<PAGE>
 
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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                            ----------------------
                                   FORM 10-K
(Mark One)
 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
     THE SECURITIES EXCHANGE ACT OF 1934.

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
     THE SECURITIES EXCHANGE ACT OF 1934.

          FOR THE TRANSITION PERIOD FROM ____________ TO ____________
                        COMMISSION FILE NUMBER 0-26312

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

               DELAWARE                                       94-3186995      
     (State or other jurisdiction of                      (I.R.S. Employer    
     incorporation or organization)                       Identification Number)

     1300 TERRA BELLA AVENUE,                                    94039-7267
     MOUNTAIN VIEW, CALIFORNIA                                   (Zip Code)
     (Address of principal executive        
      offices)                               

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 968-9241
 SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK,
                                $.001 PAR VALUE

     Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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[_]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10K or
any amendment to this Form 10K.  [_]
 
     The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company as of February 24, 1999, was
approximately $39,766,000. 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 under certain circumstances be
deemed to be affiliates.  This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.

     The number of shares of the Registrant's Common Stock outstanding as of
February 24, 1999 was 14,436,372.

                      DOCUMENT INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders to be held April 15, 1999 are incorporated by reference in Part III
of this Form 10-K.

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                               TABLE OF CONTENTS

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                                                                                                       PAGE
                                                                                                       ----
 
PART I
<S>                                                                                                    <C>
Item 1.         Description of Business.............................................................        1
Item 2.         Description of Property.............................................................       10
Item 3.         Legal Proceedings...................................................................       10
Item 4.         Submission of Matters to a Vote of Security Holders.................................       10
 
PART II
Item 5.         Market for the Registrant's Common Equity and Related Stockholder Matters...........       11
Item 6.         Selected Consolidated Financial Data................................................       12
Item 7.         Management's Discussion and Analysis of Financial Condition and Results of
                Operations..........................................................................       13
Item 8.         Financial Statements................................................................       19
Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial
                Disclosure..........................................................................       36
 
PART III
Item 10.        Directors and Executive Officers of the Registrant..................................       37
Item 11.        Executive Compensation..............................................................       37
Item 12.        Security Ownership of Certain Beneficial Owners and Management......................       37
Item 13.        Certain Relationships and Related Transactions                                             37
 
PART IV
Item 14.        Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................       38
SIGNATURES                                                                                                 39
</TABLE>

                                       i
<PAGE>
 
                                    PART I
                                    ------

     This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.  Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

     TelCom Semiconductor, Inc. (the "Company" or "TelCom") designs, develops,
manufactures and markets a diversified portfolio of high-performance analog
integrated circuits for a wide variety of applications in the industrial,
wireless communications, computing, networking and medical markets.  The
Company's products comprise four principal product families: 1) Power Management
                                                                ----------------
Products such as MOSFET drivers, low drop-out regulators, DC to DC converters,
--------                                                                      
and CMOS voltage detectors (including microprocessor supervisory circuits); 2)
Data Converter Products which include data acquisition system and display analog
-----------------------                                                         
to digital converters; 3) Thermal Management Products that provide thermal
                          ---------------------------                     
control information, and 4) Linear Products such as operational amplifiers,
                            ---------------                                
voltage references and comparators that act as linear building blocks in a wide
range of electronic systems.  Within each family, the Company markets
proprietary and selected second source products offering a range of performance,
functionality, and price.
 
     The Company was organized in Delaware in June 1993 and began operations in
December 1993 after purchasing the semiconductor operations of Teledyne, Inc.
("Teledyne") which principally consisted of its Teledyne Components Division
("Teledyne Components").  The Company's principal executive offices are located
at 1300 Terra Bella Avenue, Mountain View, California 94039, and its telephone
number is (650) 968-9241.
 

CUSTOMERS AND MARKETS
---------------------

     TelCom's basic marketing strategy is to identify and work with leading
customers within each of its targeted market segments to jointly develop product
solutions that offer a combination of high performance and increased
functionality. An additional benefit of working with leading customers is the
ability to gain insight into their next generation product requirements and to
identify second source product needs that the Company may be in a position to
fulfill.  TelCom believes that its relationships with market leaders, such as
Motorola and QualComm in the cellular telephone market and Compaq Computer and
Intel in the PC market, enable the Company to sell such product solutions to
other significant participants in such markets.  TelCom also relies on its
worldwide distribution network to accumulate information about other possible
applications for the Company's products.

     The Company uses strategic partners to augment its product portfolio and
core competencies, and to achieve new channels to market.  In addition these
strategic relationships are expected to allow the Company to more rapidly
identify and respond to market opportunities.

     The Company's products are used in a broad range of applications within the
industrial, wireless communications, networking, and computing markets. These
categories are discussed below:

     WIRELESS AND NETWORKING MARKET  The proliferation of hand-held
     ------------------------------                                
communications devices such as cellular telephones, pocket pagers and personal
two-way radios has created a demand for analog devices that monitor and reduce
power consumption.  TelCom offers a range of analog circuits to address the
demands of these products for longer battery life.  These circuits include
battery full/low charge detection and DC-DC converters for the generation of
voltages to drive liquid crystal displays, including backlighting.  These
devices are offered in miniature packages resulting in savings in space and
weight.  The Company's family of high current MOSFET drivers are used with
TelCom's switch mode power supply controllers to regulate AC to DC power in
cellular base stations, PBX and telephone and data communication equipment.

     COMPUTER MARKET  The rapid adoption of networked PCs, workstations and
     ---------------                                                       
servers and the deployment of 

                                       1
<PAGE>
 
machines using high performance microprocessors have given rise to the need for
reliable temperature rise detection for power supply shutdown and fan speed
control. As part of its smart sensor product family, TelCom has a patented solid
state temperature sensor that facilitates rapid temperature rise detection that
can be used for controlled shutdown of equipment with no loss of data or
destruction of critical or expensive components. This trend to protect critical
components by replacing older mechanical solutions with high performance analog
devices is extending into notebook computers, modular power supplies and
industrial and consumer product temperature alarms. The reliability and robust
nature of silicon make analog devices preferable to mechanical devices in many
respects. TelCom also makes power analog circuits for use in laptop/notebook
computers, palmtop computers, personal digital assistants, disk drives, pocket
organizers, facsimile modems and CD-ROM products. These products offer low
operating current and/or high current drive capability for deriving additional
voltages from battery or line powered equipment.

     INDUSTRIAL MARKET  Increased demand for precision and reliability has
     -----------------                                                    
resulted in higher semiconductor content in industrial instruments and
manufacturing equipment.  TelCom offers a broad range of integrating analog to
digital converters that address the measurement of DC and AC voltages and
currents, resistance and capacitance.  These devices are commonly used in
digital multimeters, panel meters, temperature meters, digital scales and
digital oscilloscopes. This broad line of power management circuits offers the
ability to detect and regulate voltages for use in battery and line powered
industrial equipment.
 
PRODUCTS
--------

     The Company's basic product strategy is to address an increasing spectrum
of customer applications by introducing proprietary and selected second source
products that increase the range of performance and capabilities of its product
portfolios. To accomplish this the Company focuses on providing customer value
via both higher analog performance as well as integration.  Integration is the
process of adding more functionality on a single piece of silicon and adding
value to the customer from the improved reliability and lower cost associated
with reduced component count.  The Company's internal development activities
focus on technology, high quality, and fast time to market.  Maintaining a
proper mix of platform and derivative products is also important.  A platform
product is the first product aimed at a market segment while a derivative
product takes a platform product and adds new functionality or packaging to
create a follow on product.

     The Company offers a diversified portfolio of over 500 analog and mixed
signal integrated circuit products for a wide range of market applications. The
Company's long term goal is to have a broad range of customers and products such
that dependencies on any one product, customer, or industry is small.  Through
1998 the company has not been successful in achieving this goal as Motorola and
the wireless market segment remain a significant portion of the Company's
revenue.

     POWER MANAGEMENT PRODUCTS The power management circuits offered by the
     -------------------------                                             
Company are power MOSFET drivers, low drop-out regulators, DC-DC converters, and
CMOS voltage detectors (including microprocessor supervisory circuits).  The
Company's CMOS LDO (low drop-out) regulators offer dropout voltages (minimum
voltage needed across the device to maintain output voltage regulation) of 50
milli-volts and efficient current consumption to maximize the time before the
battery is exhausted

     DATA CONVERTER PRODUCTS  TelCom's data converter products include data
     -----------------------                                               
acquisition system and display analog-to-digital (A/D) converters. The Company
is expanding its position as a supplier of A/D converters by introducing devices
with higher accuracy (resolution) and increased functionality.  The Company is
also developing relationships with customers in the field of portable measuring
instrumentation used in temperature monitoring, automotive diagnostics and field
test equipment process control and data acquisition systems also benefit from
the inherent capability of dual slope and sigma-delta A/D converters to reject
line interference.

     THERMAL MANAGEMENT PRODUCTS  The increasing trend towards lightweight, high
     ---------------------------                                                
performance PCs and other products has necessitated smaller enclosures and
faster microprocessors, resulting in a significant increase in the amount of
heat generated within such products.  TelCom's range of solid state thermal
management devices is aimed at monitoring and warning of fault conditions and
solving thermal management problems.  For example, the 

                                       2
<PAGE>
 
Company's proprietary TC620 temperature sensor protects advanced microprocessor-
based systems by monitoring the temperature of the microprocessor and
automatically turning off the system when the system temperature exceeds a
specified threshold. Other devices have various analog or digital output signals
that provide thermal control information for both consumer electronics and
industrial system applications.
 
     LINEAR PRODUCTS TelCom produces operational amplifiers, voltage references,
     ---------------                                                            
and comparators that act as linear building blocks in a wide range of electronic
systems.  The Company has developed a new family of precision CMOS devices whose
supply voltage rail-to-rail operation, low (microamp level) current drain, and
small packages make them well suited for portable, battery-operated equipment.
The Company's chopper stabilized amplifiers are used in precision amplification
of very low level signals in the microvolt (1 millionth of a volt) range often
encountered with strain gauges.  These amplifiers have extremely low drift over
both temperature and time.

     The Company's success depends upon its ability to develop new analog
circuits for existing and new markets, to introduce such products in a timely
manner and to have such products gain market acceptance. The development of new
analog circuits is highly complex and from time to time the Company has
experienced delays in developing and introducing new products.  Successful
product development and introduction depends on a number of factors, including
proper new product definition, timely completion of design and testing of new
products, achievement of acceptable manufacturing yields and market acceptance
of the Company's and its Customers' products.  Moreover, successful product
design and development is dependent on the Company's ability to attract, retain
and motivate qualified analog design engineers, of which there is a limited
number.  There can be no assurance that the Company will be able to meet these
challenges or adjust to changing market conditions as quickly and cost-
effectively as necessary to compete successfully. Due to the complexity and
variety of analog circuits, the limited number of analog circuit designers and
the limited effectiveness of computer-aided design systems in the design of
analog circuits, there can be no assurance that the Company will be able to
successfully develop and introduce new products on a timely basis.  Although the
Company seeks to design products that have the potential to become industry
standard products, there can be no assurance that any products introduced by the
Company will be adopted by such market leaders, or that any products initially
accepted by the Company's customers that are market leaders will become industry
standard products. The Company's failure to develop and introduce new products
successfully could materially and adversely affect its business and operating
results.

     The Company's results of operations are dependent on the balance between
sales of relatively higher margin but lower volume proprietary products and
relatively higher volume but lower margin second source products.  In order to
improve its margins, sales of proprietary products must in the future represent
a greater percentage of the Company's net revenues, requiring the Company to
successfully develop, introduce and market new proprietary products.  There can
be no assurance that the Company will be successful in developing new
proprietary products with the features and functionality that customers in its
key markets will demand.


DESIGN AND PROCESS TECHNOLOGY
-----------------------------

     DESIGN TECHNOLOGY.  The design of analog circuits involves the design and
     -----------------                                                        
interconnection of a variety of circuits and features to achieve the desired
function.  The specific placement and interrelationship of these circuits is
both complex and critical to the performance of the analog circuit.  Computer-
aided design and engineering tools, which have proliferated and enhanced the
design effort for digital integrated circuits, have proven to be useful but less
effective for analog devices.  Consequently, analog circuit design has
traditionally been highly dependent on the skills and expertise of individual
design engineers. The Company's design engineers principally focus on developing
next generation standard products, using computer simulation models to design
products that both meet the high performance characteristics required by
customers and adjust for process and temperature variations.  TelCom's new
product development strategy emphasizes a broad line of standard products that
are based on customer input and needs.  The Company is currently developing
products to further expand the number of offerings within each of the power
management, data converter, thermal management, and linear product families.

     PROCESS TECHNOLOGY. TelCom utilizes CMOS, Bipolar and BICMOS process
     ------------------                                                  
technologies. The process technology used for a particular product is driven by
the product specifications and customer requirements.  CMOS 

                                       3
<PAGE>
 
technology is the technology best suited for low power battery operated
applications, has the advantages of low power consumption and high packing
density, and enables the combination of analog and digital circuits on the same
chip. A substantial majority of the Company's current products utilize some
version of CMOS. Bipolar technology is best suited for high gain, high speed,
high precision and high voltage product applications.

     The Company competes in markets that are characterized by rapid
technological change and frequent new product introductions.  To remain
competitive, the Company must develop or obtain access to new semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve manufacturing yields. In order to have access
to new semiconductor process technologies, particularly for products requiring
sub-micron processing, the Company has entered into relationship with outside
foundries to provide the processes and wafers the Company needs to produce its
products. Semiconductor design and process methodologies are subject to rapid
technological change, requiring large expenditures for research and development.
The Company's future operating results could be adversely impacted if the
Company fails to develop or obtain access to advanced wafer processing
technologies, or if it fails to define, design and introduce competitive new
products on a timely basis. Also, the Company's ability to compete successfully
depends on being able to use advanced analog process technologies to manufacture
its products.  There can be no assurance that the analog process technology
utilized by the Company will not become obsolete.
 
     SALES, DISTRIBUTION AND MARKETING
     ---------------------------------

     The Company's sales and marketing effort is focused on the development of
relationships with leading companies in its targeted markets, and its sales and
marketing resources are deployed to establish and enhance such relationships.
TelCom currently employs sales managers and application engineers in sales,
marketing and applications organizations in the United States, Europe, and Asia.

