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 28, 1997
                         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
December 12, 1997 was $25,095,652. 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 December 12, 1997 was 7,373,081.

                       DOCUMENTS INCORPORATED BY REFERENCE

     (1) Portions of the Registrant's Proxy Statement related to the 1998 Annual
Meeting of Shareholders, to be filed subsequent to the date hereof - Part III.

<PAGE>
                                     PART I

Item 1.           Business

         Information set forth in this report  constitutes and includes  forward
looking information. The accuracy of such information is subject to a variety of
risks and uncertainties,  including product mix, the Company's ability to obtain
or  maintain  design  wins,  market  conditions  in the  personal  computer  and
semiconductor  industries,  product  development  schedules  and other  matters.
Actual  results may differ from the results  discussed in such  forward  looking
statements.

Introduction

         Quality Semiconductor,  Inc. ("QSI" or the "Company") designs, develops
and markets high-performance logic, clock management and QuickSwitch(R) devices,
advanced memory products and advanced  networking  semiconductor  products.  The
Company targets systems manufacturers  principally in the networking,  computer,
workstation,  and  telecommunications  markets. QSI's logic products include the
5-volt  QSFCT and  3.3-volt  LCX  families of  high-speed,  low-noise  interface
devices that interconnect various elements in a microprocessor-based system, and
the QuickSwitch(R) 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  networking  products  include  two Fast
Ethernet  CMOS  transceivers  that provide high  integration  solutions  for the
adapter,    repeater,    switch    and   card   bus    markets    and   an   ATM
multiplexer/demultiplexer device.

         Quality  Semiconductor  was  incorporated  in 1984  under  the  laws of
California.  The Company's principal executive offices are located at 851 Martin
Avenue,  Santa Clara,  California  95050-2903 and its telephone  number is (408)
450-8000.

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 their 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,  computer, workstation,
telecommunication,  and portable system 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

<PAGE>
         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  manufacturer's are demanding higher
performance logic 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 233 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.

QSI 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, workstation,
peripherals, I/O subsystems, telecommunications and portable systems industries.

         High Performance Networking Products

         The  Company  has  several   networking   products  that  provide  high
integration  solutions for the adapter,  repeater,  switch and card bus markets.
The  Company's  product  development  in the  networking  market is  directed to
multimedia    applications   and   interoperability.    The   QS6810   ATM   4:1
Multiplexer/Demultiplexer  serves 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.  See "Factors  That May Affect Future
Results - Dependence on Networking Product Line".

<PAGE>

         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 Products

         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.  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(R) Products

         The Company's innovative  QuickSwitch(R) 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 requirement for no directional control.  QuickSwitch(R) devices
provide higher  performance  alternatives to FCT and other families of interface
logic where high current drive capability is not required. In addition, they 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(R)   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(R)  offering  includes  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(R) family by incorporating
features of the QuickSwitch(R) design into higher integration products,  such as
a series of crossbar  switches and  QuickScanTM  devices for boundary  scan test
applications.

         Clock Management Products

         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.  See
"Factors That May Affect Future Results - Year 2000 Compliance."

<PAGE>

         FIFO Memory Products

         In October 1997, the Company made a strategic decision to exit the FIFO
memory  product  market.  This decision was made in order to focus the Company's
resources  on other  faster  growing  segments  of the  semiconductor  industry,
including  networking and  telecommunication  markets. The FIFO market accounted
for a small percentage of the Company's revenues. As part of this decision,  the
Company wrote off approximately $2.5 million of inventory and other costs in the
fourth quarter of fiscal 1997 primarily related to the FIFO product line.

Customers and Applications

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

         A relatively small number of customers have accounted for a significant
portion of the Company's  net revenue in each of the past several  fiscal years.
In fiscal 1997 four customers  accounted for over 35% of net revenues,  compared
to 9 customers  which  accounted for over 35% of net revenues in fiscal 1996. In
fiscal  1995  sales to the  Company's  top ten  systems  manufacturer  customers
accounted for more than half of total net revenues. See "Factors That May Affect
Future Results - Customer Concentration."

Backlog

         QSI primarily  manufactures  and markets standard  products.  Sales are
generally  made pursuant to purchase  orders,  which are  frequently  revised to
reflect  changes in  customer's  requirements.  As of September  28,  1997,  the
Company's backlog was approximately  $15.3 million, as compared to approximately
$13.0 million at September  29, 1996.  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/Milgray  Industries.  Domestic distributors accounted for approximately 19%
of the  Company's  net revenues  during fiscal 1997 as compared to 26% in 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  North  American  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. See "Factors That May Affect Future Results -
Customer Concentration."

         To   assist   the   Company's   distributor   and   independent   sales
representative,  the Company has 6 sales professionals  located at the Company's
sales offices in northern and southern  California,  Georgia,  Massachusetts and
the United  Kingdom as of  September  28, 1997.  The Company also employs  field
application  engineers who work directly with the Company's  customers to assist
them in designing systems incorporating the Company's products.

<PAGE>

         Sales outside of the United States accounted for approximately 44%, 43%
and 29% of net  product  sales for fiscal  years  ended  1997,  1996,  and 1995,
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.  See
"Factors  That  May  Affect  Future   Results  -  Dependence  on   Manufacturing
Representatives and Distributors."

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, Level One 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  networking  markets,
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. The Company has been developing capacity for the fabrication, since
the acquisition of the Wafer Fabrication  facility in February 1996. Many of the
Company's  competitors  already  have  this  capacity  which  may  provide  such
companies with more reliable manufacturing  capability,  shorter development and
manufacturing cycles and time-to-market advantages. Competitors having their own
wafer  fabrication  facilities,  or access to suppliers  having such facilities,
with 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.

<PAGE>

         As is typical in the semiconductor industry, competitors of the Company
have  developed   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.

         Historically,  average  selling  prices  ("ASPs") in the  semiconductor
industry have decreased over the life of the particular product. The willingness
of  prospective  customers to design the Company's  products into their products
depends to a  significant  extent  upon the  ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs  sufficiently to offset declines in ASPs or is unable
to introduce  new higher  performance  products with higher ASPs or is unable to
introduce new higher performance  products with higher, the Company's  operating
results  would  be  materially  and  adversely  affected.  Any  yield  or  other
production   problems,   shortages  or  supply  that   increase  the   Company's
manufacturing  costs,  or failure to reduce  manufacturing  costs,  would have a
material adverse effect on the Company's operating results.

         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

         In February  1996,  the  Company  purchased  a fully  functional  wafer
fabrication facility and product design center located in Australia. The Company
receives a significant amount of its wafer requirements for its logic and memory
products  from  this  facility.  QSI  believes  that  maintaining  its own wafer
fabrication  capability  provides a reliable source of supply of  semiconductors
and ability to develop new products and technology.  To increase its competitive
position,  the Company has  introduced  programs to reduce  manufacturing  cycle
time,  improve  yields and lower  costs.  See  "Factors  That May Affect  Future
Results - Risks Associated With Operating Australian Fabrication Facility."

         Additionally,  a  majority  of the  Company's  more  advanced,  smaller
geometry circuits  semiconductor products are fabricated by Taiwan Semiconductor
Manufacturing  Company  ("TSMC").  The remainder of the  Company's  products are
manufactured  by  Seiko   Instruments  Inc.   ("Seiko")  and  Ricoh  Corporation
("Ricoh"). The Company utilized Yamaha Corporation ("Yamaha") for wafer capacity
prior to fiscal 1997.  See "Factors That May Affect Future  Results - Dependence
on Fabrication, Assembly and Test Subcontractors."

<PAGE>

         In connection with fabrication  arrangements with Seiko and Yamaha, the
Company has granted 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 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 and the right of Seiko 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  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.

         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  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.  See "Factors That May Affect Future Results
- Dependence on Fabrication Assembly and Test Subcontractors."

<PAGE>

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 28, 1997, the Company had 49
employees involved in research and product development activities.

         The Company's  research,  development and  engineering  expenses in the
fiscal years 1997, 1996 and 1995 were approximately  $9.3 million,  $7.0 million
and $6.3  million,  respectively.  The Company  expects that it will continue to
spend  substantial  funds on research and  development  in order to maintain its
competitiveness in new product and process technology development.

         Although the Company  believes that in certain  product lines it may be
desirable  to apply its QCMOS  process at smaller  geometries  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  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.  See "Factors  That May Affect  Future  Results -
Dependence on New Products."

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.

<PAGE>

         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 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 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.  See "Factors That May Affect Future Results - Patents and
Proprietary Rights ."

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. ("QSA"),  included a fully
operational wafer foundry business and product design center.

Employees

     At  September  28,  1997,  the  Company  had  approximately  206  full-time
employees,  including  32 in  sales,  marketing  and  customer  support,  102 in
manufacturing, assembly and testing, 49 in research and product development, and
23 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  certain  employees  of  the  Company's  wafer  fab  facility  are
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 28, 1997 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
Albert Enamait                  58    Vice President of Sales and Marketing
Edward J. Bradley, Jr.          54    Vice President of Manufacturing Operations
John P. Goldsberry              43    Vice President - Finance and
                                      Chief Financial Officer (1)
Richard A. Bottomley            33    Controller
Andrew J. S. Kang               46    Director
Robert L. Puette                55    Director
Masaharu Shinya                 54    Director
David D. Tsang                  55    Director

     (1) Mr. Goldsberry resigned from the Company effective November 19, 1997 to
pursue other interests.

     Mr.  Chiu,  one of the  Company's  founders,  has  served as the  Company's
Chairman of the Board since its 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
also has  served as a director  of a  privately  owned  company,  Capella  Micro
Systems,  since  December  1996. 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.  Since May 1995,  Mr.  Gupta has served as a director  of
YieldUp  International  Corp. He also serves as a director of Innovision  Lab, a
privately  held  company.  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.

     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.

<PAGE>

     Mr. Edward J. Bradley,  Jr. joined the Company in January 1993.  Before his
appointment to Vice President of Operations 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.  John  Goldsberry  has  served as Vice  President  - Finance  and Chief
Financial  Officer of the Company  from March 1997  through  November  17, 1997.
During 1996, Mr. Goldsberry served as Vice president and Chief Financial Officer
of DSP Group,  which develops and markets  digital signal  processors and speech
compression  algorithms.  From  1992  to  1995  Mr.  Goldsberry  served  as Vice
President and Chief Financial  Officer of the Good Guys, a computer  electronics
retailer.  Prior to 1992,  Mr.  Goldsberry  held  various  positions  at Saloman
Brothers and Morgan Stanley.  Mr.  Goldsberry  received his bachelor's degree in
applied  mathematics  from Harvard  College and his Ph.D. in business  economics
from Harvard University.

     Mr.  Richard A.  Bottomley has assumed the interim role of Chief  Financial
Officer of the Company since the  resignation of John Goldsberry on November 19,
1997.  Mr.  Bottomley has been the  Controller of the Company since August 1996.
Mr. Bottomley has served in a similar position with Actel Corporation, and prior
to that was with Ernst & Young LLP for seven years.

     Mr. Kang has served as a director of the Company since 1992.  In 1990,  Mr.
Kang founded  Technology  Associates  Corp., a Taiwanese venture capital company
and was its President until October, 1997. Since October, 1997 Mr. Kang has been
the Managing  Director of Technology  Associates  Management  Co.,  Ltd.,  which
manages  Techgains  venture  fund.  Mr. Kang also is serving as the president of
Natural  Polymer  International  Corp.,  a Dallas based  biodegradable  material
research  manufacturing  company.  Mr.  Kang  holds  a MA  degree  from  Soochow
University, Taiwan, and MSM from ADL Management Education Institute,  Cambridge,
MA.

     Mr. Puette has served as a director of the Company  since 1992.  Mr. Puette
is the President of Centigram  Corporation,  a communications  solution company.
Mr. Puette was the Chairman,  President and Chief Executive  Officer of NetFRAME
Systems,  Inc.,  a computer  company from 1995 to 1997.  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.  Mr.  Puette  holds a BSEE  degree from
Northwestern University and a MSDR degree from Stanford University.

     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 and from 1988
to 1990, as Senior Managing Director.  Kanematsu Semiconductor  Corporation is a
subsidiary of Kanematsu Corporation,  a large Japanese trading house. Mr. Shinya
also serves on the Board of Directors of several privately held companies.

     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. Since January 1997, he has also been a director of
ASE Test Ltd.  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  which
includes  approximately  3,000 square feet of facilities  for the Company's test
operations.  In July 1997,  the Company  extended  its current  lease  agreement
through  March 2001.  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.

                                     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 1997 and
1996.

                                                            
                                                   High                  Low
1997
First Quarter                                     $ 9.25               $ 6.13
--------------------------------------------------------------------------------
Second Quarter                                    $10.13               $ 7.00
--------------------------------------------------------------------------------
Third Quarter                                     $11.75               $ 7.25
--------------------------------------------------------------------------------
Fourth Quarter                                    $16.75               $10.38
--------------------------------------------------------------------------------

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

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

<PAGE>

         Holders of Record

         As of September 28, 1997,  there were 108 shareholders of record of the
Company's  Common Stock.  Since many  holder's are listed under their  brokerage
firms' names, the actual number of shareholders is higher.

         On August 26, 1997, the Board of Directors of the Company  approved and
adopted the Company's  Preferred  Shares Rights Agreement dated as of August 29,
1997  between the  Company and  BankBoston,  N.A. as Rights  Agent (the  "Rights
Agreement").  The rights,  privileges and preferences of the Company's Preferred
share Purchase Rights are described in the Company's  Registration  Statement on
Form 8-K filed with the  Securities  and Exchange  Commission  on September  15,
1997.

Item 6.           Selected Financial Data
<TABLE>
<CAPTION>
                                                                   Years Ended September 30,
                                                             (In thousands, except per share data)

                                                 <S>         <C>         <C>         <C>         <C>    
                                             ------------------------------------------------------------------
                                                    1997        1996        1995        1994        1993
                                             ------------------------------------------------------------------
REVENUES:
         Net product revenues                    $62,691     $44,688     $46,189     $36,247     $26,723
        -------------------------------------------------------------------------------------------------------
        Technology revenues                           __          __          __         719         958
        -------------------------------------------------------------------------------------------------------
Total revenues                                    62,691      44,688      46,189      36,966      27,681
---------------------------------------------------------------------------------------------------------------
Operating income (loss)                              720     (3,530)       6,386       5,189       3,122
---------------------------------------------------------------------------------------------------------------
Interest, net                                      (398)          77         520       (192)       (377)
---------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit)             322     (2,015)       6,906       4,997       2,745
for taxes
---------------------------------------------------------------------------------------------------------------
Net income (loss)                                    210     (1,310)       4,766       3,243       2,513
---------------------------------------------------------------------------------------------------------------
Net income (loss) per share (1)                    $0.03    $ (0.24)      $ 0.84      $ 0.79           $
                                                                                                      --
---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding                6,989       5,524       5,649       4,104           $
                                                                                                      --
---------------------------------------------------------------------------------------------------------------
Working capital                                  $27,775     $14,103     $27,379       8,460       5,857
---------------------------------------------------------------------------------------------------------------
Total assets                                      69,832      52,521      42,779      23,146      19,371
---------------------------------------------------------------------------------------------------------------
Long-term obligations (less current portion)       7,202       2,840           5         493       1,919
---------------------------------------------------------------------------------------------------------------
Shareholders' equity                              43,637      30,345      31,221      11,888       8,495
---------------------------------------------------------------------------------------------------------------
Dividends                                              $           $           $           $           $
                                                      --          --          --          --          --
===============================================================================================================
</TABLE>

See " Management's Discussion and Analysis and notes to consolidated financial
statements."

(1) Fiscal 1993  statements of operations  omits the  historical  net income per
share  as it was not  presented  in the  initial  public  offering  registration
statement. Pro forma net income is presented for 1994.

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

Results of Operations

This  discussion  summarizes  the  significant  factors  affecting the Company's
consolidated  operating results,  financial condition,  liquidity and cash flows
during the three year period ended September 30, 1997. The following  discussion
should be read in conjunction  with the five year summary of selected  financial
data and the Company's consolidated financial statements and notes thereto.

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

                                            Years Ending September 30,
                                           1997         1996         1995
Net revenues                               100%         100%         100%
Cost of revenues                           63.9         67.6         50.9
Gross margin                               36.1         32.4         49.1
Operating expenses
Research and development                   14.8         15.7         13.7
Sales and marketing                        13.3         15.6         14.8
General and administrative                  6.9          9.0          6.8
Total operating expenses                   35.0         40.3         35.3
Operating income (loss)                     1.1         (7.9)        13.8
Other income                               --            3.2         --
Interest, net                              (0.6)         0.2          1.1
Income (loss) before provision (benefit)    0.5         (4.5)        14.9
for taxes
Provision (benefit) for taxes               0.2         (1.6)         4.6
Net income (loss)                           0.3%        (2.9)%       10.3%

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 workforce,  customer base, and
goodwill,  which are being  amortized over five years.  The Company had incurred
approximately  $610,000  of  amortization  expense in fiscal 1997  ($375,000  in
fiscal 1996) related to the acquisition. AWA Limited was issued 1,000 redeemable
preference  shares of QSA at an issue price of $1,125 per share which may be put
by AWA  Limited  back to QSA  pursuant  to the terms of a put option  deed dated
January 12, 1996. In July 1997, the Company  redeemed 426 preference  shares for
approximately  $3.0  million  dollars.  The  Company  will  redeem the final 574
preference shares for approximately $4.0 million (including interest charges) in
January 1998. These redeemable  preference  shares have been categorized as debt
on the balance sheet and  discounted to their  present  value.  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.

Net Revenues

Net  revenues  in fiscal  1997 were $62.7  million,  increasing  by 40% over net
revenues in fiscal 1996.  This compares with a decrease of net revenues of 3% in
fiscal 1996 compared to fiscal 1995. The increase in net revenues  during fiscal
1997 was mainly due to shipments of proprietary  networking and clock management
products  which  began  shipping in fiscal  1997 and  accounted  for over 30% of
fiscal 1997 revenues, and increased unit shipments in logic products,  partially
offset by lower average selling prices. The decrease in net revenues from fiscal
1996 to fiscal  1995 was mainly  due to a  substantial  decline  in the  overall
average selling prices  partially  offset by sales from 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 networking,  clock management
and  interface  logic  devices  are  expected  to  continue  to  account  for  a
significant  majority of revenues in the  foreseeable  future.  To increase  net
revenues,  the  Company  seeks to  increase  unit  sales of  existing  products,
principally by reducing prices in conjunction with cost reduction programs,  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,  19%, 26% and 21% of the Company's net revenues during fiscal
1997,  1996 and 1995,  respectively.  The decrease in percentage of net revenues
through  distribution  in  fiscal  1997  was  mainly  due to a  majority  of the
networking  products being shipped  direct from QSI. Sales by Arrow  Electronics
Inc. accounted for approximately, 12%, 19% and 16% of net revenues during fiscal
1997,  1996 and 1995,  respectively,  and the remainder of domestic  distributor
sales  were  made  primarily  through  Bell   Microproducts  Inc.  ("Bell")  and
Nu-Horizons Electronics Corp. Recognition of sales to these 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.

Export sales,  primarily consisting of sales to countries in Europe and the Far 
East,  constituted 42%, 38% and 29% of net revenues for fiscal 1997, 1996 and 
1995, respectively.

<PAGE>

Gross Margin

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

                                               Years Ended September 30,
                                          1997             1996           1995
                                         (In thousands, except percentage data)
Net revenues                             $62,691          $44,688      $46,189
Cost of revenues                          40,073           30,226       23,524
Gross margin                             $22,618          $14,462      $22,665
Gross margin as a percentage of net        36.1%            32.4%        49.1%
revenues

The Company's cost of 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,  quality
assurance functions performed by the Company, and writedowns of inventory.

Gross margin in fiscal 1997 was 36% of net  revenues,  compared  with 32% of net
revenues in fiscal  1996,  and 49% of net revenues in 1995.  The  increase  from
fiscal  1997 to 1996 in gross  margin  resulted  from  changes in  product  mix,
specifically, the sale of higher margin networking and clock management products
and the Company's cost reduction programs.  Gross margin in fiscal 1997 includes
a $2.5 million inventory  adjustment recorded in the fourth quarter,  mainly due
to a  decision  by  management  to exit  the  FIFO  product  line.  Prior to the
inventory  writedown,  gross  margin was 40% for fiscal  1997.  The decline from
fiscal 1996 to 1995 in gross margin resulted  principally  from the recording of
$2.8 million 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 Company is likely to face potential inventory risks and
writedowns.  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 markets for the Company's  products are subject to severe price  competition
and price  declines.  There can be no assurance that the Company will succeed in
reducing  its product  costs  rapidly  enough to maintain or increase  its gross
margin level.  Due to price  declines,  mainly in the  networking  product line,
gross margin as a percent of net revenues  will decrease in the first quarter of
fiscal  1998  compared  to the  fourth  quarter  of  fiscal  1997,  prior to the
inventory write-off, and the Company will incur a loss for the quarter.

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 1998 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.

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.

<PAGE>

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
1997 were $9.3 million,  or 15% of net revenues,  compared with $7.0 million, or
16% of net revenues in fiscal 1996, and $6.3 million,  or 14% of net revenues in
fiscal  1995.  The  increase  in  spending  for  fiscal  1997 was  mainly due to
increased  spending on new product  development  and process  technology.  These
costs  included  higher  material and testing  charges,  and  increased  payroll
related  expenses.  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 beginning in February  1996. 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.  All the Company's  research and development costs are
expensed as incurred. The Company currently expects to incur higher research and
development expenses in fiscal 1998.

The Company  believes that future 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 net revenues.

Sales and Marketing

Sales and marketing expenditures in fiscal 1997 were $8.3 million, or 13% of net
revenues, compared with $7.0 million, or 16% of net revenues in fiscal 1996, and
$6.8  million,  or 15% of net  revenues  in fiscal  1995.  Sales  and  marketing
expenses in fiscal 1997 increased mainly due to increased sales  commissions due
to higher revenues, increased payroll related expenses and marketing programs to
support the launch of new products.  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 Company expects to incur higher sales and marketing
expenses in fiscal 1998.

<PAGE>
General and Administrative

General and administrative  expenditures in fiscal 1997 were $4.3 million, or 7%
of net revenues,  compared  with $4.0  million,  or 9% of net revenues in fiscal
1996,  and $3.1  million,  or 7% of net  revenues  in fiscal  1995.  General and
administrative  expenditures  in fiscal 1997  remained  flat  compared to fiscal
1996. The percentage decrease reflects management's continued efforts to control
spending.  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 Company expects to incur higher
general and administrative expenses in fiscal 1998.

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  expense for fiscal  1997 was  $398,000  compared to net  interest
income of $77,000 in fiscal 1996. The decrease in net interest income was due to
increased  interest expense associated with an increase in notes payable used to
purchase property and equipment.  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.

Provision (Benefit) for Taxes

The Company's  effective tax rate was 35%, 35% and 31% for fiscal 1997, 1996 and
1995,  respectively.  Significant  items  impacting the 1997  effective tax rate
include state income taxes,  research and development  credits and nondeductible
amortization  of  interest.  The Company  recorded a tax benefit for fiscal 1996
based on available carryback  potential.  The increase in the effective tax rate
in fiscal 1996 was due  primarily  to the  recognition  of  deferred  tax assets
previously subject to valuation allowances during fiscal 1995.

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  $17.3  million to a total of $69.8  million at year end.  Cash,  cash
equivalents,   and  short-term  investments  increased  $5.7  million;  accounts
receivable increased $1.1 million;  property and equipment,  net, increased $4.8
million;  and goodwill and other assets decreased $856,000;  current liabilities
decreased $285,000;  long-term  obligations to a related party increased to $7.2
million; and shareholders equity increased $13.3 million.

<PAGE>

     The increase in cash,  cash  equivalents  and  short-term  investments  was
primarily due to cash raised in two private  placements of common stock totaling
$12.2 million during fiscal 1997,  offset by payments totaling $4.2 million made
to AWAM  under the  purchase  agreement  and  payments  made for notes  payable.
Additionally,  $199,000  was used in operating  activities  and $3.3 million was
used for the purchase of wafer  fabrication  equipment at QSA and other  capital
equipment  purchased during fiscal 1997. Capital  expenditures were $3.3 million
in fiscal 1996. See Note 3 and 4 of Notes to Consolidated Financial Statements.

Accounts  receivable  increased at September 30, 1997 mainly due to a higher net
revenues  generated in fiscal 1997.  Accounts payable  increased by $2.2 million
during  fiscal 1997 because of increases in operating  activities to support the
growth in net revenues.

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  in  December  1996,  and
converted the notes issued for such amount into 439,758  shares of the Company's
common stock.  The Company decided not to sell, and one of the investors  agreed
not to buy $2 million of the notes. In May 1997, the Company completed a private
placement  of 108,000  units,  each  consisting  of ten shares of the  Company's
common  stock and a one-year  warrant to purchase  one  additional  share of the
Company's  common  stock for $8.50.  The units were priced at $85 per unit for a
total of $9.2  million in cash.  The  Company  has used a certain  amount of the
proceeds for payment on the debt incurred in connection  with the acquisition of
certain assets of AWAM, general corporate purposes and working capital.

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. The Company does expect to be out of compliance
with certain loan covenants at its $5.0 million  unsecured line of credit in the
first quarter of fiscal 1998. 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 5% during  fiscal  1997 mainly due to the
growth of the business.  The Company had 206 employees at the end of fiscal 1997
as compared to 197 at the end of the prior fiscal year.

<PAGE>

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.  Periodically,  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.  Inflation  has  not  had  a
significant impact on the Company.

Factors That May Affect Future Results

Cautionary Statement Concerning Forward Looking Statements

     This report contains certain forward-loking  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 Section 21E of
and Rule 9b-6 under the  Securities  Exchange Act of 1934.  Such  forwrd-looking
statements  include,  without  limitations,  statements  regarding the Company's
expectations,  intentions  or future  strategies  and involve  known and unknown
risks,  uncertainties and other factors.  The following 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.  All forward
looking statements included in this document are based on information  available
to the Company on the date hereof,  and the Company  assumes no  obligations  to
update  any  such  forward  looking  statements.  Actual  results  could  differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and in the documents  incorporated by reference
herein.  In evaluating the Company's  business,  propspective  investors  should
carefully  consider  the  following  risk  factors  in  addition  to  the  other
information set forth herein or incorporated herein by reference.

Potential Declines in Operating 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 of 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 pollution regulation or
disposal of environmentally hazardous waste and events limiting production, such
as fires or other damage,  and the inability to keep production at a high level;
(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  semiconductor  industry is intensely  competitive and is  characterized  by
price erosion,  declining gross margins,  rapid  technological  change,  product
obsolescence  and  heightened  international  competition  in many markets.  The
Company's   competitors   include  large   semiconductor   companies  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.  As a
result,  average selling prices "ASPs" in the semiconductor  industry generally,
and for the Company's products in particular,  have decreased significantly over
the life of each  product.  The  Company  expects  that  ASPs  for its  existing
products  will  continue to decline over time and that ASPs for each new product
will decline significantly over the life of the product.  Declines inASPs in the
Company's  products,  if not offset by reductions in the cost of producing those
products or by sales of new products with higher gross  margins,  would decrease
the Company's  overall gross margins,  could cause a negative  adjustment to the
valuation of the Company's inventories and could materially and adversely affect
the Company's  operating  results.  Dependence on QSFCT and QuickSwitch  Product
Lines

     A substantial majority of the Company's net revenues are derived from sales
of interface  logic devices and, in particular,  products in the Company's QSFCT
and  QuickSwitch  logic  family.  The  Company  anticipates  that sales of these
products  will  continue  to  comprise a  significant  portion of the  Company's
revenues for the foreseeable future. The demand for such products may be sharply
reduced by  competition  and by  microprocessors  or other  system  devices that
increasingly  include  interface logic.  Because of the Company's  dependence on
sales of these products,  declines in gross margins for these products resulting
from declines in ASPs or otherwise  could have a material  adverse effect on the
Company's operating results.

<PAGE>

Dependence on Networking Product Line

During  fiscal 1997,  the Company  commenced  shipping  its  advanced  CMOS Fast
Ethernet  transceiver  chips that provide  high  integration  solutions  for the
adapter,  repeater,  switch and card bus markets,  and ATM mux/demux for the ATM
multiplexer  and  switch  markets.  These  products  are in the early  stages of
production  and test  results may vary more than for products in later stages of
production.  There  can  be  no  assurance  that  production  yields  will  meet
management  projections  or that the  performance  of these  products  will meet
actual specifications.  Additionally,  demand for such products may not meet the
Company's expectations.  In addition the demand for such products may decline as
competition  and  availability   increase,   and  more  advanced   products  are
introduced.

     The Company  commenced  shipping  these units to its  customers  with their
approval prior to the completion of qualification during fiscal 1997. Management
has made estimates on future  returns of these  products and provided  necessary
reserves. However, these estimates could change and the actual return rate could
be higher. Should the Company not complete the qualification process on a timely
basis or if the performance of these products do not meet specifications,  there
is no assurance  that the  customer  will not cancel  existing  orders or if the
performance  of these  products  does meet actual  specifications.  In addition,
functionality  and  demand  for such  products  may not meet  the  Company's  or
customers  expectations,  and the  demand and  pricing  for such  products  will
decline as competition and availability increase, and more advanced products are
introduced.

During the early stage of new  product  introductions,  the parts are  generally
marked  as  "engineering   samples"  and  shipped  to  potential  customers  for
evaluation. Based on successful evaluation by the customer, products are shipped
in volume to customers prior to the successful completion of qualification. Upon
successful  completion of  qualification  the engineering  samples  markings are
removed  from the  product.  There  is no  assurance  that  upon  completion  of
successful  qualification,  current and future  customers  will  accept  product
marked as engineering samples. If the Company is unable to sell through all such
marked parts,  there is no guarantee that the Company will not need to writedown
all such inventory on hand or in production to zero or minimal value.

Dependence on New Products

The Company's future success is highly dependent upon the timely  completion and
introduction  of new  products  at  competitive  price/performance  levels.  The
failure  of the  Company  to timely  complete  and  introduce  new  products  at
competitive  price/performance  levels could materially and adversely affect the
Company's  operating  results.  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.

<PAGE>

Risks Associated with Operating Australian Fabrication Facility

In February 1996, the Company  purchased a fully  functional  wafer  fabrication
facility and product design center located in Australia.  The Company receives a
significant  amount of its wafer  requirements for its logic and memory products
from this facility.  Any  disruption of the Company's  wafer fab facility or the
Company's  inability  to keep the  production  of wafers at a high  level due to
technical  factors or lack of customer  demand could have a  materially  adverse
impact on the Company's operations.

