and administrative                     4,024        3,145        2,727
================================================================================
Total operating expenses                        17,992       16,279       13,545
--------------------------------------------------------------------------------
Operating income (loss)                        (3,530)        6,386        5,189
Other income  1,438                                --           --            --
--------------------------------------------------------------------------------
Interest income                                    510          678          126
Interest expense                                 (433)        (158)        (318)
Income (loss) before provision (benefit)       (2,015)        6,906        4,997
  for taxes
Provision (benefit) for taxes                    (705)        2,140        1,754
================================================================================
Net income (loss)                             $(1,310)       $4,766       $3,243
================================================================================
Net income (loss) per share                    $(0.24)      $  0.84      $  0.79
Shares used in computing per share amounts       5,524        5,649        4,104
================================================================================
See accompanying notes to consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                            Years Ended September 30,
                                                                              1996           1995         1994
-------------------------------------------------------------------------------------------------------------------
Operating Activities
<S>                                                                       <C>              <C>          <C>
Net income (loss)                                                         $(1,310)         $4,766       $3,243
-------------------------------------------------------------------------------------------------------------------
Adjustments to  reconcile  net income  (loss) to net cash  provided by (used in)
       operating activities:
       Depreciation and amortization                                         3,977          2,305        1,558
-------------------------------------------------------------------------------------------------------------------
       Deferred income taxes, net                                          (1,021)          (676)        (650)
-------------------------------------------------------------------------------------------------------------------
       Deferred compensation amortization                                      228            228          109
-------------------------------------------------------------------------------------------------------------------
       Changes in operating assets and liabilities:
            Accounts and related parties receivable, net                     (778)        (2,096)        (582)
-------------------------------------------------------------------------------------------------------------------
            Other receivables                                                  277          (939)         (12)
-------------------------------------------------------------------------------------------------------------------
            Inventories                                                      (510)        (3,973)      (3,212)
            Prepaid expenses                                                  (66)            345        (590)
-------------------------------------------------------------------------------------------------------------------
            Accounts payable including related parties                     (1,407)          1,008          942
-------------------------------------------------------------------------------------------------------------------
            Income taxes payable                                             (282)          1,006          920
            Accrued compensation                                             (536)           (71)          372
            Other accrued liabilities and deferred rent                        806          (138)        (366)
-------------------------------------------------------------------------------------------------------------------
            Deferred income on shipments to distributors                       120             39        (197)
===================================================================================================================
            Total adjustments                                                  808        (2,962)      (1,708)
===================================================================================================================
Net cash provided by (used in) operating activities                          (502)          1,804        1,535
-------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of certain assets of Awam                                         (5,005)             --           --
-------------------------------------------------------------------------------------------------------------------
Capital expenditures                                                       (6,964)        (2,161)      (1,272)
Purchase of short-term investments                                         (5,935)      (109,744)           --
Sales and maturities of short-term investments                             13,012        100,264           --
-------------------------------------------------------------------------------------------------------------------
Deposits and other assets                                                    (126)             50          353
===================================================================================================================
Net cash used in investing activities                                      (5,018)       (11,591)        (919)
-------------------------------------------------------------------------------------------------------------------
Financing Activities
Principal payments on capital lease obligations                              (199)          (276)        (276)
-------------------------------------------------------------------------------------------------------------------
Principal payments on long-term debt                                         (472)        (1,148)      (1,010)
-------------------------------------------------------------------------------------------------------------------
Proceeds from notes payable to related party                                 3,668             --           --
Net proceeds from issuance of common stock                                     635         14,328           40
-------------------------------------------------------------------------------------------------------------------
Repurchase of common stock                                                   (819)             --           --
-------------------------------------------------------------------------------------------------------------------
Proceeds from reduction in notes receivable from shareholders                   --             11            1
===================================================================================================================
Net cash provided by (used in) financing activities                          2,813         12,915      (1,245)
===================================================================================================================
Net increase (decrease) in cash and cash equivalents                       (2,707)          3,128        (629)
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                             7,637          4,509        5,138
===================================================================================================================
Cash and cash equivalents at end of period                                  $4,930         $7,637       $4,509
===================================================================================================================
Supplemental  Disclosures of Cash Flow  Information Cash paid during this period
for:
-------------------------------------------------------------------------------------------------------------------
       Interest                                                               $107           $195         $302
-------------------------------------------------------------------------------------------------------------------
       Taxes                                                                  $724         $1,442       $1,438
-------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Noncash Investin and Financing Activities Redeemable
preference shares of a subsidiary issued as partial consideration for QSA
-------------------------------------------------------------------------------------------------------------------
                                                                            $6,300             --           --
-------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>



                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)

                                                                                                          Notes
                                        Convertible                    Additional Retained              Receivable   Total
                                      Preferred Stock   Common Stock     Paid in  Earnings  Deferred      From   Shareholder
                                     Shares     Amount  Shares Amount    Capital  (Deficit)Compensation Shareholders Equity
===========================================================================================================================
<S>                  <C> <C>          <C>         <C>   <C>        <C>  <C>       <C>         <C>         <C>        <C>
Balance at September 30, 1993         2,176       $2    1,267      $1   $13,168   $(4,531)    $(133)      $(12)      $8,495
===========================================================================================================================
     Sale of common stock for cash       --       --       48       1        39         --        --         --          40
---------------------------------------------------------------------------------------------------------------------------
     Repayment of notes receivable       --       --       --      --        --         --        --          1           1
---------------------------------------------------------------------------------------------------------------------------
     Deferred compensation related
          to stock options               --       --       --      --       852         --     (852)         --        --
---------------------------------------------------------------------------------------------------------------------------
     Amortization of deferred
          compensation                   --       --       --      --        --         --       109        ---         109
---------------------------------------------------------------------------------------------------------------------------
     Net Income                          --       --       --      --        --      3,243        --         --       3,243
===========================================================================================================================
Balance at September 30, 1994         2,176        2    1,315       2    14,059    (1,288)     (876)       (11)      11,888
===========================================================================================================================
     Conversion of preferred stock
           to common stock          (2,176)      (2)    2,176       2        --         --        --         --          --
---------------------------------------------------------------------------------------------------------------------------
     Sale of common stock for cash       --       --    1,984       1    14,327         --        --         --     14,328
---------------------------------------------------------------------------------------------------------------------------
     Repayment of notes receivable       --       --       --      --        --         --        --         11          11
---------------------------------------------------------------------------------------------------------------------------
     Amortization of deferred
           compensation                  --       --       --      --        --         --       228         --         228
---------------------------------------------------------------------------------------------------------------------------
     Net income                          --       --       --      --        --      4,766        --         --       4,766
===========================================================================================================================
Balance at September 30, 1995            --       --    5,475       5    28,386      3,478     (648)         --      31,221
===========================================================================================================================
     Sale of common stock for cash       --       --      196       1       634         --        --         --         635
---------------------------------------------------------------------------------------------------------------------------
     Tax benefit from stock option
          exercises                      --       --       --      --        81         --        --         --          81
---------------------------------------------------------------------------------------------------------------------------
     Repurchase of common stock          --       --    (135)     (1)     (818)         --        --         --       (819)
---------------------------------------------------------------------------------------------------------------------------
     Insurance of warrants               --       --       --      --        65         --        --         --          65
     Amortization of deferred
         compensation                    --       --       --      --        --         --       228         --         228
---------------------------------------------------------------------------------------------------------------------------
     Translation adjustment              --       --       --      --        --        244        --         --         244
---------------------------------------------------------------------------------------------------------------------------
     Net loss                            --       --       --      --        --    (1,310)        --         --     (1,310)
===========================================================================================================================
Balance at September 30, 1996            --       $--   5,536      $5   $28,348     $2,412    $(420)         --     $30,345
===========================================================================================================================