     The Company's products are sold to over 5,000 end-user customers throughout
the world, either directly or through its distributor network.  Sales to
customers in North America, Asia and Europe accounted for 35%, 33% and 32%%,
respectively, of the Company's net sales for 1997, and 35%, 34% and 31%,
respectively, of the Company's net sales for 1998. The Company's three largest
OEM customers, Motorola, Intel, and Compaq Computer, accounted for 30%, 3% and
7%, respectively, of the Company's net sales for 1997, and 35%, 9%, and 4%,
respectively, of the Company's net sales for 1998.  The Company anticipates that
it will continue to be dependent on a number of key customers and distributors
for a significant portion of its net sales.  The reduction, delay or
cancellation of orders from one or more significant customers for any reason
could materially and adversely affect the Company's operating results.

     The Company sells its products through a direct sales staff and a worldwide
network of independent sales representatives and distributors.  The direct sales
staff works with leading customers to determine customer requirements and
interfaces with design engineers to achieve client solutions and also manages
the Company's network of sales representatives and distributors. The Company
sells its products in Europe through an independent sales representative firm
and various independent stocking representative/distributor firms. Sales in Asia
are handled through various independent stocking representative/distributor
firms. The stocking representatives/distributor firms may buy and stock the
Company's products for resale or act as the Company's agent in arranging for
direct sales from the Company to an OEM customer. The Company's sales
organization provides direction and support to the independent sales
representative firms, the distributor firms and the overseas independent
stocking representatives/distributor firms.

     The Company currently utilizes independent sales representative firms at
various locations in the United States and Canada.  The Company also sells its
products through national distributor firms. Sales through Future Electronics,
the Company's principal national distributor, accounted for 10% and 11% of the
Company's net sales for 1997 and 1998, respectively.  Consistent with standard
industry practice, the national and regional distributor firms are entitled to
certain price rebates and are allowed to return to the Company a portion of the
products purchased by them.  The Company's distributors sell competitors'
products and are not within the control of the Company.  Loss of one or more of
the Company's current distributors or disruption in the Company's sales and
distribution channels could materially and adversely affect the Company's
business and operating results.

                                       4
<PAGE>
 
     The Company has contracts with all of its international distributors, the
material terms of which typically include the following:  (a) the distributor is
appointed as a non-exclusive authorized distributor for a designated territory,
(b) the distributor may return up to 5-10% of its net sales in the prior 6-12
month period as a credit against a new order of equal or greater amount of
product, (c) the distributor is obligated to meet certain information reporting
requirements, (d) the term of the contract is one year and is automatically
renewable for one year periods and (e) the contract may be terminated at any
time by either party upon 30 days' written notice.  The Company also has
contracts with its national distributors, including Future Electronics, which
are substantially similar to the international distributor agreements.

     International sales accounted for approximately 65% of the Company's net
sales for 1997 and 1998. The Company expects international sales to continue to
represent a significant portion of product sales.  International sales and
operations involve various risks, including unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions, and the burdens of
complying with a variety of foreign laws.  The Company is also subject to
general political risks in connection with its international operations, such as
political and economic instability.  In addition, because a substantial majority
of the Company's international sales are denominated in United States dollars,
increases in the value of the dollar would increase the price in local
currencies of the Company's products in foreign markets and make the Company's
products relatively more expensive than competitors' products, the sales of
which are denominated in local currencies. There can be no assurance that
regulatory, political and other factors will not adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.

     The Company attempts to stock products in quantities that are sufficient to
meet customer demand.  Due to the product manufacturing cycle characteristic of
semiconductor manufacturing and the inherent imprecision in forecasting customer
demand, product inventories may not always correspond to product demand, leading
to shortages or surpluses of certain products.  The Company warrants that its
products are free from defects in workmanship and materials for one year and
that they meet the published specifications.  Warranty expenses to date have
been nominal.

MANUFACTURING
-------------

     Until February 1999, TelCom produced the majority of its wafers at its
manufacturing facility in Mountain View, California.  During the 1993 to 1998
time frame the Company believed that its in-house wafer fabrication facility
provided a competitive advantage because it facilitated a close collaboration
between design and process engineers, provided control over wafer supply, and
offered the potential for lower manufacturing costs and accelerated new product
introduction.  By early 1998, market conditions had changed significantly
resulting in outside foundries willing to run non standard processes and with
market prices below the Company's internal cost to manufacture. As a result, in
August 1998, the Company announced its plans to shut down its five-inch wafer
fabrication facility and use third party foundries for all of its wafer
fabrication. The fabrication of wafers is in the process of being transferred to
third party foundries and it is anticipated that the transfer will be complete
prior to the end of the first quarter of 1999. In connection with the closure of
its wafer fabrication facility, the Company recognized restructuring and other
charges of $7.3 million in 1998. Restructuring costs for the Mountain View,
California fabrication facility were $6.5 million, while other one-time charges
totaled $.8 million. The restructuring charge includes a write down of
fabrication equipment of $4.5 million, costs associated with idle facility space
of $1.4 million, employee severance costs of $.5 million and clean up and
environmental related charges of $.1 million. The other one time charges
included the write down of $.4 million of certain test equipment in Hong Kong, ,
the write down of certain equipment in Mountain View totaling $.3 million, and
$.3 million related to certain licensing and royalty costs, offset by a decrease
of $.2 million in amounts previously accrued due to a change in the Company's
employee sabbatical policy. Approximately 20,000 square feet of the Mountain
View facility has been idled by this move to outside foundries.

     The Company utilizes CMOS, Silicon Gate, Bipolar and BiCMOS process
technologies, which are tailored to meet product specifications and customer
requirements. Outside wafers are purchased from one of five foundries and market
conditions could result in wafers being in short supply and prevent the Company
from having adequate 

                                       5
<PAGE>
 
supply to meet its customer requirements. There can be no assurances going
forward that the Company will have the ability to acquire all the wafers it
desires.
 
     The wafers are sent to the Company's wholly-owned subsidiary in Hong Kong
which tests the individual die in wafer form, and distributes them to contract
assembly houses, primarily in Malaysia and Thailand, to be packaged.  Upon
completion of the packaging operation, the units are returned to TelCom Hong
Kong for final testing in assembled form and are then shipped to customers
worldwide.  The Hong Kong facility, which is leased by the Company, is
approximately 30,000 square feet and is presently testing approximately eight
million units per month.

     The packaging of the Company's products is performed by a limited group of
subcontractors and certain of the raw materials included in such products are
obtained from a limited group of suppliers. Although the Company seeks to reduce
its dependence on its sole and limited source suppliers, disruption or
termination of any of these sources could occur and such disruptions could have
a material adverse effect on the Company's financial condition or results of
operations. In the event that any of the Company's subcontractors were to
experience financial, operational, production or quality assurance difficulties
resulting in a reduction or interruption in supply to the Company, the Company's
operating results would be adversely affected until alternate subcontractors, if
any, became available.

     TelCom designs and manufactures its own test equipment which can test both
the individual die in wafer form and the finished assembled unit.  The Company
believes the cost of its in-house tester is substantially less than the cost of
purchasing an equivalent tester from an outside vendor.  In addition to the cost
advantages, the Company can also standardize its operations on one tester type
and can therefore upgrade tester capability more easily than if it had purchased
different testers from more than one vendor.  The Company believes it is better
able to meet its internal demand for test capacity by building its own testers
because it is not subject to long lead times from outside vendors in times of
rising demand for such equipment.  The Company could purchase testers from
outside vendors if it experienced problems in producing its own testers, but
such equipment would be more costly.

     A large portion of the Company's costs of manufacturing are relatively
fixed, and, consequently, the Company's results of operation are volume
sensitive. A reduction in manufacturing yields or delays to product shipments
would impact its operational results unfavorably. The Company has from time to
time in the past experienced lower than expected production yields, which have
delayed product shipments and adversely affected gross margins. There can be no
assurance that the Company in general will be able to maintain acceptable
manufacturing yields in the future.

RESEARCH AND DEVELOPMENT
------------------------

     The ability of the Company to compete successfully will depend
substantially on its ability to define, design, develop and introduce on a
timely basis new products offering design or technology innovations.  Research
and development in the analog integrated circuit industry is characterized
primarily by circuit design and product engineering that enables new
functionality or improved performance.  The Company's research and development
efforts are also directed at improving process technologies, reducing the cost
of existing manufacturing processes, developing new process capabilities to
manufacture new products and adding new features to existing products.  With
respect to more established products, the Company's research and development
efforts also include product redesign, shrinkage of device size and reduction of
mask steps in order to improve yields per wafer and reduce per device costs.
 
     As of December 31, 1998, the Company had 35 employees engaged in research
and development.  The Company's research and development efforts are dependent
upon attracting and retaining qualified analog design engineers. The Company
also utilizes independent contractors for certain research and development
projects.

     In 1996, 1997 and 1998, the Company spent approximately $4.3 million, $5.5
million and $5.6 million, respectively, on research and development.  The
Company expects that it will continue to invest substantial funds in 

                                       6
<PAGE>
 
research and development activities. There can be no assurance that the Company
will be able to identify new product opportunities successfully 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.
There also can be no assurance that the Company's new products will be accepted
by the market. Moreover, the end markets for the Company's new products, such as
the communications and computer markets, are subject to rapid technological
change and there can be no assurance that as such markets change the Company's
product offerings will remain current and suitable for them.

INTELLECTUAL PROPERTY
---------------------

     The Company's success depends in part on its ability to obtain patents and
licenses and to preserve other intellectual property rights covering its
manufacturing processes, products and development and testing tools.  The
Company seeks patent protection for those inventions and technologies for which
it believes such protection is suitable and is likely to provide a competitive
advantage to the Company.  The Company currently holds 26 United States patents
on semiconductor devices and methods with various expiration dates, none earlier
than May 2003.  The Company has applications for six United States patents
currently pending.  The Company also holds one foreign patent.  The process of
seeking patent protection can be long and expensive and there can be no
assurance that its current patents or any new patents that may be issued will be
of sufficient scope or strength to provide any meaningful protection or any
commercial advantage to the Company.  The Company may in the future be subject
to or initiate interference proceedings in the United States Patent and
Trademark office, which can demand significant financial and management
resources.  There can be no assurance that the Company's competitors will not
independently develop or patent substantially equivalent or superior
technologies.

     Although the Company is not currently a party to any material litigation,
the semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. There can be no assurance that
any patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all.  In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries.

     As is typical in the semiconductor industry, the Company has from time to
time received, and may in the future receive, communications from third parties
asserting patents, maskwork rights, or copyrights on certain of the Company's
products and technologies.  Although the Company is not currently a party to any
material litigation, in the event a third party were to make a valid
intellectual property claim and a license relating to such intellectual property
was not available on commercially reasonable terms, the Company's operating
results could be materially and adversely affected.  Litigation, which could
result in substantial cost to the Company and diversion of its resources, may
also be necessary to enforce patents or other intellectual property rights of
the Company or to defend the Company against claimed infringement of the rights
of others.  The failure to obtain necessary licenses or the occurrence of
litigation relating to patent infringement or other intellectual property
matters could have a material adverse effect on the Company's business and
operating results.  There can be no assurance that the steps taken by the
Company to protect its intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products.

COMPETITION
-----------

     The analog semiconductor industry is highly competitive and subject to
rapid technological change.  Significant competitive factors in the analog
market for standard products include product features, performance, price, the
timing of product introductions, the emergence of new computer standards,
quality and customer support.  The Company believes that it competes favorably
in each of these areas.

     Because the standard products market for analog integrated circuits is
diverse and highly fragmented, the Company encounters different competitors in
various product markets.  The Company's principal competitors include Linear
Technology Corporation, Maxim Integrated Products and Harris Semiconductor in
one or more of 

                                       7
<PAGE>
 
its product areas. Other competitors include Motorola, National Semiconductor
Corporation, Unitrode Corporation and certain Japanese manufacturers. Each of
these companies has substantially greater technical, financial and marketing
resources and greater name recognition than the Company. Due to the increasing
demands for analog circuits, the Company expects continued competition from
existing analog circuit suppliers and the entry of new competition.
 
     Competitive pressures could reduce market acceptance of the Company's
products and result in price reductions and increases in expenses that could
adversely affect the Company's business, financial condition or results of
operations. There can be no assurance that the Company will be able to compete
successfully in the future or that competitive pressures will not adversely
affect the Company's results of operations.

BACKLOG
-------

     The Company's backlog consists of Distributor and OEM customer orders
required to be shipped within six months following the order date.  Customers
may generally cancel or reschedule orders to purchase products without
significant penalty to the customer.  As a result, the quantities of the
Company's products to be delivered and their delivery schedules are frequently
revised by customers to reflect changes in their needs.  Since backlog can be
canceled or rescheduled without significant penalty, the Company does not
believe its backlog is a meaningful indicator of future revenue.

EMPLOYEES
---------

     As of December 31, 1998, the Company had 305 full-time employees, 210 of
whom were engaged in manufacturing (including testing, quality and materials
functions), 35 in research and development, 29 in marketing and sales, and 31 in
finance and administration. Of such employees, 135 are located in Hong Kong, 7
are located in Europe, and the remainder in the United States. As part of the
wafer fabrication facility closure, the Company anticipates that approximately
50 manufacturing employees will be laid off in Mountain View during the first
two quarters of 1999.  The Company's employees are not represented by any
collective bargaining agreements, and the Company has never experienced a work
stoppage.  The Company believes that its employee relations are good.

     The Company's success depends to a significant extent upon its people.
This includes the continued service of its executive officers, management teams,
and all other technical personnel. The Company's ability to attract, retain and
motivate qualified personnel is a challenge in today's competitive market place.
The loss of the services of any key personnel, and/or the Company's inability to
successfully recruit qualified replacements could have a material adverse effect
on the Company.  There can be no assurance that the Company will be successful
in attracting and retaining key personnel.