The process  technology  for the  fabrication  of the  Company's  wafers at this
facility  is  highly  complex  and  sensitive  to dust and  other  contaminants.
Although the  fabrication  process is highly  controlled,  the equipment may not
perform flawlessly. Minute impurities, difficulties in the production process or
defects  in the masks can cause a  substantial  percentage  of the  wafers to be
rejected or individual die on each wafer to be nonfunctional.  Accordingly,  any
failure  by the  Company  to  achieve  acceptable  product  yields  could have a
material and adverse effect on the Company's operations results.

Raw  materials  essential  to  the  Company's  wafer  fabrication  business  are
generally  available  from  multiple  sources  and  theCompany  has thus far not
experienced  production  problems or delays due to  shortages  in  materials  or
components.  There can be no assurance,  however, that future shortages will not
occur;  any such shortages could have a material adverse effect on the Company's
business, financial condition or results of operations.

Government regulations impose various environmental controls on the storage, use
and disposal of chemicals and gases used in semiconductor  processing.  Although
the Company strives to conform the activities of its manufacturing facilities to
applicable environmental regulations, there can be no assurance that the Company
will not incur  unanticipated  future costs based on  inadvertent  violations of
such regulations or on the  implementation of more stringent  regulations in the
future.

Dependence on fabrication, Assembly and Test Subcontractors

     A substantial number of the wafers for the Company's semiconductor products
are  fabricated  by Taiwan  Semiconductor  Manufacturing  LTD.  ("TSMC"),  and a
limited number of wafers are manufactured by Seiko  Instruments  Inc.  ("Seiko")
and Ricoh  Corporation  "("Ricoh").  The Company's  reliance on its suppliers to
fabricate its wafers at their production facilities in Japan and Taiwan 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 these suppliers, and there can be no assurance that the Company will
not  experience  similar or more severe delays from its suppliers in the future.
Any inability or unwillingness of the Company's fabrication providers 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's reliance on third-party wafer fabrication suppliers also increases
the  length of the  development  cycle  for the  Company's  products,  which may
provide time to market advantages to competitors that have in-house  fabrication
capacity. 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  relies on overseas  subcontractors  for the assembly and testing of
its finished products.  Any significant disruption in adequate supplies from, or
degradation  in the  quality  of  components  or  services  supplied  by,  these
subcontractors,  or any other  circumstance  that would  require  the Company to
quality  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.

Risks of International Sales

The  Company  purchases a  significant  amount of its  semiconductor  wafers and
substantially all of its assembly services from foreign suppliers.  As a result,
the Company's  business is subject to the risks generally  associated with doing
business abroad, such as foreign  governmental  regulations,  reduced protection
for intellectual  property rights,  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.  The Company's purchases of
wafers from Seiko Instruments Inc. are denominated in Japanese yen. Although the
Company has from time to time engaged in hedging activities to mitigate exchange
rate risks,  there can be no assurance  that the Company will not be  materially
adversely affected by a decline in exchange rate.

<PAGE>

Patents and Proprietary Rights

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 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 any such infringing products. In addition,  the
Company could suffer  significant  monetary damages,  which could include treble
damages for any infringement that is determined to be willful.

Dependence on Key Personnel

The  Company's  future  success will depend to a large  extent on the  continued
contributions  of key  employees,  who would be  difficult  to replace,  and 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 have a material adverse effect on the Company's business.  To
manage recent and potential future growth effectively,  the Company will need to
continue to implement  and improve its  operational,  financial  and  management
information systems and to hire, train, motivate and manage its employees. There
can be no assurance that the Company will be able  effectively to achieve growth
or manage any such  growth,  and failure to do so could have a material  adverse
effect on the Company's operating results.

Customer Concentration

A relatively small number of customers have accounted for a significant  portion
of the Company's  net revenue in the past.  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.

Dependence on Manufacturer Representatives and Distributors

The  Company   markets  and   distributes   its   products   primarily   through
manufacturers'  representatives  and  independent  distributors.  The  Company's
distributors  typically offer competing products. The distribution channels have
been  characterized  by rapid  change,  including  consolidations  and financial
difficulties.  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  distributors or to carry the product
lines  of the  Company's  competitors,  could  have  a  material  effect  on the
Company's operating results.

Year 2000 Compliance

Many currently  installed  computer  systems and software  products are coded to
accept  only two digit  entries in the date code  field.  Beginning  in the year
2000,  these  date code  fields  will  need to  accept  four  digit  entries  to
distinguish  21st  century  dates  from 20th  century  dates.  As a  result,  in
approximately two years, computer systems and/or software used by many companies
may  need  to  be  upgraded  to  comply  with  such  "Year  2000"  requirements.
Significant  uncertainty exists concerning the potential effects associated with
such  compliance.  Any year 2000 compliance  problem of either the Company,  its
suppliers,  its service  providers or its customers could result in a materially
adverse  effect on the  Company's  business,  financial  condition and operating
results.

Manufacturing Systems

The Company  currently has separate  manufacturing and financial data collection
systems.  These systems,  which are manufactured by different  vendors,  are not
fully   integrated   together   and  require   significant   amounts  of  manual
reconciliations and reporting.  The Company is currently  reviewing  alternative
solutions,  reporting  and  controls in order to minimize the chance of error in
the financial statements. There is no guarantee that the Company will be able to
develop or implement an  acceptable  solution or that an error in the current or
future  financial  statements  may not occur or not be  recognized  timely.  Any
failure  to develop  or  implement  an  acceptable  solution  or an error in the
current or future financial statements could have a materially adverse effect on
the Company's operating results.

Cyclical Nature of Semiconductor Industry

The  semiconductor  industry  has  historically  been  cyclical  and  subject to
significant  economic  downturns at various times and has been  characterized by
diminished  product demand,  accelerated  erosion of ASPs and  overcapacity.  In
addition,  the end-markets for systems that  incorporate the Company's  products
are   characterized  by  rapidly  changing   technology  and  evolving  industry
standards. The Company may experience substantial period-to-period  fluctuations
in future operating results due to general  semiconductor  industry  conditions,
overall economic conditions or other factors.

Volatility of Company's 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.
The Company's stock price is also subject to potentially large volatility due to
the very low  trading  volumes  of the  Company's  stock on most days  since the
initial public offering of the Company's stock on November 17,1994. In addition,
this  low  trading   volume  may  continue  and  could  affect  the  ability  of
shareholders to sell their shares.

<PAGE>

Item 8.           Financial Statements and Supplementary Data

Quality Semiconductor, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

                                                            September 30,
                                                     1997                 1996
Assets
Current Assets:
Cash and cash equivalents                           $9,403               $4,930
Short-term investments                               3,656                2,403
Accounts receivable, net of allowances of
$856 and $173 at September 30, 1997 and 1996,
respectively                                         6,939                5,940
Accounts receivable from related parties               773                  689
Other receivables                                    1,036                  719
Inventories                                         17,689               13,984
Prepaid expenses                                     1,963                  532
Deferred tax assets                                  3,364                2,239
Total current assets                                44,823               31,436
Property and equipment, net                         22,859               18,079
Goodwill and other assets                            2,150                3,006
Total assets                                       $69,832              $52,521

Liabilities and Shareholders' Equity Current liabilities:

      Accounts payable                              $5,489               $2,749
      Accounts payable to related parties              222                  747
      Accrued compensation                           1,925                1,212
      Other accrued liabilities                        733                1,039
      Income taxes payable                              --                1,707
      Deferred rent                                     18                  201
      Deferred income on shipments to distributors   2,995                2,018
      Long-term obligations to related party due     1,684                  667
        within one year
      Redeemable preference shares of subsidiary     3,982                6,993
      Total current liabilities                     17,048               17,333
Long-term obligations to related party               7,202                2,840
Deferred tax liabilities                             1,945                2,003

<PAGE>

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--7,393,076 and 5,536,168              7             5
 Additional paid in capital                              41,600        28,348
 Retained earnings                                        2,221         2,412
 Deferred compensation                                     (191)         (420)
 Total shareholders' equity                              43,637        30,345
 Total liabilities and shareholders' equity             $69,832       $52,521

See accompanying notes to consolidated financial statements.

<PAGE>

Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

                                                 Years Ended September 30,
                                                1997         1996          1995
 

Net revenues                                $62,691       $44,688       $46,189
Cost of revenues                             40,073        30,226        23,524
          Gross margin                       22,618        14,462        22,665
Operating expenses:
      Research and development                9,281         6,982         6,326
      Sales and marketing                     8,323         6,986         6,808
      General and administrative              4,294         4,024         3,145
          Total operating expenses           21,898        17,992        16,279
Operating income (loss)                         720         (3,530)       6,386
Other income                                   --           1,438          --
Interest income                                 724           510           678
Interest expense                             (1,122)         (433)         (158)
Income (loss) before provision (benefit)        322        (2,015)        6,906
   for taxes
Provision (benefit) for taxes                   112          (705)        2,140
Net income (loss)                              $210        $(1,310)      $4,766
Net income (loss) per share                    $0.03        $(0.24)     $  0.84
Shares used in computing per share amounts     6,989         5,524        5,649

See accompanying notes to consolidated financial statements.

<PAGE>

Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                       Years Ended September 30,


<S>                                                                    <C>         <C>           <C> 
                                                                       1997        1996          1995
Operating Activities
Net income (loss)                                                        $210    $(1,310)         $4,766
Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
       Depreciation and amortization                                    5,372       3,977          2,305
       Deferred income taxes, net                                     (1,183)     (1,021)          (676)
       Deferred compensation amortization                                 229         228            228
       Changes in operating assets and liabilities:
          Accounts and related parties receivable, net                (1,083)       (778)        (2,096)
          Other receivables                                             (317)         277          (939)
          Inventories                                                 (3,705)       (510)        (3,973)
          Prepaid expenses                                            (1,431)        (66)            345
          Accounts payable including related parties                    2,215     (1,407)          1,008
          Income taxes payable                                        (1,707)       (282)          1,006
          Accrued compensation                                            713       (536)           (71)
          Other accrued liabilities and deferred rent                   (489)         806          (138)
          Deferred income on shipments to distributors                    977         120             39
          Total adjustments                                             (409)         808        (2,962)
Net cash provided by (used in) operating activities                     (199)       (502)          1,804
Investing Activities
Purchase of certain assets of AWAM                                         --     (5,005)             --
Capital expenditures, net                                             (3,340)     (3,296)        (2,161)
Purchase of short-term investments                                    (5,686)     (5,935)      (109,744)
Sales and maturities of short-term investments                          4,433      13,012        100,264
Deposits and other assets                                                 246       (126)             50
Net cash used in investing activities                                 (4,347)     (1,350)       (11,591)
Financing Activities
Principal payments on long-term debt and
    preference shares                                                 (4,235)       (472)        (1,148)
Net proceeds from promissory notes                                      2,850          --             --
Net proceeds from issuance of common stock                             10,633         635         14,328
Repurchase of common stock                                              (229)       (819)             --
Principal payments on capital lease obligations                            --       (199)          (276)
Proceeds from reduction in notes receivable
    from shareholders                                                      --          --             11
Net cash provided by (used in) financing activities                     9,019       (855)         12,915
Net increase (decrease) in cash and cash equivalents                    4,473     (2,707)          3,128
Cash and cash equivalents at beginning of period                        4,930       7,637          4,509
Cash and cash equivalents at end of period                             $9,403      $4,930         $7,637
See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>

Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
<S>                                                                     <C>         <C>          <C>
                                                                           Years Ended September 30,
                                                                        1997        1996          1995

Supplemental  Disclosures of Cash Flow  Information Cash paid during this period
for:
      Interest                                                         $1,091        $107           $195
      Taxes                                                            $2,234        $724         $1,442
Supplemental Disclosures of
Noncash Investing and Financing Activities
Redeemable preference shares of a subsidiary issued as
partial consideration for certain assets of AWAM                           $--     $6,300             $--
Conversion of promissory notes into common stock                       $3,000          $--            $--
Acquisition of property and equipment through
issuance of long term debt to related party                            $6,603      $3,668             $--

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


<PAGE>



Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>

                                 Convertible
                                  Preferred    Common Stock                           Notes  Total
                                    Stock                    AdditionRetained         ReceivaShareholders'
                                                              Paid    Earnings Deferredfrom

<S>                              <C>      <C>  <C>    <C>    <C>     <C>      <C>     <C>    <C> 
                                                               in
                                 Shares   Amt  Shares  Amt   Capital (Deficit)CompensaSharehoEquity
Balance at September 30, 1994    2,176    $2   1,315   $2    $14,059 $(1,288) $(876)  $(11)  $11,888
Conversion of preferred stock  (2,176)    (2)  2,176   2    --      --       --      --     --
to common stock                
Sale of common stock for cash   --       --    1,984   1     14,327 --       --      --      14,328
Repayment of notes receivable   --       --   --      --    --      --       --       11     11
Amortization of                 --       --   --      --    --      --        228    --      228
deferredcompensation
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          --       --   --      --     81     --       --      --      81
optionexercises
Repurchase of common stock      --       --    (135)   (1)   (818)  --       --      --      (819)
Insurance of warrants           --       --   --      --     65     --       --      --      65
Amortization of deferred        --       --   --      --    --      --        228    --      228
compensation
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
Sale of common stock,           --       --    1,890   2     13,296 --       --      --      13,298
conversion  of promissory
notes, and warrants for cash
Tax benefit from stock option   --       --   --      --     185    --       --      --      185
exercises
Repurchase of common stock      --       --    (33)   --     (229)  --       --      --      (229)
Amortization of deferred        --       --   --      --    --      --        229    --      229
compensation
Translation adjustment          --       --   --      --    --       (401)   --      --      (401)
Net income                      --       --   --      --    --       210     --      --      210
Balance at September 30, 1997   --        $--  7,393   $7    $41,600 $2,221   $(191)  $--    $43,637

</TABLE>

<PAGE>

Organization and Summary of Significant Accounting Policies

     Quality  Semiconductor,  Inc. (the Company), a California  corporation,  is
engaged in  manufacturing,  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 1997, 1996, and 1995 ended on September 28, 29, and 24, 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.

     Certain amounts  presented in the financial  statements of prior years have
been reclassified to conform to the current presentation for 1997.

Impact of Recently Issued Accounting Standards

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting Standard (SFAS) No. 128, "Earnings per Share"
(EPS), which simplifies existing  computational  guidelines,  revises disclosure
requirements,  and  increases  the  comparability  of  earnings  per share on an
international basis. Management has not yet evaluated the effects of this change
in computational  guidelines on the Company's EPS. SFAS No. 128 is effective for
periods  ending after  December 15, 1997 and requires  restatement  of all prior
period  EPS data  presented.  The  Company  will adopt SFAS No. 128 in its first
quarter of fiscal year 1998.

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income," which establishes  standards for reporting and display of comprehensive
income and its components (revenue,  expenses,  gains, and losses) in a full set
of general-purpose financial statements.  The Company will adopt SFAS No. 130 in
its fiscal year 1999.  In June 1997,  the FASB issued SFAS No. 131,  "Disclosure
about Segments of an Enterprise and Related  Information," which changes the way
public  companies report  information  about operating  segments.  SFAS No. 131,
which is based on the  management  approach  to segment  reporting,  establishes
requirements  to report  selected  segment  information  quarterly and to report
entity-wide  disclosures about products and services,  major customers,  and the
material  countries  in which the  entity  holds  assets  and  reports  revenue.
Management  has not yet evaluated the effects of this change on its reporting of
segment  information.  The  Company  will adopt SFAS No. 131 in its fiscal  year
1999.

     The preparation of the consolidated financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ materially from those 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.  Debt securities are classified as  available-for-sale  and 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, 1997 and 1996 are summarized as follows (in thousands):

                                                       September 30,
                                            1997                           1996
Cash and cash equivalents
    Cash                                  $2,243                         $1,445
    Commercial paper                       2,400                          2,437
    Municipal bonds                        4,760                          1,048
Cash and cash equivalents                 $9,403                         $4,930
Short-term investments
    Municipal bonds                       $3,656                         $2,403
Short-term investments                    $3,656                         $2,403

     Both gross  unrealized  gains and losses as of September  30, 1997 and 1996
and  realized  gains  and  losses  on sales  of  securities  for the year  ended
September  30, 1997 and 1996 were  immaterial.  At September  30, 1997 and 1996,
fair market value approximates amortized cost.

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 domestic  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.

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.  The  Company  has  adopted  Statement  of
Financial Accounting Standards No. 121 (SAS 121), "Accounting for the impairment
of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed  Of." SFAS 121
requires  impairment  losses  to  be  recorded  on  long-lived  assets  used  in
operations,  such as property and equipment,  when  indicators of impairment are
present and the  undiscounted  cash flows  estimated  to be  generated  by those
assets are less than the  carrying  amount of the assets.  The  adoption  had no
material effect on the Company's financial statements.

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.

     The Company commenced shipping certain networking products to its customers
with their approval prior to the completion of qualification during fiscal 1997.
Management  has made  estimates on future returns of these products and provided
necessary reserves.  However, these estimates could change and the actual return
rate could be higher.  During the early stage of new product  intoductions,  the
parts are  generally  marked as  engineering  samples"  and shipped to potential
customers  for  evaluation.  Based on  successful  evaluation  by the  customer,
products  MAY BE  shipped  customers  prior  to  the  successful  completion  of
qualification.  Upon  successful  completion of  qualification  the  engineering
samples  markings are removed from the product.  There is no assurance that upon
completion of successful qualification, current and future customers will accept
product marked as engineering  samples. If the Company is unable to sell through
all such marked parts,  there is no guarantee  that the Company will not need to
writedown all such inventory on hand or in production to zero or minimal value.

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 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-credit-quality  financial  institutions  and
limits the 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 and are accounted for as
hedges of firm wafer purchase commitments.  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, 1997, there were no contracts  oustanding.
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  $577,000,  $511,000, and $481,000 in fiscal 1997, 1996, and 1995,
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) and 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,
                                                        1997                1996
                                                             (In thousands)
     Inventories:
          Raw materials                                $5,421             $7,141
          Work-in-process                               3,770              2,578
          Finished goods                                8,498              4,265
                                                      $17,689            $13,984
     Property and Equipment:
          Equipment and software                      $36,631            $27,046
          Furniture and fixtures                          795                729
          Leasehold improvement                         1,608              1,717
                                                        9,034             29,492
     Less accumulated depreciation and amortization    16,175             11,413
                                                      $22,859            $18,079

3.    Purchase of Business

     On  February  16,  1996  the  Company   acquired   certain  assets  of  AWA
MicroEectronics  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 an independent  valuation,  consisted of $8.8 million
of net tangible assets and $3.0 million of intangible  assets which were related
to assembled workforce,  customer base, and goodwill,  which are being amortized
over five years. The Company had incurred approximately $610,000 of amortization
expense in fiscal 1997  ($375,000 in fiscal 1996).  AWA Limited was issued 1,000
redeemable  preference shares of QSA at an issue price of $1,125 per share which
may be put by AWA Limited back to QSA pursuant to the terms of a put option deed
dated January 12, 1996. In July 1997, the Company redeemed 426 preference shares
for approximately $3.0 million dollars.  These redeemable preference shares have
been  categorized  as debt on the balance  sheet and  discounted  to the present
value. The Company will redeem the final 574 preference shares for approximately
$4.0 million  (including  interest  charges) in January  1998.  QSA's results of
operations have been included in the  consolidated  results of operations  since
the date of acquisition.

     In November 1996, the Company  negotiated a private placement of unsecured,
convertible  promissory  notes in the amount of $5.0 million of QSA. The Company
received $3.0 million of the total financing in December 1996, and converted the
notes  issued for such  amount  into  439,758  shares of QSI common  stock.  The
Company  decided not to sell,  and one of the  investors  agreed not to buy $2.0
million of the notes.

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. In March 1997, the Company agred to enter into a second
finance agreement with Kanematsu USA Inc. to finance an additional $2.5 million.
These  agreements  expire March 31, 2001 and the  borrowings  bear interest at a
rate of 8.5% to 9.25%.  There were  borrowings  of  approximately  $10.3 million
against these agreements, of which approximately $8.9 million was outstanding at
September 30, 1997.

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

                                                      September 30, 1997
                                                        (In thousands)

             1998                                          $2,910
             1999                                           2,976
             2000                                           2,976
             2001                                           1,488



<PAGE>



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, 1997
                                                             (In thousands)

             1998                                                $1,146
             1999                                                 1,161
             2000                                                 1,206
             2001                                                   779
             2002                                                   438
             Thereafter                                           3,508

     Total  rent  expense  for fiscal  1997,  1996,  and 1995 was  approximately
$1,343,000, $952,000, and $756,000, respectively.

     In June 1997 the Company amended its $5.0 million  unsecured line of credit
which  expires  June 30,  1998.  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 (8.50% at September
30, 1997) plus 0.25% or the three month Libo rate (5.75% at September  30, 1997)
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.  As of September
30, 1997, the Company met all of the covenants under the loan  agreement.  There
were no borrowings  outstanding  under this line as of September  30, 1997.  The
Company expects to be out of compliance  with certain loan covenants  during the
first quarter of fiscal 1998.

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  matters  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. In May 1997,  the Company issued 108,000  warrants with
an exercise price of $8.50 in conjunction with the completed  private  placement
of 1,080,000 shares of common stock.  The warrants expire in May 1998.  Warrants
to  purchase  approximately  13,000  shares of  common  stock at $9.00 per share
expired 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.

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


                                                             Options Outstanding
                                           Available      Number of        Price Per         Weighted
                                           for Grant       Shares             Share           Average
                                                                                             Exercise
                                                                                               Price

<S>                                         <C>             <C>           <C>                 <C>   

Balance at September 30, 1994                 296            750           $0.15-$2.97         $2.08
        Authorized                            200            --                --               --
        Granted                              (471)           471          $2.70-$15.00        $10.20
        Exercised                             --            (213)          $0.45-$7.20         $1.59
        Canceled                              80            (80)           $0.75-$7.20         $3.08
Balance at September 30, 1995                 105            928          $0.75-$15.00         $6.23
        Authorized                            410            --                --
        Granted                             (1,347)         1,347          $4.25-$8.00         $5.25
        Exercised                             --            (116)          $0.75-$8.00         $2.09
        Canceled                              920           (920)         $0.75-$15.00         $8.59
Balance at September 30, 1996                 88            1,239          $1.20-$7.92         $3.79
        Authorized                            533            --                --               --
        Granted                              (572)           572          $7.00-$14.00         $8.36
        Exercised                                           (312)          $0.75-$9.00         $3.39
        Canceled                              271           (271)          $1.20-$8.25         $4.94
Balance at September 30, 1997                 320           1,228         $1.20-$14.00         $5.79

Outstanding  and exercisable  options  presented by price range at September 30,
1997 are as follows:
</TABLE>
<TABLE>
<CAPTION>

                            Options Outstanding                            Options Exercisable
                           Number           Weighted                           Number
                         of Options         Average          Weighted        of Options      Weighted
Range of                 Outstanding        Remaining         Average        Exercisable      Average
Exercise Prices          at 9/30/97     Contractual Life  Exercise Price     at 9/30/97   Exercise Price

<S>                       <C>                 <C>              <C>            <C>              <C>    
    $1.20 - $1.80           4,394             2.07             $1.34           4,394           $1.34
    $2.70 - $2.70          133,839            1.39             $2.70          109,700          $2.70
    $2.97 - $2.97          39,999             0.89             $2.97          39,999           $2.97
    $4.25 - $4.25          528,741            8.32             $4.25          151,424          $4.25
    $7.00 - $8.00          215,796            8.91             $7.68          17,990           $7.63
    $8.25 - $8.25          275,321            9.55             $8.25          26,990           $8.25
    $8.38 - $10.63         47,500             7.72             $8.94          10,000           $9.0
    $13.25 - $13.25        10,000             9.84            $13.25             0             $0.00
    $13.88 - $13.88        15,000             9.78            $13.88             0             $0.00
    $14.00 - $14.00        10,000             9.78            $14.00             0             $0.00
    $1.20 - $14.00        1,280,590           7.73             $5.90          360,497          $4.20
</TABLE>

     Options  to  purchase   approximately   360,000  and  321,000  shares  were
exercisable at September 30, 1997 and 1996, 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 52,762 and 79,770 shares issued under the 1993 Purchase
Plan in 1997 and 1996,  respectively and 24,103 remained  available for issuance
as of September  30, 1997.  The Company has granted  57,500  options at exercise
prices  between  $8.00 to $9.00 under the  Directors'  Plan,  5,000 options were
exercised, and 10,000 cancelled as of September 30, 1997.

     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.  During  fiscal 1997,  the Company
repurchased  an  additional  32,500  shares at an  average  price of  $7.06.  In
December  1997,  the Company  repurchased  30,000  shares at an average price of
$5.19. 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 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,
                                                     1997                 1996

     1989 and 1995 Stock Option Plans               1,548                1,327
     1993 Purchase Plan and Directors' Plan           119                  177
     Warrants                                         158                   63
     Total                                          1,825                1,567

         In September  1997, the Company  adopted a shareholder  rights plan and
declared a dividend  distribution  of one common stock  purchase  right for each
outstanding share of common stock. The rights become  exercisable based upon the
occurrence of certain  conditions  including  acquisitions of the Company stock,
tender or exchange offers and certain business  combination  transactions of the
Company.  In the event one of the  conditions is triggered,  each right entitles
the  registered  holder to  purchase  a number of shares of common  stock of the
Company  or,  under  limited  circumstances,  of the  acquirere.  The rights are
redeemable at the Company's  option,  under  certain  conditions,  for $0.01 per
right and expire September 17, 2007.



<PAGE>



Accounting for Stock Based Compensation

     The Company  applies APB  Opinion  No. 25 and  related  interpretations  in
accounting  for stock based awards to employees and directors.  If  compensation
cost for the  Company's  stock-based  compensation  plans  had  been  determined
consistent with Statement of Financial  Accounting Standards No. 123 (SFAS 123),
the  Company's net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicted below:

                                                         September 30,
                                                   1997                  1996
                                          (In thousands, except per share data)
     Net income (loss)
     As reported                                   $210                $(1,310)
     Pro forma                                    $(764)               $(2,088)

     Net income (loss) per share
     As reported                                   $0.03                $(0.24)
     Pro forma                                    $(0.10)               $(0.38)

     Because  the  method  of  accounting  prescribed  by SFAS  123 has not been
applied  to  options  granted  prior to July 1, 1995,  the  resulting  pro forma
compensation  cost may not be  representative  of that to be  expected in future
years.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The Black-Scholes option valuation model
was developed for use in estimating  the fair value of traded options which have
no  vesting   restrictions  and  are  fully  transferable.   In  addition,   the
Black-Scholes  model  requires  the  input  of  highly  subjective   assumptions
including the expected stock price volatility. Because the Company's stock-based
awards to employees have characteristics  significantly  different from those of
traded  options,  and because  changes in the subjective  input  assumptions can
materially affect the fair value estimate,  in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards to employees. The following weighted-average  assumptions
for grants during the year ended September 30, 1997 and 1996: risk-free interest
rates of 6.29% and 6.07% for 1997 and 1996, respectively; a dividend yield of 0%
for both years; a  weighted-average  expected life of 3.0 and 2.9 years for 1997
and 1996; and a volatility  factor of the expected market price of the Company's
common stock of .69 for both years.  The weighted  average grant date fair value
of options granted during 1997 and 1996 was $5.91 and $3.97, respectively.

     Compensation  cost  is  estimated  for the  fair  value  of the  employees'
purchase rights using the Black-Sholes model with the following  assumptions for
these rights granted in 1997 and 1996: a dividend yield of 0% for both years; an
expected  life of 6  months  and 4.5  months  for  1997 and  1996;  an  expected
volatility  of .69 for both years;  and a risk-free  interest  rate of 6.29% and
6.07% for 1997 and 1996. The weighted  average fair market value of the purchase
rights granted in 1997 and 1996 was $4.20 and $3.06, respectively.



<PAGE>



7. Provision (Benefit) for Taxes

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

                                                        September 30,
                                           1997             1996           1995
                                                       (In thousands)
      Federal
              Current                     $956             $282         $2,352
              Deferred                    (689)            (700)         (522)
                                           267             (418)         1,830
      State
              Current                       --              (122)          464
              Deferred                    (155)            (112)         (154)
                                          (155)            (234)          310
      Foreign
              Current                      339              267           --
              Deferred                    (339)            (320)          --
                                            --              (53)            --
      Total                               $112            $(705)        $2,140


     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, 
                                                            1997 1996 1995
                                                            (In  thousands)
 
Income taxcomputed at the federal statutory  rate          $112 $(705)  $2,417
State taxes (net offederal effect)                         (101) (152)     201 
Research and  development  credits                         (278)  (53)      --
Goodwill  amortization                                      220    101      -- 
Non-deductible  interest                                    184    145      -- 
Tax exemptinterest                                          (70) (140)      --  
Beefit of operating loss carry forward                       --    --    (641) 
Other individually immaterial items                           45    99     163 
                                                            $112 $(705) $2,140

     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, 1997 and
1996 are as follows:

<PAGE>


                                                            September 30,
                                                        1997             1996
                                                            (In thousands)
Deferred tax assets:

             Research and Development                 $  184             $ --
             Inventory reserve                         1,673              962
             Distributor reserve                       1,121              798
             Other individually immaterial items         386               479
     Total deferred tax assets                         3,364             2,239
     Valuation allowance                                  --                --
     Net deferred tax assets                          $3,364            $2,239
     Deferred tax liabilities:
             Fixed and intangible assets with        $(1,563)          $(1,902)
               no tax basis
             Depreciation                               (382)             (101)
     Total deferred tax liabilities                  $(1,945)          $(2,003)


     As of September 30, 1997,  the Company had a state tax credit carry forward
of  approximately  $184,000,  which will expire in 2002,  if not  utilized.  The
realization of the Company's net deferred tax assets,  which relate primarily to
temporary  differences,  is dependent on generating  sufficient  taxable  income
during the periods in which the temporary  differences  are expected to reverse.
Although realization is not assured,  management believes it is more likely than
not that the  deferred  tax  assets  will be  realized.  The  amount  of the net
deferred tax assets considered realizable, however, could be reduced in the near
term if future taxable income during the reversal period are reduced. Management
intends to evaluate the realizability of the net deferred tax asset each quarter
to assess the need for a valuation allowance.