See accompanying notes to consolidated financial statements.
</TABLE>



<PAGE>



Notes to Consolidated Financial Statements

1.   Organization and Summary of Significant Accounting Policies

     Quality  Semiconductor,  Inc. (the Company), a California  corporation,  is
engaged in designing and marketing high performance CMOS logic memory integrated
circuit  products.  The company  targets  systems  manufacturers  principally in
networking, personal computers and workstations, and telecommunications markets.

     The  Company's  operating  results  are  subject  to  a  variety  of  risks
characteristic  of the  semiconductor  industry,  including booking and shipment
uncertainties,  wafer yield fluctuations,  and price erosion, as well as general
economic conditions.

     Basis of Presentation

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned  subsidiary  Quality  Semiconductor  Australia,  Pty., Ltd.
("QSA")  All  significant  intercompany  accounts  and  transactions  have  been
eliminated in consolidation.

     The  Company's  fiscal  year ends on the last Sunday in  September.  Fiscal
years 1996, 1995, and 1994 ended on September 29, 24, and 25, respectively.  The
Company's fiscal quarters end on the last Sunday of each calendar  quarter.  For
convenience,  the accompanying consolidated financial statements have been shown
as ending on the last day of the calendar month.

     The Company  uses the local  currency as its  functional  currency for QSA.
Translation  adjustments,  which result from the process of translating  foreign
currency  financial  statements into U.S.  dollars are included in shareholders'
equity.

     Impact of Recently Issued Accounting Standards

     In March 1995, the Financial  Accounting  Standards Board issued  Statement
No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets Disposed Of," which requires  impairment losses to be recorded
on long-lived  assets used in  operations  when  indicators  of  impairment  are
present and the  undiscounted  cash flows  estimated  to be  generated  by those
assets are less than the assets'  carrying  amounts.  FAS 121 also addresses the
accounting  for  long-lived  assets that are  expected  to be  disposed  of. The
Company  adopted  FAS 121 in 1996 and the  implications  did not have a material
impact on the Company's financial condition or results of operations.

     In  October  1995,  the  Financial  Accounting  Standards  Board  issued  a
Statement of  Financial  Accounting  Standards  (SFAS) No. 123,  Accounting  for
Stock-Based  Compensation.  SFAS No.  123 will be  effective  for  fiscal  years
beginning  after  December  15, 1995,  and will require that the Company  either
recognize in its financial  statements costs related to its employee stock-based
compensation  plans,  such as stock option and stock purchase plans, or make pro
forma disclosures of such costs in a footnote to the financial statements.

     The  Company  expects to  continue  to use the  intrinsic  value  method of
Accounting  Principles  Board  Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based  compensation plans.  Therefore,  in
its consolidated financial statements for fiscal 1997, the Company will make the
required pro forma  disclosures  in a footnote.  SFAS No. 123 is not expected to
have a material  effect on the  Company's  results of  operations  or  financial
position.


<PAGE>



     Use of Estimates

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

     Cash Equivalents and Short-Term Investments

     Management determines the appropriate classifications of debt securities at
the time of purchase and reevaluates such  designations as of each balance sheet
date.  Marketable  equity  securities  and debt  securities  are  classified  as
available-for-sale.  Available-for-sale  securities  are  carried at fair value,
with the  unrealized  gains  and  losses,  net of tax,  reported  in a  separate
component of shareholders' equity. The amortized cost of debt securities in this
category is adjusted for  amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses   and   declines   in  value   judged  to  be   other-than-temporary   on
available-for-sale  securities  are  included  in interest  income.  The cost of
securities  sold is based on the specific  identification  method.  Interest and
dividends  on  securities  classified  as  available-for-sale  are  included  in
interest income.

     All short-term  investments,  by contractual maturity,  mature in less than
one year. The fair value of  available-for-sales  short-term investments held at
September 30, 1996 and 1995 are summarized as follows (in thousands):

                              Estimated Fair Values
--------------------------------------------------------------------------------
                                                        1996               1995
--------------------------------------------------------------------------------
 Money Market                                         $   43            $    58
--------------------------------------------------------------------------------
 Commercial paper                                      2,437              3,510
--------------------------------------------------------------------------------
 State and municipal obligations                       3,430             10,416
--------------------------------------------------------------------------------
                                                      $5,910            $13,984
================================================================================

--------------------------------------------------------------------------------
 Amounts included in cash and cash equivalents        $3,476            $ 4,258
--------------------------------------------------------------------------------
 Amounts included in short-term investments            2,403              9,480
 Amounts included in other (interest)                     31                246
--------------------------------------------------------------------------------
                                                      $5,910            $13,984
================================================================================

     Both gross  unrealized  gains and losses as of September  30, 1996 and 1995
and  realized  gains  and  losses  on sales  of  securities  for the year  ended
September  30, 1996 and 1995 were  immaterial.  At September  30, 1996 and 1995,
fair market value  approximates  amortized  cost.  Maturities  and proceeds from
sales  of  short-term  investment  securities  were  approximately  $13 and $100
million, respectively, during the years ended September 30, 1996 and 1995.

     Revenue Recognition and Deferred Revenue

     Revenue from product  sales to customers  other than sales to  distributors
are  recorded  when  products  are shipped.  Sales made to  distributors,  under
agreements  allowing price protection and right of return on merchandise  unsold
by  the  distributors,  are  deferred  until  the  merchandise  is  sold  by the
distributors.