                                       8
<PAGE>
 
EXECUTIVE OFFICERS
------------------

     The executive officers of the Company and certain information about them
are as follows:

<TABLE>
<CAPTION>
         Name                Age                               Position                                     
----------------------     ------        -----------------------------------------------------------------                
<S>                        <C>           <C>                                                                            
Phillip M. Drayer            53          Chief Executive Officer and President                                          
                                                                                                                        
Edward H. Browder            58          Vice President, Manufacturing Operations and Chief Operating                   
                                         Officer                                                                        
                                                                                                                        
Robert G. Gargus             47          Vice President, Finance and Administration and Chief Financial                 
                                         Officer                                                                        
                                                                                                                        
Donald Herman                41          Vice President, Human Resources and Information Technology                     
                                                                                                                        
Edward D. Mitchell           45          Vice President, Engineering and Chief Technical Officer                        
                                                                                                                        
Kenneth J. Rose              49          Chief Accounting Officer and Corporate Controller                               
</TABLE>
 
     PHILLIP M. DRAYER has been Chief Executive Officer, President and a
director of the Company since the Company commenced operations in December 1993.
From 1990 through 1993, Mr. Drayer was President and Chief Executive Officer of
Teledyne Components, a division of Teledyne.  From 1980 to 1990, he was
President and Chief Executive Officer for EPI Technologies, a semiconductor
testing company, and from 1976 to 1979, he was Manufacturing Manager at Mostek,
a semiconductor manufacturer.  Mr. Drayer earned his B.S.E.E. degree from Lamar
University and his J.D. degree from South Texas College of Law.  Mr. Drayer is a
member of the Texas bar.

     EDWARD H. BROWDER has been Vice President, Manufacturing Operations and
Chief Operating Officer of the Company since April 1998. From January 1996 to
December 1997, Mr. Browder was President and Chief Operating Officer of Unitrode
Corporation, a mixed signal/analog semiconductor company. From 1994 through
1995, he was President of Seacliff Technologies, a privately held company that
was a distributor of specialty programmable semiconductor devices. From 1990 to
1993, he was President and Chief Executive Officer of Concurrent Logic, Inc., a
supplier of high density semiconductor field programmable gate arrays. Mr.
Browder also held positions with Saratoga Semiconductor, Falco Data Products and
Fairchild Semiconductor. Mr. Browder earned his B.S. degree in physics from
Stetson University.
 
     ROBERT G. GARGUS has been Vice President, Finance and Administration and
Chief Financial Officer of the Company since May 1998. From 1984 to May of 1998,
he held a number of financial and non-financial positions at Tandem Computers
(now Compaq Computer).  His last two positions at Tandem were as President and
General Manager of their Atalla Security Products Division and as the Corporate
Controller.  He also has 14 years of experience in a number of financial
positions at Unisys Corporation.  Mr. Gargus earned his B.S. degree in
accounting and an MBA in Finance from the University of Detroit.

     DONALD R. HERMAN has been Vice President, Human Resources and Information
Technology of the Company since July 1998 and he has been Vice President, Human
Resources since February 1997. From 1996 to 1997, he was with VLSI Technology, a
semiconductor manufacturing company, as Worldwide Staffing Manager. From 1981 to
1996, he was employed at Schlumberger, LTD, a diversified technology company,
most recently serving as Director, Human Resources. Mr. Herman earned his B.S.
degree in mechanical engineering from Purdue University.

     EDWARD D. MITCHELL has been Vice President, Engineering and Chief Technical
Officer of the Company since November 1996, was Vice President, Quality, Product
and Test Engineering from November 1994 to 

                                       9
<PAGE>
 
November 1996, and was Vice President, Quality Management from December 1993 to
November 1994. From 1991 through 1993, he was Vice President, Quality Management
for Teledyne Components. From 1982 to 1990, he was with Seeq Technology, a
semiconductor manufacturer, most recently serving as Director of Quality and
Reliability Assurance, and from 1980 to 1982, he was Product Engineering
Supervisor for NEC Electronics, a semiconductor manufacturer. Prior thereto, he
was employed at National Semiconductor Corporation and Advanced Micro Devices in
various engineering positions. Mr. Mitchell earned his B.S.E.E. degree from the
University of California at Berkeley.

     KENNETH J. ROSE has been Chief Accounting Officer of the Company since
December 1995 and has also been Corporate Controller of the Company since
December 1993.  From 1990 to 1993, he was Vice President, Finance and
Administration of Teledyne Components.  From 1985 to 1990, he was Vice
President, Finance and Administration of Teledyne CME, a division of Teledyne.
From 1982 to 1985, he was Controller of Teledyne Micronetics, a division of
Teledyne.  Prior thereto, he held various positions in accounting at Teledyne
Ryan Aeronautical, a division of Teledyne.  Mr. Rose earned his B.S. degree from
the University of San Diego.

ITEM 2.  DESCRIPTION OF PROPERTY
---------------------------------

     The Company's main executive, administrative, and technical offices are
located in a 70,000 square foot facility in Mountain View, California.  The
lease on this facility expires in December 2003. The Company also leases 30,000
square feet of additional space in Hong Kong in which it conducts testing and
from which it ships products to customers worldwide.  The lease on the Hong Kong
facility expires in July 2000.  The Company believes that its existing
facilities are adequate to meet its needs for at least the next 12 months.

     Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of chemicals and gases used in the
Company's manufacturing process and on the facility occupied by the Company.
The Company no longer produces wafers in the Mountain View Facility and believes
that its past activities conformed to all environmental and land use regulations
applicable to its operations.

     The Company acquired the semiconductor manufacturing operations of
Teledyne, Inc. previously conducted at the Company's facility. The semiconductor
manufacturing operations conducted by Teledyne Components at the facility
allegedly contaminated the soil and groundwater of the facility and the
groundwater of properties located down-gradient of the facility.  Although the
Company was indemnified by Teledyne as part of the acquisition transaction
against, among other things, any liabilities arising from such contamination,
there can be no assurance that claims will not be made against the Company or
that such indemnification will be available or will provide meaningful
protection at the time any such claim is brought.  To the extent the Company is
subject to a claim which is not covered by the indemnity from Teledyne or as to
which Teledyne is unable to provide indemnification, the Company's financial
condition or results of operations could be materially and adversely affected.
Although the Company may be considered a successor in interest to Teledyne's
operations at the Mountain View facility, the Company believes that it is
unlikely to be subject to any material environmental liabilities relating to the
operations of the facility conducted by Teledyne because (i) the Company has
received no notice from any regulatory authority or any other person claiming
that the Company is responsible for the contamination caused by Teledyne or the
cost of any clean-up relating thereto and (ii) the Company is indemnified by
Teledyne under the acquisition agreements and lease between the Company and
Teledyne with respect to any such liabilities.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     None.

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

     Not Applicable.

                                       10
<PAGE>
 
                                    PART II
                                    -------

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

     The Company effected the initial public offering of its Common Stock on
July 27, 1995.  As of February 24, 1999, there were approximately 3,580
beneficial holders of the Company's Common Stock.  The Company's Common Stock is
listed for quotation in the Nasdaq National Market under the Symbol "TLCM."  The
following table sets forth for the periods indicated, the high and low prices of
the Company's Common Stock as quoted in the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                     High                    Low                         
                                                  ----------              ---------
<S>                                               <C>                     <C>
Fiscal year ended December 31, 1996                                         
     First Quarter                                    7 3/8                   4                             
     Second Quarter                                   7 1/8                  4 3/8                          
     Third Quarter                                  5 13/16                  4 1/4                          
     Fourth Quarter                                   5 1/2                  3 1/4                          
                                                                             
Fiscal year ended December 31, 1997                                          
     First Quarter                                    5 3/4                  4 1/8                          
     Second Quarter                                   7 1/2                   4                             
     Third Quarter                                   16 7/8                  7 1/2                          
     Fourth Quarter                                  13 1/2                6 13/16                          
                                                                             
Fiscal year ended December 31, 1998                                          
     First Quarter                                 11 11/16                  7 3/4                          
     Second Quarter                                  11 7/8                  3 5/8                          
     Third Quarter                                    5 1/4                  2 3/8                          
     Fourth Quarter                                   5 7/8                  1 1/2                           
</TABLE>

     The trading price of the Company's Common Stock is expected to continue to
be subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, general conditions in the computer and
electronic industries, changes in earnings estimates or recommendations by
analysts, or other events or factors.  In addition, the public stock markets
have recently experienced extreme price and trading volume volatility.  This
volatility has significantly affected the market prices of securities of many
high technology companies for reasons frequently unrelated to the operating
performance of the specific companies.  These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.  The Company
has not paid any cash dividends on its Common Stock and currently intends to
retain any future earnings for use in its business.  Accordingly, the Company
does not anticipate that any cash dividends will be declared or paid on the
Common Stock in the foreseeable future.

                                       11
<PAGE>
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
--------------------------------------------

     The selected consolidated financial data of the Company set forth below
should be read in conjunction with the consolidated financial statements of the
Company, including the notes thereto, and Management's Discussion and Analysis
included elsewhere herein.

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                      ---------------------------------------------------------
                                                        1994         1995        1996        1997         1998
                                                                             (in thousands)
<S>                                                   <C>          <C>         <C>          <C>          <C> 
Consolidated Statement of Operations
 Data:
 
Net sales                                             $24,454      $39,004     $37,762      $55,435      $54,263                 
Cost of sales                                          17,209       26,680      26,801       31,175       34,896                 
                                                      -------      -------     -------      -------      -------  
         Gross Profit                                   7,245       14,324      10,961       24,260       19,367                 
                                                      -------      -------     -------      -------      -------  
Operating expenses:                                                                                                              
  Research and development                              1,214        2,649       4,271        5,455        5,588                 
  Selling, general and administrative                   5,246        7,115       7,713        9,530        9,496                 
  Loss on foundry investment                                -            -           -        8,264            -                 
  Restructuring and other charges                           -            -           -            -        7,258                 
                                                      -------      -------     -------      -------      -------  
     Total operating expenses                           6,460        9,764      11,984       23,249       22,342                 
                                                      -------      -------     -------      -------      -------  
Income (loss) from operations                             785        4,560      (1,023)       1,011       (2,975)                
Interest income (expense), net                             24          299         162         (288)         386                 
                                                      -------      -------     -------      -------      -------  
Income (loss) before income taxes                                                                                                
     and extraordinary item                               809        4,859        (861)         723       (2,589)                
Provision (benefit) for income taxes                      202        1,215        (233)       2,427          958                 
                                                      -------      -------     -------      -------      -------  
Income (loss) before extraordinary item                   607        3,644        (628)      (1,704)      (3,547)                
Gain on early extinguishment of debt                      225            -           -            -            -                 
                                                      -------      -------     -------      -------      -------  
Net income (loss)                                     $   832      $ 3,644     $  (628)     $(1,704)     $(3,547)                
                                                      =======      =======     =======      =======      =======                 
                                                                                                                                 
Basic per share data (1):                                                                                                        
Income (loss) before extraordinary item               $  0.16      $  0.43     $ (0.04)     $ (0.11)     $ (0.22)                
Gain on early extinguishment of debt                     0.06            -           -            -            -                 
                                                      -------      -------     -------      -------      -------  
Net income (loss)                                     $  0.22      $  0.43     $ (0.04)     $ (0.11)     $ (0.22)                
                                                      =======      =======     =======      =======      =======                 
                                                                                                                                 
Number of shares used to compute                                                                                                 
   basic per share data                                 3,715        8,436      15,612       16,184       15,933                 
                                                      =======      =======     =======      =======      =======                 
                                                                                                                                 
Diluted per share data (1):                                                                                                      
Income (loss) before extraordinary item               $  0.06      $  0.23     $ (0.04)     $ (0.11)     $ (0.22)                
Gain on early extinguishment of debt                     0.02            -           -            -            -                 
                                                      -------      -------     -------      -------      -------  
Net income (loss)                                     $  0.08      $  0.23     $ (0.04)     $ (0.11)     $ (0.22)                
                                                      =======      =======     =======      =======      =======                 
                                                                                                                                 
Number of shares used to compute                                                                                                 
   Diluted per share data                              10,212       15,703      15,612       16,184       15,933                 
                                                      =======      =======     =======      =======      =======                 
</TABLE>

                                       12
<PAGE>
 
<TABLE>
<CAPTION>
                                                                             December 31,
                                            ---------------------------------------------------------------------------------
                                               1994                1995              1996             1997             1998 
                                            ---------           ---------         ---------        ---------        ---------
                                                                            (in thousands)
<S>                                         <C>                 <C>               <C>              <C>              <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents                     $ 6,297            $15,849           $12,761          $17,110          $14,059      
Working capital                                11,021             29,356            23,760           24,681           17,108      
Total assets                                   18,797             49,805            58,012           53,684           41,166      
Notes payable and other long term                                                                                                 
  obligations                                     507              3,328            10,047            3,462            2,678      
Mandatorily redeemable convertible                                                                                                
  Preferred stock                              13,479                  -                 -                -                -      
Total stockholders' equity                        738             37,059            36,926           36,421           25,918      
</TABLE>

(1)  All per share amounts have been restated in accordance with Statement of
     Financial Accounting Standards No. 128, "Earnings Per Share". See Note 2 to
     the Notes to the Consolidated Financial Statements.


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

     This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.

OVERVIEW
--------

     The Company was founded in December 1993 as the result of a management
buyout of the Teledyne Components Division of Teledyne Industries Inc. The
Company designs, manufactures and sells a variety of analog and mixed-signal
integrated circuits. The Company's product offerings are divided into four
primary categories: (1) Power Management, (2) Thermal Management (3) Data
Converters, and (4) Linear Building Blocks. Over the last several years, the
Company has been transitioning its product portfolio away from the legacy
products associated with the Teledyne Division to higher value proprietary
solutions. As a result, the Company's current product offering consists of both
proprietary and second source products. While the primary emphasis is developing
proprietary products, the Company does offer second source products to enhance
its total product portfolio. Average selling prices for the Company's
proprietary products have generally tended to decline at a slower rate than have
those for the Company's second source products, which are more susceptible to
competitive pricing pressures. The Company generally recognizes higher gross
margins on its proprietary products than on its second source products.

     As the Company transitioned from the legacy products manufactured using
older process technology, it became necessary to develop a source of supply for
more advanced wafer processing technology for its newer, proprietary products.
This transition began at a time when advanced semiconductor capacity was in
short supply and long term forecasts for additional capacity was not improving.
Therefore, in November 1995, the Company entered into certain agreements with IC
WORKS, Inc., a privately-held wafer foundry company.  Pursuant to such
agreements, the Company purchased $3.0 million of preferred stock of IC WORKS
and provided $10.4 million in capital equipment. In return for this investment,
TelCom received a guarantee of submicron wafer capacity at specified prices for
a period of five years, projected to start in late 1997. Since then, the wafer
capacity shortage projected in late 1995 diminished.  Since late 1995,
substantial foundry capacity has been available worldwide while overall demand
has not increased proportionately. Consequently, wafer pricing has decreased
dramatically, which has changed the economic viability of the foundry business
in which the Company invested. The IC WORKS wafer foundry was subsequently sold
to a captive supplier and as a result, in 1997, the Company recorded a loss of
$8.3 million on its foundry investment which consists of a $3.0 million write
down of the preferred stock, a loss on the sale of the equipment of $5.2
million, and $.1 million of costs associated with prepayment penalties on
financing of the equipment and legal fees. Pursuant to an agreement with IC
WORKS, in the fourth quarter of 1997, the Company sold the $10.4 million of
equipment at IC WORKS for $5.2 million and invested an additional $1.5 million
in preferred stock of IC WORKS. This agreement terminates the Company's
operating agreement with IC WORKS.