     The components of the Company's  income (loss) before  provision  (benefit)
for taxes are as follows:
                                                        September 30,
                                                   1997              1996
                                                       (In thousands)

     Domestic                                    $ 1,480          $(1,453)
     Foreign                                      (1,158)            (562)

     Total                                       $  (322)          $(2,015)

8.    Related Party Transactions

     The Company purchased approximately $1,400,000, $6,800,000, and $10,372,000
of raw products manufactured at shareholders' factories in fiscal 1997, 1996 and
1995, 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  $56,000,
$278,000, and $469,000 in fiscal 1997, 1996 and 1995, respectively.  The Company
has a payable  to the  shareholder  of  approximately  $220,000,  $220,000,  and
$2,011,000 at September 30, 1997, 1996 and 1995,  respectively,  for commissions
and inventory purchases. The Company also had product shipments of approximately
$10,520,000,  $4,898,000 and $3,377,000 to another subsidiary of the shareholder
during the years ended September 30, 1997, 1996 and 1995, respectively.

     The Company  purchased photo masks amounting to  approximately  $257,000 in
fiscal 1995 from a shareholder.

     During fiscal 1996 and 1995, the Company  purchased  approximately  $51,000
and  $82,000,  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,
                                         1997             1996             1995
                                                    (In thousands)

     United States                    $35,107          $25,627          $32,794
     Australia                          1,505            1,883             --
                                       36,612           27,510           32,794
     Export:
           Far East                    21,064           15,073            9,700
           Europe                       5,015            2,105            3,695
           Total                      $62,691          $44,688          $46,189

<PAGE>

     The  following  table  summarizes  the  Company's  operations  in different
geographic areas for 1997, 1996, and 1995:

                                               Years Ended September 30,
                                         1997             1996            1995
                                                    (In thousands)
     Sales to unaffiliated customers
           United States              $59,271          $40,814          $46,189
           Australia                    3,420            3,874             --
           Total                      $62,691          $44,688          $46,189

     Operating income (loss)
         United States                 $2,851          $(1,813)          $6,386
           Australia                   (2,131)          (1,717)            --
           Total                         $720           $(3,530)          $6,386

     Identifiable Assests
           United States              $47,249          $35,279          $42,779
           Australia                   22,583           17,242             --
           Total                      $69,832          $52,521          $42,779

     In fiscal  year  1997,  one  customer  accounted  for 17% of net  revenues.
Additionally,  one  customer  accounted  for 12%, 19% and 16% of net revenues in
fiscal 1997,  1996 and 1995,  respectively.  In fiscal year 1996 two  additional
customers accounted for 11% and 10% of total product revenues.

<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,  1997  and  1996,  and  the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
each of the three years in the period ended  September 30, 1997. Our audits also
included the  financial  statement  schedule  listed in the Index at Item 14(a).
These financial  statements and schedule are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audits.

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

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



                                                /s/  Ernst & Young LLP


San Jose, California
October 22, 1997


<PAGE>



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

         Not Applicable

                                    PART III

Item 10. Directors and Executive Officers 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 28, 1997.

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 28, 1997.

Item 13. Certain Relationships and Related Transactions

         The information  required for this item is incorporated by reference to
the 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 28, 1997.


<PAGE>



                                     PART IV

Item 14.

(a)      1.       Financial Statements

                  The financial  statements required by Item 14 (a) are filed as
part of this annual report.

         2.        Financial Statement Schedule

                  Schedule II - Validation and Qualifying Accounts

                  Schedules  not filed have been  omitted  because  they are not
                  applicable, are not required or the information required to be
                  set forth therein is included in the  financial  statements or
                  notes thereto.

         3.       Exhibits

                  The exhibits listed in the accompanying  index to exhibits are
                  filed or  incorporated  by  reference  as part of this  annual
                  report.


<PAGE>



                                INDEX TO EXHIBITS

Exhibit      Exhibit Document Description
Number

2.1          Asset Purchase Agreement dated January 2, 1996 between
             Quality Semiconductor Australia Pty. Ltd. And AWA
             Microelectronics Pty. Ltd. (incorporated by reference to Exhibit
             2.1 of the Company's Form 8-K filed on March 4, 1996)

3.1          Amended and Restated Articles of Incorporation of the Company
             (incorporated by reference to Exhibit 3.1 of the Company's
             Registrant's Registration Statement on Form S-1 (File No. 33-
             72884), which became effective on November 16, 1994

3.2          Bylaws of the Company, as amended.

4.1          Subscription Agreement dated January 12, 1996 between AWA
             Limited and Quality Semiconductor Australia Pty. Ltd
             (incorporated by reference to Exhibit 4.1 of the Company's Form
             8-K filed on March 4, 1996)

4.2          Put Option dated January 12, 1996 between Quality
             Semiconductor, Inc. and AWA Limited (incorporated by
             reference to Exhibit 4.2 of the Company's Form 8-K filed on
             March 4, 1996)

4.3          Common Stock Purchase Warrant dated February 16, 1996 issued
             by Quality Semiconductor, Inc. to AWA Limited (incorporated by
             reference to Exhibit 4.3 of the Company's Form 8-K filed on
             March 4, 1996)

4.4          Form of QSA Convertible/redeemable Note Issuance Agreement
             dated November 21, 1996, between Quality Semiconductor
             Australia, Pty. Limited, Quality Semiconductor, Inc. and
             Technology Associates (Note No. 1) (incorporated by reference to
             Exhibit 4.1 of the Company's Form 8-K filed on December 11, 1996)

4.5          Form of QSA Convertible/redeemable Note Issuance Agreement,
             dated November 21, 1996, between Quality Semiconductor
             Australia Pty. Limited, Quality Semiconductor, Inc. and Win Win
             Venture Capital Corporation (Note No. 3) (incorporated by
             reference to Exhibit 4.2 of the Company's Form 8-K filed on
             December 11, 1996)


<PAGE>



Exhibit                                                          
Number       Exhibit Document Description                         

4.6          Form of QSA Convertible/redeemable Note Issuance Agreement,
             dated November 21, 1996, between Quality Semiconductor
             Australia, Pty. Limited, Quality Semiconductor, Inc. and Win Win
             Venture Capital Corporation (Note No.4) (incorporated by
             reference to Exhibit 4.3 of the Company's Form 8-K filed on
             December 11, 1996)

4.7          Form of QSA Convertible/redeemable Note Issuance Agreement,
             dated November 21, 1996, between Quality Semiconductor
             Australia, Pty. Limited, Quality Semiconductor, Inc. and Win Win
             Venture Capital Corporation (Note No. 5) (incorporated by reference
             to Exhibit 4.4 of the Company's Form 8-K filed on
             December 11, 1996)

4.8         Form of Unsecured Convertible Promissory Note of Quality
            Semiconductor Australia, Pty. Limited (incorporated by reference
            to Exhibit 4.5 of the Company's Form 8-K filed on December 11, 1996)

4.9         Unit Purchase Agreement (including Warrant), dated May 22, 1997
            between Quality Semiconductor, Inc. and the Purchasers (incorporated
            by reference to Exhibit 4.1(1) of S-3 filed on June 27, 1997)

4.13         Preferred  Shares  Rights  Agreement,  dated  August 29, 1997,
             between  Quality  Semiconductor,  Inc.  and  BankBoston  N.A.,
             including   the   Certificate   of   Designation   of  Rights,
             Preferences and Privileges of Series  Participating  Preferred
             Stock,  the Form of  Rights  Certificate  and the  Summary  of
             Rights attached  thereto as Exhibit A, B, and C,  respectively
             (incorporated  by  reference  to Exhibit 4.1 of the  Company's
             Form 8-K filed on September 16, 1997)

10.1         Form of Indemnification Agreement for directors and officers
             (incorporated by reference to Exhibit 10.1 of the Company's
             Registration Statement on Form S-1 (File No. 33-72884), which
             became effective on November 16, 1994)

10.2         Amended  and  Restated  1989  Stock  Option  Plan and forms of
             agreements  thereunder.  (Incorporated by reference to Exhibit
             10.2 of the Company's Registration Statement on Form S-1 (File
             No. 33-72884), which became effective on November 16, 1994).

10.3         1993 Employee Stock Option Plan and forms of agreements
             thereunder (incorporated by reference to Exhibit 10.3 of the
             Company's Registration Statement on Form S-1 (File No. 33-
             72884), which became effective November 16, 1994)


Exhibit                                                                    
Number       Exhibit Document Description

10.4         1993 Directors' Stock Option Plan and forms of subscription
             agreement (incorporated by reference to Exhibit 10.4 of the
             Company's Registration Statement on Form S-1 (File No. 33-
             72884), which became effective on November 16, 1994)

10.5         Amended and Restated 1995 Stock Option Plan and form of
             agreement thereunder (incorporated by reference to Exhibit 4.3
             of the Company's Form S-8 filed April 25, 1997)

10.6         Technology/Product Development & Licensee Agreement
             between the Company and Seiko Instruments, Inc., dated as of
             October 17, 1988. (incorporated by reference to Exhibit 10.13
             of the Company's Registration Statement on Form S-1 (File
             No. 33-72884), which became effective on November 16, 1994)

10.7         Technology/Product Development & License Agreement between
             the Company and Yamaha Corporation, dated as of September
             23, 1989.  (incorporated by reference to Exhibit 10.14 of the
             Company's Registration Statement on Form S-1 (File No. 33-72884),
             which became effective on November 16, 1994)

10.8         Distribution  Agreement  between  the  Company  and  Kanematsu
             Semiconductor  Corporation,  dated  as  of  November  7,  1991
             (incorporated  by reference to Exhibit  10.15 of the Company's
             registration Statement on Form S-1 (File No. 33-72884),  which
             became effective on November 16, 1994)

10.9         Sales   Agreement    between   the   Company   and   Kanematsu
             Semiconductor   Corporation,   dated  as  of  June  1,   1990,
             (incorporated  by reference to Exhibit  10.16 of the Company's
             Registration Statement on Form S-1 (File No. 33-72884),  which
             became effective on November 16, 1994)

10.10        Lease  Agreement  dated  December 12, 1990 between the Company
             and the Prudential Insurance Company of America  (incorporated
             by reference to Exhibit  10.19 of the  Company's  Registration
             Statement  on Form  S-1  (File  No.  33-72884),  which  became
             effective on November 16, 1994)

10.11        Master Lease Agreement dated November 1, 1993 between the
             Company and Comdisco Inc., as amended.  (incorporated by
             reference to Exhibit 10.20 of the Company's Registration
             Statement on Form S-1 (File No. 33-72884), which became
             effective on November 16, 1994)


Exhibit                                        
Number       Exhibit Document Description                                  

10.12        Guaranty and Indemnification Agreement dated January 12, 1996
             among AWA Limited, Quality Semiconductor Australia Pty. Ltd.
             And Quality Semiconductor, Inc. (incorporated by reference to
             Exhibit 2.2 of the Company's Form 8-K filed on March 4, 1996)

10.13        Technology Services Agreement dated February 16, 1996 among
             AWA Limited, AWA MicroElectronics Pty. Ltd. And Quality
             Semiconductor, Australia Pty. Ltd. (incorporated by reference to
             Exhibit 2.3 of the Company's Form 8-K filed on March 4, 1996)

10.14        Building Lease Agreement amended, dated July 22, 1997
             between the Company and James S. Lindsay

10/15        Credit Agreement amendment, dated June 25, 1997 between the
             Company and Bank of America

10.16        Change of Control Agreement, effective August 28, 1997 between
             the Company and Directors

10.17        Change of Control Agreement effective August 28, 1997 between
             the Company and R. Paul Gupta

10.18        Change of Control Agreement effective August 28, 1997 between
             the Company and employees.

11.1         Statement regarding Computation of Earnings Per Share

12.1         Subsidiaries of the Registrant

23.1         Consent of Ernst & Young LLP, Independent Auditors

24.1         Power of Attorney included on the signature page of this Annual
             Report on Form 10-K

27.1         Financial Data Schedule


     Management   Contracts  and  Compensation  Plans  or  Agreements  in  which
directors and executive officers are eligible to participate.

(b)      Reports on Form 8-K

         The Company  filed a report on Form 8-K on September  16, 197 reporting
         the adoption of Preferred Shares Rights Agreement ("Poison Pill").

         The Company  filed a report on Form 8-K on October 23, 1997  announcing
         its financial results for the fiscal year ended September 30, 1997

         The Company filed a report on Form 8-K on November 11, 1997  announcing
         the resignation of John Goldsberry as Vice President, Finance and Chief
         Financial Officer.

         The Company  filed a report on Form 8-K on December 10, 1997 announcing
         its first quarter of fiscal 1998 outlook.

<PAGE>

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

                                                             Charged to
                                                              Costs and             (1)
                                            Beginning         Expenses       Deductions  Ending
                                            Balance
<S>                                              <C>            <C>                    <C>    
                                                                                         Balance
 Year ended September 30, 1997
      Allowance for Doubtful Accounts .         $123,000         $74,000                     $197,000
                                                                                       $
                                                                                       -
      Allowance for Sales Returns . . . .         50,000         609,000               -      659,000
                                            ------------------------------------------------------------
                                            ============================================================
                                                $173,000        $683,000                     $856,000
                                                                                       $
                                                                                       -
                                            ============================================================

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

 Year ended September 30, 1995
      Allowance for Doubtful Accounts .         $144,000       $               $  61,000     $123,000
                                                                  40,000
      Allowance for Sales Returns . . . .         20,000               -          20,000            -
                                            ============================================================
                                                $164,000       $               $  81,000     $123,000
                                                                  40,000
                                            ============================================================

</TABLE>


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


<PAGE>



                                                                    Exhibit 3.2














                                     BYLAWS



                                       OF



                           QUALITY SEMICONDUCTOR, INC.


<PAGE>



                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                                  <C>    

                                                                                                      Page
ARTICLE I - CORPORATE OFFICES
         1.1 PRINCIPAL OFFICE...........................................................................28
         1.2 OTHER OFFICES..............................................................................28
ARTICLE II - MEETINGS OF SHAREHOLDERS...................................................................28
         2.1 PLACE OF MEETINGS..........................................................................28
         2.2 ANNUAL MEETING.............................................................................28
         2.3 SPECIAL MEETING............................................................................28
         2.4 NOTICE OF SHAREHOLDERS' MEETINGS...........................................................29
         2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE...............................................29
         2.6 QUORUM.....................................................................................30
         2.7 ADJOURNED MEETING; NOTICE..................................................................30
         2.8 VOTING.....................................................................................30
         2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT..........................................31
         2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...................................32
         2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS...............................32
         2.12 PROXIES...................................................................................33
         2.13 INSPECTORS OF ELECTION....................................................................33
ARTICLE III - DIRECTORS.................................................................................34
         3.1 POWERS.....................................................................................34
         3.2 NUMBER OF DIRECTORS........................................................................34
         3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS...................................................35
         3.4 RESIGNATION AND VACANCIES..................................................................35
         3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................................................35
         3.6 REGULAR MEETINGS...........................................................................36
         3.7 SPECIAL MEETINGS; NOTICE...................................................................36
         3.8 QUORUM.....................................................................................36
         3.9 WAIVER OF NOTICE...........................................................................36
         3.10 ADJOURNMENT...............................................................................37
         3.11 NOTICE OF ADJOURNMENT.....................................................................37
         3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.........................................37
         3.13 FEES AND COMPENSATION OF DIRECTORS........................................................37
         3.14 APPROVAL OF LOANS TO OFFICERS.............................................................37
ARTICLE IV - COMMITTEES.................................................................................38
         4.1 COMMITTEES OF DIRECTORS....................................................................38
         4.2 MEETINGS AND ACTION OF COMMITTEES..........................................................38
ARTICLE V - OFFICERS....................................................................................39
         5.1 OFFICERS...................................................................................39
         5.2 ELECTION OF OFFICERS.......................................................................39
         5.3 SUBORDINATE OFFICERS.......................................................................39
         5.4 REMOVAL AND RESIGNATION OF OFFICERS........................................................39
         5.5 VACANCIES IN OFFICES.......................................................................39
         5.6 CHAIRMAN OF THE BOARD......................................................................39
         5.7 PRESIDENT..................................................................................40
         5.8 VICE PRESIDENTS............................................................................40
         5.9 SECRETARY..................................................................................40
         .10 CHIEF FINANCIAL OFFICER....................................................................40
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS........................41
         6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................................................41
         6.2 INDEMNIFICATION OF OTHERS..................................................................41
         6.3 PAYMENT OF EXPENSES IN ADVANCE.............................................................41
         6.4 INDEMNITY NOT EXCLUSIVE....................................................................42
         6.5 INSURANCE INDEMNIFICATION..................................................................42
         6.6 CONFLICTS..................................................................................42
ARTICLE VII - RECORDS AND REPORTS.......................................................................43
         7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER...............................................43
         7.2 MAINTENANCE AND INSPECTION OF BYLAWS.......................................................43
         7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS......................................43
         7.4 INSPECTION BY DIRECTORS....................................................................44
         7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER......................................................44
         7.6 FINANCIAL STATEMENTS.......................................................................44
         7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............................................45
ARTICLE VIII - GENERAL MATTERS..........................................................................45
         8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING......................................45
         8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS..................................................45
         8.3 CORPORATE CONTRACTS AND INSTRUMENTS:  HOW EXECUTED.........................................46
         8.4 CERTIFICATES FOR SHARES....................................................................46
         8.5 LOST CERTIFICATES..........................................................................47
         8.6 CONSTRUCTION; DEFINITIONS..................................................................47
ARTICLE IX - AMENDMENTS.................................................................................47
         9.1 AMENDMENT BY SHAREHOLDERS..................................................................47
         9.2 AMENDMENT BY DIRECTORS.....................................................................47
</TABLE>




<PAGE>



                                     BYLAWS

                                       OF

                           QUALITY SEMICONDUCTOR, INC.


                                    ARTICLE I

                                CORPORATE OFFICES


         1.1       PRINCIPAL OFFICE

                  The board of directors shall fix the location of the principal
executive  office of the corporation at any place within or outside the State of
California.  If the principal executive office is located outside such state and
the corporation has one or more business  offices in such state,  then the board
of directors shall fix and designate a principal business office in the State of
California.

         1.2       OTHER OFFICES

                  The board of  directors  may at any time  establish  branch or
subordinate offices at any place or places where the corporation is qualified to
do business.


<PAGE>



                                   ARTICLE II

                            MEETINGS OF SHAREHOLDERS

         2.1       PLACE OF MEETINGS

                  Meetings of shareholders  shall be held at any place within or
outside the State of California  designated  by the board of  directors.  In the
absence of any such  designation,  share holders'  meetings shall be held at the
principal executive office of the corporation.

         2.2       ANNUAL MEETING

                  The annual meeting of shareholders  shall be held each year on
a date and at a time  designated  by the board of  directors.  In the absence of
such designation, the annual meeting of share holders shall be held on the first
Monday of June in each year at 9:30 a.m.  However,  if such day falls on a legal
holiday,  then the meeting  shall be held at the same time and place on the next
succeeding full business day. At the meeting,  directors  shall be elected,  and
any other proper business may be transacted.

         2.3       SPECIAL MEETING

                  A special  meeting  of the  shareholders  may be called at any
time by the board of  directors,  or by the  chairman  of the  board,  or by the
president,  or by one or  more  shareholders  holding  shares  in the  aggregate
entitled to cast not less than ten percent (10%) of the votes at that meeting.

                  If a special  meeting is called by any person or persons other
than the board of directors or the president or the chairman of the board,  then
the request  shall be in writing,  specifying  the time of such  meeting and the
general  nature  of the  business  pro  posed  to be  transacted,  and  shall be
delivered  personally  or sent by  registered  mail or by  telegraphic  or other
facsimile  transmission  to the chairman of the board,  the president,  any vice
president or the secretary of the corporation. The officer receiving the request
shall cause notice to be promptly given to the shareholders entitled to vote, in
accordance with the pro visions of Sections 2.4 and 2.5 of these bylaws,  that a
meeting will be held at the time requested by the person or persons  calling the
meeting,  so long as that time is not less than  thirty-five  (35) nor more than
sixty (60) days after the  receipt  of the  request.  If the notice is not given
within  twenty (20) days after  receipt of the  request,  then the person or per
sons  requesting  the  meeting may give the notice.  Nothing  contained  in this
paragraph  of this  Section  2.3  shall be  construed  as  limiting,  fixing  or
affecting the time when a meeting of shareholders  called by action of the board
of directors may be held.

         2.4       NOTICE OF SHAREHOLDERS' MEETINGS

                  All  notices  of  meetings  of  shareholders  shall be sent or
otherwise given in accordance with Section 2.5 of these bylaws not less than ten
(10) (or, if sent by  third-class  mail pursuant to Section 2.5 of these bylaws,
thirty (30)) nor more than sixty (60) days before the date of the  meeting.  The
notice  shall  specify the place,  date,  and hour of the meeting and (i) in the
case of a special  meeting,  the general nature of the business to be transacted
(no business  other than that specified in the notice may be transacted) or (ii)
in the case of the annual  meeting,  those matters which the board of directors,
at the  time of  giving  the  notice,  intends  to  present  for  action  by the
shareholders  (but  subject  to the  provisions  of the next  paragraph  of this
Section 2.4 any proper  matter may be presented at the meeting for such action).
The notice of any meeting at which directors are to be elected shall include the
name of any  nominee  or  nominees  who,  at the time of the  notice,  the board
intends to present for election.

                  If action is proposed to be taken at any meeting for  approval
of (i) a contract or  transaction  in which a director  has a direct or indirect
financial  interest,  pursuant  to  Section  310 of  the  Corporations  Code  of
California  (the  "Code"),  (ii) an amendment of the articles of  incorporation,
pursuant to Section 902 of the Code, (iii) a reorganization  of the corporation,
pursuant  to  Section  1201 of the Code,  (iv) a  voluntary  dissolution  of the
corporation,  pursuant to Section  1900 of the Code,  or (v) a  distribution  in
dissolution  other than in accordance  with the rights of outstanding  preferred
shares,  pursuant to Section 2007 of the Code,  then the notice shall also state
the general nature of that proposal.

         2.5       MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE

                  Written notice of any meeting of  shareholders  shall be given
either (i) personally or (ii) by first-class  mail or (iii) by third-class  mail
but only if the  corporation  has  outstanding  shares  held of  record  by five
hundred  (500) or more  persons  (determined  as  provided in Section 605 of the
Code) on the record date for the share holders' meeting,  or (iv) by telegraphic
or other written  communication.  Notices not personally delivered shall be sent
charges prepaid and shall be addressed to the shareholder at the address of that
share  holder  appearing  on  the  books  of the  corporation  or  given  by the
shareholder  to the  corporation  for the purpose of notice.  If no such address
appears on the corporation's  books or is given,  notice shall be deemed to have
been given if sent to that share holder by mail or  telegraphic or other written
communication to the corporation's  principal  executive office, or if published
at least once in a news paper of general  circulation  in the county  where that
office is  located.  Notice  shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other means
of written communication.

                  If any notice  addressed  to a  shareholder  at the address of
that  shareholder  appearing on the books of the  corporation is returned to the
corporation  by the United  States  Postal  Service  marked to indicate that the
United States Postal Service is unable to de liver the notice to the shareholder
at that address, then all future notices or reports shall be deemed to have been
duly  given  without  further  mailing  if the same  shall be  available  to the
shareholder  on written  demand of the  shareholder  at the principal  executive
office  of the  corporation  for a period  of one (1) year  from the date of the
giving of the notice.

                  An  affidavit  of the  mailing  or other  means of giving  any
notice  of any  shareholders'  meeting,  executed  by the  secretary,  assistant
secretary or any transfer agent of the corporation  giving the notice,  shall be
prima facie evidence of the giving of such notice.

         2.6       QUORUM

                  The  presence  in  person  or by  proxy  of the  holders  of a
majority of the shares  entitled to vote  thereat  constitutes  a quorum for the
transaction  of business  at all  meetings of  shareholders.  The share  holders
present  at a duly  called  or held  meeting  at which a quorum is  present  may
continue to do business  until  adjournment,  notwithstanding  the withdrawal of
enough shareholders to leave less than a quorum, if any action taken (other than
adjournment)  is  approved  by at least a  majority  of the shares  required  to
constitute a quorum.

         2.7       ADJOURNED MEETING; NOTICE

                  Any shareholders' meeting, annual or special, whether or not a
quorum  is  present,  may be  adjourned  from  time to  time by the  vote of the
majority  of the  shares  represented  at that  meeting,  either in person or by
proxy.  In the absence of a quorum,  no other business may be transacted at that
meeting except as provided in Section 2.6 of these bylaws.
                  When any meeting of shareholders, either annual or special, is
adjourned  to another time or place,  notice need not be given of the  adjourned
meeting  if the time  and  place  are  announced  at the  meeting  at which  the
adjournment is taken. However, if a new record date for the adjourned meeting is
fixed or if the  adjournment is for more than forty-five (45) days from the date
set for the original  meeting,  then notice of the  adjourned  meeting  shall be
given.  Notice of any such adjourned meeting shall be given to each share holder
of record  entitled  to vote at the  adjourned  meeting in  accordance  with the
provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the
corporation  may transact any business  which might have been  transacted at the
original meeting.

         2.8       VOTING

                  The  shareholders  entitled  to vote at any  meeting  of share
holders shall be determined in accordance with the provisions of Section 2.11 of
these bylaws,  subject to the provisions of Sections 702 through 704 of the Code
(relating to voting shares held by a fiduciary,  in the name of a corporation or
in joint ownership).

                  The  shareholders'  vote  may be by voice  vote or by  ballot;
provided, however, that any election for directors must be by ballot if demanded
by any shareholder at the meeting and before the voting has begun.

                  Except as provided in the last  paragraph of this Section 2.8,
or as  may  be  otherwise  provided  in  the  articles  of  incorporation,  each
outstanding  share,  regardless of class,  shall be entitled to one vote on each
matter  submitted to a vote of the  shareholders.  Any share holder  entitled to
vote on any  matter  may vote part of the  shares in favor of the  proposal  and
refrain  from  voting the  remaining  shares or,  except  when the matter is the
election of  directors,  may vote them against the  proposal;  but, if the share
holder  fails to specify the number of shares  which the  shareholder  is voting
affirmatively,  it  will  be  conclusively  presumed  that  the  share  holder's
approving  vote is with respect to all shares which the  shareholder is entitled
to vote.

                  If a quorum is present,  the affirmative  vote of the majority
of the shares represented and voting at a duly held meeting (which shares voting
affirmatively  also constitute at least a majority of the required quorum) shall
be the act of the share  holders,  unless the vote of a greater number or a vote
by classes is required by the Code or by the articles of incorporation.

                  At a  shareholders'  meeting  at  which  directors  are  to be
elected,  a shareholder  shall be entitled to cumulate votes (i.e., cast for any
candidate  a number  of  votes  greater  than the  number  of votes  which  such
shareholder  normally is entitled  to cast) if the  candidates'  names have been
placed in nomination prior to commencement of the voting and the shareholder has
given notice prior to commencement of the voting of the shareholder's  intention
to cumulate votes. If any shareholder has given such a notice,  then every share
holder  entitled to vote may cumulate votes for candidates in nomination  either
(i) by giving one  candidate a number of votes equal to the number of  directors
to be elected  multiplied  by the  number of votes to which that share  holder's
shares are normally entitled or (ii) by distributing the shareholder's  votes on
the same  principle  among any or all of the  candidates,  as the  share  holder
thinks fit. The candidates receiving the highest number of affirmative votes, up
to the number of directors to be elected,  shall be elected;  votes  against any
candidate and votes withheld shall have no legal effect.

         2.9       VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT

                  The transactions of any meeting of shareholders, either annual
or special,  however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and notice,
if a quorum be present  either in person or by proxy,  and if,  either before or
after the meeting,  each person  entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes  thereof.  The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or  special  meeting of share  holders,  except  that if action is
taken or proposed to be taken for approval of any of those matters  specified in
the second  paragraph  of Section 2.4 of these  bylaws,  the waiver of notice or
consent or approval  shall state the general  nature of the  proposal.  All such
waivers,  consents,  and approvals shall be filed with the corporate  records or
made a part of the minutes of the meeting.

                  Attendance  by a person at a meeting  shall also  constitute a
waiver of notice of and presence at that meeting, except when the person objects
at the beginning of the meeting to the  transaction of any business  because the
meeting is not  lawfully  called or convened.  Attendance  at a meeting is not a
waiver of any right to object to the  consideration  of matters  required by the
Code to be included in the notice of the  meeting but not so  included,  if that
objection is expressly made at the meeting.

         2.10      SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

                  Any action which may be taken at any annual or special meeting
of  shareholders  may be taken without a meeting and without prior notice,  if a
consent in writing,  setting forth the action so taken, is signed by the holders
of  outstanding  shares  having not less than the  minimum  number of votes that
would be  necessary  to  authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.

                  In the case of election of directors,  such a consent shall be
effective only if signed by the holders of all  outstanding  shares  entitled to
vote for the election of  directors.  However,  a director may be elected at any
time to fill any  vacancy on the board of  directors,  provided  that it was not
created  by  removal  of a  director  and  that it has not  been  filled  by the
directors,  by  the  written  consent  of  the  holders  of a  majority  of  the
outstanding shares entitled to vote for the election of directors.

                  All  such  consents  shall  be  maintained  in  the  corporate
records.  Any shareholder giving a written consent,  or the share holder's proxy
holders,  or a transferee  of the shares,  or a personal  representative  of the
shareholder,  or their  respective  proxy  holders,  may revoke the consent by a
writing received by the secretary of the corporation  before written consents of
the number of shares  required to authorize the proposed  action have been filed
with the secretary.

                  If the consents of all shareholders  entitled to vote have not
been  solicited  in writing  and if the  unanimous  written  consent of all such
shareholders has not been received,  then the secretary shall give prompt notice
of the corporate  action approved by the share holders  without a meeting.  Such
notice  shall  be  given to  those  shareholders  entitled  to vote who have not
consented  in writing and shall be given in the manner  specified in Section 2.5
of these  bylaws.  In the case of approval of (i) a contract or  transaction  in
which a  director  has a direct or  indirect  financial  interest,  pursuant  to
Section 310 of the Code, (ii)  indemnification  of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation,  pursuant
to Section 1201 of the Code, and (iv) a distribution  in dissolution  other than
in  accordance  with the rights of  outstanding  preferred  shares,  pursuant to
Section  2007 of the  Code,  the  notice  shall be given at least  ten (10) days
before the consummation of any action authorized by that approval.

         2.11      RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS

                  For  purposes  of  determining  the  shareholders  entitled to
notice  of any  meeting  or to vote  thereat  or  entitled  to give  consent  to
corporate action without a meeting,  the board of directors may fix, in advance,
a record  date,  which  shall not be more than sixty (60) days nor less than ten
(10) days  before  the date of any such  meeting  nor more than  sixty (60) days
before any such action without a meeting, and in such event only shareholders of
record  on the date so  fixed  are  entitled  to  notice  and to vote or to give
consents, as the case may be,  notwithstanding any transfer of any shares on the
books of the corporation after the record date, except as otherwise  provided in
the Code.