     During  1994 the Company had  agreements  under which it receives  fees for
certain rights to technology and products currently under development.  Revenues
associated  with  these  technology   development  and  license  agreements  are
recognized using the percentage-of-completion method.



<PAGE>



     Property and Equipment

     Property and equipment are stated at cost.  Depreciation  and  amortization
are computed using the  straight-line  method over the assets`  estimated useful
lives of two to ten years.  Capitalized  leases and leasehold  improvements  are
amortized using the straight-line method over the shorter of the useful lives of
the assets or the terms of the lease.

     Cash and Cash Equivalents

     The Company  considers  all highly  liquid  investments  with a maturity of
three  months or less when  purchased  to be cash  equivalents.  The  Company is
exposed to credit risk in the event of default by the financial  institutions to
the extent of amounts recorded on the balance sheet.

     Inventories

     Inventories  are stated at the lower of  standard  cost which  approximates
actual (first-in, first out method) or market (estimated net realizable value).

     The Company's  inventory valuation process is done on a part-by-part basis.
Lower of cost to market adjustments,  specifically  identified on a part-by-part
basis,  reduce  the  carrying  value of the  related  inventory  and takes  into
consideration  reductions of sales prices,  excess inventory levels and obsolete
inventory. Once established,  these adjustments are considered permanent and are
not reversed until the related  inventory is sold or disposed.  During the third
quarter of fiscal 1996 the Company wrote down $2.8 million of inventory.

     The Company  produces  inventory  based on orders  received and  forecasted
demand.  The Company  must order wafers and build  inventory  well in advance of
product  shipments.  Because the  Company's  markets are volatile and subject to
rapid  technology  and  price  changes,  there is a risk that the  Company  will
forecast   incorrectly  and  produce  excess  or  insufficient   inventories  of
particular  products.  This  inventory  risk is  heightened  because many of the
Company's  customers place orders with short lead times. Demand will differ from
forecasts and such  difference  may have a material  effect on actual results of
operations.

     Given the volatility of the market for the Company's products,  the Company
makes inventory  provisions for potentially  excess and obsolete inventory based
on backlog and  forecast  demand.  However,  such  backlog  demand is subject to
revisions,  cancellations,  and rescheduling.  Actual demand will  inevitability
differ from such  backlog  and  forecast  demand,  and such  differences  may be
material to the financial  statements.  Excess  inventory  increases the risk of
obsolescence, is a non-productive use of capital resources,  increases inventory
handling costs,  and delays  realization of the price and  performance  benefits
associated with more advanced manufacturing processes.

     Other Income

     Other  income  of $1.4  million  in fiscal  1996 was  earned as a result of
engineering  and  marketing  services  provided  by the  Company  pursuant to an
agreement  with AWA Limited.  The Company has completed  the services  under the
agreement  of AWA Limited  and does not expect this other  income to continue in
the future.

     Concentration of Risk

     The Company  uses  financial  instruments  that  potentially  subject it to
concentrations  of credit  risk.  Such  instruments  include  cash  equivalents,
short-term investments,  accounts receivable,  and financial instruments used in
hedging activities.  The Company invests its cash in cash deposits, money market
funds,  commercial  paper or readily  marketable  debt  securities.  The Company
places its investments with high-quality financial institutions and limits the

<PAGE>



credit  exposure to any one financial  institution or  instrument.  To date, the
Company has not experienced losses on these  investments.  The Company primarily
sells its products to original  equipment  manufacturers and  distributors.  The
Company  performs  ongoing  credit  evaluations  of  its  customers'   financial
positions and generally  requires no collateral.  The Company maintains reserves
for  potential  credit  losses,  and such losses  have been within  management's
expectations. The Company has an exposure to nonperformance by a counterparty on
the foreign exchange contracts used in hedging activities.  This counterparty is
a large  international  financial  institution and to date, it has not failed to
meet its  financial  obligations  to the  Company.  The Company does not believe
there is a significant risk of non-performance by this counterparty  because the
Company  periodically  monitors  its  position  and the  credit  ratings  of the
counterparty.   The  Company   continuously   evaluates  the  need  for  hedging
fluctuations in foreign currencies.

         The  Company  operates  a wafer  fabrication  facility  which  involves
significant risks inherent in any manufacturing  endeavor,  including production
yields,  technical  difficulties  with  process  control,  and  events  limiting
production, such as fires or other damage.

         Sales  and  marketing  risks  include  such  factors  as the  loss of a
significant  distributor,  concentration of customers, and volume discounts that
may be granted to significant customers.

     Foreign Exchange Contracts

     The  Company  makes  yen-denominated  purchases  of  wafers  from  Japanese
suppliers.  In fiscal year 1995 this  resulted in material  unfavorable  foreign
exchange transactions  included in cost of product revenues.  The Company enters
into forward exchange contracts primarily to hedge against the short-term impact
of foreign currency fluctuations on purchases denominated in yen. The maturities
of forward exchange contracts are short-term in nature.  Notwithstanding,  these
precautions,  however, the Company remains subject to the transaction  exposures
that arise from  foreign  exchange  movements  between the dates of when foreign
currency purchase transactions are recorded and the dates cash payments are made
in foreign currencies.  At September 30, 1996,  commitments under such contracts
to purchase yen maturing through November 1996 were outstanding in the aggregate
amount of  approximately  $630,000.  In the  aggregate,  the fair  value of such
foreign currency exchange forward contracts  approximated costs. These contracts
are accounted for as hedges of firm wafer purchase commitments. The Company does
not hedge for speculative purposes.

     Advertising and Promotion Costs

     The Company's policy is to expense  advertising and promotion costs as they
are  incurred.   The   Company's   advertising   and  promotion   expenses  were
approximately  $511,000,  $481,000, and $464,000 in fiscal 1996, 1995, and 1994,
respectively.

     Net Income (loss) Per Share

     Net income (loss) per share is computed  using the weighted  average number
of shares of common stock and common  equivalent  shares,  when  dilutive,  from
convertible  preferred  stock  (using the  if-converted  method)  and from stock
options and warrants (using the treasury stock method). Shares used in computing
net loss per share for 1996 excludes common equivalent shares because the effect
of their  inclusion would be  anti-dilutive.  Fully diluted shares have not been
presented  as  part  of  the  consolidated   financial  statements  because  the
difference is insignificant.  Pursuant to the Securities and Exchange Commission
Staff Accounting  Bulletins,  common and common  equivalent shares issued by the
Company at prices  below the initial  public  offering  price  during the twelve
month  period prior to the  November,  1994 initial  public  offering  have been
included  in the  calculation  as if  they  were  outstanding  for  all  periods
presented  (using the  treasury  stock method until shares are issued) have been
included in the calculation of common and equivalent shares  outstanding for all
periods prior to the initial public offering.