     In August 1998, the Company announced its plans to shut down its five-inch
wafer fabrication facility in Mountain View, California and use third party
foundries for all of its wafer fabrication.  This change was desirable because
of continuing market conditions that made it more economical to purchase wafers
than to produce them internally.  A majority of the Company's new products that
have been developed in the past year utilize sub-micron wafer technology and are
currently 

                                       13
<PAGE>
 
fabricated by outside foundries. All other remaining wafers were fabricated in
the Mountain View facility. In January 1999, the wafer fabrication facility was
shut-down. The fabrication of wafers is in the process of being transferred to
third party foundries and it is anticipated that the transfer will be complete
prior to the end of the first quarter of 1999. In connection with the closure of
its wafer fabrication facility, the Company recognized restructuring and other
charges of $7.3 million. Restructuring costs for the Mountain View, California
fabrication facility were $6.5 million, while other one-time charges totaled $.8
million. The restructuring charge includes a write down of fabrication equipment
of $4.5 million, costs associated with idle facility space of $1.4 million,
employee severance costs of $.5 million and clean up and environmental related
charges of $.1 million. The other one time charges included the write down of
$.4 million of certain test equipment in Hong Kong, the write down of certain
equipment in Mountain View totaling $.3 million, and $.3 million related to
certain licensing and royalty costs, offset by a decrease of $.2 million in
amounts previously accrued due to a change in the Company's employee sabbatical
policy. Net income from operations, excluding these charges, was $3.6 million
for 1998 or $.21 in earnings per share. Including these charges, the net loss
was $3.5 million. The Company expects annual savings of approximately $2.0
million on completion of the restructuring activities.

     The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect net sales, gross
margins and operating income. These factors include the volume and timing of
orders received, changes in the mix of proprietary and second source products
sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to introduce new products
on a timely basis, the timing and extent of research and development expenses,
fluctuations in manufacturing yields, cyclical semiconductor industry
conditions, the Company's access to advanced process technologies and the timing
and extent of process development costs. Historically in the semiconductor
industry, average selling prices of products have decreased over time. If the
Company is unable to introduce new products with higher margins, maintain its
product mix between proprietary and second source products, or reduce
manufacturing cost to offset decreases in the prices of its existing products,
then the Company's operating results will be adversely affected. The Company's
business is characterized by short-term orders and shipment schedules, and
customer orders typically can be canceled or rescheduled without penalty to the
customer. Since most of the Company's backlog is cancelable without penalty, the
Company typically plans its production and inventory levels based on internal
forecasts of customer demand.  Customer demand remains highly unpredictable and
variances to the forecast can fluctuate substantially. In addition, because of
high fixed costs on the semiconductor industry, the Company is limited in its
ability to reduce costs quickly in response to any revenue shortfalls. As a
result of the foregoing or other factors, the Company has experienced and may in
the future experience material adverse fluctuations in its operating results on
a quarterly or annual basis, which have in the past and would in the future
materially affect the Company's business, financial condition and results of
operations.

RESULTS OF OPERATIONS
---------------------

     The following table sets forth certain consolidated statement of operations
data of the Company as a percentage of net sales.

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                      -----------------------------------------
                                                         1996           1997            1998
                                                      ---------     ----------      -----------
<S>                                                   <C>           <C>             <C>
 
Net sales                                                100.0%         100.0%          100.0%                                      
Cost of sales                                             71.0           56.3            64.3                                      
                                                      --------      ---------       ---------                                      
Gross margin                                              29.0           43.7            35.7                                      
                                                      --------      ---------       ---------    
Operating expenses:                                                                                                                
     Research and development                             11.3            9.8            10.3                                      
     Selling, general and administrative                  20.4           17.2            17.5                                      
     Loss on foundry investment                              -           14.9               -                                      
     Restructuring and other                                 -              -            13.4                                      
Total operating expenses                                  31.7           41.9            41.2                                      
                                                      --------      ---------       ---------    
Income (loss) from operations                             (2.7)           1.8            (5.5)                                      
Interest income (expense), net                             0.4           (0.5)            0.7                                      
                                                      --------      ---------       ---------    
Income (loss) before taxes                                (2.3)           1.3            (4.8)                                      
Provision (benefit) for income taxes                      (0.6)           4.4             1.7                                      
                                                      --------      ---------       ---------
Net income (loss)                                         (1.7)%         (3.1)%          (6.5)%   
                                                      ========      =========       =========    
</TABLE>

YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------

     NET SALES.  Net sales in 1998 were $54.3 million, a decrease of $1.1
million or 2.0%, compared to $55.4 million in 1997. The decrease in net sales
was primarily due to lower average selling prices caused by product mix and a
change by Motorola from a device which had a higher average sales price to a
device with a lower average sales price for the same 

                                       14
<PAGE>
 
application. Net sales in 1998 for the Company's geographical areas of the
United States, Asia and Europe accounted for 35%, 34%, and 31%, respectively,
compared to 35%, 33%, and 32%, respectively, in 1997. Sales to the Company's
three largest OEM customers, Motorola, Intel and Compaq were $18.8 million or
35%, $4.6 million or 9%, and $2.4 million or 4%, respectively, of net sales in
1998 compared to $16.5 million or 30%, $1.5 million or 3% and $4.1 million or
7%, respectively, of net sales in 1997.

     GROSS MARGIN.  Gross margin decreased to 35.7% in 1998 from 43.7% in 1997.
The decrease in gross margin was caused by decreased production volume in the
Company's wafer fabrication facility due to lower demand, a decrease in unit
selling prices for products sold to Motorola, and an additional charge related
to surplus inventory related to the closure of the Company's wafer fabrication
facility. The Company's ability  to increase gross margins will depend on the
successful introduction of its new proprietary products and controlling its
manufacturing costs. Thus, future wafer costs will depend on the volume and
availability of wafers from the Company's wafer fabrication foundries.

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$5.6 million, or 10.3% of net sales, in 1998, compared to $5.5 million, or 9.8%
of net sales, in 1997. The increase in research and development expenses, in
absolute dollars, was primarily attributable an increase in design engineers and
product engineers and the costs associated with the purchase and maintenance of
computer-aided design (CAD) systems for design engineers. The Company expects
research and development expenses to increase in absolute dollars in future
periods although such expenses may fluctuate as a percentage of net sales.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $9.5 million, or 17.5% of net sales, in 1998
compared to $9.5 million, or 17.2% of net sales, in 1997. The Company expects
selling, general and administrative expenses generally to increase in absolute
dollars in the future periods although such expenses may fluctuate as a
percentage of sales.

     RESTRUCTURING AND OTHER CHARGES.  During 1998, the Company recognized
restructuring and other charges of $7.3 million. Restructuring costs for the
Mountain View, California fabrication facility were $6.5 million, while other
one-time charges totaled $.8 million. The restructuring charge includes a write
down of fabrication equipment of $4.5 million, costs associated with idle
facility space of $1.4 million, employee severance costs of $.5 million and
clean up and environmental related charges of $.1 million. The other one time
charges included the write down of $.4 million of certain test equipment in Hong
Kong, the write down of certain equipment in Mountain View totaling $.3 million,
and $.3 million related to certain licensing and royalty costs, offset by a
decrease of $.2 million in amounts previously accrued due to a change in the
Company's employee sabbatical policy.

     INTEREST INCOME (EXPENSE), NET.  Net interest income increased from an
expense of $228,000 in 1997 to an income of $386,000 in 1998, reflecting lower
interest expense associated with equipment financing.

     INCOME TAXES. The Company recorded an income tax provision of $1.0 million
in 1998 at an effective rate of negative 37% compared to $2.4 million in 1997 at
an effective rate of 336%. The decrease in the effective tax rate is due to the
non deductibility of certain foundry investment losses and a tax charge relating
to the repatriation of certain of the Company's foreign subsidiaries
undistributed earnings, offset by an increase in the 1998 valuation allowance
relating to the Company's net deferred tax assets.

YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------

     NET SALES.  Net sales in 1997 were $55.4 million, an increase of $17.6
million or 46.8%, compared to $37.8 million in 1996. The increase in net sales
was primarily due to higher sales volume in the Company's power management
product line. Net sales in 1997 for the Company's geographical areas of the
United States, Asia and Europe accounted for 35%, 33%, and 32%, respectively,
compared to 37%, 38%, and 25%, respectively, in 1996. Sales to the Company's two
largest OEM customers, Motorola and Compaq were $16.5 million or 30% and $4.1
million or 7%, respectively, of net sales in 1997 compared to $4.4 million or
12% and $3.1 million or 9%, respectively, of net sales in 1996.

     GROSS MARGIN.  Gross margin increased to 43.7% in 1997 from 29.0% in 1996.
The increase in gross margin was caused by  increased production volume in the
Company's wafer fabrication facility due to higher demand, increased efficiency
in wafer fabrication and higher gross margins on sales of power management
products.

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$5.5 million, or 9.8% of net sales, in 1997, compared to $4.3 million, or 11.3%
of net sales, in 1996. The increase in research and development expenses, in
absolute dollars, was primarily attributable to cost of wafers and associated
expense for new products, and costs associated with the 

                                       15
<PAGE>
 
purchase and maintenance of computer-aided design (CAD) systems for design
engineers.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $9.5 million, or 17.2% of net sales, in
1997 from $7.7 million, or 20.4% of net sales, in 1996. Selling, general and
administrative expenses increased, in absolute dollars, primarily as a result of
(i) the hiring of sales personnel, (ii) an increase in outside sales commissions
due to higher sales, and (iii) the distribution of management bonus and company
wide profit sharing to all employees.

     LOSS ON FOUNDRY INVESTMENT. In November 1995, the Company entered into
certain agreements with IC WORKS. Pursuant to these agreements, in 1996 the
Company purchased $3.0 million of preferred stock of IC WORKS and provided $10.4
million in capital equipment. In return for this investment, the Company
received a guarantee of submicron wafer capacity at specified prices for a
period of five years, projected to start in late 1997. In 1997, the Company
recorded a loss of $8.3 million on its foundry investment which consists of a
$3.0 million write down of the preferred stock, a loss on the sale of the
equipment of $5.2 million, and $.1 million of costs associated with prepayment
penalties on financing of the equipment and legal fees. Pursuant to an agreement
with IC WORKS, Inc., in the fourth quarter of 1997, the Company sold the $10.4
million of equipment at IC WORKS for $5.2 million and invested an additional
$1.5 million in preferred stock of IC WORKS Inc.
 
     INTEREST INCOME (EXPENSE), NET. Net interest income decreased from $162,000
in 1996 to an expense of $288,000 in 1997, reflecting higher interest expense
associated with equipment financing.

     INCOME TAXES. The Company recorded an income tax provision of $2.4 million
in 1997 at an effective rate of 336% compared to an income tax benefit of
$233,000 in 1996 at an effective rate of 27%. The increase in the effective tax
rate is due to the non deductibility of certain foundry investment losses and a
tax charge relating to repatriation of certain of the Company's foreign
subsidiaries' undistributed earnings.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     In 1996, the Company generated approximately $1.3 million from operating
activities, principally attributable to net loss adjusted for non cash items,
including depreciation of $3.3 million, and a decrease in accounts receivable of
$900. These increases in cash were primarily offset by taxes receivable of $1.4
million and taxes payable of $1.2 million. At December 31, 1996, the Company had
cash and cash equivalents of $12.8 million.

     The Company invested $13.7 million in capital equipment and leasehold
improvements of which $10.4 million was for purchases of capital equipment
pursuant to an agreement with IC WORKS in 1996. The Company financed part of
this investment through notes payable, which increased $9.0 million on a net
basis.

     Pursuant to an agreement with IC WORKS, the Company invested $3.0 million
in preferred stock of IC WORKS in 1996.

     In 1997, the Company generated approximately $11.9 million from operating
activities, primarily from income before the loss on foundry investment,
depreciation of $4.1 million and a net increase of $1.2 million in working
capital items. The net increase in working capital primarily reflects a decrease
of income tax receivable of $1.4 million, due to collection of tax refunds
recorded in the prior year, an increase in accounts payable of $1.4 million, an
increase in taxes payable of $1.8 million, offset by an increase in accounts
receivable from higher fourth quarter sales of  $2.2 million, and an increase in
sensor product inventory of $1.8 million.   At December 31, 1997, the Company
had cash and cash equivalents of $17.1 million.

     Pursuant to an agreement with IC WORKS, in the fourth quarter of 1997, the
Company sold the $10.4 million of equipment at IC WORKS for $5.2 million and
invested an additional $1.5 million in preferred stock of IC WORKS. This
agreement terminates the Company's operating agreement with IC WORKS and its
wafer production arrangement was amended to allow the Company to purchase wafers
for a period of time prior to finding an alternative supplier, up to April 1998.

     In 1997, the Company invested $7.6 million in capital equipment and
leasehold improvements. The Company financed $3.3 million of this investment
through notes payable and paid $10.8 million in principal payments of which $7.7
million was for equipment sold as part of the IC WORKS agreement and $3.1
million was principal payments on other equipment financing for prior years.

     In 1998, the Company generated approximately $9.9 million of cash from
operating activities primarily from income 

                                       16
<PAGE>
 
before restructuring and other charges, depreciation of $5.2 million and a net
increase of $.9 million in working capital items. The net increase in working
capital primarily reflects decreases in accounts receivable of $.5 million,
inventory of $1.9 million, accounts payable of $.2 million, accrued liabilities
of $.5 million and deferred income taxes of $.8 million.

In 1998, the Company invested or used $5.8 million to fund capital equipment and
leasehold improvements. The Company expects capital expenditures of $3.0 million
in 1999.  As of December 31, 1998, the Company had no material commitments
related to such expenditures. The Company also used $9.6 million of cash to
repurchase Company's common stock for $7.9 million and to pay down notes payable
(debt) by $2.6 million.  These were partially offset by cash generated from the
sale of stock through the employee stock option and stock purchase plans of $1.0
million.