                  If the board of directors does not so fix a record date:

                  (a) the record date for determining  shareholders  entitled to
                      notice of or to vote at a meeting of shareholders shall be
                      at  the  close  of  business  on  the  business  day  next
                      preceding  the day on which  notice is given or, if notice
                      is waived,  at the close of business on the  business  day
                      next preceding the day on which the meeting is held; and

                  (b) the record date for determining  shareholders  entitled to
                      give  consent to  corporate  action in  writing  without a
                      meeting,  (i) when no prior  action  by the board has been
                      taken, shall be the day on which the first written consent
                      is given,  or (ii) when prior action by the board has been
                      taken,  shall be at the  close of  business  on the day on
                      which the board  adopts the  resolution  relating  to that
                      action, or the sixtieth (60th) day before the date of such
                      other action, whichever is later.

                  The record date for any other  purpose shall be as provided in
Article VIII of these bylaws.

         2.12      PROXIES

                  Every person  entitled to vote for directors,  or on any other
matter,  shall have the right to do so either in person or by one or more agents
authorized  by a written proxy signed by the person and filed with the secretary
of the corporation.  A proxy shall be deemed signed if the shareholder's name is
placed  on the proxy  (whether  by manual  signature,  typewriting,  telegraphic
transmission   or   otherwise)   by  the   shareholder   or  the   shareholder's
attorney-in-fact.  A validly  executed  proxy  which  does not state  that it is
irrevocable  shall  continue in full force and effect  unless (i) the person who
executed  the  proxy  revokes  it prior to the time of voting  by  delivering  a
writing to the  corporation  stating that the proxy is revoked or by executing a
subsequent  proxy and presenting it to the meeting or by voting in person at the
meeting,  or (ii) written notice of the death or incapacity of the maker of that
proxy is received by the  corporation  before the vote pursuant to that proxy is
counted; provided, however, that no proxy shall be valid after the expiration of
eleven (11) months from the date of the proxy,  unless otherwise provided in the
proxy.  The dates  contained on the forms of proxy  presumptively  determine the
order of execution,  regardless of the postmark  dates on the envelopes in which
they are mailed.  The revocability of a proxy that states on its face that it is
irrevocable  shall be governed by the pro visions of Sections  705(e) and 705(f)
of the Code.

         2.13      INSPECTORS OF ELECTION

                  Before any meeting of shareholders, the board of directors may
appoint an  inspector  or  inspectors  of  election to act at the meeting or its
adjournment.  If no inspector of election is so appointed,  then the chairman of
the meeting may, and on the request of any share holder or a shareholder's proxy
shall, appoint an inspector or inspectors of election to act at the meeting. The
number of  inspectors  shall be either one (1) or three (3). If  inspectors  are
appointed at a meeting  pursuant to the request of one (1) or more  shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall  determine  whether one (1) or three (3)  inspectors are to be
appointed.  If any person  appointed  as  inspector  fails to appear or fails or
refuses to act,  then the  chairman of the meeting  may, and upon the request of
any share holder or a share holder's proxy shall,  appoint a person to fill that
vacancy.

                  Such inspectors shall:

                  (a) determine the number of shares  outstanding and the voting
                      power of each,  the  number of shares  represented  at the
                      meeting,  the existence of a quorum, and the authenticity,
                      validity, and effect of proxies;
                  (b)  receive votes, ballots or consents;
                  (c)  hear and determine all  challenges  and questions in any
                       way arising in connection  with the right to vote;
                  (d)  count and tabulate all votes or consents;
                  (e)  determine when the polls shall close;
                  (f)  determine the result; and
                  (g) do any  other  acts  that may be  proper  to  conduct  the
                      election or vote with fairness to all shareholders.



<PAGE>



                                   ARTICLE III

         3.1       DIRECTORS POWERS

                  Subject to the  provisions of the Code and any  limitations in
the articles of incorporation and these bylaws relating to action required to be
approved by the  shareholders  or by the  outstanding  shares,  the business and
affairs of the  corporation  shall be managed and all corporate  powers shall be
exercised by or under the direction of the board of directors.

         3.2       NUMBER OF DIRECTORS

                  The number of directors of the  corporation  shall be not less
than three (3) nor more than five (5). The exact  number of  directors  shall be
five (5)* until changed,  within the limits specified above, by a bylaw amending
this Section 3.2, duly adopted by the board of directors or by the shareholders.
The indefinite  number of directors may be changed,  or a definite number may be
fixed without provision for an indefinite number, by a duly adopted amendment to
the articles of  incorporation  or by an amendment to this bylaw duly adopted by
the vote or written consent of holders of a majority of the  outstanding  shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the  minimum  number of  directors  to a number less than five (5) can not be
adopted if the votes cast against its  adoption at a meeting,  or the shares not
consenting in the case of an action by written  consent,  are equal to more than
sixteen and two-thirds  percent (16-2/3%) of the outstanding  shares entitled to
vote thereon.  No amendment may change the stated  maximum  number of authorized
directors to a number  greater than two (2) times the stated  minimum  number of
directors minus one (1).

                  No reduction of the authorized  number of directors shall have
the effect of  removing  any  director  before  that  director's  term of office
expires.

         3.3       ELECTION AND TERM OF OFFICE OF DIRECTORS

                  Directors   shall  be  elected  at  each  annual   meeting  of
shareholders  to hold  office  until the next  annual  meeting.  Each  director,
including  a director  elected to fill a vacancy,  shall hold  office  until the
expiration  of the term for which elected and until a successor has been elected
and qualified.

         3.4       RESIGNATION AND VACANCIES

                  Any director may resign  effective on giving written notice to
the  chairman  of the  board,  the  president,  the  secretary  or the  board of
directors,  unless the notice  specifies  a later time for that  resignation  to
become  effective.  If the  resignation  of a director is  effective at a future
time,  the board of  directors  may elect a  successor  to take  office when the
resignation becomes effective.

                  Vacancies  in  the  board  of  directors  may be  filled  by a
majority of the remaining  directors,  even if less than a quorum,  or by a sole
remaining  director;  however, a vacancy created by the removal of a director by
the vote or written consent of the  shareholders or by court order may be filled
only by the affirmative vote of a majority of the shares  represented and voting
at a duly  held  meeting  at which a quorum  is  present  (which  shares  voting
affirmatively  also  constitute  a majority of the required  quorum),  or by the
unanimous written consent of all shares entitled to vote thereon.  Each director
so elected shall hold office until the next annual  meeting of the  shareholders
and until a successor has been elected and qualified.

                  A vacancy  or  vacancies  in the board of  directors  shall be
deemed to exist (i) in the event of the  death,  resignation  or  removal of any
director,  (ii) if the board of  directors  by  resolution  declares  vacant the
office of a director who has been  declared of unsound mind by an order of court
or  convicted  of a  felony,  (iii) if the  authorized  number of  directors  is
increased,  or (iv) if the share holders fail, at any meeting of shareholders at
which any director or directors are elected, to elect the number of directors to
be elected at that meeting.

                  The shareholders may elect a director or directors at any time
to fill any  vacancy  or  vacancies  not filled by the  directors,  but any such
election other than to fill a vacancy created by removal, if by written consent,
shall require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.

         3.5       PLACE OF MEETINGS; MEETINGS BY TELEPHONE

                  Regular  meetings of the board of directors may be held at any
place within or outside the State of California  that has been  designated  from
time to time by resolution of the board.  In the absence of such a  designation,
regular  meetings  shall  be  held  at the  principal  executive  office  of the
corporation.  Special  meetings of the board may be held at any place  within or
outside the State of  California  that has been  designated in the notice of the
meeting  or,  if not  stated  in the  notice  or if there is no  notice,  at the
principal executive office of the corporation.

                  Any  meeting,  regular or special,  may be held by  conference
telephone  or  similar  communication   equipment,  so  long  as  all  directors
participating in the meeting can hear one another;  and all such directors shall
be deemed to be present in person at the meeting.

         3.6       REGULAR MEETINGS

                  Regular meetings of the board of directors may be held without
notice if the times of such meetings are fixed by the board of directors.

         3.7       SPECIAL MEETINGS; NOTICE

                  Special  meetings of the board of directors for any purpose or
purposes may be called at any time by the chairman of the board,  the president,
any vice president, the secretary or any two directors.

                  Notice  of the time and  place of  special  meetings  shall be
delivered  personally  or by telephone to each  director or sent by  first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address  as it is shown on the  records  of the  corporation.  If the  notice is
mailed,  it shall be deposited in the United  States mail at least four (4) days
before  the time of the  holding  of the  meeting.  If the  notice is  delivered
personally or by telephone or telegram,  it shall be delivered  personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the  meeting.  Any oral  notice  given  personally  or by
telephone  may be  communicated  either  to the  director  or to a person at the
office of the  director  who the person  giving the notice has reason to believe
will promptly  communicate  it to the director.  The notice need not specify the
purpose  or the  place  of the  meeting,  if the  meeting  is to be  held at the
principal executive office of the corporation.

         3.8       QUORUM

                  A  majority  of  the  authorized  number  of  directors  shall
constitute  a quorum  for the  transaction  of  business,  except to  adjourn as
provided in Section 3.10 of these bylaws.  Every act or decision done or made by
a majority of the directors  present at a duly held meeting at which a quorum is
present shall be regarded as the act of the board of  directors,  subject to the
provisions  of  Section  310 of  the  Code  (as  to  approval  of  contracts  or
transactions  in which a director  has a direct or indirect  material  financial
interest),  Section 311 of the Code (as to appointment of  committees),  Section
317(e)  of the  Code (as to  indemnification  of  directors),  the  articles  of
incorporation, and other applicable law.

                  A meeting at which a quorum is initially  present may continue
to transact business  notwithstanding the withdrawal of directors, if any action
taken is  approved  by at  least a  majority  of the  required  quorum  for that
meeting.

         3.9       WAIVER OF NOTICE

                  Notice of a meeting  need not be given to any director (i) who
signs a waiver of notice or a consent to holding  the  meeting or an approval of
the minutes  thereof,  whether before or after the meeting,  or (ii) who attends
the meeting without protesting,  prior thereto or at its commencement,  the lack
of notice to such directors. All such waivers,  consents, and approvals shall be
filed with the corporate  records or made part of the minutes of the meeting.  A
waiver of notice need not specify the purpose of any regular or special  meeting
of the board of directors.

         3.10      ADJOURNMENT

                  A  majority  of  the   directors   present,   whether  or  not
constituting a quorum, may adjourn any meeting to another time and place.

         3.11      NOTICE OF ADJOURNMENT

                  Notice of the time and place of holding an  adjourned  meeting
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than  twenty-four  (24) hours,  then
notice of the time and place of the adjourned  meeting shall be given before the
adjourned  meeting takes place, in the manner  specified in Section 3.7 of these
bylaws, to the directors who were not present at the time of the adjournment.

         3.12      BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING

                  Any action  required or  permitted to be taken by the board of
directors may be taken without a meeting, provided that all members of the board
individually or collectively  consent in writing to that action.  Such action by
written  consent shall have the same force and effect as a unanimous vote of the
board of directors.  Such written consent and any counterparts  thereof shall be
filed with the minutes of the proceedings of the board.

         3.13      FEES AND COMPENSATION OF DIRECTORS

                  Directors   and  members  of   committees   may  receive  such
compensation,  if any, for their services and such  reimbursement of expenses as
may be fixed or determined by resolution of the board of directors. This Section
3.13  shall  not  be  construed  to  preclude  any  director  from  serving  the
corporation  in any other capacity as an officer,  agent,  employee or otherwise
and receiving compensation for those services.

          3.14     ASPPROVAL OF LOANS TO OFFICERS

                  The  corporation  may,  upon  the  approval  of the  board  of
directors  alone,  make  loans  of  money  or  property  to,  or  guarantee  the
obligations  of, any  officer of the  corporation  or its parent or  subsidiary,
whether  or  not a  director,  or  adopt  an  employee  benefit  plan  or  plans
authorizing  such loans or  guaranties  provided that (i) the board of directors
determines  that such a loan or guaranty or plan may  reasonably  be expected to
benefit the  corporation,  (ii) the corporation  has outstanding  shares held of
record by 100 or more  persons  (determined  as  provided  in Section 605 of the
Code) on the date of approval by the board of directors,  and (iii) the approval
of the board of directors is by a vote sufficient  without  counting the vote of
any interested director or directors.


<PAGE>



                                   ARTICLE IV

                                   COMMITTEES

         4.1       COMMITTEES OF DIRECTORS

                  The  board  of  directors  may,  by  resolution  adopted  by a
majority  of the  authorized  number  of  directors,  designate  one (1) or more
committees,  each consisting of two or more directors,  to serve at the pleasure
of the board.  The board may  designate  one (1) or more  directors as alternate
members of any  committee,  who may replace any absent  member at any meeting of
the committee.  The  appointment of members or alternate  members of a committee
requires  the vote of a majority  of the  authorized  number of  directors.  Any
committee, to the extent provided in the resolution of the board, shall have all
the authority of the board, except with respect to:

     (a) the  approval  of any  action  which,  under  the Code,  also  requires
shareholders' approval or approval of the outstanding shares;

     (b) the filling of vacancies on the board of directors or in any committee;
(c) the fixing of  compensation of the directors for serving on the board or any
committee;  (d) the  amendment  or repeal of these bylaws or the adoption of new
bylaws;  (e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;

     (f) a distribution to the shareholders of the corporation, except at a rate
or in a  periodic  amount or  within a price  range  determined  by the board of
directors; or

     (g) the  appointment  of any other  committees of the board of directors or
the members of such committees.

         4.2       MEETINGS AND ACTION OF COMMITTEES

     Meetings and actions of committees shall be governed by, and held and taken
in accordance  with, the provisions of Article III of these bylaws,  Section 3.5
(place of  meetings),  Section 3.6  (regular  meetings),  Section  3.7  (special
meetings  and  notice),  Section 3.8  (quorum),  Section 3.9 (waiver of notice),
Section 3.10  (adjournment),  Section 3.11 (notice of adjournment),  and Section
3.12 (action without meeting),  with such changes in the context of those bylaws
as are necessary to  substitute  the commit tee and its members for the board of
directors and its members; provided,  however, that the time of regular meetings
of committees  may be determined  either by resolution of the board of directors
or by resolution of the committee,  that special meetings of committees may also
be called by resolution  of the board of  directors,  and that notice of special
meetings of committees shall also be given to all alternate  members,  who shall
have the right to attend all meetings of the  committee.  The board of directors
may adopt rules for the  government of any committee not  inconsistent  with the
provisions of these bylaws.


<PAGE>



                                    ARTICLE V

                                    OFFICERS

         5.1       OFFICERS

                  The  officers  of the  corporation  shall  be a  president,  a
secretary,  and a chief financial officer. The corporation may also have, at the
discretion of the board of directors,  a chairman of the board, one or more vice
presidents, one or more assistant secretaries, one or more assistant treasurers,
and such other officers as may be appointed in accordance with the provisions of
Section  5.3 of these  bylaws.  Any  number of  offices  may be held by the same
person.

         5.2       ELECTION OF OFFICERS

                  The officers of the  corporation,  except such officers as may
be appointed in accordance  with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of an
officer under any contract of employment.

         5.3       SUBORDINATE OFFICERS

                  The  board  of  directors  may  appoint,  or may  empower  the
president to appoint, such other officers as the business of the corporation may
require,  each of whom shall hold office for such period,  have such  authority,
and  perform  such  duties as are  provided  in these  bylaws or as the board of
directors may from time to time determine.

         5.4       REMOVAL AND RESIGNATION OF OFFICERS

                  Subject  to the  rights,  if  any,  of an  officer  under  any
contract of  employment,  any  officer  may be  removed,  either with or without
cause,  by the board of directors at any regular or special meeting of the board
or,  except  in case of an  officer  chosen by the  board of  directors,  by any
officer  upon  whom  such  power of  removal  may be  conferred  by the board of
directors.

                  Any officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified  in that  notice,  the  acceptance  of the  resignation  shall  not be
necessary to make it  effective.  Any  resignation  is without  prejudice to the
rights,  if any, of the corporation under any contract to which the officer is a
party.

         5.5       VACANCIES IN OFFICES

                  A  vacancy  in  any  office  because  of  death,  resignation,
removal,  disqualification  or any other  cause  shall be  filled in the  manner
prescribed in these bylaws for regular appointments to that office.

         5.6       CHAIRMAN OF THE BOARD

                  The  chairman  of the board,  if such an  officer be  elected,
shall,  if present,  preside at meetings of the board of directors  and exercise
and perform such other powers and duties as may from time to time be assigned to
him by the board of directors or as may be pre scribed by these bylaws. If there
is no  president,  then  the  chairman  of the  board  shall  also be the  chief
executive  officer  of the  corporation  and shall  have the  powers  and duties
prescribed in Section 5.7 of these bylaws.

         5.7       PRESIDENT

                  Subject to such supervisory powers, if any, as may be given by
the  board  of  directors  to the  chairman  of the  board,  if there be such an
officer,  the president shall be the chief executive  officer of the corporation
and  shall,  subject  to the  control of the board of  directors,  have  general
supervision,  direction,  and control of the  business  and the  officers of the
corporation.  He shall preside at all meetings of the  shareholders  and, in the
absence or non  existence  of a chairman  of the board,  at all  meetings of the
board of  directors.  He shall have the general  powers and duties of management
usually vested in the office of president of a corporation,  and shall have such
other powers and duties as may be  prescribed by the board of directors or these
bylaws.

         5.8       VICE PRESIDENTS

                  In the  absence  or  disability  of the  president,  the  vice
presidents,  if any,  in order of their rank as fixed by the board of  directors
or, if not ranked, a vice president designated by the board of directors,  shall
perform all the duties of the  president  and when so acting  shall have all the
powers of, and be subject to all the restrictions upon, the president.  The vice
presidents  shall have such other  powers and perform  such other duties as from
time to time may be prescribed for them  respectively by the board of directors,
these bylaws, the president or the chairman of the board.

         5.9       SECRETARY

                  The secretary shall keep or cause to be kept, at the principal
executive  office  of the  corporation  or such  other  place  as the  board  of
directors  may  direct,  a book  of  minutes  of all  meetings  and  actions  of
directors,  committees of directors and shareholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized  and the notice  given),  the names of those  present  at  directors'
meetings or committee  meetings,  the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.

                  The  secretary  shall  keep,  or  cause  to be  kept,  at  the
principal  executive  office  of  the  corporation  or  at  the  office  of  the
corporation's  transfer  agent or registrar,  as determined by resolution of the
board of directors, a share register, or a duplicate share register, showing the
names of all shareholders and their addresses,  the number and classes of shares
held by each, the number and date of certificates  evidencing  such shares,  and
the  number  and date of  cancellation  of  every  certificate  surrendered  for
cancellation.

                  The secretary shall give, or cause to be given,  notice of all
meetings of the shareholders and of the board of directors  required to be given
by law or by these bylaws. He shall keep the seal of the corporation,  if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.

         5.10.....CHIEF FINANCIAL OFFICER

                  The chief financial officer shall keep and maintain,  or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation,  including accounts
of its assets,  liabilities,  receipts,  disbursements,  gains, losses, capital,
retained  earnings,  and shares.  The books of account  shall at all  reasonable
times be open to inspection by any director.

                  The chief financial  officer shall deposit all money and other
valuables  in  the  name  and  to  the  credit  of  the  corporation  with  such
depositaries  as may be designated by the board of directors.  He shall disburse
the funds of the corporation as may be ordered by the board of directors,  shall
render to the president and  directors,  whenever they request it, an account of
all of  his  transactions  as  chief  financial  officer  and  of the  financial
condition of the corporation,  and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or these bylaws.


<PAGE>



                                   ARTICLE VI

       INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENT

         6.1       INDEMNIFICATION OF DIRECTORS AND OFFICERS

                  The corporation shall, to the maximum extent and in the manner
permitted by the Code,  indemnify  each of its  directors  and officers  against
expenses  (as  defined  in  Section  317(a)  of  the  Code),  judgments,  fines,
settlements,  and other amounts  actually and reason ably incurred in connection
with any  proceeding  (as  defined  in Section  317(a) of the Code),  arising by
reason of the fact that such person is or was an agent of the  corporation.  For
purposes of this  Article  VI, a  "director"  or  "officer"  of the  corporation
includes any person (i) who is or was a director or officer of the  corporation,
(ii) who is or was  serving at the request of the  corporation  as a director or
officer of  another  corporation,  partnership,  joint  venture,  trust or other
enterprise,  or (iii) who was a director or officer of a corporation which was a
predecessor  corporation  of the  corporation  or of another  enterprise  at the
request of such predecessor corporation.

         6.2       INDEMNIFICATION OF OTHERS

                  The corporation shall have the power, to the extent and in the
manner  permitted by the Code,  to indemnify  each of its  employees  and agents
(other than  directors  and  officers)  against  expenses (as defined in Section
317(a) of the Code), judgments,  fines, settlements,  and other amounts actually
and reason  ably  incurred  in  connection  with any  proceeding  (as defined in
Section  317(a) of the Code),  arising by reason of the fact that such person is
or was an  agent  of the  corporation.  For  purposes  of this  Article  VI,  an
"employee"  or "agent" of the  corporation  (other  than a director  or officer)
includes  any person (i) who is or was an employee or agent of the  corporation,
(ii) who is or was serving at the request of the  corporation  as an employee or
agent  of  another  corporation,  partnership,  joint  venture,  trust  or other
enterprise,  or (iii) who was an employee or agent of a corporation  which was a
predecessor  corporation  of the  corporation  or of another  enterprise  at the
request of such predecessor corporation.

         6.3       PAYMENT OF EXPENSES IN ADVANCE

                  Expenses incurred in defending any civil or criminal action or
proceeding for which  indemnification is required pursuant to Section 6.1 or for
which   indemnification   is  permitted   pursuant  to  Section  6.2   following
authorization thereof by the Board of Directors shall be paid by the corporation
in advance of the final disposition of such action or proceeding upon receipt of
an under taking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified  party is not entitled to
be indemnified as authorized in this Article VI.

         6.4       INDEMNITY NOT EXCLUSIVE

                  The  indemnification  provided by this Article VI shall not be
deemed exclusive of any other rights to which those seeking  indemnification may
be entitled under any bylaw,  agreement,  vote of shareholders or  disinterested
directors  or  otherwise,  both as to action in an official  capacity  and as to
action in another  capacity  while holding such office,  to the extent that such
additional  rights  to  indemnification   are  authorized  in  the  Articles  of
Incorporation.

         6.5       INSURANCE INDEMNIFICATION

                  The corporation  shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation  against any liability  asserted against or incurred by
such person in such  capacity or arising  out of such  person's  status as such,
whether or not the  corporation  would have the power to  indemnify  him against
such liability under the provisions of this Article VI.

         6.6       CONFLICTS

                  No indemnification or advance shall be made under this Article
VI,  except  where  such  indemnification  or advance is man dated by law or the
order,  judgment  or  decree  of any  court of  competent  jurisdiction,  in any
circumstance where it appears:

                  (1) That it  would be  inconsistent  with a  provision  of the
                      Articles of  Incorporation,  these bylaws, a resolution of
                      the  shareholders or an agreement in effect at the time of
                      the accrual of the alleged cause of the action asserted in
                      the  proceeding  in which the  expenses  were  incurred or
                      other  amounts  were paid,  which  prohibits  or otherwise
                      limits indemnification; or

                  (2) That it would be inconsistent with any condition expressly
                      imposed by a court in approving a settlement.


<PAGE>



                                   ARTICLE VII

                               RECORDS AND REPORTS

         7.1       MAINTENANCE AND INSPECTION OF SHARE REGISTER

                  The corporation  shall keep either at its principal  executive
office  or at the  office  of its  transfer  agent or  registrar  (if  either be
appointed),  as determined by resolution of the board of directors,  a record of
its  shareholders  listing the names and addresses of all  shareholders  and the
number and class of shares held by each share holder.

                  A shareholder or  shareholders of the corporation who holds at
least five percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of  directors,  may (i) inspect and copy the records of share  holders'
names,  addresses,  and  shareholdings  during usual  business hours on five (5)
days' prior  written  demand on the  corporation,  (ii) obtain from the transfer
agent of the  corporation,  on written demand and on the tender of such transfer
agent's  usual  charges for such list, a list of the names and  addresses of the
shareholders  who are entitled to vote for the election of directors,  and their
shareholdings,  as of the most  recent  record date for which that list has been
compiled or as of a date specified by the shareholder  after the date of demand.
Such list shall be made available to any such  shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date  specified in the demand as the date as of which the list is
to be compiled.

                  The record of shareholders shall also be open to inspection on
the written demand of any  shareholder or holder of a voting trust  certificate,
at any time during usual business hours, for a purpose reasonably related to the
holder's  interests  as a  share  holder  or as the  holder  of a  voting  trust
certificate.

                  Any  inspection and copying under this Section 7.1 may be made
in person or by an agent or  attorney of the  shareholder  or holder of a voting
trust certificate making the demand.

         7.2       MAINTENANCE AND INSPECTION OF BYLAWS

                  The corporation  shall keep at its principal  executive office
or, if its principal executive office is not in the State of California,  at its
principal  business  office in California the original or a copy of these bylaws
as amended to date, which bylaws shall be open to inspection by the shareholders
at all reason able times during office hours. If the principal  executive office
of the corporation is outside the State of California and the corporation has no
principal  business  office in such state,  then the secretary  shall,  upon the
written request of any shareholder, furnish to that share holder a copy of these
bylaws as amended to date.

         7.3       MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS

                  The   accounting   books  and   records  and  the  minutes  of
proceedings of the  shareholders,  of the board of directors,  and of any commit
tee or  committees  of the  board of  directors  shall be kept at such  place or
places as are  designated  by the board of  directors  or,  in  absence  of such
designation,  at the principal executive office of the corporation.  The minutes
shall be kept in written  form,  and the  accounting  books and records shall be
kept either in written form or in any other form capable of being converted into
written form.
                  The minutes and accounting  books and records shall be open to
inspection  upon the  written  demand of any  shareholder  or holder of a voting
trust  certificate,  at any reasonable time during usual business  hours,  for a
purpose  reasonably related to the holder's interests as a shareholder or as the
holder of a voting trust certificate. The inspection may be made in person or by
an agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary  corporation
of the corporation.

         7.4       INSPECTION BY DIRECTORS

                  Every director shall have the absolute right at any reasonable
time to inspect all books,  records,  and documents of every kind as well as the
physical properties of the corporation and each of its subsidiary  corporations.
Such  inspection by a director may be made in person or by an agent or attorney.
The  right of  inspection  includes  the  right to copy  and  make  extracts  of
documents.

         7.5       ANNUAL REPORT TO SHAREHOLDERS; WAIVER

                  The board of directors shall cause an annual report to be sent
to the shareholders not later than one hundred twenty (120) days after the close
of the fiscal year  adopted by the  corporation.  Such  report  shall be sent at
least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner  specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.

                  The annual  report shall contain (i) a balance sheet as of the
end of the fiscal year, (ii) an income  statement,  (iii) a statement of changes
in financial  position for the fiscal year,  and (iv) any report of  independent
accountants  or, if there is no such report,  the  certificate  of an authorized
officer of the corporation  that the statements were prepared without audit from
the books and records of the corporation.

                  The foregoing  requirement of an annual report shall be waived
so long as the  shares of the  corporation  are held by fewer  than one  hundred
(100) holders of record.

         7.6       FINANCIAL STATEMENTS

                  If no annual report for the fiscal year has been sent to share
holders, then the corporation shall, upon the written request of any shareholder
made more than one  hundred  twenty  (120) days  after the close of such  fiscal
year, deliver or mail to the person making the request,  within thirty (30) days
thereafter,  a copy of a balance  sheet as of the end of such fiscal year and an
income statement and statement of changes in financial  position for such fiscal
year.

                  If a shareholder or shareholders holding at least five percent
(5%) of the outstanding  shares of any class of stock of the corporation makes a
written request to the  corporation  for an income  statement of the corporation
for the three-month,  six-month or nine-month  period of the then current fiscal
year ended more than thirty (30) days before the date of the request,  and for a
balance sheet of the  corporation  as of the end of that period,  then the chief
financial  officer  shall cause that  statement to be  prepared,  if not already
prepared,  and shall deliver  personally or mail that statement or statements to
the person  making the request  within thirty (30) days after the receipt of the
request.  If the corporation has not sent to the  shareholders its annual report
for the last fiscal year, the statements  referred to in the first  paragraph of
this Section 7.6 shall  likewise be delivered  or mailed to the  shareholder  or
shareholders within thirty (30) days after the request.
                  The quarterly income statements and balance sheets referred to
in this section shall be accompanied by the report,  if any, of any  independent
accountants  engaged by the  corporation or by the  certificate of an authorized
officer of the corporation  that the financial  statements were prepared without
audit from the books and records of the corporation.

         7.7       REPRESENTATION OF SHARES OF OTHER CORPORATIONS

                  The chairman of the board, the president,  any vice president,
the chief  financial  officer,  the  secretary  or  assistant  secretary of this
corporation,  or any other  person  authorized  by the board of directors or the
president or a vice president, is authorized to vote, represent, and exercise on
behalf of this  corporation  all  rights  incident  to any and all shares of any
other corporation or corporations standing in the name of this corporation.  The
authority  herein granted may be exercised  either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly executed
by such person having the authority.


<PAGE>



ARTICLE VIII

                                 GENERAL MATTERS

         8.1       RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING

                  For  purposes  of  determining  the  shareholders  entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the  shareholders  entitled  to  exercise  any rights in respect of any other
lawful action (other than action by share holders by written  consent  without a
meeting), the board of directors may fix, in advance, a record date, which shall
not be more than sixty  (60) days  before any such  action.  In that case,  only
share  holders  of  record  at the  close of  business  on the date so fixed are
entitled to receive the  dividend,  distribution  or allotment of rights,  or to
exercise such rights,  as the case may be,  notwithstanding  any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.

                  If the board of directors does not so fix a record date,  then
the record date for  determining  shareholders  for any such purpose shall be at
the  close of  business  on the day on which  the board  adopts  the  applicable
resolution or the sixtieth (60th) day before the date of that action,  whichever
is later.

         8.2       CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS

                  From time to time, the board of directors  shall  determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money,  notes or other evidences of indebtedness  that are
issued in the name of or payable  to the  corporation,  and only the  persons so
authorized shall sign or endorse those instruments.