<PAGE>



2.   Balance Sheet Components

                                  September 30,
                                    1996 1995
--------------------------------------------------------------------------------
                                 (In thousands)
Inventories:
--------------------------------------------------------------------------------
  Raw materials                                       $7,142            $4,259
--------------------------------------------------------------------------------
  Work-in-process                                      2,578             4,027
--------------------------------------------------------------------------------
  Finished goods                                       4,265             4,324
--------------------------------------------------------------------------------
                                                     $13,984           $12,610
================================================================================
Property and Equipment:
--------------------------------------------------------------------------------
  Equipment and software                             $27,046           $11,139
--------------------------------------------------------------------------------
  Furniture and fixtures                                 729               363
--------------------------------------------------------------------------------
  Leasehold improvement                                1,717               195
                                                      29,492            11,697
Less accumulated depreciation and amortization        11,413             7,811
--------------------------------------------------------------------------------
                                                     $18,079            $3,886
================================================================================

3.   Purchase of Business

     On  February  16,  1996  the  Company   acquired   certain  assets  of  AWA
MicroElectronics  Pty.  Ltd.  ("AWAM"),  a subsidiary  of AWA Limited,  based in
Sydney, Australia. The AWAM assets that were acquired by a new subsidiary of the
Company,  Quality Semiconductor Australia,  Pty. Ltd. ("QSA"),  included a fully
operational  wafer foundry  business and product design center.  The acquisition
was accounted for using the purchase method.

     The net purchase price of the AWAM facility was $11.8  million,  consisting
of $5.0 million cash, $6.3 million present value of redeemable preference shares
of  QSA,  fair  value  of  warrants  of  $65,000,   and  acquisition   costs  of
approximately  $400,000.  The  allocation  of the  purchase  price,  based  upon
independent  valuation consisted of $8.8 million of net tangible assets and $3.0
million of assembled  workforce,  customer  base,  and goodwill  which are being
amortized  over five years.  As of September 30, 1996,  the Company had incurred
approximately  $375,000 of  amortization  expense.  AWA Limited was issued 1,000
redeemable  preference  shares at an issue price of $1,125 per share. The shares
may be put by AWA Limited back to QSA beginning July, 1997 pursuant to the terms
of a put option deed dated January 12, 1996. These redeemable  preference shares
have been  categorized  as debt on the balance  sheet  discounted to the present
value.  Between July 1997 and July 1999, the Company will make the final payment
of a minimum of approximately $7.0 million up to a maximum of approximately $7.8
million.  QSA's  results of operations  have been  included in the  consolidated
results of operations since the date of acquisition.

     The  following  summarized,  unaudited pro forma  information,  assumed the
acquisition occurred as of the beginning of fiscal 1995 (in thousands except per
share  amounts).  The pro forma  information  has been prepared for  comparative
purposes only and does not purport to be indicative  of what  operating  results
would have been if the  acquisition had actually taken place at the beginning of
1995 or of future operating results.

                            Year Ended September 30,
--------------------------------------------------------------------------------
                                                      1996            1995
--------------------------------------------------------------------------------
Net revenues                                       $47, 631         $54,321
--------------------------------------------------------------------------------
Net income (loss)                                   (2,378)           1,418
--------------------------------------------------------------------------------
Net income (loss) per share                         $(0.43)           $0.25
================================================================================


<PAGE>



4.   Long-Term Obligations to Related Party

     On March 28, 1996, the Company entered into an agreement with Kanematsu USA
Inc., an affiliate of Kanematsu Semiconductor  Corporation, a shareholder of the
Company,  to finance  approximately $8.0 million of wafer fabrication  equipment
for installation at QSA. The agreement expires March 31, 2001 and the borrowings
bear interest at a rate of 8.5%. As of September 30, 1996, there were borrowings
of $3.7 million against this agreement, of which $3.5 million was outstanding.


     Future minimum payments on long-term  obligations to Kanematsu USA Inc. are
as follows:


                               September 30, 1996
--------------------------------------------------------------------------------
                                 (In thousands)

         1997                                                 $667
         1998                                                  726
         1999                                                  791
         2000                                                  862
         2001                                                  461


5.   Commitments and Contingencies

     Commitments

     The Company  leases its  manufacturing  and office  facilities  and certain
equipment  under  noncancelable  operating  leases  expiring  through 2010.  The
Company is generally responsible for taxes,  insurance and utilities under these
leases.  The Company's office facilities lease contains scheduled rent increases
over the term of the  lease.  Rental  expense  is  charged  to  operations  on a
straight-line  basis over the lease term. The office facilities lease is secured
by a deposit of $47,500 included in deposits and other assets.


     Future minimum lease payments under  noncancelable  operating leases are as
follows:

                               September 30, 1996
--------------------------------------------------------------------------------
                                 (In thousands)

         1997                                                   $1,174
         1998                                                      730
         1999                                                      428
         2000                                                      438
         2001                                                      438
         Thereafter                                              3,946


     Total  rent  expense  for fiscal  1996,  1995,  and 1994 was  approximately
$952,000, $756,000, and $580,000, respectively.



<PAGE>



     In March 1996 the Company entered into a $5.0 million new unsecured line of
credit  which  expires  February 28, 1997.  The  borrowings  under this line are
limited  to  eligible  accounts  receivable,   as  defined  in  this  agreement.
Borrowings  bear  interest,  at the Company's  option,  at the bank's prime rate
(8.25% at September 30, 1996) plus 0.75% or the three month  Liborate  (5.58% at
September  30,  1996) plus 1.75%.  The loan  agreement  requires  the Company to
maintain certain financial ratios,  minimum working capital and minimum tangible
net worth and requires the bank's consent for the payment of cash dividends. The
amount of common  stock  repurchases  is  limited  to $1.3  million  under  this
agreement.  As of  September  30,  1996,  the  Company  did not  meet all of the
covenants  under the loan  agreement,  but has  received a waiver from the bank.
There were no borrowings outstanding under this line as of September 30, 1996.

     Contingencies

     The  Company  has from  time to time  received  communications  from  third
parties  asserting  that the  Company is  infringing  certain  patents and other
intellectual property rights of others or seeking  indemnifications against such
alleged  infringements.  The  Company  is unable to  determine  at this time the
extent to which these  maters will be pursued by  claimants  or to predict  with
certainty the eventual outcome.  However, the Company believes that the ultimate
resolution  of these  matters  will not have a  material  adverse  effect on its
financial position, results of operations or cash flow.