     The Company believes that the existing cash and cash equivalents, expected
cash flow from operations and its existing financing sources will be sufficient
to support its operating and capital needs for at least the next 12 months. Any
major change in the nature of the Company's business, such as the acquisition of
products, the need for significant new capital expenditures or the acquisition
of an existing business, could change the Company's capital requirements. To the
extent the Company requires additional cash, there can be no assurances that the
Company will be able to obtain such financing on terms favorable to the Company,
or at all.

YEAR 2000 ISSUES
----------------

     The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year.  If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than the
Year 2000.  This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.  The Company has identified its Year 2000 risk in four categories:
internal information systems; internal non-financial software and imbedded chip
technology; product compliance; and external noncompliance by third parties.

     1) INTERNAL INFORMATION SYSTEMS.  During 1997, the Company inventoried all
of its mission critical systems, programs and databases.  Such systems, if
failure occurred, could result in a disruption in business operations that could
have a material adverse affect on the Company's operations.  During 1998, the
Company completed an assessment of these mission critical systems.  As a result
of the assessment, the Company does not anticipate any significant issues from
its internal information systems.  Certain software packages will require
upgrading to Year 2000 compliant versions.  These upgrades should be completed
by June 1999.  The costs incurred to-date for the assessment performed as well
as the costs to upgrade to the Year 2000 compliant software packages are not
expected to be material to the Company's financial condition or results of
operations.  These expenses will  continue to be expensed in the periods
incurred.  Since the Company has completed its assessment and is in the process
of making the necessary changes, the Company has not developed a contingency
plan for its internal information systems.

     2) INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY.   During
1998, the Company completed an assessment of its non-financial software and
imbedded chip technology regarding the impact of the Year 2000 on such non-
financial systems as manufacturing equipment, and security equipment.  As a
result of the assessment, the Company does not anticipate any significant issues
from its non-financial software and imbedded chip technology.  If the Company is
unable to achieve Year 2000 compliance for its major non-financial systems, the
Year 2000 could have a material impact on the operations of the Company. The
costs incurred to-date for the assessment performed and any anticipated costs to
be incurred in the future related to internal non-financial software and
imbedded chip technology are not expected to be material to the Company's
financial condition or results of operations and will continue to be expensed in
the periods incurred.  Since the Company has completed its assessment and has
not found any significant issues, the Company has not developed a contingency
plan for its internal non-financial software and imbedded chip technology.

     3) PRODUCT COMPLIANCE.  The Company designs, develops, manufactures and
markets a wide portfolio of high performance integrated circuits.  During 1998,
the Company completed an assessment of its current products regarding its
compliance with the Year 2000 issue.  As a result of the assessment, the Company
believes its products are Year 2000 compliant and does not anticipate any
significant Year 2000 compliance issues.  If the Company's products were found
not to be Year 2000 compliant, the Year 2000 issue could have a material impact
on the operations of the Company. The costs incurred to-date, for the assessment
performed and any anticipated costs to be incurred in the future are not
expected to be material to the Company's financial condition and will continue
to be expensed in the periods incurred.  Since the Company has completed its
assessment and has not found any significant issues, the Company has not
developed a contingency plan for 

                                       17
<PAGE>
 
its products.

     4) EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS.  The Company is in
the process of identifying and contacting its critical suppliers, service
providers and contractors to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remedy their
own Year 2000 issues.  It is expected that full identification of any
noncompliance issues in this area will be completed in the third quarter of
1999.  To the extent that responses to Year 2000 readiness are unsatisfactory,
the Company intends to change suppliers, service providers or contractors to
those who have demonstrated Year 2000 readiness. However, there can be no
assurance that the Company will be successful in finding such alternative
suppliers, service providers and contractors. The costs incurred to-date for the
assessment performed and any anticipated costs to be incurred in the future are
not expected to be material to the Company's financial condition or results of
operations and will continue to be expensed in the periods incurred.  In the
event that any of the Company's significant customers and suppliers do not
successfully achieve Year 2000 compliance, and the Company is unable to replace
them with new customers or alternate suppliers, the Company's business or
operations could be materially adversely affected.

     During 1998, the Company incurred costs of $.1 million related to Year 2000
issues. The Company estimates that it will incur costs of approximately $.3
million during 1999 for costs related to Year 2000 issues.

MARKET RISK DISCLOSURE
----------------------

     INTEREST RATE RISK - The Company does not use derivative financial
instruments in its investment portfolio. At December 31, 1997, the Company's
investment portfolio is comprised of municipal government securities that mature
within one year. The Company places investments in instruments that meet high
credit quality standards. These securities are subject to interest rate risk,
and could decline in value if interest rates fluctuate. Due to the short
duration and conservative nature of the Company's investment portfolio, the
Company does not expect any material loss with respect to its investment
portfolio.

     FOREIGN CURRENCY EXCHANGE RATE RISK - Certain of the Company's sales, cost
of manufacturing and marketing are transacted in local currencies. As a result,
the Company's international results of operations are subject to foreign
exchange rate fluctuations. The Company does not currently hedge against foreign
currency rate fluctuations. Gains and losses from such fluctuations have not
been material to the Company's consolidated results of operations. A 10% move in
local currencies against the US dollar as of December 31, 1998 would have an
immaterial effect on the Company's pretax earnings over the next fiscal year.

                                       18
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS
----------------------------


                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

<TABLE>
<CAPTION>
                                                                                                    Page
<S>                                                                                                 <C>
Report of Independent Accountants....................................................                20
Consolidated Balance Sheets as of December 31, 1997 and 1998.........................                21
Consolidated Statements of Operations for the years ended
   December 31, 1996, 1997 and 1998..................................................                22
Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1996, 1997 and 1998..................................................                23
Consolidated Statements of Cash Flows for the years ended
   December 31, 1996, 1997 and 1998..................................................                24
Notes to Consolidated Financial Statements...........................................                25
</TABLE>

                                       19
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------

To the Board of Directors and Stockholders of
     TelCom Semiconductor, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of  stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of TelCom
Semiconductor, Inc. and its subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP

San Jose, California
January 20, 1999

                                       20
<PAGE>
 
                          TELCOM SEMICONDUCTOR, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                            --------------------------------------------------------
                                                                      1997                              1998
                                                            -----------------------          -----------------------
<S>                                                         <C>                              <C>
ASSETS
 
Current assets:
    Cash and cash equivalents                                               $17,110                          $14,059
    Marketable securities                                                     2,469                                -
    Accounts receivable, less allowance for doubtful
        accounts of $195 and $195                                             7,452                            6,944
    Inventory                                                                 8,289                            6,377
    Deferred income taxes                                                     1,167                            1,099
    Other current assets                                                        751                              799
                                                            -----------------------          -----------------------
        Total current assets                                                 37,238                           29,278
 
Property and equipment, net                                                  14,946                           10,388
Other assets                                                                  1,500                            1,500
                                                            -----------------------          -----------------------
                                                                            $53,684                          $41,166
                                                            =======================          =======================
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
    Current portion of notes payable                                        $ 2,641                          $ 1,886
    Accounts payable                                                          3,461                            3,247
    Accrued liabilities                                                       2,460                            2,982
    Deferred distributor income                                               1,429                            1,484
    Income taxes payable                                                      2,566                            2,571
                                                            -----------------------          -----------------------
        Total current liabilities                                            12,557                           12,170
 
Notes payable and other long term obligations, net of
 current
  portion                                                                     3,462                            2,678
Deferred income taxes                                                         1,244                              400
                                                            -----------------------          -----------------------
        Total liabilities                                                    17,263                           15,248
                                                            -----------------------          -----------------------
 
Commitments and contingencies (Note 10)                                           -                                -
 
Stockholders' equity:
      Preferred stock, $0.001 par value; 5,000,000
          shares authorized; none issued or outstanding                           -                                -
     Common stock, $0.001 par value; 30,000,000
          shares authorized; 16,418,180 and 16,859,214
          shares issued and 16,418,180 and 14,557,214
          shares outstanding                                                     16                               17
    Additional paid-in capital                                               34,387                           35,355
    Treasury stock (2,302,000 shares at cost)                                     -                           (7,925)
    Retained earnings                                                         2,018                           (1,529)
                                                            -----------------------          ----------------------- 
        Total stockholders' equity                                           36,421                           25,918
                                                            -----------------------          -----------------------
 
                                                                            $53,684                          $41,166
                                                            =======================          =======================
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       21
<PAGE>
 
                          TELCOM SEMICONDUCTOR, INC.

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


<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                              ----------------------------------------------------------------
                                                      1996                   1997                   1998
                                              ------------------     ------------------     ------------------
<S>                                           <C>                    <C>                    <C>
Net sales                                               $ 37,762               $ 55,435               $ 54,263
Cost of sales                                             26,801                 31,175                 34,896
                                              ------------------     ------------------     ------------------
Gross profit                                              10,961                 24,260                 19,367
                                              ------------------     ------------------     ------------------
 
Operating expenses:
    Research and development                               4,271                  5,455                  5,588
    Selling, general and administrative                    7,713                  9,530                  9,496
    Loss on foundry investment                                 -                  8,264                      -
    Restructuring and other                                    -                      -                  7,258
                                              ------------------     ------------------     ------------------
          Total operating expenses                        11,984                 23,249                 22,342
                                              ------------------     ------------------     ------------------
 
Income (loss) from operations                             (1,023)                 1,011                 (2,975)
Interest income                                              914                    959                    845
Interest expense                                            (752)                (1,247)                  (459)
                                              ------------------     ------------------     ------------------
Income (loss) before income taxes                           (861)                   723                 (2,589)
Provision (benefit) for income taxes                        (233)                 2,427                    958
                                              ------------------     ------------------     ------------------
Net income (loss)                                       $   (628)              $ (1,704)              $ (3,547)
                                              ==================     ==================     ==================
 
Per share data:
  Net income (loss)
       Basic                                            $  (0.04)              $  (0.11)              $  (0.22)
                                              ==================     ==================     ==================
       Diluted                                          $  (0.04)              $  (0.11)                $(0.22)
                                              ==================     ==================     ==================
 
Number of shares used to compute per
   share data
       Basic                                              15,612                 16,184                 15,933
                                              ==================     ==================     ==================
       Diluted                                            15,612                 16,184                 15,933
                                              ==================     ==================     ==================
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       22
<PAGE>
 
                          TELCOM SEMICONDUCTOR, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
 
                                                             Additional                                 Total
                                           Common stock      Paid - in     Treasury     Retained     Stockholders'
                                        -----------------
                                        Shares     Amount     Capital        Stock      Earnings        Equity
                                        ------     ------     -------        -----      --------        ------
<S>                                     <C>        <C>       <C>           <C>          <C>          <C>
Balance at December 31, 1995            15,487        $15       $32,694           -      $ 4,350           $37,059
 
Sale of common stock                       313          1           486           -            -               487
Repurchase of common stock                 (94)         -             -           -            -                 -
Payment on notes receivable from
  stockholders                               -          -             8                        -                 8
Net loss                                     -          -             -           -         (628)             (628)
                                        ------     ------     ---------      ------     --------        ----------
 
Balance at December 31, 1996            15,706         16        33,188           -        3,722            36,926
 
Sale of common stock                       712          -         1,190           -            -             1,190
Payment on notes receivable from
  stockholders                               -          -             9           -            -                 9
Net loss                                     -          -             -           -       (1,704)           (1,704)
                                        ------     ------     ---------      ------     --------        ----------
 
Balance at December 31, 1997            16,418         16        34,387           -        2,018            36,421
 
Sale of common stock                       441          1           968           -            -               969
Repurchase of common stock                   -          -             -      (7,925)           -            (7,925)
Net loss                                     -          -             -           -       (3,547)           (3,547)
                                        ------     ------     ---------      ------     --------        ----------
Balance at December 31, 1998            16,859        $17       $35,355     $(7,925)     $(1,529)          $25,918
                                        ======     ======     =========      ======     ========        ==========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       23
<PAGE>
 
                          TELCOM SEMICONDUCTOR, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                         --------------------------------------------------------------
                                                                 1996                   1997                  1998
                                                         -----------------      -----------------      ----------------
<S>                                                      <C>                    <C>                    <C>
Cash flows from operating activities:
Net income (loss)                                                 $   (628)              $ (1,704)              $(3,547)
Adjustments to reconcile net income (loss) to net
   cash provided by (used for) operating activities:
      Loss on foundry investment                                         -                  8,264                     -
      Restructuring and other                                            -                      -                 7,258
      Depreciation and amortization                                  3,335                  4,113                 5,247
      Deferred income taxes                                            644                     77                  (776)
      Changes in assets and liabilities:
           Accounts receivable                                         945                 (2,164)                  508
           Inventory                                                   392                 (1,799)                1,912
           Income taxes receivable                                  (1,430)                 1,430                     -
           Other current assets                                       (184)                  (393)                  (48)
           Accounts payable                                           (125)                 1,419                  (214)
           Accrued liabilities                                          98                    454                  (543)
           Deferred distributor income                                (575)                   352                    55
           Income taxes payable                                     (1,164)                 1,805                     5
                                                         -----------------      -----------------      ----------------
Net cash provided by operating activities                            1,308                 11,854                 9,857
                                                         -----------------      -----------------      ----------------
 
Cash flows from investing activities:
      Purchases of property and equipment                          (13,651)                (7,574)               (5,816)
      Investment in IC WORKS, Inc.                                  (3,000)                (1,500)                    -
      Net proceeds from sale of equipment at IC Works,                   -                  5,099                     -
       Inc.
      (Purchases) sales of marketable securities                     2,788                  2,733                 2,469
                                                         -----------------      -----------------      ----------------
Net cash used for investing activities                             (13,863)                (1,242)               (3,347)
                                                         -----------------      -----------------      ----------------
 
Cash flow from financing activities:
      Proceeds from sale of common stock                               487                  1,190                   969
      Payment on notes receivable from stockholders                      8                      9                     -
      Repurchase of common stock                                         -                      -                (7,925)
      Proceeds from issuance of notes payable                       11,011                  3,333                     -
      Principal payments on notes payable                           (2,039)               (10,795)               (2,605)
                                                         -----------------      -----------------      ----------------
Net cash provided by (used for) financing activities                 9,467                 (6,263)               (9,561)
                                                         -----------------      -----------------      ----------------
 
Net increase (decrease) in cash and cash
      equivalents                                                   (3,088)                 4,349                (3,051)
 
Cash and cash equivalents at the beginning of period                15,849                 12,761                17,110
                                                         -----------------      -----------------      ----------------
Cash and cash equivalents at the end of period                    $ 12,761               $ 17,110               $14,059
                                                         =================      =================      ================
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       24
<PAGE>
 
                          TELCOM SEMICONDUCTOR, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (amounts in thousands, except per share data)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION:
-----------------------------------------------

     TelCom Semiconductor, Inc. ("TelCom" or the "Company") designs, develops
and markets a diversified portfolio of high performance analog integrated
circuits for use in a wide variety of electronic systems. The Company was
organized in Delaware in June 1993 and began operations in December 1993 after
the management-led buyout of the semiconductor operations of Teledyne, Inc. The
Company has operations in the United States, Hong Kong and Germany. The Company
operates and reports financial results on a 52-53 week fiscal year. During 1997,
the Company changed its fiscal year end from the last Friday of December to the
Friday closest to the last day of December. Fiscal year 1997 is a 53 week year
ended on January 2, 1998. Fiscal 1996 and 1998 are 52 week years ended on
December 27, 1996 and January 1, 1999, respectively. For convenience, the
Company presents its fiscal years as ending on December 31.