         8.3       CORPORATE CONTRACTS AND INSTRUMENTS:  HOW EXECUTED

                  The board of directors,  except as otherwise provided in these
bylaws, may authorize any officer or officers, or agent or agents, to enter into
any  contract  or  execute  any  instrument  in the name of and on behalf of the
corporation;  such  authority may be general or confined to specific  instances.
Unless so  authorized or ratified by the board of directors or within the agency
power of an  officer,  no  officer,  agent or  employee  shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
         8.4       CERTIFICATES FOR SHARES

                  A certificate or  certificates  for shares of the  corporation
shall be issued to each  shareholder when any of such shares are fully paid. The
board of directors may authorize the issuance of certificates  for shares partly
paid  provided  that  these  certificates  shall  state the total  amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the  corporation  by the chairman of the board or
the vice chairman of the board or the  president or a vice  president and by the
chief  financial  officer  or an  assistant  treasurer  or the  secretary  or an
assistant secretary,  certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile.

                  In case  any  officer,  transfer  agent or  registrar  who has
signed or whose facsimile  signature has been placed on a certificate  ceases to
be that officer,  transfer agent or registrar before that certificate is issued,
it may be issued by the corporation  with the same effect as if that person were
an officer, transfer agent or registrar at the date of issue.

         8.5       LOST CERTIFICATES

                  Except as provided in this  Section  8.5, no new  certificates
for shares shall be issued to replace a previously issued certificate unless the
latter is  surrendered  to the  corporation  and canceled at the same time.  The
board of directors may, in case any share  certificate  or  certificate  for any
other  security  is  lost,  stolen  or  destroyed,  authorize  the  issuance  of
replacement  certificates on such terms and conditions as the board may require;
the board may require  indemnification  of the corporation  secured by a bond or
other adequate security  sufficient to protect the corporation against any claim
that may be made against it,  including any expense or liability,  on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.

         8.6       CONSTRUCTION; DEFINITIONS

                  Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Code shall govern the construction
of these bylaws. Without limiting the generality of this provision, the singular
number  includes the plural,  the plural number  includes the singular,  and the
term "person" includes both a corporation and a natural person.


<PAGE>



                                   ARTICLE IX

                                   AMENDMENTS

         9.1       AMENDMENT BY SHAREHOLDERS

                  New bylaws  may be  adopted or these  bylaws may be amended or
repealed  by the  vote or  written  consent  of  holders  of a  majority  of the
outstanding shares entitled to vote; provided,  however, that if the articles of
incorporation of the corporation set forth the number of authorized directors of
the corporation,  then the authorized number of directors may be changed only by
an amendment of the articles of incorporation.

         9.2       AMENDMENT BY DIRECTORS

                  Subject  to the  rights of the  shareholders  as  provided  in
Section 9.1 of these  bylaws,  bylaws,  other than a bylaw or an  amendment of a
bylaw changing the authorized  number of directors (except to fix the authorized
number of  directors  pursuant  to a bylaw  providing  for a variable  number of
directors), may be adopted, amended or repealed by the board of directors.


<PAGE>



                        CERTIFICATE OF ADOPTION OF BYLAWS

                                       OF

                           QUALITY SEMICONDUCTOR, INC.



                            Adoption by Incorporator

         The undersigned  person  appointed in the Articles of  Incorporation to
act as the  Incorporator  of  QUALITY  SEMICONDUCTOR,  INC.  hereby  adopts  the
foregoing  bylaws,  comprising  twenty-two  (22)  pages,  as the  Bylaws  of the
corporation.

         Executed this 21st day of October 1988.

                                               /s/  Steven J. Hanley
                                               Steven J. Hanley, Incorporated


                            Certificate by Secretary
                           of Adoption by Incorporator


         The  undersigned   hereby  certifies  that  he  is  the  duly  elected,
qualified,  and acting  Secretary  of QUALITY  SEMICONDUCTOR,  INC. and that the
foregoing Bylaws,  comprising  twenty-two (22) pages, were adopted as the Bylaws
of the corporation on October 21, 1988, by the person  appointed in the Articles
of Incorporation to act as the Incorporator of the corporation.

         IN WITNESS  WHEREOF,  the  undersigned  has  hereunto  set his hand and
affixed the corporate seal this 21st day of October 1988.



                                                     /s/  Craig W. Johnson
                                                     Craig W. Johnson, Secretary




<PAGE>



                                                                   Exhibit 10.2a

                                   PROSPECTUS


                           QUALITY SEMICONDUCTOR, INC.

                             1989 STOCK OPTION PLAN


This  Prospectus  relates  to  1,221,910  shares  of  Common  Stock  of  Quality
Semiconductor,  Inc. (the "Company") which are offered for sale upon exercise of
options to purchase  shares of Common Stock  granted or to be granted  under the
Company's  1989 Stock Option Plan.  The terms and conditions of grants under the
Plan,  including  the price of the shares of Common  Stock,  are governed by the
provisions of such plan and the  agreements  thereunder  between the Company and
each participant.


                         THIS DOCUMENT CONSTITUTES PART
                       OF A PROSPECTUS COVERING SECURITIES
                            THAT HAVE BEEN REGISTERED
                        UNDER THE SECURITIES ACT OF 1933.


     THE SECURITIES  OFFERED  HEREBY INVOLVE A HIGH DEGREE OF RISK.  PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE MATTERS SET FORTH UNDER "RISK FACTORS."


            THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
               THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
                 COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
                    OF THIS PROSPECTUS. ANY REPRESENTATION TO
                       THE CONTRARY IS A CRIMINAL OFFENSE.


TABLE OF CONTENTS

Page
INTRODUCTION................................................................2
RISK FACTORS ...............................................................2
THE 1989 STOCK OPTION PLAN .................................................2
RESTRICTIONS ON RESALE......................................................8
INCORPORATION OF DOCUMENTS BY REFERENCE.....................................9

The date of this Prospectus is February 13, 1995.



<PAGE>



                           QUALITY SEMICONDUCTOR INC.

                             1989 STOCK OPTION PLAN

INTRODUCTION

This Prospectus  relates to 1,221,910 shares of Common Stock ("Common Stock") of
Quality  Semiconductor,  Inc. (the "Company")  issuable upon exercise of options
granted or to be granted to optionees under the Company's 1989 Stock Option Plan
(the "Plan").  This  Prospectus sets forth  information  concerning the Plan and
will be distributed to participating optionees pursuant to the Securities Act of
1933 (the "Securities Act").

Additional  information about the Plan and its administration can be obtained by
writing the Stock  Administrator of the Company at its executive  offices at 851
Martin Avenue, Santa Clara,  California 95050 or calling the Stock Administrator
at (408) 450-8000.

RISK FACTORS

For a  discussion  of certain  factors  that should be  considered  carefully in
evaluating the Company and its business before  purchasing the shares offered by
this  Prospectus,  reference is made to the sections  entitled  "Risk  Factors,"
"Business," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations"  contained in the Company's  Prospectus  (the  "Company's
Prospectus")  filed on November 18, 1994 with the U.S.  Securities  and Exchange
Commission (the "SEC") pursuant to Rule 424(b)(4) of the Securities Act of 1933,
as amended.

More recent information than that contained in the Company's  Prospectus will be
available  at such time as the Company  files with the SEC its Annual  Report on
Form 10-K (the  "Annual  Report")  for 1995 and  future  years.  Readers of this
Prospectus should refer to Item 1, entitled  "Business," which will be contained
in the  Annual  Report.  Readers  should  also  refer  to the  section  entitled
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"   that  will  be  contained  in  the  Company's   Annual  Report  to
Shareholders  for 1995 and future years and which will be included in the Annual
Report.  In addition,  readers  should refer to Item 2,  entitled  "Management's
Discussion and Analysis of Financial  Condition and Results of Operations," that
will be contained in the Company's  Quarterly  Reports on Form 10-Q, to be filed
with the SEC at certain dates.

Copies  of each of the  documents  described  above  are  available  (or will be
available) without charge from the Company through its Stock Administrator.

                           THE 1989 STOCK OPTION PLAN

General

The Plan was adopted by the Board of Directors in November  1989 and approved by
the  shareholders in December 1989. A total of 1,316,666  shares of Common Stock
have  been  reserved  for  issuance  under  the  Plan  As of the  date  of  this
Prospectus,  options to purchase  884,683 shares of Common Stock are outstanding
under the Plan,  337,227  shares of Common  Stock  remain  available  for future
option  grants and 94,756  shares had been  issued upon  exercise of  previously
granted options.

The following  summary of the Plan is provided as a matter of  convenience  only
and is qualified  in its entirety by the text of the Plan,  which is attached to
this Prospectus and incorporated by reference herein.

The Plan  provides  for grants to  employees  (including  officers  and employee
directors) of "incentive  stock options"  ("ISOs") within the meaning of Section
422 of the Internal  Revenue  Code of 1986,  as amended  (the  "Code"),  and for
grants of non-statutory  options ("NSOs") to employees  (including  officers and
employee directors) and consultants (not including nonemployee directors) of the
Company or any  subsidiary  of the  Company.  See  "Certain  Federal  Income Tax
Aspects of the Plan"  below for  information  concerning  the tax  treatment  of
incentive stock options and nonstatutory options.

The Plan is not a qualified  deferred  compensation plan under Section 401(a) of
the Code, and is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").

Purposes of the Plan

The  purposes  of the Plan are,  among  others,  to attract  and retain the best
available   personnel,   to  provide  additional   incentive  to  employees  and
consultants  of  the  Company  to  increase  the  value  of the  Company  to its
shareholders, and to encourage their continued service to the Company.

Administration

The Plan is  administered  by the Company's Board of Directors or a committee of
the Board (the  "Administrator").  The  Administrator may determine the terms of
the options granted,  including the exercise price, the number of shares subject
to each  option,  and the  conditions  to and  timing of  exercisability  of the
option.  The Administrator  also has the full power to select the individuals to
whom  options  will be  granted  and to make any  combination  of  grants to any
participants.   The  Administrator's  interpretation  and  construction  of  any
provision of the Plan are final and binding upon all participants.

Members of the Board receive no additional  compensation  for their  services in
connection  with the  administration  of the Plan. All directors  currently hold
office until the annual meeting of shareholders  of the Company  following their
election,  or until their  successors are duly elected and qualified.  Directors
may be removed  from office by the vote of the  majority of  outstanding  shares
pursuant to the provisions of Section 303 of the California General  Corporation
Law or by court order.

Securities to be Purchased

The securities to be purchased under the Plan are shares of Common Stock,  $.001
par value, of the Company.  The holders of Common Stock are entitled to one vote
per  share on all  matters  to be voted  upon by the  shareholders.  Subject  to
preferences  that may be  applicable  to any  outstanding  Preferred  Stock  the
holders of Common Stock are entitled to receive ratably such dividends,  if any,
as may be  declared  from  time to time by the Board of  Directors  out of funds
legally  available  therefor.  In the  event of a  liquidation,  dissolution  or
winding up of the  Company,  the holders of Common  Stock are  entitled to share
ratably in all assets  remaining after payment of liabilities,  subject to prior
rights of Preferred  Stock,  if any, then  outstanding.  The Common Stock has no
preemptive  or  conversion  rights or other  subscription  rights.  There are no
redemption or sinking fund provisions available to the Common Stock. The Company
has adopted  provisions in its Restated  Articles of Incorporation and Bylaws to
eliminate the ability of shareholders to take actions by written consent.  These
provisions may have the effect of discouraging,  delaying or preventing a change
in control of the Company.

The Company has 1,000,000  authorized  shares of "blank check"  Preferred  Stock
that may be issued  with such  designations,  rights and  preferences  as may be
determined from time to time by the Board of Directors, without any further vote
or action by the shareholders.  The issuance of Preferred Stock, while providing
desirable  flexibility  in  connection  with  possible  acquisitions  and  other
corporate  purposes,  could  have the effect of making it more  difficult  for a
third  party to  acquire  a  majority  of the  outstanding  voting  stock of the
Company,  thereby  delaying,  deferring or preventing a change in control of the
Company.  Furthermore,  such  Preferred  Stock may have other rights,  including
economic  rights,  senior to the Common  Stock and as a result,  the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common  Stock.  Although  the Company has no present  intention to issue any
additional  shares of its Preferred  Stock,  there can be no assurance  that the
Company will not do so in the future.

Eligibility

The Plan provides that incentive stock options may be granted only to employees,
(including  officers and employee directors) of the Company or any subsidiary of
the  Company,  while  nonstatutory  stock  options  may be  granted  not only to
employees (including officers and employee directors), but also consultants (not
including  non-employee  directors)  of the  Company  or any  subsidiary  of the
Company.

The Plan does not set  either a maximum  or  minimum  number of shares of Common
Stock which may be granted under options to any person.  However,  no person may
hold in a calendar  year more than  $100,000  worth of incentive  stock  options
(determined  by the total fair market value of shares  issuable upon exercise of
the vested options,  with the fair market value determined by the exercise price
of the options at time of grant) that first become  exercisable in that calendar
year.  To the extent  options  have been issued to a person  above the  $100,000
limit,  such options are treated as nonstatutory  options.  See "Certain Federal
Income Tax Aspects of the Plan" below.

Terms and Conditions of Options

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


     (a) Exercise of the Option.  The Administrator  determines when options may
be exercised. An option is exercised by giving written notice of exercise to the
Company specifying the number of full shares of Common Stock to be purchased and
by tendering of payment of the purchase price.  The purchase price of the shares
purchased upon exercise of an option shall be paid in consideration of such form
as is determined by the  Administrator,  and such form of consideration may vary
for each option.  Each  optionee  should refer to his or her  individual  option
agreement for  information as to the  exercisability  and form of  consideration
applicable to his or her option.



     (b) Exercise Price and  Consideration.  The option  exercise price for each
share  issuable  under an ISO may not be less than 100% of the fair market value
per  share on the date of  grant.  The  option  exercise  price  for each  share
issuable  under an NSO may not be less  than 85% of the fair  market  value  per
share on the date of grant of the  option.  In the case of  either  ISOs or NSOs
granted to a person who at the time of the grant  owns stock  representing  more
than 10% of the  total  combined  voting  power of all  classes  of stock of the
Company or any parent or  subsidiary,  the option  exercise price for each share
covered by such option may not be less than 1 10% of the fair market  value of a
share of Common Stock on the date of grant of such option.

     The  Administrator  of the Plan  determines  the fair  market  value of the
Common  Stock.  As long as the  Common  Stock of the  Company  is trading on the
National Market System of the National  Association of Securities Dealers,  Inc.
Automated  Quotation System  ("NASDAQ-NMS")  (as of the date of this Prospectus,
the Common Stock was traded on NASDAQ-NMS),  the fair market value of a share of
Common Stock of the Company  shall be the closing  sales price for such stock as
quoted on such system on the date of determination  (if for a given day no sales
were  reported,  the  closing  bid on that day shall be used),  as such price is
reported in The Wall Street Journal or such other source the Administrator deems
reliable.

     The  consideration  to be paid for  shares  issued on  exercise  of options
granted under the Plan,  including  the method of payment,  is determined by the
Administrator (in the case of ISOs, such determination shall be made at the time
of grant) and may consist entirely of cash, check, promissory note, other shares
of Common Stock that either have been beneficially  owned by the optionee for at
least six months or were not acquired, directly or indirectly, from the Company,
with a fair market value on the surrender  date equal to the aggregate  exercise
price of the shares as to which such option  shall be  exercised,  or such other
consideration  and method of payment  for the  issuance  of shares to the extent
permitted under Sections 408 and 409 of the California General  Corporation Law.
The  Administrator  may also authorize  payments by any combination of the above
methods or such other  consideration  and method of payment for the  issuance of
shares to the extent permitted under applicable laws.

     (c)  Termination  of Status As an Employee or  Consultant.  In the event of
termination  of an optionee's  employment or  consulting  relationship  with the
Company for any reason  other than death or permanent  disability,  the optionee
may  exercise  his or her option to the extent  that he or she was  entitled  to
exercise it at the date of  termination,  but such  exercise must be made within
thirty days (or such other period of time determined by the  Administrator,  but
not exceeding three months in the case of an ISO or six months in the case of an
NSO,  with such  determination  in the case of an ISO being  made at the time of
grant of the option).

     (d) Disability.  If an optionee is unable to continue his or her employment
or consulting  relationship with the Company as a result of his or her total and
permanent  disability,  an  option  may  be  exercised  (to  the  extent  it was
exercisable  upon the date of termination)  within six months of termination (or
such other period of time determined by the Administrator,  but not to exceed 12
months,  with such  determination in the case of an incentive stock option being
made at the time of grant of the  option),  but an option  may not be  exercised
later  than the date of  expiration  of the term of the option as set out in the
option  agreement.  Notwithstanding  the foregoing,  if an optionee is unable to
continue his or her employment or consulting  relationship with the Company as a
result of any disability not  constituting a total and permanent  disability (as
defined in Section  22(e)(3)  of the Code),  he may,  but only within six months
from  the  date of such  termination  (but in no  event  later  than the date of
expiration  of the term of such  option as set forth in the  option  agreement),
exercise  his option to the extent he was entitled to exercise it at the date of
such termination; provided, however, that if such optionee fails to exercise any
ISO within three months from the date of termination of employment,  such option
shall be treated  for federal  income tax  purposes as a NSO. To the extent that
optionee was not entitled to exercise the option at the date of termination,  or
if optionee  does not exercise  such option  (which he was entitled to exercise)
within the time specified herein, the option shall terminate.

     (e) Death.  If an  optionee  should die while  employed,  or within 30 days
following  the  termination  of optionee's  continuous  status as an employee or
consulting relationship,  the optionee's estate or a person who has acquired the
right to exercise the option by bequest or  inheritance  may exercise the option
at any time  within six  months  after the date of death (but not later than the
date  of  expiration  of  the  term  of the  option  as  set  out in the  option
agreement).  The option shall be  exercisable  to the extent the optionee  would
have been entitled So exercise the option had the optionee  continued living and
remained  an  employee  for six months  after the date of death.  If an optionee
shall die within 30 days (or such other  period not  exceeding  three  months as
determined by the  Administrator,  with the  determination in the case of an ISO
being made at the time of grant) after  termination  of  employment,  the option
shall be  exercisable at any time within six months after the date of death (but
in no event later than the date of  expiration  of the term of the option as set
forth in the option agreement).

     (f) Rule 16b-3.  Options granted to persons subject to Section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") must comply with Rule 16b-3
and shall contain such additional  conditions or restrictions as may be required
thereunder to qualify for the maximum  exemption from Section 16 of the Exchange
Act with respect to Plan transactions.

     (g) Term of Options.  The term of an option is  determined  by the specific
option  agreement.  Incentive  stock options may not have a term of more than 10
years.  Furthermore,  the maximum term for an option  granted to an optionee who
immediately  before  the  grant of such  option  owns more than 10% of the total
combined  voting  power of all  classes of stock of the Company or any parent or
subsidiary  is five years.  No option may be  exercised  by any person after its
term expires.

     (h) Option Not Transferable.  An option is  nontransferable by the optionee
other  than by will or the  laws of  descent  and  distribution.  An  option  is
exercisable  during  the  optionee's  lifetime  only  by the  optionee  and  the
designation of a beneficiary by an optionee will not constitute a transfer.

     (i)  Change  in  Control  Transactions.  In the  event  of a sale of all or
substantially  all of the assets of the  Company,  or the merger of the  Company
with or into  another  corporation,  the option may be assumed or an  equivalent
option  substituted by the successor  corporation.  In the event of the proposed
dissolution  or  liquidation  of the Company,  each option will terminate to the
extent it has not been previously exercised.

     (j) Other  Provisions.  The  option  agreement  may  contain  other  terms,
provisions and conditions as may be determined by the  Administrator  as long as
they are consistent with the Plan.

Adjustments upon Changes in Capitalization

In the  event  any  change  such as a stock  split  or  dividend  is made in the
Company's  capitalization  that results in an increase or decrease in the number
of outstanding  shares of Common Stock without receipt of  consideration  by the
Company,  appropriate  adjustment shall be made in the exercise price and in the
number of shares  subject  to each  option,  as well as in the  number of shares
available for issuance under the Plan.

Amendment and Termination of the Plan

The Board  may amend the Plan at any time or from time to time or may  terminate
the Plan without approval of the shareholders,  except that shareholder approval
is required for any  amendment to the Plan in such a manner and to such a degree
as required  to comply  with Rule 16b-3 or with  Section 422 of the Code (or any
other  applicable law or  regulation,  including the  requirements  of any Stock
Exchange).  However,  no action by the Board or shareholders may adversely alter
or impair any option  previously  granted under the Plan, unless mutually agreed
otherwise  between  the  optionee  and the Board.  The Plan shall  terminate  in
November 1999. Any options  outstanding at that time under the Plan shall remain
outstanding until they expire by their own terms.

Certain Federal Income Tax Aspects of the Plan

The following is a brief summary of the effect of federal  income  taxation upon
an optionee and the Company with respect to the grant of options and purchase of
shares under the Plan. This summary does not purport to be complete and does not
address  the federal  income tax  consequences  to  taxpayers  with  special tax
status. In addition,  this summary does not discuss the provisions of the income
tax laws of any municipality,  state or foreign country in which the participant
may reside,  and does not discuss estate,  gift or other tax consequences  other
than income tax consequences. The summary is based on federal income tax laws in
effect  as of the date of this  Prospectus,  which  could  change.  The  Company
advises  each  optionee  to consult  his or her own tax  advisor  regarding  the
taxation  of  option  grants  and  exercises  and for  reference  to  applicable
provisions of the Code.

              Options  granted  under  the Plan may be either  "incentive  stock
              options," as defined in Section 422 of the Code,  or  nonstatutory
              options.

If an option  granted under the Plan is an ISO, the optionee  will  recognize no
income upon grant of the incentive  stock option and incur no tax liability upon
the exercise  unless the  alternative  minimum tax rules apply (see below).  The
Company  will not be allowed a deduction  for federal  income tax  purposes as a
result  of  the  exercise  of an ISO  regardless  of  the  applicability  of the
alternative  minimum tax.  Upon the sale or exchange of the shares more than two
years  after grant of the ISO and one year after  exercise of the ISO,  any gain
will be  taxed to the  optionee  as  long-term  capital  gain.  If both of these
holding  periods are not  satisfied  at the time of  disposition  of the shares,
including  by gift (a  "premature  disposition"),  the optionee  will  recognize
ordinary  income in connection  with such  disposition  equal to the  difference
between the  exercise  price and the lower of the fair market value of the stock
at the date of the option  exercise or the sale price of the stock.  A different
rule for measuring  ordinary income upon such a premature  disposition may apply
if the optionee is also an officer,  director or 10% shareholder of the Company.
The Company  will be entitled to a deduction  in the same amount as the ordinary
income  recognized  by the  optionee.  Any gain  recognized  on such a premature
disposition  of the shares in excess of the amount  treated as  ordinary  income
will be characterized as long-term capital gain if the sale occurs more than one
year after  exercise of the option or as short-term  capital gain if the sale is
made earlier.  Currently,  the federal  income tax rate on net capital gain (net
long-term  capital  gain minus net  short-term  capital  loss) is capped at 28%,
whereas  other income is taxable at federal  rates of as much as 39.6%.  Capital
losses are allowed in full against capital gains plus $3,000 of other income.

All  options  which  are not ISOs are  treated  as NSOs.  An  optionee  will not
recognize any taxable  income at the time he or she is granted an NSO.  However,
upon its exercise,  the optionee will recognize ordinary income for tax purposes
measured  by the excess of the then fair  market  value of the  shares  over the
option  price.  In certain  circumstances,  where the  shares  are  subject to a
substantial  risk of forfeiture  when acquired or where sale of shares  acquired
upon  exercise of an option could  subject the  optionee,  because of his or her
status as a director,  officer or 10% shareholder of the Company,  to suit under
Section 16 of the Exchange Act, the date of recognition of such ordinary  income
may be  deferred  for up to six  months  unless  the  optionee  timely  files an
election with the Internal  Revenue Service under Section 83(b) of the Code. The
optionee's  holding period for long-term capital gains purposes  commences as of
the  date  he or she  recognizes  ordinary  income  with  respect  to an  option
exercise. Upon resale of such shares by the optionee, any difference between the
sales price and the exercise  price,  to the extent not  recognized  as ordinary
income as  provided  above,  will be treated as capital  gain or loss,  and will
qualify for  long-term  capital  gain or loss  treatment if the shares have been
held for more than one year.  The Company will be entitled to a tax deduction in
the amount and at the time that the  optionee  recognizes  ordinary  income with
respect to shares acquired upon exercise of an NSO

Alternative Minimum Tax

The exercise of an ISO may subject the optionee to the  alternative  minimum tax
("AMT")  under  Section 55 of the Code.  The AMT is calculated by applying a tax
rate of 26% to alternative  minimum  taxable income up to $175,000  ($87,500 for
married taxpayers filing separately) and 28% to alternative minimum income above
$175,000.  Alternative  minimum  taxable  income is equal to (i) taxable  income
adjusted for certain items  (including  any excess at the time of exercise of an
incentive  stock  option of the value of the stock  over the  exercise  price as
described  below),  plus (ii) items of tax preference less (iii) an exclusion of
$45,000 for joint returns and $33,750 for individual returns.

In computing  alternative minimum taxable income, shares purchased upon exercise
of an ISO are treated as if they had been  acquired by the optionee  pursuant to
an NSO.  Accordingly,  alternative minimum taxable income includes the excess of
the value of the stock  subject to such option  over the  exercise  price.  That
excess  normally is  increased  as of the date of exercise of the option,  but a
special rule applies. This may be particularly  significant if shares subject to
a repurchase option of the Company are purchased upon exercise of an ISO or if a
sale of the shares acquired upon exercise of an option could subject an optionee
to suit under Section 16(b) of the Exchange Act. Under certain circumstances, an
optionee may affect the timing and measurement of AMT by filing an election with
the Internal  Revenue  Service  under  Section  83(b) of the Code within 30 days
after the date of exercise of an ISO. Therefore,  an optionee should consult his
or her own tax advisor prior to exercising an ISO concerning the advisability of
filing an election under Section 83(b) of the Code.

If an  optionee  pays AMT in excess of his or her  regular  tax  liability,  the
amount of such AMT relating to ISOs may be carried  forward as a credit  against
any subsequent year's regular tax in excess of the AMT.


<PAGE>



RESTRICTIONS ON RESALE

The officers and directors of the Company  eligible to  participate  in the Plan
may be deemed to be  "affiliates"  of the Company as that term is defined  under
the  Securities  Act.  Common Stock  acquired under the Plan by an affiliate may
only be reoffered or resold pursuant to an effective  registration  statement or
pursuant  to Rule 144 under the  Securities  Act or another  exemption  from the
registration  requirements  of the Securities  Act. Such reoffers or resales may
not be made pursuant to this Prospectus.

                     INCORPORATION OF DOCUMENTS BY REFERENCE

              This Prospectus  incorporates by reference the following documents
              that  have  been  filed by the  Company  with the  Securities  and
              Exchange Commission, or portions of such documents:

1. The  Company's  Prospectus  filed  on  November  18,  1994  pursuant  to Rule
424(b)(4) of the Securities Act, which contains audited financial statements for
the Company's latest fiscal year for which such statements have been filed.

2. Items 1 and 2 of the  Company's  Registration  Statement on Form 8-A filed on
October 26, 1994 pursuant to Section 12 of the Exchange Act.

All  documents  subsequently  filed by the Company  pursuant to Sections  13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective
amendment  which  indicates that all securities  offered have been sold or which
deregisters  all  securities  then  remaining  unsold,  shall  be  deemed  to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents.

The Company hereby undertakes to provide without charge to each person to whom a
copy of this  Prospectus has been  delivered,  on the written or oral request of
any such  person,  copies of the  documents  described  above and all  documents
subsequently  filed by the Company  pursuant to Sections  13(a),  13(c),  14 and
15(d) of the Exchange Act  (including  Annual  Reports,  Forms 10-K and 10-Q and
Proxy  Statements)  prior to the  filing  of a  post-effective  amendment  which
indicates that all securities  offered have been sold or which  deregisters  all
securities then remaining unsold,  all of which are hereby  incorporated in this
Prospectus by reference, effective upon the filing date of such documents.

Requests for such copies, or additional  information  regarding the Plan and its
administration  should be directed to the Company's Stock  Administrator  at the
Company's offices at 851 Martin Avenue, Santa Clara, California 95050 (telephone
number: (408) 450-8000).


<PAGE>



                                                                   Exhibit 10.2b

                           QUALITY SEMICONDUCTOR, INC.

                             1989 STOCK OPTION PLAN


1.  Purposes of the Plan.  The purposes of this Stock Option Plan are to attract
and  retain  the  best   available   personnel  for  positions  of   substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.

         Options  granted   hereunder  may  be  either   Incentive   Options  or
Nonstatutory  Stock Options,  at the discretion of Board and as reflected in the
terms of the written option agreement.

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

     (a) "Board" shall mean the  Committee,  if one has been  appointed,  or the
         Board of Directors of the Company, if no Committee is appointed.

     (b) "Code" shall mean the Internal Revenue Code of 1986, as amended.

     (c) "Committee"  shall  mean  the  Committee  appointed  by  the  Board  of
         Directors in accordance with paragraph (a) of Section 4 of the Plan, if
         one is appointed.

     (d) "Common Stock" shall mean the Common Stock of the Company.

     (e) "Company" shall mean Quality Semiconductor, Inc., a California    
         corporation.

     (f) "Consultant" shall mean any person who is engaged by the Company or any
         Parent or Subsidiary to render  consulting  services and is compensated
         for such consulting  services,  and any director of the Company whether
         compensated for such services or not; provided that if and in the event
         the  Company  registers  any class of any equity  security  pursuant to
         Section 12 of the  Securities  Exchange  Act of 1934,  as amended  (the
         "Exchange  Act"),  the term  Consultant  shall  thereafter  not include
         directors who are not compensated for their services or are paid only a
         director's fee by the Company.

     (g) "Continuous Status as an Employee or Consultant" shall mean the absence
         of any  interruption  or  termination  of  service  as an  Employee  or
         Consultant. Continuous Status as an Employee or Consultant shall not be
         considered  interrupted in the case of sick leave,  military  leave, or
         any other leave of absence  approved by the Board;  provided  that such
         leave is for a period of not more than 90 days or reemployment upon the
         expiration of such leave is guaranteed by contract or statute.

     (h) "Employee"  shall mean any person,  including  officers and  directors,
         employed by the Company or any Parent or Subsidiary of the Company. The
         payment of a director's  fee by the Company  shall not be sufficient to
         constitute "employment" by the Company.

     (i) "Incentive Stock Option" shall mean an Option intended to qualify as an
         incentive stock option within the meaning of Section 422A of the Code.