6.   Shareholders' Equity

     Warrants

     As partial  consideration for the purchase of QSA the Company issued 50,000
warrants with an exercise  price of $13.00 per share,  valued at $65,000,  which
expire in February  1999. At September 30, 1996  warrants  were  outstanding  to
purchase  approximately  13,000  shares of common stock at $9.00 per share.  The
warrants are currently exercisable,  subject to certain antidilution  provisions
and expire in October, 1996.

     Preferred Stock

     The Board of  Directors  has the  authority,  without any  further  vote or
action by the  shareholders,  to provide for the issuance of 1,000,000 shares of
preferred stock from time to time in one or more series with such  designations,
rights,  preferences  and  limitations  as the Board of Directors may determine,
including the consideration received therefore,  the number of shares comprising
each series,  dividend rates,  redemption provisions,  liquidation  preferences,
redemption fund provisions  conversion rights and voting rights, all without the
approval of the holders of common stock.

     Stock Option Plan

     The Company's  1989 and 1995 Stock Option Plans (the plans) provide for the
grant of incentive  stock options and  nonstatutory  stock options to employees,
directors,  and  consultants  of the Company at prices  ranging from 85% to 120%
(depending on the type of grant) of the fair market value of the common stock on
the date of grant as determined by the Board of Directors. The options generally
vest at a rate of 25% one year  after the date of the grant and 12.5%  every six
months or monthly thereafter.  The vesting and exercise provisions of the option
grants are determined by the Board of Directors.


<PAGE>



     The  following is a summary of option  activity (in  thousands,  except per
share amounts):

                                         Options Outstanding
--------------------------------------------------------------------------------
                              Available                Aggregate      Price Per
                              for grant     Shares   Exercise Price     Share
--------------------------------------------------------------------------------
Balance at September 30, 1993   291          603       $1,025        $0.15-$2.97
--------------------------------------------------------------------------------
  Authorized                    200           --           --            --
--------------------------------------------------------------------------------
  Granted                     (333)          333        1,047        $2.70-$8.50
  Exercised                      --         (48)         (40)        $0.15-$2.70
  Canceled                      138        (138)        (472)        $0.75-$8.50
Balance at September 30, 1994   296          750        1,560        $0.15-$2.97
  Authorized                    200           --           --            --
  Granted                     (471)          471        4,804       $2.70-$15.00
  Exercised                      --        (213)        (338)        $0.45-$7.20
  Canceled                       80         (80)        (246)        $0.75-$7.20
Balance at September 30, 1995   105          928        5,780       $0.75-$15.00
  Authorized                    410           --           --            --
  Granted                   (1,347)        1,347        7,068        $4.25-$8.00
  Exercised                      --        (116)        (243)        $0.75-$8.00
  Canceled                      920        (920)      (7,907)       $0.75-$15.00
--------------------------------------------------------------------------------
 Balance at September 30, 1996   88        1,239       $4,698        $1.20-$7.92
================================================================================

     Options  to  purchase   approximately   321,000  and  233,000  shares  were
exercisable at September 30, 1996 and 1995, respectively.

     For certain options  granted,  the Company  recognized as compensation  the
excess of the deemed value for accounting  purposes of the common stock issuable
upon exercise of such options over the aggregate  exercise price of such options
based on the fair value of the stock as  determined  by the  Company's  Board of
Directors.  Additionally,  in May 1994,  the  Board of  Directors  approved  the
repricing  of options  previously  granted  during  fiscal  1994.  Approximately
144,000  stock  option  grants were  repriced at $2.70 per share and the Company
recognized  approximately  $376,000 of compensation for the excess of the deemed
value of the common  stock  issuable  upon  exercise  of such  options  over the
aggregate exercise price of such options.  The compensation expense is amortized
ratably over the vesting period of the options.

     January 1994, the  shareholders  approved the adoption of the 1993 Employee
Stock Purchase Plan (the "1993 Purchase Plan") covering 200,000 shares of common
stock for  issuance  under the plan and  adoption of the 1993  Directors'  Stock
Option Plan ( the  "Directors"  Plan)  covering  100,000  shares of common stock
issuance under the plan. Under the 1993 Purchase Plan,  employees may be granted
the  opportunity to purchase common stock at 85% of market value on the first or
last day of the  offering  period (as defined by the plan),  whichever is lower.
The  Directors'  Plan provides for the issuance of stock options to directors of
the Company.  There were 79,770 and 43,365 shares issued under the 1993 Purchase
Plan in 1996 and 1995,  respectively and 76,865 remained  available for issuance
as of September  30, 1996.  The Company has granted  47,500  options at exercise
prices of $8.00 to $9.00 under the Directors' Plan and no options were exercised
as of September 30, 1996.

     In February 1996, the Board of Directors approved a plan for the Company to
repurchase  up to 200,000  shares of its  outstanding  common  stock in the open
market from time to time limited to the total purchase price of $1.3 million per
the loan agreement.  The repurchased  shares are to provide additional shares to
the existing 1995 Stock Option Plan. During fiscal 1996, the Company repurchased
135,000  shares at an average  price of $6.07.  In  October  1996,  the  Company
repurchased an additional 7,500 shares at an average price of $6.42.

     In October 1995 and July 1996,  the Company  offered all optionees  holding
outstanding options the opportunity to exchange such options for similar options
with exercise prices equal to the then fair market value. Under the

<PAGE>



October 1995 offer,  options to purchase  180,700  shares with  exercise  prices
exceeding $8.00 per share were exchanged for nonstatutory options exercisable at
$8.00 per share.  Officers of the Company  were  excluded  from the October 1995
exchange.  Under the July 1996 offer,  options to purchase  564,375  shares with
exercise  prices  exceeding  $4.25 per share were exchanged for similar  options
exercisable at $4.25 per share.  Except for officers,  each option  retained the
original  option's  four-year  vesting period.  The 196,500 options exchanged by
officers  have vesting  beginning  with the new grant date.  The effect of these
exchanges has been  included in the table in 1996  activity for options  granted
and cancelled.