     The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
----------------------------------------------------

     PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.

     REVENUE RECOGNITION

     Revenue from product sales to customers other than domestic distributors is
recognized upon shipment. The Company estimates returns from these customers and
provides an allowance at the time revenue is recognized. Sales to domestic
distributors are generally subject to agreements allowing certain rights of
return and price protection with respect to unsold merchandise held by each
distributor. The Company defers recognition of revenue and related gross margin
on the sales to domestic distributors until the product is sold by these
distributors.

     SALES TO SIGNIFICANT CUSTOMERS

     Sales to one customer represented 12%, 30% and 35% of the Company's net
sales for the years ended December 31, 1996, 1997 and 1998, respectively.
Accounts receivable from this customer totaled $777 and $1,771 at December 31,
1997 and 1998, respectively. Sales to two other customers represented 12% and
9%, 10% and 7%, and 11% and 4% of the Company's net sales for the years ended
December 31, 1996, 1997 and 1998, respectively.

     CASH EQUIVALENTS

     All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents. The fair values of these
investments approximated their costs at the respective balance sheet dates.

     MARKETABLE SECURITIES

     At December 31, 1997, the Company's marketable securities, which are
municipal government obligations, are classified as available for sale and are
reported at fair market value, which approximates cost. Realized gains and
losses are based on the book value of the specific securities sold and were not
material in 1996, 1997 and 1998. At December 31, 1998, the Company had no
marketable securities.

                                       25
<PAGE>
 
     FOREIGN CURRENCY TRANSLATION

     The functional currency of the Company's foreign entities is the U.S.
dollar; however, certain of the Company's costs and expenses are paid in
currencies other than the U.S. dollar. The Company does not currently hedge
against foreign currency exchange rate fluctuations and gains and losses arising
from the translation of foreign currency balances and transactions are included
in consolidated results of operations. Gains and losses from such fluctuations
have not been material to the Company's consolidated results of operations.

     INVENTORY

     Inventory is stated at the lower of cost, determined on a first-in, first-
out basis, or market.

     PROPERTY AND EQUIPMENT

     Equipment acquired pursuant to the management-led buyout from Teledyne,
Inc. aggregating $2,167 is stated at fair value at the date of purchase less the
excess of the fair value of all net assets acquired over the purchase price. All
other equipment and leasehold improvements are stated at cost, or fair market
value at the time of impairment for impaired assets. Depreciation is computed
using the straight-line method with estimated useful lives of three to five
years for equipment. Leasehold improvements consist of improvements to the
Company's facilities and are amortized over the remaining term of the lease or
useful life of the asset, whichever is less.

     LONG-LIVED ASSETS

     The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company assesses the impairment of long-lived assets based
upon the estimated future cash flows from these assets.

     CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of trade accounts receivable.
The Company sells its integrated circuits to customers throughout the world. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectable accounts receivable. The Company's
write-offs of accounts receivable were not significant in 1996, 1997 and 1998.
Five customers accounted for 56% and 59% of the Company's gross accounts
receivable at December 31, 1997 and 1998, respectively.

     NET INCOME (LOSS) PER SHARE

     The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the fourth quarter of fiscal 1997. All
prior-period earnings per share data has been restated in accordance with SFAS
128. SFAS 128 requires presentation of both Basic EPS and Diluted EPS on the
face of the income statement. Basic EPS is computed by dividing net income
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period
including stock options, using the treasury stock method, and convertible
preferred stock, using the if-converted method. In computing Diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options.

                                       26
<PAGE>
 
     Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations:

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                  ------------------------------------------------------------
                                                                         1996                 1997                   1998
                                                                  ----------------     ----------------      -----------------
<S>                                                               <C>                  <C>                   <C>
Net loss attributable to common shareholders                               $  (628)             $(1,704)               $(3,547)
                                                                  ================     ================      =================
 
Weighted average common shares outstanding (basic)                          15,612               16,184                 15,933
Effect of dilutive warrants and options                                          -                    -                      -
                                                                  ----------------     ----------------      -----------------
Weighted average common shares outstanding (diluted)                        15,612               16,184                 15,933
                                                                  ================     ================      =================
 
Loss per share:
Basic                                                                      $ (0.04)             $ (0.11)               $ (0.22)
                                                                  ================     ================      =================
Diluted                                                                    $ (0.04)             $ (0.11)               $ (0.22)
                                                                  ================     ================      =================
</TABLE>

     Due to the Company's net loss from continuing operations in 1996, 1997 and
1998, a calculation of EPS assuming dilution is not required. At December 31,
1996, there were 2,509 options and warrants outstanding to purchase common stock
at a weighted average price of $2.38 per share. At December 31, 1997, there were
2,386 options and warrants outstanding to purchase common stock at a weighted
average price of $4.40 per share. At December 31, 1998, there were 2,975 options
outstanding to purchase common stock at a weighted average price of $3.65 per
share. The securities have been excluded from the computation of dilutive EPS
because the inclusion of such warrants and options would have been anti-
dilutive.
 

     STOCK-BASED COMPENSATION

     The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the date of the grant. Accordingly, no compensation cost has been
recognized in the Company's statements of operations. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."

 
     COMPREHENSIVE INCOME

     In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), Reporting Comprehensive Income. The adoption of FAS 130
did not affect the results of the Company's operations.


     SEGMENT REPORTING
 
     In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise", replacing the "Industry Segment" approach with the
"Management" approach.  The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The Company operates in one industry segment comprising the
design, development, manufacture and sale of integrated circuits. The adoption
of SFAS 131 did not affect results of the Company's operations or financial
position or the segments reported in 1998.


     ACCOUNTING FOR DERIVATIVES
 
      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities."  SFAS no. 133 establishes standards for

                                       27
<PAGE>
 
accounting and reporting on derivative instruments for periods beginning After
June 15, 1999 and early adoption is permitted.  SFAS No. 133 requires that all
derivative instruments be recognized in the balance sheet as either assets or
liabilities and measured at fair value.  Furthermore, SFAS no. 133 requires
current recognition in earnings of changes in the fair value of derivative
instruments depending on the intended use of the derivative and the resulting
designation.  The Company is currently evaluating the effects of the new
standard and has not determined its method or timing of adopting SFAS No. 133 or
the impact on its financial statements.

NOTE 3 - BALANCE SHEET DETAILS:
-------------------------------

<TABLE>
<CAPTION>
                                                                         December 31,                               
                                                           -------------------------------------                    
                                                                 1997                  1998                         
                                                           --------------       ----------------                    
     <S>                                                   <C>                  <C>                       
     Inventory:                                                                                                     
        Raw materials                                              $  871                 $  108                    
        Work-in-process                                             4,385                  4,331                    
        Finished goods                                              3,033                  1,938                    
                                                           --------------       ----------------                    
                                                                   $8,289                 $6,377                    
                                                           ==============       ================                    
                                                                                                                    
     Property and equipment:                                                                                        
        Equipment                                                 $20,081                $15,077                    
        Carrying value of assets to be disposed of                      -                  2,594                    
        Leasehold improvements                                      2,708                     81                    
                                                           --------------       ----------------                    
                                                                   22,789                 17,752                    
        Accumulated depreciation                                   (9,811)                (8,313)                   
                                                           --------------       ----------------                    
                                                                   12,978                  9,439                    
        Construction in progress                                    1,968                    949                    
                                                           --------------       ----------------                    
                                                                  $14,946                $10,388                    
                                                           ==============       ================                    
                                                                                                                    
     Accrued liabilities:                                                                                           
        Payroll and related                                        $1,667                 $2,074                    
        Other                                                         793                    908                    
                                                           --------------       ----------------                    
                                                                   $2,460                 $2,982                    
                                                           ==============       ================                     
</TABLE>
                                                                               
NOTE 4. RESTRUCTURING AND OTHER CHARGES
---------------------------------------
 
     During 1998, the Company recorded restructuring and other charges totaling
$7,258, consisting of $6,515 of items relating to the closure of the Company's
wafer fabrication facility, and $743 relating to other one-time charges.
 
     In August 1998, the Company announced its plans to shut down its five-inch
wafer fabrication facility in Mountain View, California and use third party
foundries for all of its wafer fabrication.   In conjunction with the shut-down
of its wafer fabrication foundry, the Company recorded fab closure charges
totaling $6,515 to write down and write off manufacturing equipment and
facilities improvements; accrue for future idle facility space; the severance of
manufacturing and other personnel and other costs.
 
     A majority of the Company's new products that have been developed in the
past year utilize sub-micron wafer technology and are currently fabricated by
outside foundries. All other remaining wafers were fabricated in the Mountain
View facility. In January 1999, the wafer fabrication facility was shut-down and
the fabrication equipment is no longer in use and is being held for sale.  The
fabrication of wafers is in the process of being transferred to third party
foundries and it is anticipated that the transfer will be complete prior to the
end of the first quarter of 1999. The facility shutdown is a result of
developments in the semiconductor industry, primarily the availability of low
cost wafer fabrication capacity and the willingness of outside foundries to
offer non-standard processes. Competitive designs use submicron technology which
allows for more die per wafer than the five inch wafer fabrication currently
used in the Mountain View facility.  The restructuring charge relating to the
write down of the carrying value of the Company's fabrication equipment to its
estimated fair value is $4,458. The cost and 

                                       28
<PAGE>
 
accumulated depreciation of the fabrication equipment prior to the write down
was $13,027 and $6,330, respectively. The fair value of the fabrication
equipment was estimated to be $2,239 and is recorded as "assets to be disposed
of". Given the current downturn in the semiconductor industry, and the resulting
oversupply in the used semiconductor equipment market, the Company is unable to
predict the time needed to dispose of the assets classified as "assets to be
disposed of". The fair value of the fabrication equipment was based on third
party estimates of fair value. The restructuring charge also includes charges
for idle facilities of $1,406, severance payments totaling $519 for
approximately 50 employees, to be terminated upon closing of the facility and
environmental and related clean up costs of $132.
 
     The following table sets forth the Company's accruals in 1998 for
restructuring expense and charges taken against the accrual in 1999 and the
remaining restructuring accrual balance at December 31, 1998:

<TABLE>
<CAPTION>
                                                                   (in thousands)
                                               1998        
                                           Restructuring                                  Balance
                                              Expense              Utilized            Dec. 31, 1998
                                           -------------       --------------        -----------------  
<S>                                        <C>                 <C>                   <C> 
Idle facility charge                              $1,406         $          -                   $1,406       
Employee severance and other                         651         $          -                      651       
                                           -------------       --------------        -----------------       
                                                  $2,057         $          -                   $2,057        
                                           =============       ==============        =================    
</TABLE>

     Separately, the Company recorded other one time charges of $743 during
1998, comprised of $391 for the write-off of certain test equipment in Hong
Kong, $278 for the write-off of certain equipment in Mountain View, California
and $250 for certain licensing and royalty costs, offset by a decrease of $176
in amounts previously accrued due to a change in the Company's employee
sabbatical policy. The cost and accumulated depreciation of the equipment in
Mountain View prior to and the write down was $814 and $181, respectively. The
fair value of the equipment was estimated to be $355 is recorded as "assets to
be disposed of". The equipment is no longer in use and is currently held for
sale. These charges are included in Restructuring and Other in the
accompanying statement of operations.
 
NOTE 5 - NOTES PAYABLE:
-----------------------

     The Company financed its acquisition of certain equipment with secured
notes payable bearing interest ranging from 9% to 13% per annum and payable in
equal monthly installments of principal and interest. At December 31, 1998,
future maturities of notes payable are as follows:

     1999                                      $1,886   
     2000                                         850                         
     2001                                         762                         
                                       --------------                         
                                                3,498                         
     Less: current portion                      1,886                         
                                       --------------                         
                                               $1,612                         
                                       ==============                         

     The net book value of the equipment pledged under these notes amounted to
$2,229 at December 31, 1998.

NOTE 6 - INCOME TAXES:
----------------------

     The Company accounts for income taxes under an asset and liability approach
that requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or income tax returns. Provisions are made for
estimated United States and foreign income taxes, less available tax credits and
deductions, which may be incurred on the remittance of certain of the Company's
foreign subsidiaries' undistributed earnings. Deferred taxes have not been
provided for the cumulative undistributed earnings of foreign subsidiaries which
are considered by management to be permanently reinvested.