     (j)  "Nonstatutory  Stock  Option"  shall  mean an Option not  intended  to
qualify as an Incentive Stock Option.

     (k) "Option" shall mean a stock option granted pursuant to the Plan.

     (1) "Optioned Stock" shall meant he Common Stock subject to an Option.

     (m) "Optionee" shall mean an Employee or Consultant who receives an Option.

     (n) "Parent"  shall mean a "parent  corporation",  whether now or hereafter
         existing, as defined in Section 425(e) of the Code.

     (o) "Plan" shall mean this 1989 Stock Option Plan.

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

     (q) "Subsidiary"  shall mean a  "subsidiary  corporation",  whether  now or
         hereafter existing, as defined in Section 425(f) of the Code.

     3. Stock  Subject to the Plan.  Subject to the  provisions of Section 11 of
the Plan, the maximum  aggregate number of shares which may be optioned and sold
under  the  Plan  is  1,116,666  shares  of  Common  Stock.  The  Shares  may be
authorized, but unissued, or reacquired Common Stock.

         If an  Option  should  expire or become  unexercisable  for any  reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated,  become available for
future grant under the Plan.  Notwithstanding  any other  provision of the Plan,
shares  issued  under the Plan and later  repurchased  by the Company  shall not
become available for future grant or sale under the Plan.

4.       Administration of the Plan.

     (a) Procedure. The Plan shall be administered by the Board of Directors of 
         the Company.

     (i) Subject to  subparagraph  (ii),  the Board of  Directors  may appoint a
Committee  consisting  of not less than two members of the Board of Directors to
administer  the Plan on behalf of the Board of Directors,  subject to such terms
and  conditions as the Board of Directors may  prescribe.  Once  appointed,  the
Committee  shall  continue  to serve  until  otherwise  directed by the Board of
Directors. Members of the Board who are either eligible for Options or have been
granted Options may vote on any matters affecting the administration of the Plan
or the grant of any  Options  pursuant  to the Plan,  except that no such member
shall act upon the granting of an Option to himself,  but any such member may be
counted in  determining  the  existence  of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Options to him.

     (ii)  Notwithstanding  the foregoing  subparagraph (i), if and in any event
the Company registers any class of any equity security pursuant to Section 12 of
the Exchange Act, from the effective date of such registration  until six months
after the termination of such registration' any grants of Options to officers or
directors shall only be made by the Board of Directors;  provided, however, that
if a majority of the Board of Directors is eligible to  participate in this Plan
or any other  stock  option or other  stock  plan of the  Company  or any of its
affiliates,  or has been eligible at any time during the prior  one-year  period
(or, if shorter,  the period following the initial registration of the Company's
equity  securities  under Section 12 of the Exchange Act), any grants of Options
to directors must be made by, or only in accordance with the  recommendation of,
a  Committee  consisting  of  three  or more  persons,  who may but  need not be
directors or employees of the Company,  appointed by the Board of Directors  and
having  full  authority  to act in the  matter,  none  of whom  is  eligible  to
participate  in this Plan or any other  stock  option or other stock plan of the
Company or any of its  affiliates,  or has been  eligible at any time during the
prior  one-year  period  (or,  if  shorter,  the period  following  the  initial
registration of the Company's equity securities under Section 12 of the Exchange
Act).  Any Committee  administering  the Plan with respect to grants to officers
who are not also directors  shall conform to the  requirements  of the preceding
sentence. Once appointed,  the Committee shall continue to serve until otherwise
directed by the Board of Directors.

     (iii) Subject to the  foregoing  subparagraphs  (i) and (ii),  from time to
time the Board of Directors  may increase the size of the  Committee and appoint
additional  members thereof,  remove members (with or without cause) and appoint
new members in substitution  therefor,  fill vacancies however caused, or remove
all members of the Committee and thereafter directly administer the Plan.

     (b) Powers of the Board.  Subject to the  provisions of the Plan, the Board
shall  have the  authority,  in its  discretion:  (i) to grant  Incentive  Stock
Options  or  Nonstatutory  Stock  Options;  (ii) to  determine,  upon  review of
relevant  information  and in accordance with Section 8(b) of the Plan, the fair
market  value of the Common  Stock;  (iii) to determine  the exercise  price per
share of Options to be granted,  which  exercise  price shall be  determined  in
accordance  with Section 8(a) of the Plan;  (iv) to determine  the  Employees or
Consultants  to whom,  and the time or times at which,  Options shall be granted
and the number of shares to be represented by each Option,  (v) to interpret the
Plan, (vi) to prescribe, amend and rescind rules and regulations relating to the
Plan,  (vii) to determine the terms and provisions of each Option granted (which
need not be identical)  and, with the consent of the holder  thereof,  modify or
amend each Option,  (viii) to  authorize  any person to execute on behalf of the
Company any instrument  required to effectuate the grant of an Option previously
granted by the Board; and (ix) to make all other determinations deemed necessary
or advisable for the administration of the Plan.

     (c)  Effect  of  Board's  Decision.   All  decisions,   determinations  and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.

5.       Eligibility

     (a) Nonstatutory  Stock  Options  may be  granted  only  to  Employees  and
         Consultants.  Incentive Stock Options may be granted only to Employees.
         An Employee or Consultant  who has been granted an Option may, if he is
         otherwise eligible, be granted an additional Option or Options.

     (b) Each Option  shall be  designated  in the written  option  agreement as
         either an  Incentive  Stock  Option  or a  Nonstatutory  Stock  Option.
         However,  notwithstanding  such  designations,  to the extent  that the
         aggregate fair market value of the Shares with respect to which Options
         designated  as Incentive  Stock Options are  exercisable  for the first
         time by any Optionee  during any calendar  year (under all plans of the
         Company)   exceeds   $100,000,   such  Options   shall  be  treated  as
         Nonstatutory Stock Options.

     (c) For purposes of Section  5(b),  Options  shall be taken into account in
         the order in which they were granted,  and the fair market value of the
         Shares  shall be  determined  as of the time the Option with respect to
         such Shares is granted.

     (d) The Plan shall not confer upon any  Optionee  any right with respect to
         continuation of employment or consulting relationship with the Company,
         nor shall it interfere in any way with his right or the Company's right
         to terminate his  employment or  consulting  relationship  at any time,
         with or without cause.

6. Term of Plan.  The Plan shall become  effective  upon the earlier to occur of
its adoption by the Board of Directors  or its approval by the  shareholders  of
the Company as described in Section 17 of the Plan. It shall  continue in effect
for a term of ten (10) years unless  sooner  terminated  under Section 13 of the
Plan.

7. Term of Option.  The term of each  Incentive  Stock  Option shall be ten (10)
years from the date of grant  thereof or such shorter term as may be provided in
the Incentive Stock Option Agreement. The term of each Nonstatutory Stock Option
shall be ten (10)  years and one (1) day from the date of grant  thereof or such
shorter  term as may be provided in the  Nonstatutory  Stock  Option  Agreement.
However,  in the case of an Option  granted to an Optionee  who, at the time the
Option is granted,  owns stock  representing  more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
(a) if the Option is an Incentive Stock Option,  the term of the Option shall be
five (5) years  from the date of grant  thereof or such  shorter  term as may be
provided in the  Incentive  Stock  Option  Agreement,  or (b) if the Option is a
Nonstatutory  Stock  Option,  the term of the Option shall be five (5) years and
one (1) day  from  the  date of grant  thereof  or such  shorter  term as may be
provided in the Nonstatutory Stock Option Agreement.

8.       Exercise Price and Consideration.

     (a) The per Share  exercise  price for the Shares to be issued  pursuant to
         exercise  of an  Option  shall be such  price as is  determined  by the
         Board, but shall be subject to the following:

          (i)     In the case of an Incentive Stock Option

              (A)   granted to an Employee who, at the time of the grant of such
                    Incentive Stock Option,  owns stock  representing  more than
                    ten  percent  (10%) of the  voting  power of all  classes of
                    stock of the  Company or any Parent or  Subsidiary,  the per
                    Share  exercise price shall be no less than 110% of the fair
                    market value per Share on the date of grant.

              (B)   granted to any Employee,  the per Share exercise price shall
                    be no less than 100% of the fair  market  value per Share on
                    the date of grant.

         (ii) In the case of a Nonstatutory Stock Option

              (A)   granted  to a person  who,  at the time of the grant of such
                    Option,  owns stock representing more than ten percent (10%)
                    of the voting  power of all  classes of stock of the Company
                    or any Parent or  Subsidiary,  the per Share  exercise price
                    shall be no less  than  110% of the fair  market  value  per
                    Share on the date of the grant.

              (B)   granted to any person, the per Share exercise price shall be
                    no less than 85% of the fair  market  value per Share on the
                    date of grant.

For  purposes of this  Section  8(a),  in the event that an Option is amended to
reduce the exercise price,  the date of grant of such Option shall thereafter be
considered to be the date of such amendment.

     (b) The  fair  market  value  shall  be  determined  by  the  Board  in its
         discretion;  provided, however, that where there is a public market for
         the Common  Stock the fair market  value per Share shall be the mean of
         the bid and asked prices (or the closing  price per share if the Common
         Stock is listed  on the  National  Association  of  Securities  Dealers
         Automated  Quotation  ("NASDAQ")  National Market System) of the Common
         Stock for the date of grant,  as reported  in the Wall  Street  Journal
         (or, if not so reported,  as otherwise  reported by the NASDAQ  System)
         or, in the event the Common  Stock is listed on a stock  exchange,  the
         fair market value per Share shall be the closing price on such exchange
         on the date of grant of the  Option,  as  reported  in the Wall  Street
         Journal.

     (c) The  consideration to be paid for the Shares to be issued upon exercise
         of an Option,  including the method of payment,  shall be determined by
         the Board and may consist  entirely  of cash,  check  promissory  note,
         other  Shares of Common  Stock  which (i) either have been owned by the
         Optionee  for more than six (6) months on the date of surrender or were
         not acquired, directly or indirectly, from the Company, and (ii) have a
         fair  market  value on the  date of  surrender  equal to the  aggregate
         exercise  price  of  the  Shares  as to  which  said  Option  shall  be
         exercised, or any combination of such methods of payment, or such other
         consideration  and method of payment for the  issuance of Shares to the
         extent  permitted under Sections 408 and 409 of the California  General
         Corporation  Law.  In  making  its  determination  as to  the  type  of
         consideration to accept, the Board shall consider if acceptance of such
         consideration  may  be  reasonably  expected  to  benefit  the  Company
         (Section 315(b) of the California General Corporation Law).

9.       Exercise of Option.

     (a) Procedure for Exercise:  Rights as a  Shareholder.  Any Option  granted
         hereunder  shall be exercisable at such times and under such conditions
         as determined by the Board, including performance criteria with respect
         to the Company and/or the Optionee,  and as shall be permissible  under
         the  terms  of  the  Plan;  provided  that  such  Option  shall  become
         exercisable  at the rate of at least twenty percent (20%) per year over
         five (5) years from the date the Option is granted.

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

         An Option shall be deemed to be exercised  when written  notice of such
         exercise has been given to the Company in accordance  with the terms of
         the  Option by the  person  entitled  to  exercise  the Option and full
         payment  for the Shares with  respect to which the Option is  exercised
         has been  received by the Company.  Full payment may, as  authorized by
         the Board, consist of any consideration and method of payment allowable
         under Section 8(c) of the Plan. Until the issuance (as evidenced by the
         appropriate  entry on the books of the Company or of a duly  authorized
         transfer agent of the Company) of the stock certificate evidencing such
         Shares,  no right to vote or receive dividends or any other rights as a
         shareholder   shall  exist  with   respect  to  the   Optioned   Stock,
         notwithstanding the exercise of the Option. The Company shall issue (or
         cause to be issued) such stock  certificate  promptly  upon exercise of
         the Option.  In the event that the  exercise of an Option is treated in
         part as the  exercise of an  Incentive  Stock Option and in part as the
         exercise of a Nonstatutory  Stock Option  pursuant to Section 5(b), the
         Company shall issue a separate stock certificate  evidencing the Shares
         treated as acquired  upon  exercise of an Incentive  Stock Option and a
         separate  stock  certificate  evidencing the Shares treated as acquired
         upon exercise of a Nonstatutory  Stock Option,  and shall identify each
         such  certificate   accordingly  in  its  stock  transfer  records.  No
         adjustment  will be made for a  dividend  or other  right for which the
         record  date is  prior to the date the  stock  certificate  is  issued,
         except as provided in Section 11 of the Plan.

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

     (b) Termination  of Status as an  Employee or  Consultant.  In the event of
         termination  of an  Optionee's  Continuous  Status  as an  Employee  or
         Consultant  (as the case may be),  such  Optionee  may, but only within
         thirty (30) days (or such other period of time, not exceeding three (3)
         months in the case of an  Incentive  Stock  Option or six (6) months in
         the case of a Nonstatutory Stock Option, as is determined by the Board,
         with such  determination in the case of an Incentive Stock Option being
         made  at the  time of  grant  of the  Option)  after  the  date of such
         termination  (but in no event later than the date of  expiration of the
         term of such Option as set forth in the Option Agreement), exercise his
         Option to the extent that he was entitled to exercise it at the date of
         such  termination.  To the extent that he was not  entitled to exercise
         the Option at the date of such termination,  or if he does not exercise
         such  Option  (which  he was  entitled  to  exercise)  within  the time
         specified herein, the Option shall terminate.

(c)      Disability of Optionee.

     (i)  Notwithstanding  the provisions of Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his total and permanent  disability (as defined in Section 22(e)(3) of
the Code),  he may, but only within six (6) months (or such other period of time
not  exceeding  twelve  (12)  months as is  determined  by the Board,  with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option)  from the date of such  termination  (but in no event later
than  the date of  expiration  of the term of such  Option  as set  forth in the
Option Agreement), exercise his Option to the extent he was entitled to exercise
it at the date of such  termination.  To the extent that he was not  entitled to
exercise the Option at the date of termination,  or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein, the
Option shall terminate.

     (ii)  Notwithstanding the provisions of Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of any disability not  constituting a total and permanent  disability (as
defined in Section 22(e)(3) of the Code), he may, but only within six (6) months
from  the  date of such  termination  (but in no  event  later  than the date of
expiration  of the term of such  Option as set forth in the  Option  Agreement),
exercise  his Option to the extent he was entitled to exercise it at the date of
such termination; provided, however, that if such Optionee fails to exercise any
Incentive  Stock Option within three (3) months from the date of  termination of
employment,  such Option  shall be treated for federal  income tax purposes as a
Nonstatutory  Stock  Option.  To the extent that  Optionee  was not  entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such  Option  (which he was  entitled  to  exercise)  within the time  specified
herein, the Option shall terminate.

     (d) Death of  Optionee.  Notwithstanding  the  provisions  of Section  9(b)
above, in the event of the death of an Optionee:

     (i)  during  the  term of the  Option  who is at the  time of his  death an
Employee or  Consultant  of the  Company  and who shall have been in  Continuous
Status as an Employee or Consultant  since the date of grant of the Option,  the
Option may be exercised, at any time within six (6) months following the date of
death  (but in no event  later than the date of  expiration  of the term of such
Option as set forth in the Option  Agreement),  by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or  inheritance,
but only to the extent of the right to exercise  that would have accrued had the
Optionee  continued  living and remained in Continuous  Status as an Employee or
Consultant six (6) months after the date of death, or

     (ii) within  thirty (30) days (or such other  period of time not  exceeding
three (3) months as is determined by the Board,  with such  determination in the
case of an Incentive Stock Option being made at the time of grant of the Option)
after the  termination of Continuous  Status as an Employee or  Consultant,  the
Option may be exercised, at any time within six (6) months following the date of
death  (but in no event  later than the date of  expiration  of the term of such
Option as set forth in the Option  Agreement),  by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or  inheritance,
but only to the extent of the right to exercise  that had accrued at the date of
termination.

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

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

         In the event of the proposed dissolution or liquidation of the Company,
the Option will terminate immediately prior to the consummation of such proposed
action.  In  the  event  of a  merger  of  the  Company  with  or  into  another
corporation,  the  Option  may  be  assumed  or  an  equivalent  option  may  be
substituted  by such  successor  corporation  or a parent or  subsidiary of such
successor corporation.

     12. Time of Granting Options. The date of grant of an Option shall, for all
purposes,  be the date on which the Board makes the determination  granting such
Option.  Notice  of the  determination  shall  be  given  to  each  Employee  or
Consultant  to whom an Option is so granted  within a reasonable  time after the
date of such grant.

13.      Amendment and Termination of the Plan.

     (a) Amendment  and  Termination.  The Board may amend or terminate the Plan
         from time to time in such  respects  as the  Board may deem  advisable;
         provided  that,  the following  revisions or  amendments  shall require
         approval of the  shareholders of the Company in the manner described in
         Section 17 of the Plan:

         (i)   any increase in the number of Shares  subject to the Plan,  other
               than in  connection  with an  adjustment  under Section 11 of the
               Plan;

          (ii) any change in the designation of the class of persons eligible to
               be granted Options; or

         (iii) if the Company has a class of equity securities  registered under
               Section 12 of the  Exchange  Act at the time of such  revision or
               amendment,  any  material  increase in the  benefits  accruing to
               participants under the Plan.

     (b) Shareholder  Approval.  If any amendment requiring shareholder approval
         under  Section  13(a)  of the  Plan is  made  subsequent  to the  first
         registration  of any class of equity  securities  by the Company  under
         Section 12 of the Exchange  Act,  such  shareholder  approval  shall be
         solicited as described in Section 17 of the Plan.

     (c) Effect of Amendment or  Termination.  Any such amendment or termination
         of the Plan shall not affect Options  already  granted and such Options
         shall  remain  in full  force  and  effect as if this Plan had not been
         amended or terminated,  unless  mutually agreed  otherwise  between the
         Optionee and the Board,  which  agreement must be in writing and signed
         by the Optionee and the Company.

14.  Conditions Upon Issuance of Shares.  Shares shall not be issued pursuant to
the  exercise of an Option  unless the  exercise of such Option and the issuance
and  delivery of such Shares  pursuant  thereto  shall  comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further  subject to the  approval of counsel  for the Company  with
respect to such compliance.

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

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

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

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

17.      Shareholder Approval.

      (a)Continuance   of  the  Plan  shall  be  subject  to   approval  by  the
         shareholders  of the Company  within twelve (12) months before or after
         the date the Plan is adopted.

     (b) If and in the  event  that the  Company  registers  any class of equity
         securities  pursuant to Section 12 of the  Exchange  Act,  any required
         approval  of  the  shareholders  of the  Company  obtained  after  such
         registration  shall  be  solicited  substantially  in  accordance  with
         Section  14(a)  of the  Exchange  Act and  the  rules  and  regulations
         promulgated thereunder.

     (c) If any required  approval by the  shareholders of the Plan itself or of
         any amendment  thereto is solicited at any time  otherwise  than in the
         manner described in Section 17(b) hereof, then the Company shall, at or
         prior to the first annual meeting of  shareholders  held  subsequent to
         the  later  of (1)  the  first  registration  of any  class  of  equity
         securities  of the Company  under Section 12 of the Exchange Act or (2)
         the  granting of an Option  hereunder  to an officer or director  after
         such registration, do the following:

         (i)  furnish in writing to the  holders  entitled  to vote for the Plan
              substantially  the same  information  which would be required  (if
              proxies to be voted with respect to approval or disapproval of the
              Plan or  amendment  were then  being  solicited)  by the rules and
              regulations  in effect under  Section 14(a) of the Exchange Act at
              the time such information is furnished; and

         (ii) file with,  or mail for filing to,  the  Securities  and  Exchange
              Commission four copies of the written  information  referred to in
              subsection  (i)  hereof  not  later  than the  date on which  such
              information is first sent or given to shareholders.

18. Information to Optionees. The Company shall provide to each Optionee, during
the period for which such Optionee has one or more Options  outstanding,  copies
of all annual  reports.  The  Company  shall not be  required  to  provide  such
information  if the  issuance  of  Options  under  the  Plan is  limited  to key
employees  whose duties in  connection  with the Company  assure their access to
equivalent information.


<PAGE>



                                                                   Exhibit 10.2c

THIS  SECURITY HAS BEEN  ACQUIRED FOR  INVESTMENT  AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION  THEREOF.  NO SUCH SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT AN EFFECTIVE  REGISTRATION  STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL FOR THE COMPANY  THAT SUCH  REGISTRATION  IS NOT  REQUIRED
UNDER THE SECURITIES ACT OF 1933.

                           QUALITY SEMICONDUCTOR, INC.

                        INCENTIVE STOCK OPTION AGREEMENT


QUALITY  SEMICONDUCTOR,  INC., a California  corporation  (the  "Company"),  has
granted to the  undersigned  ("Optionee"),  an option to purchase  the number of
shares of Common Stock  designated  on the Notice of Grant of Stock  Options and
Grant Agreement (the "Notice")  attached hereto,  and in all respects subject to
the  terms,  definitions,  and  provisions  of the 1989 Stock  Option  Plan (the
"Plan")  adopted  by the  Company,  both of which  are  incorporated  herein  by
reference.  The terms  defined in the Plan shall have the same defined  meanings
herein.

     1. Nature of the Option. This Option is intended to qualify as an Incentive
Stock Option as defined in Section 422A of the Internal Revenue Code of 1989, as
amended (the "Code").

     2. Exercise Price.  The exercise price for each share of Common Stock shall
be the option Price designated on the Notice attached hereto, which price is not
less than the fair  market  value per share of the  Common  Stock on the date of
grant.

     3. Exercise of Option.  This Option shall be exercisable during its term in
accordance with the provisions of Section 9 of the Plan as follows:

     (i) Right to Exercise.

         (a)  Subject to subsections  3(i)(b) and (c), below,  this option shall
              be exercisable as designated on the Notice attached hereto.

         (b)  This Option may not be exercised for a fraction of a share.

         (c)  In the event of Optionee's death,  disability or other termination
              of  employment,  the  exercisability  of the Option is governed by
              Sections 7, 8 and 9 below.

     (ii)Method of Exercise.  This Option shall be exercisable by written notice
         stating the  election to exercise  the Option,  the number of Shares in
         respect  of which  the  Option  is  being  exercised,  and  such  other
         representations  and  agreements as to the holder's  investment  intent
         with  respect to such shares of Common  Stock as may be required by the
         Company  pursuant to the  provisions of the Plan.  Such written  notice
         shall be signed by the  Optionee and shall be delivered in person or by
         certified  mail to the  Secretary  of the Company.  The written  notice
         shall be  accompanied  by payment of the  exercise  price for the total
         number of shares  being  purchased.  This Option  shall be deemed to be
         exercised   upon  receipt  by  the  Company  of  said  written   notice
         accompanied  by said  exercise  price.  A form of notice is attached to
         this  Agreement  as Exhibit A and a form of  investment  representation
         letter is attached hereto as Exhibit B for Optionee's convenience.

         No Shares shall be issued  pursuant to the exercise of an Option unless
         such issuance and such exercise comply with all relevant  provisions of
         law and the  requirements  of any stock  exchange upon which the Shares
         may then be listed.  Assuming  such  compliance,  the  Shares  shall be
         considered  to be  transferred  to  Optionee  on the date on which  the
         Option is exercised with respect to such Shares.

4.       Optionee's  Representations.  By receipt of this option, by its
         execution, and by its exercise in whole or
         in part, Optionee represents to the Company that he understands that:

     (i)  both this option,  and any Shares  purchased  upon its  exercise,  are
          securities  the issuance by the Company of which  requires  compliance
          with federal and state security laws;

     (ii)these  securities  are made available to him only on the condition that
          he makes  the  representation  contained  in this  section  (4) to the
          Company;

     (iii)he has made a reasonable  investigation  of the affairs of the Company
          sufficient to be well informed as to the rights and the value of these
          securities;

     (iv)he understands  that the securities have not been registered  under the
          Securities  Act of  1933  (the  "Act")  in  reliance  upon a  specific
          exemption  contained  in that Act  which  depends  upon his bona  fide
          investment intention in acquiring these securities; that his intention
          is to hold these  securities  for his own  benefit  for an  indefinite
          period;  that he has no present  intention of selling or  transferring
          any part thereof (recognizing that the option is not transferable) and
          that  there may be  certain  restrictions  on  transfer  of the shares
          subject to the option;

     (v)  he understands  that the Shares subject to the option,  in addition to
          other  restrictions  on  transfer,  must be held  indefinitely  unless
          subsequently  registered  under the Act, or unless an  exemption  from
          registration  is  available;   that  Rules  144  and  701,  the  usual
          exemptions  from  registration,  are  only  available  (i)  after  the
          satisfaction  of certain  holding  periods,  (ii) in the presence of a
          public market for the Shares and (iii) in the case of Rule 701, if the
          Company   satisfies   certain   conditions  and  files  the  necessary
          documentation with the Securities and Exchange Commission (the "SEC");
          that there is no  certainty  that a public  market for the Shares will
          exist, and that otherwise it will be necessary that the Shares be sold
          pursuant to another exemption from registration which may be difficult
          to satisfy;

     (vi)he understands that the certificate representing the Shares will bear a
          legend prohibiting their transfer in the absence of their registration
          or the  opinion of counsel for the Company  that  registration  is not
          required,  and a legend prohibiting their transfer without the consent
          of the Commissioner of Corporations of the State of California; and

     (vii)he has read the applicable  rules of the Commissioner of Corporations,
          which are attached as Exhibit C to this Agreement.

5.       Method of Payment. Payment of the exercise price shall be by:

         (a)  cash; or

         (b)  check.

6. Restrictions on Exercise. This Option may not be exercised if the issuance of
such Shares upon such  exercise  or the method of payment of  consideration  for
such shares  would  constitute a violation  of any  applicable  federal or state
securities  or other law or  regulation,  including  any rule  under Part 207 of
Title 12 of the Code of Federal Regulations  ("Regulation G"), as promulgated by
the Federal  Reserve Board.  As a condition to the exercise of this Option,  the
Company may  require  Optionee to make any  representation  and  warranty to the
Company that may be required by any applicable law or regulation.

7.  Termination  of Status as an  Employee.  If  Optionee  ceases to serve as an
Employee,  he may, but only within  thirty (30) days after the date he ceases to
be an Employee of the  Company,  exercise  this Option to the extent that he was
entitled to exercise it at the date of such  termination.  To the extent that he
was not entitled to exercise this Option at the date of such termination,  or if
he does not exercise this Option within the time  specified  herein,  the Option
shall terminate.

8. Disability of Optionee. Notwithstanding the provisions of Section 7 above, if
Optionee is unable to continue  his  employment  with the Company as a result of
his total and  permanent  disability  (as defined in Section  422A(C) (9) of the
Internal  Revenue Code), he may, but only within six (6) months from the date of
termination of employment,  exercise his Option to the extent he was entitled to
exercise  it at the  date of such  termination.  To the  extent  that he was not
entitled to exercise  the Option at the date of  termination,  or if he does not
exercise  such  Option  (which he was  entitled  to  exercise)  within  the time
specified herein, the Option shall terminate.

9.       Death of optionee. In the event of the death of Optionee:


<PAGE>



     (a) during the term of this Option and while an Employee of the Company and
         having been in Continuous Status as an Employee since the date of grant
         of this Option, this Option may be exercised,  at any time within three
         (3) months  following the date of death,  by Optionee's  estate or by a
         person who  acquired  the right to  exercise  this Option by bequest or
         inheritance, but only to the extent of the right to exercise that would
         have accrued had Optionee  continued  living and remained in Continuous
         Status as an Employee three (3) months after the date of death; or

     (b) within thirty (30) days after the termination of Optionee's  Continuous
         Status as an Employee, this Option may be exercised, at any time within
         three (3) months  following the date of death, by Optionee's  estate or
         by a person who acquired  the right to exercise  this Option by bequest
         or  inheritance,  but only to the extent of the right to exercise  that
         had accrued at the date of termination.

10.  Non-Transferability  of  Option.  This  Option  may not be  sold,  pledged,
assigned,  hypothecated,  transferred or disposed of in any manner other than by
will or by the laws of descent or distribution  and may be exercised  during the
lifetime of Optionee only by him. The terms of this Option shall be binding upon
the executors, administrators, heirs, successors, and assigns of Optionee.

11.  Right of First  Refusal.  In the event,  at any time after the date of this
Option, the Optionee or his transferee desires to sell or transfer in any manner
the Shares  which he has received  under this Option,  he shall first offer such
Shares for sale to the  Company at the same  price,  and upon the same terms (or
terms as similar as  reasonably  possible)  upon which he is  proposing or is to
dispose of said  Shares.  Said right of first  refusal  shall be provided to the
Company  for a period of thirty  (30) days  following  receipt by the Company of
written notice by the Optionee of the terms and conditions of said proposed sale
or transfer  and the name,  address and phone number of each  proposed  buyer of
transferee.  If the Company desires to exercise such right of first refusal,  it
shall notify Optionee in writing within such thirty day period. In the event the
Shares are not disposed of on such terms within thirty (30) days following lapse
of the period of the right of first  refusal  provided  to the Company or if the
Optionee proposes to change the price or other terms to make them more favorable
to the buyer,  they  shall  once again be subject to the right of first  refusal
herein provided.

12.  Involuntary  Transfer.  In the  event,  at any time  after the date of this
Option,  of any transfer by operation of law or any other  involuntary  transfer
(including  death or  divorce)  of all or  portion  of the  Shares by the record
holder  thereof,  the Company shall have an option to purchase all of the Shares
transferred.  Upon such a  transfer,  the  person  acquiring  the  Shares  shall
promptly  notify the  Secretary  of the Company of such  transfer.  The right to
purchase  such  Shares  shall be  provided to the Company for a period of thirty
(30) days  following  receipt by the  Company  of  written  notice by the person
acquiring the Shares.  With respect to any stock to be  transferred  pursuant to
this Section 12, the price per Share shall be the price established by the Board
of Directors as the then fair market value of the Shares.

     13. Assignment. The right of the Company to purchase any part of the Shares
under  Sections  11 or 12 of this  Option may be assigned in whole or in part to
any   shareholder   or   shareholders   of  the  Company  or  other  persons  or
organizations.

14.  Termination  of Repurchase and Refusal  Rights.  The right of first refusal
granted  the  Company by Section 11 of this  Option and the right of  repurchase
granted the Company by Section 12 of this Option shall terminate at such time as
a public market exists for the Company's Common Stock (or any other stock issued
to Optionee in exchange for the Shares purchased under this Agreement).  For the
purpose of this  Agreement,  a "Public  Market"  shall be deemed to exist if (i)
said stock is listed on a national  securities exchange (as that term is used in
the  Securities  Exchange  Act of 1934) or (ii)  said  stock  is  traded  on the
over-the-counter  market and prices are  published  daily on business  days in a
recognized  financial  journal.  Notwithstanding  the  foregoing,  Optionee  and
Optionee's  transferees  will not,  without  the prior  written  consent  of the
Company,  offer,  sell,  contract  to sell or grant any  option to  purchase  or
otherwise  dispose of any of the Shares for a period of one hundred twenty (120)
days  following  the  effectiveness  of  a  registration   statement  under  the
Securities  Act of 1933, as amended,  in connection  with the Company's  initial
public offering of securities.