     Common stock was reserved for issuance as follows (in thousands of shares):

                                  September 30,
--------------------------------------------------------------------------------
                                                         1996              1995
--------------------------------------------------------------------------------
         1989 and 1995 Stock Option Plans               1,327             1,033
--------------------------------------------------------------------------------
         1993 Purchase Plan and Directors` Plan           177               217
--------------------------------------------------------------------------------
         Warrants                                          63                13
--------------------------------------------------------------------------------
         Total                                          1,567             1,263
================================================================================

7.   Provision (Benefit) for Taxes

The provision (benefit) for income taxes consists of the following:

                                  September 30,
--------------------------------------------------------------------------------
                                              1996          1995            1994
--------------------------------------------------------------------------------
                                 (In thousands)
Federal:    Current                        $  282         $2,352          $2,058
--------------------------------------------------------------------------------
            Deferred                        (700)          (522)           (650)
--------------------------------------------------------------------------------
                                            (418)          1,830           1,408
State:      Current                         (122)            464             306
            Deferred                        (112)          (154)              --
                                            (234)            310             306
Foreign:    Current                           267             --              40
            Deferred                        (320)             --              --
                                             (53)             --              40
--------------------------------------------------------------------------------
Total                                      $(705)         $2,140          $1,754
================================================================================

     A  reconciliation  of the income tax  provision  (benefit)  at the  federal
statutory rate (35%) to the income tax provision  (benefit) at the effective tax
rate is as follows:
                                  September 30,
--------------------------------------------------------------------------------
                                               1996          1995           1994
--------------------------------------------------------------------------------
                                 (In thousands)

Income tax computed at the federal            $(705)        $2,417        $1,749
--------------------------------------------------------------------------------
State taxes (net of federal effect)            (152)           201           202
--------------------------------------------------------------------------------
Research and development credits                (53)            --            --
Goodwill amortization                            101            --            --
Non-deductible interest                          145            --            --
Foreign withholding tax                           --            --            40
Tax exempt interest                            (140)            --            --
--------------------------------------------------------------------------------
Variation of temporary differences                --         (641)         (234)
--------------------------------------------------------------------------------
Other individually immaterial items               99           163           (3)
--------------------------------------------------------------------------------
                                              $(705)        $2,140        $1,754
================================================================================



<PAGE>



     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's  deferred tax  liabilities and assets as of September 30, 1996 and
1995 are as follows:

                                  September 30,
--------------------------------------------------------------------------------
                                                        1996              1995
--------------------------------------------------------------------------------
                                 (In thousands)
 Deferred tax assets:
    Vacation accrual                                    $  82             $ 106
--------------------------------------------------------------------------------
    State taxes                                            --               130
--------------------------------------------------------------------------------
    Inventory reserve                                     962               704
    Distributor reserve                                   798               441
    Capitalized research and development costs             61                81
    Other individually immaterial items                   336               147
Total deferred tax assets                               2,239             1,609
Valuation allowance                                        --                --
--------------------------------------------------------------------------------
Net deferred tax assets                                $2,239            $1,609
================================================================================
Deferred tax liabilities:
   Fixed and intangible assets with no tax basis       $(1,902)           $  --
   Depreciation                                           (101)            (283)
--------------------------------------------------------------------------------
Total deferred tax liabilities                         $(2,003)           $(283)
================================================================================


     The components of the Company's  income (loss) before  provision  (benefit)
for taxes are as follows:

                          Year ended September 30, 1996
--------------------------------------------------------------------------------
         Domestic                                             $(1,453)
--------------------------------------------------------------------------------
         Foreign                                                 (562)
--------------------------------------------------------------------------------

         Total                                                $(2,015)
================================================================================

8.   Related Party Transactions

     Under agreements with two preferred  shareholders,  the Company  recognized
technology  development and license revenues of approximately $292,000 in fiscal
1994. In addition, royalty payments may be received for future sales of products
by the licensees,  and the licensees are required to provide certain products to
the Company at a reduced cost. The Company  accounts for the difference  between
its cost for products and the current market value of the products as technology
development and license revenues, which totaled approximately $427,000 in fiscal
1994. In addition, the Company purchased approximately $6,800,000,  $10,372,000,
and $8,284,000 of raw products  manufactured at the  shareholders'  factories in
fiscal 1996, 1995, and 1994, respectively.

     A shareholder  acts as an intermediary in the purchase of products from the
factories  discussed above. The Company pays a commission for the service and in
return receives extended payment terms, foreign exchange services, and inventory
handling  services.  The Company paid  commissions  of  approximately  $278,000,
$469,000, and $389,000 in fiscal 1996, 1995, and 1994, respectively. The Company
has a payable to the  shareholder of  approximately  $220,000,  $2,011,000,  and
$2,694,000 at September 30, 1996, 1995 and 1994,  respectively,  for commissions
and  inventory  purchases.  In another  arrangement,  the Company paid fees to a
subsidiary  of the  preferred  shareholder  for  services  rendered  in securing
license agreements and other consulting totaling approximately $13,000 in fiscal
1994. The Company also had

<PAGE>



product  shipments of approximately  $4,898,000,  $3,377,000,  and $2,171,000 to
another subsidiary of the shareholder during the years ended September 30, 1996,
1995, and 1994, respectively.

     The Company  purchased photo masks amounting to approximately  $257,000 and
$301,000  in fiscal  1995 and 1994,  respectively,  from a  shareholder.  During
fiscal  1996,  1995,  and 1994,  the Company  purchased  approximately  $51,000,
$82,000, and $94,000,  respectively,  of computer equipment from a company owned
by affiliates of an executive officer of the Company.

9.   Industry and Geographic Information

     The Company operates in a single industry segment.  The Company markets its
products  in the  United  States  and in  foreign  countries  through  its sales
personnel,  independent sales representatives,  and distributors.  The Company's
geographic sales as a percent of net product revenues are as follows:

                            Years Ended September 30,
--------------------------------------------------------------------------------
                                          1996            1995            1994
--------------------------------------------------------------------------------
                                 (In thousands)
         United States                  $25,627          $32,794        $28,635
         Australia                        1,883               --             --
--------------------------------------------------------------------------------
                                        $27,510          $32,794        $28,635
         Export:
                  Far East               15,073            9,700          4,712
--------------------------------------------------------------------------------
                  Europe                  2,105            3,695          2,900
--------------------------------------------------------------------------------
                                        $44,688          $46,189        $36,247
================================================================================

     The  following  table  summarizes  the  Company's  operations  in different
geographic areas for the year end September 30, 1996:

                                         United
                                         States      Australia     Consolidated

Sales to unaffiliated customers         $40,814         $3,874          $44,688
--------------------------------------------------------------------------------
Loss from operations                    (1,813)        (1,717)          (3,530)
--------------------------------------------------------------------------------
Other income net                            360          1,155            1,515
--------------------------------------------------------------------------------
Loss before benefit for taxes          $(1,453)         $(562)         $(2,015)
--------------------------------------------------------------------------------
Identifiable assets                     $35,279        $17,242          $57,521
--------------------------------------------------------------------------------

     One customer  accounted  for 19%,  16% and 21% of total  revenues in fiscal
1996, 1995 and 1994, respectively.  In fiscal year 1996 two additional customers
accounted for 11% and 10% of total product revenues.