                                       29
<PAGE>
 
     The components of income (loss) before income taxes were as follows:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,                   
                                             ----------------------------------------------------------------  
                                                    1996                   1997                   1998         
                                             -----------------      ------------------      -----------------  
     <S>                                       <C>                    <C>                     <C>              
     U.S.                                              $(2,597)                $(1,414)               $(3,424) 
     Foreign                                             1,736                   2,137                    835  
                                             -----------------      ------------------      -----------------  
     Income before taxes                               $  (861)                $   723                $(2,589) 
                                             =================      ==================      =================   
</TABLE>

     The components of the provision (benefit) for income taxes were as follows:

<TABLE>
<CAPTION>
                                                               Year Ended December 31,                  
                                                 ----------------------------------------------------   
                                                       1996               1997               1998       
                                                 -------------      --------------     --------------   
     <S>                                         <C>                <C>                <C>              
     Current:                                                                                           
      U.S.                                            $(1,060)             $1,253             $  993    
      Foreign                                             174                 590                543    
      State                                                 9                 507                198    
                                                 -------------      --------------     --------------    
                                                         (877)              2,350              1,734    
                                                 -------------      --------------     --------------   
                                                                                                        
     Deferred:                                                                                          
      U.S.                                                644                  77               (776)   
                                                 -------------      --------------     --------------    
                                                          644                  77               (776)   
                                                 -------------      --------------     --------------    
     Provision (benefit) for income taxes               $(233)             $2,427              $ 958    
                                                 =============      ==============     ==============    
</TABLE>

     The components of deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                                              December 31,              
                                                               ---------------------------------------  
                                                                     1997                     1998      
                                                               ----------------       ----------------  
     <S>                                                       <C>                    <C>           
     Property and equipment                                            $     -                $   116       
     Reserves and other non-deductible expenses                          1,060                  3,821             
     Research and development credit carryforwards                         684                    871             
     Deferred distributor income                                           640                    651             
     Federal effect of state deferrals                                    (456)                  (441)            
     Other                                                                  20                    122             
                                                               ----------------       ----------------  
          Gross deferral tax assets                                      1,948                  5,140             
                                                               ----------------       ----------------     
                                                                                                                  
     Property and equipment                                               (588)                     -             
     Unremitted earnings of foreign subsidiaries                          (400)                  (400)            
                                                               ----------------       ----------------  
         Gross deferred tax liabilities                                   (988)                  (400)            
                                                               ----------------       ----------------  
     Deferred tax asset valuation allowance                             (1,037)                (4,041)            
                                                               ----------------       ----------------     
                                                                       $   (77)               $   699             
                                                               ================       ================   
</TABLE>

     Due to the uncertainty of the realization of a portion of deferred tax
assets, the Company has provided a valuation allowance on these assets to the
extent there is no current realization at December 31, 1997 and 1998. Upon
recognition of  the Company's deferred tax assets, approximately $1,600 will be
credited directly to equity as a result of previous exercises of non qualified
stock options and disqualifying dispositions of incentive stock options.

                                       30
<PAGE>
 
     The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. statutory federal rate to income before extraordinary item
as a result of the following:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,                     
                                                       ---------------------------------------------------------------  
                                                             1996                    1997                    1998       
                                                       ---------------         --------------          ---------------  
     <S>                                               <C>                     <C>                     <C>              
     Tax at statutory rate                                      $(301)                $  253                   $ (906)   
     Differential in rates on earnings of                                                                                
       foreign operations                                         (36)                  (158)                    (196)   
     State taxes                                                    -                    507                      129    
     Loss on foundry investment                                     -                  1,050                        -    
     Current year losses with no tax benefit                                                                             
       recognized                                                 192                    688                    1,969    
     Research and development credits                             (55)                     -                      (56)   
     Other                                                        (33)                    87                       18    
                                                       ---------------         --------------          ---------------   
                                                                $(233)                $2,427                   $  958   
                                                       ===============         ==============          ===============   
</TABLE>

NOTE 7 - PREFERRED STOCK:
-------------------------

     The Company has authorized 5,000,000 shares of undesignated Preferred
Stock. The Board of Directors has the authority to issue the undesignated
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
shares of undesignated Preferred Stock and to fix the number of shares
constituting any series in the designations of such series, without any
further vote or action by the stockholders. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. In November 1998, the Company designated 30,000 shares of Preferred
Stock as Series A of Participating Preferred Stock in connection with the
adoption of a shareholders rights program. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of
the Company.

NOTE 8 - COMMON STOCK:
----------------------

     COMMON STOCK OPTION AGREEMENT

     In December 1993, the Company granted to certain entities affiliated with
U.S. Venture Partners (collectively USVP) options to purchase an aggregate of
237,500 shares of the Company's Common Stock. The purchase price for the option
shares is $0.10 per share. During January 1997, USVP elected to exercise its
options to purchase all 237,500 shares. As provided in the option agreement,
USVP received a reduced number of shares in exchange for the aggregate exercise
price due, resulting in the issuance by the Company of 233,183 shares to USVP.

     STOCK PURCHASE RIGHTS PLAN

     In November 1998, the Company implemented a plan to protect shareholders'
rights in the event of a proposed takeover of the Company. Under the plan, each
share of the Company's outstanding common stock carries one right to purchase
one-thousandth of a share of the Company's Series A Participating Preferred
Stock (the "Right") at an exercise price of $30.00 per share. The Right enables
the holder to purchase common stock of the Company or of the acquiring company
ten days after a person or group publicly announces it has acquired or has
tendered an offer for 15% or more of the Company's outstanding common stock. The
Rights are redeemable by the Company at $0.001 per Right at any time on or
before the tenth day following acquisition by a person or group of 15% or more
of the Company's common stock. If prior to redemption of the Rights, a person or
group acquires 15% or more of the Company's common stock, each Right not owned
by a holder of 15% or more of the common stock (or an affiliate of such holder)
will entitle the holder to purchase, at the Right's then current exercise price,
that number of shares of common stock of the Company having a market value at
the time of twice the Right's exercise price. The Rights expire in November
2008.

     EMPLOYEE STOCK OPTION PLAN

     In February 1994, the Company adopted its 1994 Stock Option Plan (the
"Option Plan") which provides for the granting of incentive stock options and
nonstatutory stock options to officers, employees and consultants of the
Company. Incentive stock options are granted at an amount not less than 100% of
the fair market value of the stock on the grant date. 

                                       31
<PAGE>
 
During 1996, the Board of Directors and shareholders approved an increase to the
number of shares that may be issued under the plan from 2,050,000 shares to
2,800,000 shares. During 1997, the Board of Directors and shareholders approved
an increase to the number of shares that may be issued under the plan from
2,800,000 shares to 3,300,000 shares. During 1998, the Board of Directors and
shareholders approved an increase to the number of shares that may be issued
under the plan from 3,300,000 shares to 4,300,000 shares. At December 31, 1995,
options to purchase 56,166 shares had been granted subject to such approval and
are included in the table below. In January 1996, the Board of Directors
approved an option exchange program whereby certain employees were able to
exchange their existing options to purchase an aggregate of 418,500 shares of
Common Stock at exercise prices ranging from $6.00 to $8.75 for new options to
purchase an aggregate of 418,500 shares at $4.87 per share. In June 1998, the
Board of Directors approved an option exchange program whereby certain employees
were able to exchange their existing options to purchase an aggregate of 934,243
shares of Common Stock at exercise prices ranging from $7.88 to $15.94 for new
options to purchase an aggregate of 934,243 shares at $4.31 per share. Generally
all employees exchanged their existing options for new options. Options
generally vest over a four year period. Option terms may not exceed ten years
from the date of grant and unexercised options expire upon termination of
employment. At December 31, 1998, 996,960 options were exercisable. The weighted
average fair value of options granted during 1996, 1997, 1998 was $2.08, $3.78
and $2.50, respectively.

     The Option Plan activity is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                                          Options Outstanding            
                                                                                --------------------------------------   
                                                             Shares                                                      
                                                            Available                                    Price           
                                                            For Grant                 Shares           Per Share         
                                                      --------------------      --------------------------------------   
     <S>                                               <C>                      <C>                    <C>               
     Balance at December 31, 1995                                 (56,166)             2,062,651       $ 0.10 - $8.75    
     Increase in authorized shares                                750,000                                                
     Options granted                                           (1,048,500)             1,048,500       $ 3.88 - $4.94    
     Options exercised                                                  -               (242,202)      $ 0.10 - $3.25    
     Options canceled                                             732,899               (732,899)      $ 0.10 - $8.75    
                                                      --------------------      -----------------                        
     Balance at December 31, 1996                                 378,233              2,136,050       $ 0.10 - $4.94    
     Increase in authorized shares                                500,000                                                
     Options granted                                             (999,743)               999,743       $4.31 - $15.94    
     Options exercised                                                  -               (327,140)      $ 0.10 - $4.94    
     Options canceled                                             474,315               (474,315)      $0.10 - $13.25    
                                                      --------------------      -----------------                        
     Balance at December 31, 1997                                 352,805              2,334,338                         
     Increase in authorized shares                              1,000,000                                                
     Options granted                                           (2,401,243)             2,401,243       $ 2.94 - $9.63    
     Options exercised                                                                  (280,762)      $ 0.10 - $5.13    
     Options canceled                                           1,479,748             (1,479,748)      $0.10 - $15.94    
                                                      --------------------      -----------------                        
     Balance at December 31, 1998                                 431,310              2,975,071                         
                                                      ====================      =================                         
</TABLE>


     DIRECTOR STOCK OPTION PLAN

     During 1996, the Company adopted and approved the Company's 1996 Director
Stock Option Plan (the "Director Plan") with 100,000 shares of Common Stock
reserved for issuance thereunder. Under the Director Plan, each non-employee
director who joins the Board will automatically be granted a non-statutory
option to purchase 12,000 shares of Common Stock on the date upon which such
person first becomes a director. In addition, each non-employee director will
automatically receive a non-statutory option to purchase 3,000 shares of Common
Stock upon such director's annual re-election to the Board, provided the
director has been a member of the Board for at least six (6) months upon the
date of reelection. The exercise price of each option granted under the Director
Plan must be equal to the fair market value of the Common Stock on the date of
the grant. The 12,000 share grant vests at the rate of  twenty-five percent
(25%) of the option shares upon the first anniversary of the date of grant and
as to twenty-five (25%) of the shares each year thereafter and the 3,000 share
grant vests monthly over a twelve (12) month period. Options granted under the
Director Plan have a term of ten (10) years unless terminated sooner, whether
upon termination of the optionee's status as a director or otherwise pursuant to
the Director Plan. Options for 9,000 shares were granted under the Director Plan
in each of 1996 and 1997 and options for 27,000 shares were granted during 1998.
The weighted average fair values of the options granted during 1996, 1997 and
1998 was $4.83, $3.22 and $7.14 per share, 

                                       32
<PAGE>
 
respectively. At December 31, 1998, 33,000 options are outstanding and 8,000
options are exercisable. The Board believes that the Director Plan is necessary
to attract and retain highly qualified individuals to serve as non-employee
members of the Board of Directors.

     Information relating to stock options outstanding under the Option Plan and
Director Plan at December 31, 1998 is as follows:

<TABLE>
<CAPTION>
                                                                         Options outstanding
                                                                               Weighted
                                                                                average                  Weighted
                                                       Number                  remaining                 average
                                                     outstanding           contractual life           exercise price
                                                -------------------      -------------------     ----------------------
<S>                                             <C>                      <C>                     <C> 
Range of exercise prices:
     $  0.10                                                109,077               5.4  years                      $0.10
     $  0.25 - $  0.30                                      127,917               4.3  years                      $0.25
     $  1.50                                                212,881               5.6  years                      $1.50
     $  2.94 - $  4.38                                    1,992,789               9.0  years                      $3.86
     $  4.44 - $  6.38                                      484,942               7.2  years                      $4.94
     $  7.88 - $  10.38                                      80,465               8.6  years                      $8.49
                                                -------------------    
                                                          3,008,071               8.1  years                      $3.70
                                                ===================
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Options exercisable
                                                                     -----------------------------------------------
                                                                                                      Weighted
                                                                             Number                   average
                                                                          exercisable              exercise price
                                                                     --------------------     ----------------------
<S>                                                                  <C>                      <C>
Range of exercise prices:
     $ 0.10                                                                       109,077                    $0.10 
     $ 0.25 - $ 0.30                                                              127,363                    $0.25   
     $ 1.50                                                                       193,727                    $1.50   
     $ 2.94 - $ 4.38                                                              261,187                    $3.90   
     $ 4.44 - $ 6.38                                                              293,428                    $4.93   
     $ 7.88 - $ 10.38                                                              20,178                    $8.45   
                                                                     --------------------                            
                                                                                1,004,960                    $2.95    
                                                                     ====================
</TABLE>
                                                                               
     The fair value of each option is estimated on the date of grant using the
Black-Scholes model with the following assumptions used for grants during 1996,
1997 and 1998: annual dividend yield of 0.0% for all periods; risk-free annual
interest rates of  5.38% to 6.51% for options granted during the year ended
December 31, 1996, 5.87% to 6.67% for options granted during the year ended
December 31, 1997 and 4.25% to 5.62% for options granted during the year ended
December 31, 1998; a weighted average expected option term of five years for all
periods; and an expected volatility factor of 60% for 1996 and 1997 and 72% for
1998.

     EMPLOYEE STOCK PURCHASE PLAN

     In May 1995, the Company adopted its 1995 Employee Stock Purchase Plan
("Purchase Plan"). Under the Purchase Plan, an eligible employee may purchase
shares of Common Stock from the Company through payroll deductions of up to 10%
of their base compensation plus commissions, at a price per share equal to 85%
of the fair market value as of the first day or the last day, whichever is
lower, of each six-month offering period under the Purchase Plan.  An employee
can purchase at the lowest offering period's purchase price going back for up to
two years of participation. The offering periods commence on July 1 and January
1 of each year. The Company has reserved 200,000 shares of Common Stock for
issuance under the Purchase Plan. During 1996, the Purchase Plan was amended to
increase the shares reserved for issuance by 200,000 shares, bringing the total
number of shares issuable under the Purchase Plan to 400,000. During 1998, the
Purchase Plan was amended to increase the shares reserved for issuance by
500,000 shares, bringing the total number of shares issuable under the Purchase
Plan to 900,000.  At December 31, 1998, 352,405 shares of Common Stock had been
issued under the Purchase Plan, and 547,595 shares remained available for future
issuance under the Purchase Plan.

                                       33
<PAGE>
 
     The fair value of each stock award is estimated on the date of grant using
the Black-Scholes model with the following assumptions used for grants during
1996, 1997 and 1998: annual dividend yield of 0.0% for all periods; risk-free
annual interest rates of  5.18% to 5.46% for stock awards granted during the
year ended December 31, 1996 and 5.49% to 5.66% for stock awards granted during
the year ended December 31, 1997 and 5.27% to 5.79% for stock awards granted
during the year ended December 31, 1998; a weighted average expected stock award
term of six months for all periods; and an expected volatility factor of 60% for
1996 and 1997 and 72% for 1998.
 