         Upon  termination of the right of first refusal  imposed by this Option
and the  expiration or exercise of the  Company's  repurchase  option  described
above, a new certificate or certificates representing the Shares not repurchased
shall be issued, on request, without any legend referring to such right of first
refusal or repurchase options.

15. Exempt  Transfers.  The  restrictions on transfer on the Shares (but not the
restriction on transfer of the  unexercised  option which is the subject of this
Agreement)  under Sections 11 and 12 shall not apply to a transfer to Optionee's
spouse  or to a  trustee  for  their  benefit,  or to  Optionee's  ancestors  or
descendants by descent  provided that such transferee  shall agree in writing to
take  such  Shares  subject  to all  the  terms  of  this  Agreement,  including
restrictions on further transfer.

     16.  Term of Option.  This Option may not be  exercised  more than ten (10)
years from the date of grant of this Option,  any may be  exercised  during such
term only in accordance with the Plan and the terms of this Option.

17. Early Disposition of Stock. Optionee understands that, if he disposes of any
Shares  received  under this Option  within two (2) years after the date of this
Agreement or within one (1) year after such Shares were transferred to him, then
he will be treated for federal income tax purposes as having  received  ordinary
income at the time of such  disposition  in an mount  equal to the excess of the
fair market  value of the Shares at the time such Shares were  delivered  to him
over the price paid for the Shares. Optionee hereby agrees to notify the Company
in  writing  within  thirty  (30) days  after the date of any such  disposition.
Optionee  understands  that, if he disposes of such Shares at any time after the
expiration of such two-year and one-year holding periods,  then any gain on such
sale will be taxed at capital gain rates.

<PAGE>



DATE OF GRANT: _____ /_____/9__


                                         QUALITY SEMICONDUCTOR, INC.
                                         A California Corporation

                                         By: STEPHEN H. VONDERACH VICE PRESIDENT
                                             and FINANCE CHIEF FINANCIAL OFFICER

OPTIONEE  ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION
3 HEREOF IS EARNED ONLY BY  CONTINUING  SERVICE AS AN EMPLOYEE OR  CONSULTANT AT
THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED,  BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER).  OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT,  NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED  HEREIN BY  REFERENCE,  SHALL  CONFER UPON  OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY,  NOR SHALL IT INTERFERE IN
ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT AT ANY
TIME, WITH OR WITHOUT CAUSE.

Optionee  acknowledges  receipt  of a copy of the Plan and  certain  information
related thereto and represents that he is familiar with the terms and provisions
thereof,  and  hereby  accepts  this  Option  subject  to all of the  terms  and
provisions  thereof.  Optionee  has  reviewed  the Plan and this Option in their
entirety,  has had an  opportunity  to obtain  the  advice of  counsel  prior to
executing  this  Option and fully  understands  all  provisions  of the  Option.
Optionee hereby agrees to accept as binding,  conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.




                                            (Optionee's signature)


                                            (Optionee's printed name)



<PAGE>



                                                                       EXHIBIT A

                              NOTICE OF EXERCISE OF
                             INCENTIVE STOCK OPTION

Quality Semiconductor, Inc.
851 Martin Ave.                                                  Date of
Santa Clara, CA 95050                                            Exercise:

              Re: Incentive Stock Option Grant Dated           /        /9

Gentlemen:

This  constitutes  notice  under my stock  option that I elect to  purchase  the
number of shares of Quality Semiconductor, Inc. Common Stock set forth below for
the price set forth below:

              Option Grant dated:         /        /9

              Number of shares as to which option is exercised:

              Total exercise price:

              Cash payment delivered herewith:


Unless such  documents  are  enclosed  herewith,  I hereby agree to execute such
additional  documents as may be required  pursuant to  subparagraph  9(a) of the
1989 Stock Option Plan. Please advise what additional documents may be required.

                                                       Very truly yours,


                                                       (Optionee's signature)


                                                       (Optionee's printed name)





<PAGE>



                                    LEASE ADDENDUM                 Exhibit 10.14

Landlord:                  James S. Lindsey
Tenant:                    Quality Semiconductor, Inc.
Premises:                  851 Martin Avenue, Santa Clara, CA 95050

WHEREAS

 1. Tenant and Landlord's predecessor,  Prudential Insurance Company of America,
executed a lease (hereinafter "the Lease") dated for reference purposes December
12, 1990, covering the Premises.

 2.   The Lease expires, by its terms, or March 10, 1998.

 3.   Landlord and Tenant wish to amend the Lease, and extend the Lease to
      expire on March 10, 2001.

         March 1, 1998                               $55,967.74
         April 1, 1998 thru August 1, 1999           $60,000.00
         September 1, 1999                           $62,666.66
         October 1, 1999 thru February 1, 2001       $64,000.00
         March 1, 2001                               $20,645.16

 4.  Landlord  shall  credit  the sum of  $75,000.00  against  the  rent due for
September and October,  1997. Tenant shall, before July 1, 1998, expend such sum
or more on improvements to the Premises, from the following list:

     o repair of plumbing  systems o repair of water damage to floor and walls o
     electrical repairs o replacement of carpeting o painting of interior walls

     Tenant shall submit paid bills proving said  expenditures on or before July
1, 1998. If less than  $75,000.00 is spent by Tenant prior to July 1, 1998, then
the difference between the sum spend and $75,000.00 shall be paid to Landlord on
July 1, 1998.

 5. Tenant shall have the benefit of the option described on paragraph 41 of the
Lease  except  that the Term  (paragraph  41(a) shall be three (3) years and the
Base rent shall be adjusted  (paragraph  41c(i) at the  beginning of month 18 by
one plus the  percentage  change  in the  Consumer's  Price  Index for the urban
consumers,  all items for the San  Francisco-Oakland-San  Jose Metropolitan area
from the first day of the Extension Term to the beginning of month eighteen (18)
of the Extension Term.

Dated:   July 22, 1997

Landlord:         /s/ James S. Lindsey      Tenant:  Quality Semiconductor, Inc.
                  James S. Lindsey
                                            By:      /s/ R. Paul Gupta
                                                         R. Paul Gupta
                                            Its:     President and CEO

<PAGE>
                                                                   Exhibit 10.15

                      FOURTH AMENDMENT TO CREDIT AGREEMENT

THIS FOURTH AMENDMENT TO CREDIT AGREEMENT ("Amendment"), dated as of
June 25,  1997,  effective  as of May 30,  1997,  is entered into by and between
QUALITY SEMICONDUCTOR,  INC. (the "Borrower") and BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION (the "Bank").

RECITALS

     A. The Borrower and the Bank are parties to a Credit  Agreement dated as of
March 22, 1996, as amended by a Waiver and First  Amendment to Credit  Agreement
dated as of July 31, 1996, and a Waiver and Second Amendment to Credit Agreement
dated as of November 27, 1996, and a Third  Amendment to Credit  Agreement dated
as of March 4, 1997,  effective  as of February  28,  1997 (as so  amended,  the
"Credit  Agreement")  pursuant  to which the Bank has  extended  certain  credit
facilities to the Borrower and certain of its Subsidiaries.

     B. The Borrower has requested that the Bank agree to certain  amendments to
the Credit Agreement.

     C. The Bank is willing to amend the Credit Agreement,  subject to the terms
and conditions of this Amendment.

NOW, THEREFORE,  for valuable  consideration,  the receipt and adequacy of which
are hereby acknowledged, the parties hereto hereby agree as follows:

     1. Defined Terms.  Unless otherwise defined herein,  capitalized terms used
herein  shall  have  the  meanings,  if any,  assigned  to  them  in the  Credit
Agreement.

     2.  Amendments to Credit Agreement.

         (a)  Section  1.01 of the  Credit  Agreement  shall be  amended  at the
              defined term "Availability  Period" by amending and restating such
              defined term in its entirety as follows:

     "'Availability Period': the period commencing on the date of this Agreement
and ending on the date that is the  earliest to occur of (i) June 30,  1998,  or
(ii) the  date on  which  the  Bank's  commitment  to  extend  credit  hereunder
terminates."

         (b)  Section  1.01 of the  Credit  Agreement  shall be  amended  at the
              defined term "Final  Maturity Date" by amending and restating such
              defined term in its entirety as follows:

     "'Final Maturity Date': (a) in respect of any Advances,  June 30, 1998; and
(b) in respect of any standby or  commercial  letters of credit,  September  30,
1998."

         (c)  Subsection  2.02 (a) of the Credit  Agreement shall be amended and
              restated in its entirety so as to read as follows:

              "(a)Subject  to the  other  provisions  of  this  Section,  Dollar
                    Advances under the Revolving Facility shall bear interest at
                    a rate per annum  equal to the  Reference  Rate  plus  0.25%
                    percentage  points per annum (the  Reference Rate plus 0.25%
                    percentage  points  per annum is  referred  to herein as the
                    "Floating  Rate").  The Borrower  shall,  or shall cause the
                    applicable Acceptable Subsidiary to, pay interest quarterly,
                    on the last day of each calendar  quarter until the last day
                    of the  Availability  Period,  on which date all accrued and
                    unpaid interest shall be due and payable. The Borrower shall
                    repay or cause the applicable Acceptable Subsidiary to repay
                    the principal  amount of each  Reference Rate Advance on the
                    date such advance is converted into an Offshore Rate Advance
                    under  subsection  (b)  below  and  on the  last  day of the
                    Availability Period."

         (d)  Clause (ii) of subsection  2.02 (b) of the Credit  Agreement shall
              be amended and restated in its entirety so as to read as follows:

              "(ii) The  Borrower  shall  pay  or  shall  cause  the  applicable
                    Acceptable  Subsidiary to pay interest on each Offshore Rate
                    Advance on the last day of the Offshore Rate Interest Period
                    for such Advance;  provided,  however,  that if any Interest
                    Period for a Offshore  Rate Advance  exceeds  three  months,
                    interest shall also be payable on the date which falls three
                    months after the  beginning of such  Interest  Period and on
                    each date which falls three months  after any such  interest
                    payment  date.  The Borrower  shall repay or shall cause the
                    applicable  Acceptable  Subsidiary  to repay  the  principal
                    balance of each Offshore Rate Advance on the last day of the
                    Offshore  Rate  Interest  Period for such  Advance,  and (if
                    sooner  occurring)  on the  last  day  of  the  Availability
                    Period."

         (e)  Section 7.09 of the Credit Agreement shall be amended and restated
              in its entirety so as to read as follows:

              "7.09 Tangible Net Worth. The Borrower shall not permit,  at any
              time, its consolidated  Tangible Net Worth to be less than
              $35,000,000."

         (f)  Schedule 2 to the  Compliance  Certificate  shall be  amended  and
              restated in its  entirety so as to read as set forth in Schedule 2
              attached hereto.

     3.  Representations and Warranties. The Borrower hereby represents and
         warrants to the Bank as follows:

         (a)  No Default or Event of Default has occurred and is continuing.

         (b)  The  execution,  delivery and  performance by the Borrower of this
              Amendment has been duly authorized by all necessary  corporate and
              other  action  and do not and will not  require  any  registration
              with, consent or approval of, - notice to or action by, any person
              (including  any  governmental  authority) in order to be effective
              and enforceable. The Credit Agreement as amended by this Amendment
              constitutes  the  legal,  valid  and  binding  obligations  of the
              Borrower, enforceable against it in accordance with its respective
              terms, without defense, counterclaim or offset.

         (c)  All  representations  and warranties of the Borrower  contained in
              the Credit Agreement are true and correct.

         (d)  The Borrower is entering  into this  Amendment on the basis of its
              own investigation  and for its own reasons,  without reliance upon
              the Bank or any other person.

<PAGE>

     4.  Effective Date: Post-Closing Deliveries.

         (a)  This Amendment will become effective as of May 30, 1997;  provided
              that on or before June 30, 1997,  the Bank has  received  from the
              Borrower a duly executed  original (or, if elected by the Bank, an
              executed facsimile copy) of this Amendment.

         (b)  The  Borrower  covenants  to  deliver to the Bank (i) on or before
              July 15, 1997, a current  incumbency  certificate,  and (ii) on or
              before August 30, 1997, a copy of a resolution passed by the board
              of directors  of the  Borrower,  certified by the  Secretary or an
              Assistant  Secretary  of the  Borrower  as being in full force and
              effect  on  the  date  of  such  certification,   authorizing  the
              execution, delivery and performance of this Amendment.

     5.  Reservation of Rights.  The Borrower  acknowledges  and agrees that the
         execution  and  delivery  by the Bank of this  Amendment  shall  not be
         deemed to create a course of dealing or otherwise  obligate the Bank to
         execute similar  amendments under the same or similar  circumstances in
         the future.

     6.  Miscellaneous.

     (a) Except as herein expressly amended, all terms, covenants and provisions
of the Credit  Agreement  are and shall  remain in full force and effect and all
references  therein or in the other Credit  Documents  to such Credit  Agreement
shall  henceforth  refer to the Credit  Agreement as amended by this  Amendment.
This  Amendment  shall be deemed  incorporated  into,  and a part of, the Credit
Agreement.

     (b) This  Amendment  shall be binding  upon and inure to the benefit of the
parties hereto and thereto and their respective successors and assigns. No third
party beneficiaries are intended in connection with this Amendment.

     (c) This  Amendment  shall be governed by and construed in accordance  with
the law of the State of California.

     (d) This Amendment may be executed in any number of  counterparts,  each of
which shall be deemed an  original,  but all such  counterparts  together  shall
constitute  but  one  and  the  same  instrument.  Each  of the  parties  hereto
understands  and agrees  that this  document  (and any other  document  required
herein) may be delivered by any party thereto  either in the form of an executed
original or an executed  original sent by facsimile  transmission to be followed
promptly by mailing of a hard copy  original,  and that receipt by the Bank of a
facsimile transmitted document purportedly bearing the signature of the Borrower
shall bind the  Borrower,  with the same force and effect as the  delivery  of a
hard copy  original.  Any failure by the Bank to receive the hard copy  executed
original of such  document  shall not diminish the binding  effect of receipt of
the facsimile  transmitted  executed  original of such document  which hard copy
page was not received by the Bank.

     (e) This Amendment, together with the Credit Agreement, contains the entire
and  exclusive  agreement  of the parties  hereto with  reference to the matters
discussed  herein and therein.  This  Amendment  supersedes all prior drafts and
communications  with respect thereto.  This Amendment may be amended or modified
only in writing, signed by the Borrower and the Bank.

     (f) If any term or provision of this Amendment  shall be deemed  prohibited
by or invalid under any  applicable  law, such  provision  shall be  invalidated
without  affecting  the  remaining  provisions  of this  Amendment or the Credit
Agreement, respectively.

     (g) The Borrower  covenants to pay to or reimburse  the Bank,  upon demand,
for all costs and  expenses  (including  allocated  costs of  in-house  counsel)
incurred in connection with the development, preparation, negotiation, execution
and delivery of this Amendment.


     IN WITNESS  WHEREOF,  the parties  hereto have executed and delivered  this
Amendment as of the date first above written.

                                       QUALITY SEMICONDUCTOR, INC.

                                       By: /s/  John P. Goldsberry

                                       Title:       Vice President - Finance
                                                    and Chief Financial Officer


                                       BANK OF AMERICA NATIONAL TRUST
                                       AND SAVINGS ASSOCIATION

                                       By: /s/  Debra G. Staiger

                                       Title:       Vice President



<PAGE>

                                                   Date: _______________, 199__
                                                   For the fiscal quartr/year
                                                   ended _______________, 199__

SCHEDULE 2
to Compliance Certificate
($ in 000s)1/

                                               Actual         Required/Permitted

1.       Section 7.03
         Dividends (Stock Repurchases).

         Repurchase of common stock                           Not to exceed
         since the date of the                                $1,300,000 in  
         Agreement                                            the aggregate

2.       Section 7.09
         Minimum Tangible Net Worth.

         Tangible Net Worth:

         (i)   Total Assets

                           less

         (ii)  goodwill, patents, trademarks, trade names, organization expense,
               treasury shares,  unamortized debt discount and premium, deferred
               charges and other like intangibles

                           less

         (iii) all liabilities (including
               accrued and deferred
               income taxes and
               subordinated liabilities)

                          (i) - (ii) - (iii)  =        Not less than $35,000,000





<PAGE>



                                           Actual            Required/Permitted

3.       Section 7.10 Quick Ratio.
         the ratio of:

         A.       the sum of:

                  (i)  cash

                          plus

                  (ii)short-term cash
                      investments

                          plus

                  (iii) current net accounts
                        receivable

                  =   (i)   +   (ii)   +   (iii)   =

         B.       current net liabilities

                          A
                          B                    =      Not less than 1.15 to 1.00

4.       Section 7.11
         Leverage Ratio.

         the ratio of:

         A.       total liabilities

         B.       Tangible Net Worth
                  (from 2 above)

                          A
                          B                    =   Not greater than 0.85 to 1.00





<PAGE>



                                         Actual              Required/Permitted

5.       Section 7.12(a)
         Losses in Two Consecutive
         Quarters.

         A.       (i) Operating loss for
                      fiscal quarter just                    Not to exceed 0 if
                      ended                                  (ii) shows a loss.

                  (ii)Operating loss for the
                      fiscal quarter
                      immediately preceding
                      the fiscal quarter just
                      ended

         B.       (i) Net loss for fiscal          Not to exceed 0 if (ii) shows
                      quarter just ended           a loss.

                  (ii)Net loss for the
                      fiscal quarter
                      immediately preceding
                      the fiscal quarter just
                      ended

6.       Section 7.12(b) Losses in
         One Quarter.

         Operating loss for fiscal quarter          Not to exceed 5% of Tangible
         just ended                                 Net Worth as of immediately
                                                    preceding fiscal quarter:
                                                    Tangible Net Worth
                                                    from last quarter's
                                                    Compliance
                                                    Certificate
                                                    Item No. 2

                                                    x 5%

                                                    =

         Net loss for fiscal quarter               Not to exceed 5% of Tangible
         just ended                                Net Worth as of immediately
                                                   preceding fiscal quarter as
                                                   computed above:


<PAGE>


                                                                   Exhibit 10.16

                           CHANGE OF CONTROL AGREEMENT

         This Change of Control  Agreement (the "Agreement") is made and entered
into  effective as of August 28, 1997, by and among the  directors  signing this
Agreement (each a "Director" and,  collectively,  the  "Directors")  and Quality
Semiconductor, Inc., a California corporation (the "Company").

RECITALS

     A. It is expected  that  another  company or other  entity may from time to
time  consider  the  possibility  of  acquiring  the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board").  The Board recognizes that such consideration can be
a distraction  to a Director and can cause the Director to consider  alternative
opportunities.  The Board has determined that it is in the best interests of the
Company and its  shareholders to assure that the Company will have the continued
dedication and objectivity of the Directors,  notwithstanding  the  possibility,
threat or occurrence of a Change of Control (as defined below) of the Company.

     B. The Board  believes that it is in the best  interests of the Company and
its  shareholders to provide each of the Directors with an incentive to continue
his or her engagement with the Company.

     C. The Board  believes that it is imperative to provide the Directors  with
certain  benefits  upon a Change of  Control,  which  benefits  are  intended to
provide the Directors with financial  security and provide sufficient income and
encouragement  to the Directors to remain with the Company  notwithstanding  the
possibility of a Change of Control.

     D. To accomplish the foregoing  objectives,  the Company, upon execution of
this  Agreement  by the  parties,  will  agree  to the  terms  provided  in this
Agreement.

     E. Certain capitalized terms used in the Agreement are defined in Section 3
below.

         In  consideration  of the mutual  covenants  herein  contained,  and in
consideration  of the  continuing  engagement  of Director by the  Company,  the
parties agree as follows:

     1. Restricted  Stock and Stock Options.  Subject to Section 5 below, in the
event of a Change of Control and  regardless of whether a Director's  engagement
with the Company is  terminated in  connection  with the Change of Control,  the
vesting  schedule for each unvested  share of Common Stock or option to purchase
Common Stock held by a Director (collectively referred to as the "Shares") shall
be accelerated by two (2) years. Thereafter, so long as Director remains engaged
by  the  Company  (or  a  successor  corporation)  as a  Director,  employee  or
consultant, the remaining Shares that have not otherwise vested as of the Change
of Control shall vest over the remaining  vesting term applicable to the Shares.
Each stock option  shall be  exercisable  to the extent so vested in  accordance
with the  provisions  of the option  agreement  and Plan  pursuant to which such
option  was  granted  and  each  Share  of  restricted  stock  shall  be  freely
transferable  to the extent so vested in accordance  with the  provisions of the
agreement pursuant to which such stock was purchased by Director.


     2. Change of Control. In the event a Director's  engagement  terminates for
any reason  prior to the  occurrence  of a Change of Control,  then the Director
shall not be entitled  to  acceleration  of vesting  under this  Agreement.  The
Director's benefits will be terminated under the Company's then existing benefit
plans and policies in  accordance  with such plans and policies in effect on the
date of termination or as otherwise  determined by the Board of Directors of the
Company.

     3.  Definition of Terms.  The following terms referred to in this Agreement
shall have the following meanings:

     (a) Change of Control. "Change of Control" shall mean the occurrence of any
of the following events:

     (i)  Ownership.  Any "Person"  (as such term is used in Sections  13(d) and
14(d) of the  Securities  Exchange  Act of 1934,  as  amended) is or becomes the
"Beneficial  Owner"  (as  defined in Rule 13d-3  under  said Act),  directly  or
indirectly, of securities of the Company representing fifty-one percent (51%) or
more of the total voting power  represented  by the Company's  then  outstanding
voting securities without the approval of the Board of Directors of the Company;

     (ii)  Merger/Sale  of  Assets.  A merger or  consolidation  of the  Company
whether or not approved by the Board of  Directors of the Company,  other than a
merger or  consolidation  which  would  result in the voting  securities  of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining  outstanding  or by being  converted  into  voting  securities  of the
surviving  entity)  at least  fifty  percent  (50%) of the  total  voting  power
represented  by the voting  securities of the Company or such  surviving  entity
outstanding immediately after such merger or consolidation;

     (iii) Sale of Assets; Liquidation. An agreement for the sale or disposition
by the  Company  of all or  substantially  all of the  Company's  assets  or the
shareholders  of the  Company  approve  a plan of  complete  liquidation  of the
Company in  connection  with an  agreement  for the sale or  disposition  by the
Company of all or substantially all of the Company's assets; or

     (iv) Change in Board Composition.  A change in the composition of the Board
of Directors  of the Company,  as a result of which fewer than a majority of the
directors are Incumbent  Directors.  "Incumbent  Directors" shall mean directors
who either (A) are directors of the Company as of the date of this  Agreement or
(B) are elected,  or nominated  for  election,  to the Board of Directors of the
Company  with the  affirmative  votes of at least a  majority  of the  Incumbent
Directors at the time of such election or  nomination  (but shall not include an
individual  whose  election or  nomination  is in  connection  with an actual or
threatened proxy contest relating to the election of directors to the Company).

     4. Tax  Liability  on  Payments.  To the extent that any of the payments or
benefits  provided  for in this  Agreement to a Director  constitute  "parachute
payments"  within the meaning of Section  280G of the  Internal  Revenue Code of
1986,  as amended (the "Code") and would be subject to the excise tax imposed by
Section  4999 of the Code,  the Company will pay the Director an amount equal to
such excise tax;  provided,  however,  that the Director will be responsible for
paying  any and all  income  taxes  owed by him or her as a result of receipt of
such payment  from the Company and the Company will not be further  obligated to
gross  up  Director's  payments  and/or  benefits  to  offset  such  income  tax
obligation.

     5. Certain  Business  Combinations.  In the event it is  determined  by the
Board, upon receipt of a written opinion of the Company's  independent auditors,
that the  enforcement of any agreement  between a Director and the Company which
allows for the acceleration of vesting of stock and/or stock options granted for
the Company's  securities upon the effective date of a Change of Control,  would
preclude  accounting  for  any  proposed  business  combination  of the  Company
involving a Change of Control as a pooling of interests, and the Board otherwise
desires to approve  such a proposed  business  transaction  which  requires as a
condition  to the  closing of such  transaction  that it be  accounted  for as a
pooling of interests,  then any such Section of this Agreement shall be null and
void.  For purposes of this Section 5, the Board's  determination  shall require
the unanimous approval of the non-employee Board members.

     6. Successors. Any successor to the Company (whether direct or indirect and
whether by purchase, lease, merger, consolidation,  liquidation or otherwise) to
all or  substantially  all of the Company's  business and/or assets shall assume
the  obligations  under  this  Agreement  and agree  expressly  to  perform  the
obligations  under this  Agreement  in the same manner and to the same extent as
the Company  would be required to perform such  obligations  in the absence of a
succession.  The  terms  of  this  Agreement  and all of the  Directors'  rights
hereunder  shall inure to the benefit of, and be  enforceable  by, a  Director's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.

     7.  Notice.  Notices  and all  other  communications  contemplated  by this
Agreement  shall be in writing  and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt  requested and postage  prepaid.  Mailed  notices to a Director shall be
addressed to the Director at the home address  which the Director  most recently
communicated  to the  Company in  writing.  In the case of the  Company,  mailed
notices shall be addressed to its corporate headquarters,  and all notices shall
be directed to the attention of its Secretary.

     8. Miscellaneous Provisions.

     (a) No Duty to Mitigate.  The  Directors  shall not be required to mitigate
the  amount  of any  payment  contemplated  by this  Agreement,  nor,  except as
otherwise  provided in this Agreement,  shall any such payment be reduced by any
earnings that the Directors may receive from any other source.

     (b) Waiver.  No provision of this  Agreement  shall be modified,  waived or
discharged  as to a Director  unless the  modification,  waiver or  discharge is
agreed to in writing and signed by the Director and by an authorized  officer of
the Company (other than the  Director).  No waiver by either party of any breach
of, or of compliance  with,  any condition or provision of this Agreement by the
other party shall be considered a waiver of any other  condition or provision or
of the same condition or provision at another time.

     (c) Whole  Agreement.  No  agreements,  representations  or  understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this  Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes any agreement of
the same title and concerning  similar subject matter dated prior to the date of
this  Agreement,  and by execution of this Agreement both parties agree that any
such predecessor agreement shall be deemed null and void.

     (d)  Choice  of  Law.  The  validity,   interpretation,   construction  and
performance  of this  Agreement  shall be  governed  by the laws of the State of
California without reference to conflict of laws provisions.

     (e)  Severability.  If any  term  or  provision  of this  Agreement  or the
application  thereof to any  circumstance  shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such  jurisdiction  to the extent of such  invalidity or  unenforceability
without  invalidating  or  rendering   unenforceable  the  remaining  terms  and
provisions of this Agreement or the  application of such terms and provisions to
circumstances  other than those as to which it is held invalid or unenforceable,
and a suitable and equitable term or provision shall be substituted  therefor to
carry out,  insofar as may be valid and  enforceable,  the intent and purpose of
the invalid or unenforceable term or provision.

     (f) Arbitration.  Any dispute or controversy arising under or in connection
with this  Agreement  may be settled  at the  option of either  party by binding
arbitration  in the County of Santa Clara,  California,  in accordance  with the
rules of the American  Arbitration  Association then in effect.  Judgment may be
entered on the  arbitrator's  award in any court having  jurisdiction.  Punitive
damages shall not be awarded.

     (g)  Legal  Fees and  Expenses.  The  parties  shall  each  bear  their own
expenses, legal fees and other fees incurred in connection with this Agreement.

     (h) No  Assignment  of  Benefits.  The rights of any person to  payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary  assignment or by operation of law, including
(without  limitation)  bankruptcy,  garnishment,  attachment or other creditor's
process, and any action in violation of this subsection (h) shall be void.

     (i) Employment  Taxes. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.

     (j)  Assignment  by Company.  The Company may assign its rights  under this
Agreement to an  affiliate,  and an  affiliate  may assign its rights under this
Agreement  to another  affiliate  of the  Company or to the  Company;  provided,
however,  that no  assignment  shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually has engaged the Director.

     (k) Counterparts.  This Agreement may be executed in counterparts,  each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.

     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.


QUALITY SEMICONDUCTOR, INC.                 DIRECTOR



By:

Title:


<PAGE>



                                                                  Exhibit 10.17

                           CHANGE OF CONTROL AGREEMENT

         This Change of Control  Agreement (the "Agreement") is made and entered
into effective as of August 28, 1997, by and between R. Paul Gupta  ("Employee")
and Quality Semiconductor, Inc., a California corporation (the "Company").

RECITALS

     A. It is expected  that  another  company or other  entity may from time to
time  consider  the  possibility  of  acquiring  the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board").  The Board recognizes that such consideration can be
a distraction to the Employee and can cause the Employee to consider alternative
employment  opportunities.  The  Board  has  determined  that it is in the  best
interests  of the Company and its  shareholders  to assure that the Company will
have the continued  dedication and objectivity of the Employee,  notwithstanding
the possibility,  threat or occurrence of a Change of Control (as defined below)
of the Company.

     B. The Board  believes that it is in the best  interests of the Company and
its  shareholders  to provide the Employee  with an incentive to continue his or
her employment with the Company.

     C. The Board  believes  that it is  imperative to provide the Employee with
certain benefits upon a Change of Control and, under certain circumstances, upon
termination of the Employee's employment in connection with a Change of Control,
which benefits are intended to provide the Employee with financial  security and
provide  sufficient  income and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.

     D. To  accomplish  the  foregoing  objectives,  the Board of Directors  has
directed the Company, upon execution of this Agreement by the Employee, to agree
toithe terms provided in this Agreement.

     E. Certain capitalized terms used in the Agreement are defined in Section 4
below.

     In  consideration  of  the  mutual  covenants  herein  contained,   and  in
consideration  of the  continuing  employment  of Employee by the  Company,  the
parties agree as follows:

     1. At-Will  Employment.  The Company and the Employee  acknowledge that the
Employee's  employment  is and shall  continue to be at-will,  as defined  under
applicable  law.  If  the  Employee's  employment  terminates  for  any  reason,
including (without limitation) any termination prior to a Change of Control, the
Employee  shall not be entitled to any payments,  benefits,  damages,  awards or
compensation  other than as  provided  by this  Agreement,  the terms of certain
Board  resolutions  and  agreements  issued to the Employee  with respect to the
grant of stock options for the Company's  securities  (as described in Section 2
below) and the Company's  established employee plans and written policies at the
time of  termination.  The terms of this Agreement shall terminate upon the date
that all obligations of the parties hereunder have been satisfied. A termination
of the terms of this  Agreement  pursuant  to the  preceding  sentence  shall be
effective for all purposes,  except that such  termination  shall not affect the
payment or provision of  compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.