10.  Subsequent Events

     In November 1996, the Company  negotiated a private placement of unsecured,
convertible  promissory notes in the principal  amount of $5.0 million,  of QSA.
The notes are  convertible  at the option of the  investors  or the Company into
either  732,931  shares  of the  Company's  common  stock or  732,931  shares of
non-voting  Series B  Preference  shares of QSA.  The  Company  has  received $3
million of the total  financing  by December  1996,  and plans to  complete  the
balance of the funding no later than February 28, 1997.



<PAGE>



     In  December  1996 the  Company  negotiated  revised  payment  terms on the
balance  due  to  AWA  Limited  as a  result  of the  acquisition  of the  wafer
fabrication facility from AWA MicroElectronics  Pty. Ltd. The revised payment at
the option of the  Company is either  $3.0  million by January  31, 1997 and the
balance of $4.0 million by January 31, 1998 or $3.0 million by July 31, 1997 and
the balance of $4.0 million by January 31, 1998. If the latter payment option is
elected  then the $4.0 million  balance  will bear  interest at 10% from July 1,
1997.


<PAGE>



                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


     The Board of Directors and Shareholders
     Quality Semiconductor, Inc.

     We have audited the  accompanying  consolidated  balance  sheets of Quality
Semiconductor,  Inc.  as of  September  30,  1996  and  1995,  and  the  related
consolidated  statements of operations,  shareholders equity, and cash flows for
each of the three years in the period ended  September 30, 1996. 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
Quality Semiconductor, Inc. at September 30, 1996 and 1995, and the consolidated
results of its  operations and its cash flows for each of the three years in the
period  ended  September  30,  1996,  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.


                                             ERNST & YOUNG LLP


San Jose,  California  October 18,  1996,  except as to Note 10, as to which the
data is December 12, 1996



<PAGE>


Item 9.           Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure

         Not Applicable

                                    PART III


Item 10. Directors, Officers and Other Registrants' of the Registrant

         The  information  concerning  the  registrant's  executive  officers is
included under the caption "Officers and Directors of the Registrant"  following
Part I, Item 1 of this report.

Item 11. Executive Compensation

         The information  required for this item is incorporated by reference to
the Executive  Compensation  Section of the Company's Proxy Statement which will
be filed  with the  Securities  and  Exchange  Commission  within 120 days after
September 30, 1996.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information  required for this item is incorporated by reference to the
Security  Ownership  of Principal  Shareholders  and  Management  Section of the
Company's  Proxy  Statement which will be filed with the Securities and Exchange
Commission within 120 days after September 30, 1996.

Item 13. Certain Relationships and Related Transactions

     The  information  required  for this item is  incorporated  by reference to
Certain  Relationships and Related  Transactions  Section of the Company's Proxy
Statement which will be filed with the Securities and Exchange Commission within
120 days after September 30, 1996.


<PAGE>

                                     PART IV

Item 14.  Exhibits, Financial Statements Schedules, and Reports of Form 8K

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

               1.   Consolidated Financial Statements
               2.   Financial Statement Schedules
                           Schedule II - Valuation and Qualifying Accounts

                                                                     SequentiaL
Exhibit  Exhibit Document Description                                   Page
Number                                                                 Number

 
3.1      Restated Articles of Incorporation of the Company.                  *

3.2      Form of Amended and Restated Articles of Incorporation              *
         of the Company.

3.3      Bylaws of the Company.                                              *

3.4      Certificate of Amendment of the Bylaws of the Company               *

4.1      Subscription Agreement dated January 12, 1996 between              **
         AWA Limited and Quality Semiconductor Australia Pty. Ltd.

4.2      Semiconductor, Inc. and AWA Limited.                               **

4.3      Common Stock Purchase Warrant dated February 16, 1996              **
         issued by Quality Semiconductor, Inc. to AWA Limited.

10.1     Form of Indemnification Agreement for directors and officers.       *

10.2     Amended and Restated 1989 Stock Option Plan and forms              *+
         of agreements thereunder.

10.3     1993 Employee Stock Purchase Plan and form of                      *+
         subscription agreement.

10.4     1993 Director' Stock Option Plan and form of subscription         *+
         agreement.


10.5     Technology/Product Development & License Agreement                  *
         between the Company and Seiko Instruments, Inc.,
         dated as of October 17, 1988, as amended to date.

<PAGE>
                                      
                                                                     Sequential
Exhibit  Exhibit Document Description                                   Page
Number                                                                 Number


10.6     Technology/Product Development & License Agreement                  *
         between the Company and Yamaha Corporation, dated
         as of September 23, 1989, as amended to date.

10.7     Distribution Agreement between the Company and Kanematsu            *
         Semiconductor Corporation, dated as of November 7, 1991.


10.8     Sales Agreement between the Company and Kanemat                     *
         Semiconductor Corporation, dated as of June 1, 1990,
         as amended to date.

10.9     Lease Agreement dated December 12, 1990 between                     *
         the Company and the Prudential Insurance Company
         of America.

10.10    Master Lease Agreement dated November 1, 1993                       *
         between the Company and Comdisco Inc., as amended.
 
10.11    Credit Agreement, dated November 30,1994 between                  ***
         the Company and Bank of America.

10.12    Asset Purchase Agreement dated January 12, 1996                    **
         between Quality Semiconductor Australia Pty. Ltd. and AWA
         MicroElectronics Pty. Ltd.

10.13    Guaranty and Indemnification Agreement dated January 12,           **
         1996 among AWA Limited, Quality Semiconductor Australia Pty
         Ltd. and Quality Semiconductor, Inc.
 
10.14    Technology Services Agreement dated February 16, 1996              **
         among AWA Limited, AWA MicroElectronics Pty. Ltd. and
         Quality Semiconductor, Australia Pty. Ltd.

10.15    Form of QSA Convertible/Redeemable Note Insurance Agreement,     ****
         dated November 21, 1996, between Quality Semiconductor Australia,
         Pty. Limited, Quality Semiconductor, Inc. and Technology Associates
         (Note No.1).