FAIR VALUE DISCLOSURES

     Had compensation cost for the Company's stock option and stock purchase
plans been determined based on the fair value of the options at the grant dates
using the Black-Scholes model as provided by FAS 123, the Company's net income
(loss) and net income (loss) per share for the years ended December 31, 1996,
1997 and 1998 would have been as follows:

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                          ----------------------------------------------------------------------
                                                                 1996                      1997                        1998
                                                          ----------------          ------------------          ----------------
<S>                                                       <C>                       <C>                         <C>  
Net income (loss):
        As reported.................................              $  (628)                    $(1,704)                  $(3,547)  
        Pro forma...................................              $(1,346)                    $(3,022)                  $(5,219)  
                                                                                                                                  
Net income (loss) per share:                                                                                                      
        As reported.................................                                                                              
              Basic                                               $ (0.04)                    $ (0.11)                  $ (0.22) 
              Diluted                                             $ (0.04)                    $ (0.11)                  $ (0.22) 
        Pro forma...................................                                                                              
              Basic                                               $ (0.09)                    $ (0.19)                  $ (0.33) 
              Diluted                                             $ (0.09)                    $ (0.19)                  $ (0.33) 
</TABLE>

     The pro forma amounts reflect compensation expenses related to 1996, 1997
and 1998 employee and director option grants and employee stock purchase plan
awards only. In future years, the annual compensation expense will increase due
to the expense associated with future grants.

NOTE 9 - TREASURY STOCK
-----------------------

     In July 1998, the Company's Board of Directors approved a plan to
repurchase an aggregate of up to 2.0 million shares of common stock. In October
1998, the Company's Board of Directors approved a plan to repurchase an
additional 2.0 million shares of common stock, for a total repurchase of up to
4.0 million shares. At December 31, 1998, a total of 2.3 million shares have
been repurchased by the Company at an aggregate cost of $7,925.

                                       34
<PAGE>
 
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
----------------------------------------

     The Company occupies its present principal facilities under non-cancelable
operating leases expiring December 2003 and July 2000. The Company is required
to pay taxes, insurance and maintenance expenses.

     Future minimum lease payments under non-cancelable leases at December 31,
1998 are as follows (amounts include payments accrued for idle facility charges
see Note 4):

          Year Ending December 31,
          ------------------------
          1999                                                    $1,484   
          2000                                                     1,350      
          2001                                                     1,201      
          2002                                                     1,201      
          2003                                                     1,201      
                                                         ---------------      
          Minimum lease payments                                  $6,437      
                                                         ===============      

     Rent expense for the years ended December 31, 1996, 1997 and 1998 was $745,
$767 and $867, respectively.

NOTE 11 - SEGMENT INFORMATION:
------------------------------

     The Company operates in one industry segment comprising the design,
development, manufacture and sale of integrated circuits. The following is a
summary of the Company's operations:
 
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,                     
                                                    -------------------------------------------------------------   
                                                          1996                     1997                  1998       
                                                    --------------           -------------         --------------   
     <S>                                            <C>                      <C>                   <C>              
     Sales to third-party customers                                                                                 
        located in:                                                                                                 
           United States                                  $14,088                 $19,420                $19,035     
           Asia                                            14,122                  18,367                 18,373     
           Germany                                          3,261                   6,288                  6,102     
           United Kingdom                                   3,461                   7,872                  7,431     
           Other Europe                                     2,830                   3,488                  3,322     
                                                    --------------           -------------         --------------   
                                                          $37,762                 $55,435                $54,263     
                                                    ==============           =============         ==============    
</TABLE>

<TABLE>
<CAPTION>
                                                                              December 31,
                                                              --------------------------------------------
                                                                       1997                     1998
                                                              -------------------      -------------------
<S>                                                           <C>                      <C>
Identifiable assets:
      United States                                                      $37,295                  $26,300      
      Hong Kong                                                           15,553                   14,074      
      Europe                                                                 836                      792      
                                                              -------------------      ------------------
                                                                         $53,684                  $41,166      
                                                              ===================      ===================     
</TABLE>
                                                                               
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,                                         
                                              -----------------------------------------------------------                        
                                                    1996                 1997                  1998                              
                                              ---------------     -----------------     -----------------                        
<S>                                           <C>                 <C>                   <C>                                      
Cash paid during the year for:                                                                                                   
   Interest                                          $  752                 $1,247               $  459                          
   Income taxes paid (received), net                  1,828                   (885)               1,807                          
</TABLE>

                                       35
<PAGE>
 
NOTE 13 - LOSS ON FOUNDRY INVESTMENT
------------------------------------

     In November 1995, the Company entered into certain agreements with IC
WORKS, Inc. a privately-held company located in San Jose, California. Pursuant
to these agreements, in 1996 the Company purchased $3.0 million of preferred
stock of IC WORKS and provided $10.4 million in capital equipment. In return for
this investment, TelCom received a guarantee of submicron wafer capacity at
specified prices for a period of five years, projected to start in late 1997.
The shortage of wafer capacity projected in late 1995 has diminished and since
late 1995, substantial foundry capacity has been available worldwide while
overall demand has not increased proportionately. Consequently, wafer pricing
has decreased dramatically, which has changed the economic viability of the
foundry business in which the Company invested. As a result, in the first
quarter of 1997, the Company recorded an impairment loss on its foundry
investment of $8.0 million, consisting of a $3.0 million write down of the
preferred stock and a $5.0 million impairment write down of the equipment. In
the fourth quarter of 1997, pursuant to an agreement with IC WORKS, the Company
sold the $10.4 million dollars of equipment at IC WORKS for $5.2 million and
invested an additional $1.5 million in preferred stock of IC WORKS. This
agreement terminates the Company's operating agreement with IC WORKS. As a
result of these events and transactions, the Company recorded a loss of $8.3
million on its foundry investment in 1997 (of which $8.0 million was recorded in
the first quarter of 1997), which consists of a $3.0 million write down of the
preferred stock, a loss on the sale of the equipment of $5.2 million, and $.1
million of costs associated with prepayment penalties on financing of the
equipment and legal fees. Two of the Company's directors who served during 1997
also served as directors of IC WORKS.
 
ITEM 9.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL  DISCLOSURE
---------------------

     None.

                                       36
<PAGE>
 
                                   PART III
                                   --------

     Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on April 15, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     (a)  Executive Officers -- See the section entitled "Executive Officers" in
          Part I, Item 1 hereof.

     (b)  Directors -- The information required by this Item is incorporated by
          reference to the section entitled "Election of Directors" in the Proxy
          Statement.

     The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

     The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
 
     The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.

                                       37
<PAGE>
 
                                    PART IV
                                    -------

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

14(a) Exhibits

Exhibit
Number                                 Description of Document               
---------      -----------------------------------------------------------------

3.1+           Restated Certificate of Incorporation of Registrant.  
                                                                     
3.2+           Bylaws of Registrant.                                 
 
3.3+           Certificate of Ownership and Merger merging TelCom Semiconductor,
               Inc., a California Corporation, with and into TelCom
               Semiconductor, Inc., a Delaware Corporation
 
10.1+          Form of Indemnification Agreement for Executive Officers and
               Directors.
               
10.2+*         1994 Stock Option Plan and form of Stock Option Agreement.
               
10.3+*         Employee Stock Purchase Plan and form of Subscription Agreement.
               
10.4+          Investor Rights Agreement dated as of December 20, 1993 by and
               among the Registrant and certain investors, including amendments
               thereto.
               
10.5+          Lease Agreement dated December 20, 1993 related to premises
               located at 1300 Terra Bella Avenue, Mountain View, California.
               
10.6+          Tenancy Agreements dated September 16, 1992 related to a portion
               of the premises located at the Jing Wah Building No. 10 Sam Chuk
               Street, Hong Kong.
               
10.7+          Loan and Security Agreement dated November 17, 1994 between the
               Registrant and PhoenixCor Corporation
               
10.8+          Authorized Distributor Agreement between Future Electronics, Inc.
               and the Registrant.
               
10.9+          1995 Distributor/Sales Representative Warrant Plan.
               
10.10+         First Amendment to Lease dated as of July 10, 1995.
               
10.11++        Operating Agreement between the Registrant and IC Works, Inc.
               dated as of November 2, 1995
               
10.12++        Wafer Production Agreement between the Registrant and IC Works,
               Inc. dated as of November 2, 1995
               
10.13+++       Amendment to Lease Agreement dated December 20, 1993 related to
               premises located at 1300 Terra Bella Avenue, Mountain View,
               California
               
10.14++++      Tenancy Agreements dated July 28, 1997 related to a portion of
               the premises located at the Jing Wah Building No. 10 Sam Chuk
               Street, Hong Kong.
               
10.15+++++*    Director Option Plan
               
10.16*         Executive Retention Agreement - Phil Drayer
               
10.17*         Executive Retention Agreement - Robert Gargus
               
10.18*         Executive Retention Agreement - Other Executive Officers
               
21.1+          List of subsidiaries.
               
23.1           Consent of PricewaterhouseCoopers LLP, Independent Accountants
               
27.1           Financial Data Schedule

      ________________
+     Incorporated by reference from the Registrant's Registration Statement on
      Form SB-2 (file no. 33-93840-LA), as amended, filed on June 22, 1995.
++    Incorporated by reference from the Registrant's Quarterly Report on Form
      10-QSB for the period ended September 30, 1995.
+++   Incorporated by reference from the Registrant's Annual Report on Form
      10-KSB for the period ended December 31, 1995.
++++  Incorporated by reference from the Registrant's Annual Report on Form
      10-Q for the period ended June 30, 1997.
+++++ Incorporated by reference from the Registrant's Registration Statement on
      Form S8 (file no. 333-31433), as amended, filed on June 22, 1995.
*     Management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this form.

14 (b) Reports on Form 8-K: None
 

                                       38
<PAGE>
 
                                  SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Mountain
View, State of California, on March 8, 1999.

                                         TELCOM SEMICONDUCTOR, INC.



                                   By:         /s/ Phillip M. Drayer
                                       -----------------------------------------
                                               Phillip M. Drayer
                                        Chief Executive Officer and President


                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Phillip M. Drayer and Robert G.
Gargus, and each of them acting individually, as his attorney-in-fact, each with
full power of substitution for him in any and all capacities, to sign any and
all amendments to this report on Form 10-K, and file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our attorney to any and all amendments to said Report.

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
         Signature                                                Title                                       Date
----------------------------                  ----------------------------------------------          --------------------
<S>                                           <C>                                                     <C>
 
/s/ Phillip M. Drayer                         Chief Executive Officer and President                   March 8, 1999
----------------------------
     Phillip M. Drayer                        (Principal Executive Officer) and Director
 
/s/ Robert G. Gargus                          Vice President, Chief Financial Officer                 March 8, 1999
----------------------------
     Robert G. Gargus                         (Principal Financial Officer)
 
/s/ Kenneth J. Rose                           Chief Accounting Officer and Corporate                  March 8, 1999
----------------------------
     Kenneth J. Rose                          Controller (Principal Accounting Officer)
 
/s/ Donald E. Fowler                          Director                                                March 8, 1999
----------------------------
     Donald E. Fowler
 
/s/ Frank Gill                                Director                                                March 8, 1999
----------------------------
     Frank Gill
 
/s/ T. Peter Thomas                           Director                                                March 8, 1999
----------------------------
     T. Peter Thomas
</TABLE>

                                       39
<PAGE>
 
                          TELCOM SEMICONDUCTOR, INC.

                               INDEX TO EXHIBITS
                               -----------------
 
Exhibit
Number                           Description of Document
 
3.1+           Restated Certificate of Incorporation of Registrant.             
                                                                                
3.2+           Bylaws of Registrant.                                            
                                                                                
3.3+           Certificate of Ownership and Merger merging TelCom 
               Semiconductor, Inc., a California Corporation, with 
               and into TelCom Semiconductor, Inc., a Delaware corporation
                                                                                
10.1+          Form of Indemnification Agreement for Executive Officers and
               Directors.
                                                                                
10.2+*         1994 Stock Option Plan and form of Stock Option Agreement.       
                                                                                
10.3+*         Employee Stock Purchase Plan and form of Subscription 
               Agreement.
                                                                                
10.4+          Investor Rights Agreement dated as of December 20, 1993 by 
               and among the Registrant and certain investors, including 
               amendments thereto.
                                                                                
10.5+          Lease Agreement dated December 20, 1993 related to premises 
               located at 1300 Terra Bella Avenue, Mountain View, 
               California.                                                
                                                                                
10.6+          Tenancy Agreements dated September 16, 1992 related to a         
               portion of the premises located at the Jing Wah Building         
               No. 10 Sam Chuk Street, Hong Kong.                               
                                                                                
10.7+          Loan and Security Agreement dated November 17, 1994 between 
               the Registrant and PhoenixCor Corporation.               
                                                                                
10.8+          Authorized Distributor Agreement between Future Electronics, 
               Inc. and the Registrant.                            
                                                                                
10.9+          1995 Distributor/Sales Representative Warrant Plan.              
                                                                                
10.10+         First Amendment to Lease dated as of July 10, 1995.              
                                                                                
10.11++        Operating Agreement between the Registrant and IC Works, 
               Inc. dated as of November 2, 1995                                
                                                                                
10.12++        Wafer Production Agreement between the Registrant and IC 
               Works, Inc. dated as of November 2, 1995.                        
                                                                                
10.13+++       Amendment to Lease Agreement dated December 20, 1993 related 
               to premises located at 1300 Terra Bella Avenue, Mountain 
               View, California.                                       
                                                                                
10.14++++      Tenancy Agreements dated July 28, 1997 related to a portion 
               of the premises located at the Jing Wah Building No. 10 Sam 
               Chuk Street, Hong Kong.                               
                                                                                
10.15+++++*    Director Option Plan                                             
                                                                                
10.16*         Executive Retention Agreement - Phil Drayer                      
                                                                                
10.17*         Executive Retention Agreement - Robert Gargus                    
                                                                                
10.18*         Executive Retention Agreement - Other Executive Officers         
                                                                                
21.1+          List of subsidiaries.                                            
                                                                                
23.1           Consent of PricewaterhouseCoopers LLP, Independent               
               Accountants                                                    
                                                                                
27.1           Financial Data Schedule                                        

      ________________
+     Incorporated by reference from the Registrant's Registration Statement on
      Form SB-2 (file no. 33-93840-LA), as amended, filed on June 22, 1995.
++    Incorporated by reference from the Registrant's Quarterly Report on Form
      10-QSB for the period ended September 30, 1995.
+++   Incorporated by reference from the Registrant's Annual Report on Form
      10-KSB for the period ended December 31, 1995.
++++  Incorporated by reference from the Registrant's Annual Report on Form
      10-Q for the period ended June 30, 1997.
+++++ Incorporated by reference from the Registrant's Registration Statement on
      Form S8 (file no. 333-31433), as amended, filed on June 22, 1995.
*     Management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this form.

                                       40