     2. Restricted  Stock and Stock Options.  Subject to Section 6 below, in the
event of a Change of Control and regardless of whether the Employee's employment
with the Company is  terminated in  connection  with the Change of Control,  the
vesting  schedule for each unvested  share of Common Stock or option to purchase
Common Stock held by the  Employee  (collectively  referred to as the  "Shares")
shall be accelerated by two (2) years.  Thereafter,  so long as Employee remains
employed by the Company (or a successor Corporation),  the remaining Shares that
have not  otherwise  vested as of the  Change  of  Control  shall  vest over the
remaining  vesting  term  applicable  to the Shares.  Each stock option shall be
exercisable  to the extent so vested in  accordance  with the  provisions of the
option  agreement  and Plan  pursuant  to which such option was granted and each
share of restricted  stock shall be freely  transferable to the extent so vested
in accordance with the provisions of the agreement  pursuant to which such stock
was purchased by Employee. 3. Change of Control.

     (a) Termination Following A Change of Control. If the Employee's employment
with the Company is terminated at any time within one (1) year after a Change of
Control,  then the Employee shall be entitled to receive  severance  benefits as
follows:

     (i) Voluntary  Resignation.  If the Employee  voluntarily  resigns from the
Company (other than as an Involuntary  Termination  (as defined below) or if the
Company terminates the Employee's employment for Cause (as defined below)), then
the Employee shall not be entitled to receive severance payments. The Employee's
benefits will be terminated  under the Company's then existing benefit plans and
policies  in  accordance  with such plans and  policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.

     (ii) Involuntary Termination. If the Employee's employment is terminated as
a result of an Involuntary  Termination other than for Cause, the Employee shall
be entitled to receive the following benefits:  (i) a lump sum severance payment
consisting of (a) eighteen (18) months (the  "Severance  Period") of the monthly
salary  which the  Employee  was  receiving  immediately  prior to the Change of
Control  and (b) the  Employee's  "target  bonus"  prorated  over the  Severance
Period,  with such severance  payment being made on the termination date; (ii) a
prorated  amount of the  Employee's  "target bonus" for the fiscal year in which
the  termination  occurs (or for the prior fiscal year if a target bonus has not
yet been  determined  for the  fiscal  year in which  the  termination  occurs),
calculated  based on the number of months  during  such fiscal year in which the
Employee  was  employed by the Company (or a successor  corporation),  with such
payment being made on the termination  date; (iii)  continuation of all benefits
through the end of the  Severance  Period  substantially  identical  to those to
which the Employee was entitled  immediately prior to the Change of Control; and
(iv)  out-placement  services  with a total  value  not to exceed  $15,000.  For
purposes of this  Agreement,  the term "target bonus" shall mean that percentage
of the  Employee's  base salary  that is  prescribed  by the  Company  under its
Management  Bonus Program as the  percentage of such base salary  payable to the
Employee as a bonus if the Company pays bonuses at one-hundred percent (100%) of
its operating plan.

     (iii)  Involuntary  Termination for Cause. If the Employee's  employment is
terminated  for  Cause,  then the  Employee  shall not be  entitled  to  receive
severance  payments.  The  Employee's  benefits  will be  terminated  under  the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination.


     (b) Termination  Apart from Change of Control.  In the event the Employee's
employment terminates for any reason, either prior to the occurrence of a Change
of Control or after the one year period following the effective date of a Change
of Control,  then the  Employee  shall not be entitled to receive any  severance
payments under this Agreement.  The Employee's benefits will be terminated under
the Company's then existing  benefit plans and policies in accordance  with such
plans  and  policies  in  effect  on the  date of  termination  or as  otherwise
determined by the Board of Directors of the Company.

     4.  Definition of Terms.  The following terms referred to in this Agreement
shall have the following meanings:

     (a) Change of Control. "Change of Control" shall mean the occurrence of any
of the following events:

     (i)  Ownership.  Any "Person"  (as such term is used in Sections  13(d) and
14(d) of the  Securities  Exchange  Act of 1934,  as  amended) is or becomes the
"Beneficial  Owner"  (as  defined in Rule 13d-3  under  said Act),  directly  or
indirectly, of securities of the Company representing fifty-one percent (51%) or
more of the total voting power  represented  by the Company's  then  outstanding
voting securities without the approval of the Board of Directors of the Company;

     (ii)  Merger/Sale  of  Assets.  A merger or  consolidation  of the  Company
whether or not approved by the Board of  Directors of the Company,  other than a
merger or  consolidation  which  would  result in the voting  securities  of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining  outstanding  or by being  converted  into  voting  securities  of the
surviving  entity)  at least  fifty  percent  (50%) of the  total  voting  power
represented  by the voting  securities of the Company or such  surviving  entity
outstanding immediately after such merger or consolidation;

     (iii) Sale of Assets; Liquidation. An agreement for the sale or disposition
by the  Company  of all or  substantially  all of the  Company's  assets  or the
shareholders  of the  Company  approve  a plan of  complete  liquidation  of the
Company in  connection  with an  agreement  for the sale or  disposition  by the
Company of all or substantially all of the Company's assets; or

     (iv) Change in Board Composition.  A change in the composition of the Board
of Directors  of the Company,  as a result of which fewer than a majority of the
directors are Incumbent  Directors.  "Incumbent  Directors" shall mean directors
who either (A) are directors of the Company as of the date of this  Agreement or
(B) are elected,  or nominated  for  election,  to the Board of Directors of the
Company  with the  affirmative  votes of at least a  majority  of the  Incumbent
Directors at the time of such election or  nomination  (but shall not include an
individual  whose  election or  nomination  is in  connection  with an actual or
threatened proxy contest relating to the election of directors to the Company).

     (b) Cause. "Cause" shall mean (i) gross negligence or willful misconduct in
the  performance  of the  Employee's  duties to the  Company  where  such  gross
negligence  or  willful  misconduct  has  resulted  or is  likely  to  result in
substantial  and  material  damage  to the  Company  or its  subsidiaries,  (ii)
repeated  unexplained or unjustified absence from the Company,  (iii) a material
and willful violation of any federal or state law; (iv) commission of any act of
fraud with  respect to the  Company;  or (v)  conviction  of a felony or a crime
involving moral turpitude  causing  material harm to the standing and reputation
of the  Company,  in each  case as  determined  in good  faith  by the  Board of
Directors of the Company.

     (c) Involuntary  Termination.  "Involuntary  Termination" shall include any
termination  by the Company  other than for Cause and the  Employee's  voluntary
termination,  upon 30 days prior written notice to the Company,  following (i) a
material  reduction or change in job duties,  responsibilities  and requirements
inconsistent  with the  Employee's  position with the Company and the Employee's
prior  duties,  responsibilities  and  requirements;  (ii) any  reduction of the
Employee's  base  compensation  or target bonus (other than in connection with a
general decrease for most officers of the successor  corporation);  or (iii) the
Employee's refusal to relocate to a facility or location more than 50 miles from
the Company's current location.

     5. Tax  Liability  on  Payments.  To the extent that any of the payments or
benefits  provided for in this  Agreement to an Employee  constitute  "parachute
payments"  within the meaning of Section  280G of the  Internal  Revenue Code of
1986,  as amended (the "Code") and would be subject to the excise tax imposed by
Section  4999 of the Code,  the Company will pay the Employee an amount equal to
such excise tax;  provided,  however,  that the Employee will be responsible for
paying  any and all  income  taxes  owed by him or her as a result of receipt of
such payment  from the Company and the Company will not be further  obligated to
gross  up  Employee's  payments  and/or  benefits  to  offset  such  income  tax
obligation.  6. Certain Business Combinations.  In the event it is determined by
the Board,  upon  receipt  of a written  opinion  of the  Company's  independent
auditors,  that the  enforcement  of any agreement  between the Employee and the
Company  which  allows for the  acceleration  of vesting of stock  and/or  stock
options granted for the Company's securities upon the effective date of a Change
of Control,  would preclude accounting for any proposed business  combination of
the  Company  involving a Change of Control as a pooling of  interests,  and the
Board otherwise  desires to approve such a proposed  business  transaction which
requires as a condition to the closing of such  transaction that it be accounted
for as a pooling of interests,  then any such Section of this Agreement shall be
null and void. For purposes of this Section 6, the Board's  determination  shall
require the unanimous approval of the non-employee Board members. 7. Successors.
Any  successor  to the  Company  (whether  direct or  indirect  and  whether  by
purchase,  lease,  merger,  consolidation,  liquidation  or otherwise) to all or
substantially  all of the  Company's  business  and/or  assets  shall assume the
obligations  under this Agreement and agree expressly to perform the obligations
under this  Agreement  in the same  manner and to the same extent as the Company
would be required to perform such  obligations  in the absence of a  succession.
The terms of this Agreement and all of the  Employee's  rights  hereunder  shall
inure to the benefit of, and be enforceable by, the Employee's personal or legal
representatives,  executors,  administrators,  successors,  heirs, distributees,
devisees and legatees.

     8.  Notice.  Notices  and all  other  communications  contemplated  by this
Agreement  shall be in writing  and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt  requested and postage prepaid.  Mailed notices to the Employee shall be
addressed to the Employee at the home address  which the Employee  most recently
communicated  to the  Company in  writing.  In the case of the  Company,  mailed
notices shall be addressed to its corporate headquarters,  and all notices shall
be directed to the attention of its Secretary.

     9. Miscellaneous Provisions.

     (a) No Duty to Mitigate. The Employee shall not be required to mitigate the
amount of any payment  contemplated  by this  Agreement  (whether by seeking new
employment or in any other manner),  nor,  except as otherwise  provided in this
Agreement,  shall any such payment be reduced by any earnings  that the Employee
may receive from any other source.

     (b) Waiver.  No provision of this  Agreement  shall be modified,  waived or
discharged unless the modification,  waiver or discharge is agreed to in writing
and signed by the Employee and by an  authorized  officer of the Company  (other
than the Employee). No waiver by either party of any breach of, or of compliance
with,  any condition or provision of this  Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.

     (c) Whole  Agreement.  No  agreements,  representations  or  understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this  Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes any agreement of
the same title and concerning  similar subject matter dated prior to the date of
this  Agreement,  and by execution of this Agreement both parties agree that any
such predecessor agreement shall be deemed null and void.

     (d)  Choice  of  Law.  The  validity,   interpretation,   construction  and
performance  of this  Agreement  shall be  governed  by the laws of the State of
California without reference to conflict of laws provisions.

     (e)  Severability.  If any  term  or  provision  of this  Agreement  or the
application  thereof to any  circumstance  shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such  jurisdiction  to the extent of such  invalidity or  unenforceability
without  invalidating  or  rendering   unenforceable  the  remaining  terms  and
provisions of this Agreement or the  application of such terms and provisions to
circumstances  other than those as to which it is held invalid or unenforceable,
and a suitable and equitable term or provision shall be substituted  therefor to
carry out,  insofar as may be valid and  enforceable,  the intent and purpose of
the invalid or unenforceable term or provision.

     (f) Arbitration.  Any dispute or controversy arising under or in connection
with this  Agreement  may be settled  at the  option of either  party by binding
arbitration  in the County of Santa Clara,  California,  in accordance  with the
rules of the American  Arbitration  Association then in effect.  Judgment may be
entered on the  arbitrator's  award in any court having  jurisdiction.  Punitive
damages shall not be awarded.

     (g)  Legal  Fees and  Expenses.  The  parties  shall  each  bear  their own
expenses, legal fees and other fees incurred in connection with this Agreement.

     (h) No  Assignment  of  Benefits.  The rights of any person to  payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary  assignment or by operation of law, including
(without  limitation)  bankruptcy,  garnishment,  attachment or other creditor's
process, and any action in violation of this subsection (h) shall be void.

     (i) Employment  Taxes. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.

     (j)  Assignment  by Company.  The Company may assign its rights  under this
Agreement to an  affiliate,  and an  affiliate  may assign its rights under this
Agreement  to another  affiliate  of the  Company or to the  Company;  provided,
however,  that no  assignment  shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Employee.

     (k) Counterparts.  This Agreement may be executed in counterparts,  each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.

         IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized  officer,  as of the day and year
first above written.


QUALITY SEMICONDUCTOR, INC.                 EMPLOYEE



By:
                                            R. Paul Gupta
Title:



<PAGE>



                                                                   Exhibit 10.18

                           CHANGE OF CONTROL AGREEMENT

         This Change of Control  Agreement (the "Agreement") is made and entered
into  effective as of August 28, 1997, by and among the  employees  signing this
Agreement (each an "Employee and,  collectively,  the  "Employees")  and Quality
Semiconductor, Inc., a California corporation (the "Company").

RECITALS

     A. It is expected  that  another  company or other  entity may from time to
time  consider  the  possibility  of  acquiring  the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board").  The Board recognizes that such consideration can be
a  distraction  to the  Employees  and  can  cause  the  Employees  to  consider
alternative employment opportunities. The Board has determined that it is in the
best  interests of the Company and its  shareholders  to assure that the Company
will  have  the  continued  dedication  and  objectivity  of  up to  twelve  key
Employees,  notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Company.

     B. The Board  believes that it is in the best  interests of the Company and
its  shareholders  to provide the Employees  with an incentive to continue their
employment with the Company.

     C. The Board  believes that it is imperative to provide the Employees  with
certain benefits upon a Change of Control and, under certain circumstances, upon
termination of the Employees' employment in connection with a Change of Control,
which benefits are intended to provide the Employees with financial security and
provide  sufficient income and encouragement to the Employees to remain with the
Company notwithstanding the possibility of a Change of Control.

     D. To  accomplish  the  foregoing  objectives,  the Board of Directors  has
directed the Company,  upon  execution of this  Agreement by the  Employees,  to
agree to the terms provided in this Agreement.

     E. Certain capitalized terms used in the Agreement are defined in Section 4
below.

     In  consideration  of  the  mutual  covenants  herein  contained,   and  in
consideration  of the  continuing  employment  of Employees by the Company,  the
parties agree as follows:

     1. At-Will  Employment.  The Company and each of the Employees  acknowledge
that his or her employment is and shall continue to be at-will, as defined under
applicable  law.  If  any  Employee's  employment  terminates  for  any  reason,
including  (without  limitation) any  termination  prior to a Change of Control,
such Employee shall not be entitled to any payments,  benefits,  damages, awards
or compensation  other than as provided by this Agreement,  the terms of certain
Board  resolutions  and  agreements  issued to the Employee  with respect to the
grant of stock options for the Company's  securities  (as described in Section 2
below) and the Company's  established employee plans and written policies at the
time of  termination.  The terms of this Agreement shall terminate upon the date
that all obligations of the parties hereunder have been satisfied. A termination
of the terms of this  Agreement  pursuant  to the  preceding  sentence  shall be
effective for all purposes,  except that such  termination  shall not affect the
payment or provision of  compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.

     2. Restricted  Stock and Stock Options.  Subject to Section 6 below, in the
event of a Change of Control and regardless of whether an Employee's  employment
with the Company is  terminated in  connection  with the Change of Control,  the
vesting  schedule for each unvested  share of Common Stock or option to purchase
Common Stock held by such  Employee  (collectively  referred to as the "Shares")
shall be accelerated by two (2) years.  Thereafter,  so long as Employee remains
employed by the Company (or a successor Corporation),  the remaining Shares that
have not  otherwise  vested as of the  Change  of  Control  shall  vest over the
remaining  vesting  term  applicable  to the Shares.  Each stock option shall be
exercisable  to the extent so vested in  accordance  with the  provisions of the
option  agreement  and Plan  pursuant  to which such option was granted and each
share of restricted  stock shall be freely  transferable to the extent so vested
in accordance with the provisions of the agreement  pursuant to which such stock
was purchased by Employee. 3. Change of Control.

     (a) Termination Following A Change of Control.  Subject to Section 5 below,
if an  Employee's  employment  with the Company is terminated at any time within
one (1) year after a Change of Control,  then such Employee shall be entitled to
receive severance benefits as follows:

     (i) Voluntary  Resignation.  If the Employee  voluntarily  resigns from the
Company (other than as an Involuntary  Termination  (as defined below) or if the
Company terminates the Employee's employment for Cause (as defined below)), then
the Employee shall not be entitled to receive severance payments. The Employee's
benefits will be terminated  under the Company's then existing benefit plans and
policies  in  accordance  with such plans and  policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.

     (ii) Involuntary Termination. If the Employee's employment is terminated as
a result of an Involuntary  Termination other than for Cause, the Employee shall
be entitled to receive the following benefits:  (i) a lump sum severance payment
consisting of (a) six (6) months (the "Severance  Period") of the monthly salary
which the Employee was receiving  immediately prior to the Change of Control and
(b) the Employee's "target bonus" prorated over the Severance Period,  with such
severance  payment being made on the termination date; (ii) a prorated amount of
the  Employee's  "target  bonus"  for the fiscal  year in which the  termination
occurs  (or  for the  prior  fiscal  year if a  target  bonus  has not yet  been
determined  for the fiscal  year in which the  termination  occurs),  calculated
based on the number of months  during such fiscal year in which the Employee was
employed by the Company (or a successor  corporation),  with such payment  being
made on the termination date; (iii) continuation of all benefits through the end
of the Severance Period  substantially  identical to those to which the Employee
was entitled  immediately prior to the Change of Control; and (iv) out-placement
services  with a  total  value  not to  exceed  $15,000.  For  purposes  of this
Agreement,  the term "target bonus" shall mean that percentage of the Employee's
base salary that is prescribed by the Company under its Management Bonus Program
as the  percentage of such base salary payable to the Employee as a bonus if the
Company pays bonuses at one-hundred percent (100%) of its operating plan.

     (iii)  Involuntary  Termination for Cause. If the Employee's  employment is
terminated  for  Cause,  then the  Employee  shall not be  entitled  to  receive
severance  payments.  The  Employee's  benefits  will be  terminated  under  the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination.

     (b) Termination  Apart from Change of Control.  In the event the Employee's
employment terminates for any reason, either prior to the occurrence of a Change
of Control or after the one year period following the effective date of a Change
of Control,  then the  Employee  shall not be entitled to receive any  severance
payments under this Agreement.  The Employee's benefits will be terminated under
the Company's then existing  benefit plans and policies in accordance  with such
plans  and  policies  in  effect  on the  date of  termination  or as  otherwise
determined by the Board of Directors of the Company.

     4.  Definition of Terms.  The following terms referred to in this Agreement
shall have the following meanings:

     (a) Change of Control. "Change of Control" shall mean the occurrence of any
of the following events:

     (i)  Ownership.  Any "Person"  (as such term is used in Sections  13(d) and
14(d) of the  Securities  Exchange  Act of 1934,  as  amended) is or becomes the
"Beneficial  Owner"  (as  defined in Rule 13d-3  under  said Act),  directly  or
indirectly, of securities of the Company representing fifty-one percent (51%) or
more of the total voting power  represented  by the Company's  then  outstanding
voting securities without the approval of the Board of Directors of the Company;

     (ii)  Merger/Sale  of  Assets.  A merger or  consolidation  of the  Company
whether or not approved by the Board of  Directors of the Company,  other than a
merger or  consolidation  which  would  result in the voting  securities  of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining  outstanding  or by being  converted  into  voting  securities  of the
surviving  entity)  at least  fifty  percent  (50%) of the  total  voting  power
represented  by the voting  securities of the Company or such  surviving  entity
outstanding immediately after such merger or consolidation;

     (iii) Sale of Assets; Liquidation. An agreement for the sale or disposition
by the  Company  of all or  substantially  all of the  Company's  assets  or the
shareholders  of the  Company  approve  a plan of  complete  liquidation  of the
Company in  connection  with an  agreement  for the sale or  disposition  by the
Company of all or substantially all of the Company's assets; or

     (iv) Change in Board Composition.  A change in the composition of the Board
of Directors  of the Company,  as a result of which fewer than a majority of the
directors are Incumbent  Directors.  "Incumbent  Directors" shall mean directors
who either (A) are directors of the Company as of the date of this  Agreement or
(B) are elected,  or nominated  for  election,  to the Board of Directors of the
Company  with the  affirmative  votes of at least a  majority  of the  Incumbent
Directors at the time of such election or  nomination  (but shall not include an
individual  whose  election or  nomination  is in  connection  with an actual or
threatened proxy contest relating to the election of directors to the Company).

     (b) Cause. "Cause" shall mean (i) gross negligence or willful misconduct in
the  performance  of an  Employee's  duties  to the  Company  where  such  gross
negligence  or  willful  misconduct  has  resulted  or is  likely  to  result in
substantial  and  material  damage  to the  Company  or its  subsidiaries,  (ii)
repeated  unexplained or unjustified absence from the Company,  (iii) a material
and willful violation of any federal or state law; (iv) commission of any act of
fraud with  respect to the  Company;  or (v)  conviction  of a felony or a crime
involving moral turpitude  causing  material harm to the standing and reputation
of the  Company,  in each  case as  determined  in good  faith  by the  Board of
Directors of the Company.

     (c) Involuntary  Termination.  "Involuntary  Termination" shall include any
termination  by the  Company  other than for Cause and an  Employee's  voluntary
termination,  upon 30 days prior written notice to the Company,  following (i) a
material  reduction or change in job duties,  responsibilities  and requirements
inconsistent  with an Employee's  position  with the Company and the  Employee's
prior  duties,  responsibilities  and  requirements;  (ii) any  reduction  of an
Employee's  base  compensation  or target bonus (other than in connection with a
general  decrease for most officers of the successor  corporation);  or (iii) an
Employee's refusal to relocate to a facility or location more than 50 miles from
the Company's current location.

     5. Tax  Liability  on  Payments.  To the extent that any of the payments or
benefits  provided for in this  Agreement to an Employee  constitute  "parachute
payments"  within the meaning of Section  280G of the  Internal  Revenue Code of
1986,  as amended (the "Code") and would be subject to the excise tax imposed by
Section  4999 of the Code,  the Company will pay the Employee an amount equal to
such excise tax;  provided,  however,  that the Employee will be responsible for
paying  any and all  income  taxes  owed by him or her as a result of receipt of
such payment  from the Company and the Company will not be further  obligated to
gross  up  Employee's  payments  and/or  benefits  to  offset  such  income  tax
obligation.  6. Certain Business Combinations.  In the event it is determined by
the Board,  upon  receipt  of a written  opinion  of the  Company's  independent
auditors,  that the  enforcement  of any  agreement  between an Employee and the
Company  which  allows for the  acceleration  of vesting of stock  and/or  stock
options granted for the Company's securities upon the effective date of a Change
of Control,  would preclude accounting for any proposed business  combination of
the  Company  involving a Change of Control as a pooling of  interests,  and the
Board otherwise  desires to approve such a proposed  business  transaction which
requires as a condition to the closing of such  transaction that it be accounted
for as a pooling of interests,  then any such Section of this Agreement shall be
null and void. For purposes of this Section 6, the Board's  determination  shall
require the unanimous approval of the non-employee Board members. 7. Successors.
Any  successor  to the  Company  (whether  direct or  indirect  and  whether  by
purchase,  lease,  merger,  consolidation,  liquidation  or otherwise) to all or
substantially  all of the  Company's  business  and/or  assets  shall assume the
obligations  under this Agreement and agree expressly to perform the obligations
under this  Agreement  in the same  manner and to the same extent as the Company
would be required to perform such  obligations  in the absence of a  succession.
The terms of this Agreement and all of the  Employees'  rights  hereunder  shall
inure to the benefit of, and be  enforceable  by,  each  Employee's  personal or
legal   representatives,    executors,   administrators,    successors,   heirs,
distributees, devisees and legatees.

     8.  Notice.  Notices  and all  other  communications  contemplated  by this
Agreement  shall be in writing  and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt  requested and postage prepaid.  Mailed notices to any Employee shall be
addressed to such  Employee at the home address which the Employee most recently
communicated  to the  Company in  writing.  In the case of the  Company,  mailed
notices shall be addressed to its corporate headquarters,  and all notices shall
be directed to the attention of its Secretary.

     9. Miscellaneous Provisions.

     (a) No Duty to Mitigate.  The  Employees  shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner),  nor,  except as otherwise  provided in this
Agreement,  shall any such payment be reduced by any earnings  that any Employee
may receive from any other source.

     (b) Waiver.  No provision of this  Agreement  shall be modified,  waived or
discharged  as to an Employee  unless the  modification,  waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized  officer of
the Company (other than the  Employee).  No waiver by either party of any breach
of, or of compliance  with,  any condition or provision of this Agreement by the
other party shall be considered a waiver of any other  condition or provision or
of the same condition or provision at another time.

     (c) Whole  Agreement.  No  agreements,  representations  or  understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this  Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes any agreement of
the same title and concerning  similar subject matter dated prior to the date of
this  Agreement,  and by execution of this Agreement both parties agree that any
such predecessor agreement shall be deemed null and void.

     (d)  Choice  of  Law.  The  validity,   interpretation,   construction  and
performance  of this  Agreement  shall be  governed  by the laws of the State of
California without reference to conflict of laws provisions.

     (e)  Severability.  If any  term  or  provision  of this  Agreement  or the
application  thereof to any  circumstance  shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such  jurisdiction  to the extent of such  invalidity or  unenforceability
without  invalidating  or  rendering   unenforceable  the  remaining  terms  and
provisions of this Agreement or the  application of such terms and provisions to
circumstances  other than those as to which it is held invalid or unenforceable,
and a suitable and equitable term or provision shall be substituted  therefor to
carry out,  insofar as may be valid and  enforceable,  the intent and purpose of
the invalid or unenforceable term or provision.

     (f) Arbitration.  Any dispute or controversy arising under or in connection
with this  Agreement  may be settled  at the  option of either  party by binding
arbitration  in the County of Santa Clara,  California,  in accordance  with the
rules of the American  Arbitration  Association then in effect.  Judgment may be
entered on the  arbitrator's  award in any court having  jurisdiction.  Punitive
damages shall not be awarded.

     (g)  Legal  Fees and  Expenses.  The  parties  shall  each  bear  their own
expenses, legal fees and other fees incurred in connection with this Agreement.

     (h) No  Assignment  of  Benefits.  The rights of any person to  payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary  assignment or by operation of law, including
(without  limitation)  bankruptcy,  garnishment,  attachment or other creditor's
process, and any action in violation of this subsection (h) shall be void.

     (i) Employment  Taxes. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.

     (j)  Assignment  by Company.  The Company may assign its rights  under this
Agreement to an  affiliate,  and an  affiliate  may assign its rights under this
Agreement  to another  affiliate  of the  Company or to the  Company;  provided,
however,  that no  assignment  shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Employee.

     (k) Counterparts.  This Agreement may be executed in counterparts,  each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.

         IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized  officer,  as of the day and year
first above written.


QUALITY SEMICONDUCTOR, INC.                          EMPLOYEE



By:

Title:


<PAGE>



                                                                    Exhibit 11.1



                           QUALITY SEMICONDUCTOR, INC.

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



                                                    September 30,
                                        1997            1996             1995
                                   ------------    ------------    -------------

Net income (loss)                       $210        $(1,310)           $4,766
                                    ============   ============    ============
Computation of common and common
     equivalents
       shares outstanding
       Common stock                    6,361           5,524            4,750
       Options and warrants              628               -              559
       Cheap stock                         -               -               29
       Preferred shares                    -               -              311
                                   ===========    ============     ============
Shares used in computing per share     6,989           5,524            5,649
     amounts
                                   ===========    ============     ============

Net income (loss) per share            $0.03         $(0.24)            $0.84

                                   ============   ============     ============


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


<PAGE>
                                                                    Exhibit 22.1


                           QUALITY SEMICONDUCTOR, INC.

                              LIST OF SUBSIDIARIES


Name            Location of Incorporation          Names Under Which Subsidiary
                                                            is Doing Business

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



<PAGE>



                                                                    Exhibit 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


     We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos.  33-89724,333,3234 and 333-25809; and Amendment No. 1 to Form S-3
No.  333-30189)  of our report  dated  October  22,  1997,  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, 1997.


                                                      /s/   Ernst & Young LLP


San Jose, California
December 17, 1997


<PAGE>



                                                                   Exhibit 24.1

                                   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 19, 1997                 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, 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 19, 1997
--------------------------
Chun P. Chiu

/s/ R. Paul Gupta          Director, President and             December 19, 1997
--------------------------
R. Paul Gupta              Chief Executive Officer

/s/ Richard A. Bottomley   Chief Financial Officer - Acting    December 19, 1997
--------------------------
Richard A. Bottomley

/s/ Andrew J.S. Kang       Director                            December 19, 1997
Andrew J. S. Kang

/s/ Robert L. Puette       Director                            December 19, 1997
--------------------------
Robert L. Puette

/s/ Masaharu Shinya        Director                            December 19, 1997
Masaharu Shinya

/s/ David D. Tsang         Director                            December 19, 1997
--------------------------
David D. Tsang



<PAGE>

                                                                    Exhibit 27.1


                           QUALITY SEMICONDUCTOR, INC.
                             Financial Data Schedule

                      (In thousands, except per share data)


Cash and cash items                                                     $9,403

Marketable securities                                                    3,656

Notes and accounts receivable - trade                                    7,253

Allowances for doubtful accounts                                           314

Inventory                                                               17,689

Total current assets                                                    44,823

Property, plant and equipment                                           39,034

Accumulated depreciation                                                16,175

Total assets                                                            69,832

Total current liabilities                                               17,048

Bonds, mortgages and similar debt                                           --

Preferred stock - mandatory redemption                                      --

Preferred Stock - non-mandatory redemption                                  --

Common Stock                                                                 7

Other Stockholders' Equity                                              43,630

Total liabilities and stockholders' equity                              69,832

Net sales of tangible products                                          62,691

Total revenue                                                           62,691

Cost of tangible goods sold                                             40,073

Total costs and expenses applicable                                     61,971
 to sales and revenue

Other costs and expenses                                                21,898

Provision for doubtful accounts and notes                                  314

Interest and amortization of debt discount                               1,122

Income before taxes                                                        322

Income tax expense                                                         112

Income/loss continuing operations                                          210

Discontinued operations                                                     --

Extraordinary items                                                         --

Cumulative effect-changes in accounting                                     --
 principles

Net income or loss                                                         210

Earnings per share - primary                                              0.03

Earnings per share - fully diluted                                        0.03