10.16    Form of QSA Convertible/Redeemable Note Issuance Agreement,      ****
         dated Nobember 21, 1996, between Quality Semiconductor Australia,
         Pty. Limited, Quality Semiconductor, Inc. and Win Win Venture
         Capital Corporation (Note No.3).

<PAGE>
                                                                    Sequential
Exhibit  Exhibit Document Description                                  Page
Number                                                                Number


10.17    Form of QSA Convertible/Redeemable Note Issuance Agreement,      ****
         dated Nobember 21, 1996, between Quality Semiconductor Australia,
         Pty. Limited, Quality Semiconductor, Inc. and Win Win Venture
         Capital Corporation (Note No.4).

10.18    Form of QSA Convertible/Redeemable Note Issuance Agreement,      ****
         dated Nobember 21, 1996, between Quality Semiconductor Australia,
         Pty. Limited, Quality Semiconductor, Inc. and Win Win Venture
         Capital Corporation (Note No.5).

10.19    Form of Unsecured Convertible Promissory Note of Quality         ****
         Semiconductor Australia, Pty. Limited.

11.1     Statement regarding Computation of Earnings Per Share              51

22.1     Subsidiaries of the Registrant                                     52

23.1     Consent of Ernst & Young LLP, Independent Auditors.                53

25.1     Power of Attorney included on the signature page of this           49
         Annual Report on Form 10-K.

*       Incorporated  by reference to exhibits  filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and Amendment
No. 1,  Amendment No. 2,  Amendment No. 3,  Amendment No. 4, and Amendment No. 5
thereto (File No. 33-72884), which became effective on November 16, 1994.

**       Previously filed with Form 8K on March 4, 1996.

***      Previously Filed with Form 10-K on December 26, 1995.

****     Previously filed with Form 8-K on December 10, 1996.

+       Indicates a  management  contract or  compensatory  plan or  arrangement
required to be filed as an Exhibit to this Annual  Report on Form 10-K  pursuant
to Item 14(c).


<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.

                                             QUALITY SEMICONDUCTOR, INC.

Dated: December 20, 1996                     By:   /s/R. Paul Gupta
                                                   ----------------
                                                  R. Paul Gupta
                             Chief Executive Officer

                                                 POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below  constitutes  and appoints R. Paul Gupta and Stephen H. Vonderach,
his  attorney-in-fact,  with the power of  substitution,  for him in any and all
capacities,  to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith with the
Securities  and Exchange  Commission,  hereby  ratifying and confirming all that
said  attorney-in-fact,  or his substitute or substitutes  may do or cause to be
done by virtue hereof.

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

Signature                     Title                                  Date

/s/Chun P. Chiu           Director and Chairman of the Board   December 20, 1996
-----------------------
Chun P. Chiu

/s/R. Paul Gupta          Director, President and              December 20, 1996
-----------------------   Chief Executive Officer
R. Paul Gupta

/s/Stephen H. Vonderach   Vice President of Finance and        December 20, 1996
-----------------------   Chief Financial Officer
Stephen H. Vonderach

/s/Andrew J. S. Kang      Director                             December 20, 1996
-----------------------
Andrew J. S. Kang

/s/Manhor L. Malwah       Director                             December 20, 1996
-----------------------
Manhor L. Malwah

/s/Robert L. Puette       Director                             December 20, 1996
-----------------------
Robert L. Puette

/s/Masaharu Shinya        Director                             December 20, 1996
-----------------------
Masaharu Shinya

/s/David D. Tsang         Director                             December 20, 1996
-----------------------
David D. Tsang


<PAGE>





                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                                   Charged to
                                  Costs and (1)

                                       Beginning   Expense   Deductions  Ending
                                       Balance                           Balance
 Year ended September 30, 1996
  Allowance for Doubtful Accounts .     $123,000   $      -   $      -  $123,000
  Allowance for Sales Returns . . . .          -     50,000          -    50,000
                                       -----------------------------------------
                                       =========================================
                                        $123,000   $ 50,000   $      -  $173,000
                                       =========================================

 Year ended September 30, 1995
  Allowance for Doubtful Accounts .     $144,000    $40,000   $ 61,000  $123,000

  Allowance for Sales Returns . . . .     20,000          -     20,000
                                       =========================================
                                        $164,000    $40,000   $ 81,000  $123,000
                                       =========================================

 Year ended September 30, 1994
  Allowance for Doubtful Accounts .     $132,000    $70,000    $ 58,000 $144,000

  Allowance for Sales Returns . . . .    420,000     20,000     420,000   20,000
                                       =========================================
                                        $552,000    $90,000    $478,000 $164,000
                                       =========================================

     (1) Primarily  deductions  represent  write-offs of accounts receivable and
sales returns.



<PAGE>



                                                                   Exhibit 11.1



                           QUALITY SEMICONDUCTOR, INC.

              STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
                      (In thousands, except per share data)



                                  September 30,
                                 1996 1995 1994
                                       ------------    ------------    ---------

Net income (loss)                         $(1,310)          $4,766       $3,243
                                       ============    ============    =========
Computation of common and common
  equivalents
   shares outstanding
   Common stock                             5,524           4,750         1,294
   Options and warrants                         -             559           430
   Cheap stock                                  -              29           204
   Preferred shares                             -             311         2,176
                                       ============    ============    =========
Shares used in computing per share          5,524           5,649         4,104
  amount
                                       ============    ============    =========

Net income (loss) per share               $(0.24)           $0.84         $0.79
                                       ============    ============    =========



----------
Fully diluted  computation  not presented since such amount differs by less than
3% of the net income per share amount shown above.


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                                                                    Exhibit 22.1


                           QUALITY SEMICONDUCTOR, INC.

                              LIST OF SUBSIDIARIES


Name                     Location of                Names Under Which Subsidiary
                         Incorporation              is Doing Business

Quality Semiconductor    Australia                  Quality Semiconductor
Australia Pty. Limited   ACN 072 373 730            Australia


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                                                                    Exhibit 23.1


               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


     We consent to the incorporation by reference in the Registration  Statement
(Form S-8 Nos. 33-89724 and 333-3234)  pertaining to the 1989 Stock Option Plan,
1993 Employee Stock Purchase Plan, 1993 Director's  Plan, 1995 Stock Option Plan
of Quality  Semiconductor,  Inc. of our report dated October 18, 1996 (except as
to Note 10, as to which the date is  December  12,  1996),  with  respect to the
consolidated  financial statements and schedule of Quality  Semiconductor,  Inc.
included in the Annual Report (Form 10-K) for the year ended September 30, 1996.


                                          ERNST & YOUNG LLP


San Jose, California
December 18, 1996

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