QUALITY SEMICONDUCTOR INC, DEFA14A, 1997-01-27

QUALITY SEMICONDUCTOR INC
DEFA14A, 1997-01-27
SEMICONDUCTORS & RELATED DEVICES

Previous: QUALITY SEMICONDUCTOR INC, DEFA14A, 1997-01-27

Next: QUALIX GROUP INC, 8-A12G, 1997-01-27

QUALITY SEMICONDUCTOR, INC.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held February 27, 1997

TO THE SHAREHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of QUALITY
SEMICONDUCTOR, INC. (the "Company") will be held on Thursday, February 27, 1997,
at 12:15 p.m., local time, at the Company's principal executive offices, located
at 851 Martin Avenue, Santa Clara, California 95050 for the following purposes:

1. To elect directors to serve for the ensuing year and until their
successors are elected and qualified; and

2. To approve amendments to the Company's 1995 Stock Option Plan to
increase the number of shares available for issuance thereunder by 500,000
shares, to further increase the option pool by up to 200,000 shares through the
repurchase of the Common Stock of the Company in the open market (142,500 shares
have been repurchased as of December 31, 1996) and to require that all
nonstatutory options granted under the 1995 Stock Option Plan must equal at
least 100% of the fair market value of the Common Stock of the Company on the
date of the grant;

3. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending September 30, 1997; and

4. To transact such other business as may properly come before the meeting
or any postponement or adjournment(s) thereof.

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.

Only shareholders of record at the close of business on December 31, 1996
("Record Date") are entitled to notice of and to vote at the meeting and any
adjournment(s) thereof.

All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed Proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if such shareholder returned a Proxy.

FOR THE BOARD OF DIRECTORS

Stephen H. Vonderach
Vice President of Finance and
Chief Financial Officer
Santa Clara, California
January 23, 1997

- --------------------------------------------------------------------------------
IMPORTANT
- --------------------------------------------------------------------------------

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. IF A QUORUM IS NOT REACHED, THE COMPANY WILL HAVE THE ADDED EXPENSE OF
RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU
MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON. THANK YOU FOR ACTING PROMPTLY.

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

<PAGE>

QUALITY SEMICONDUCTOR, INC.

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

PROXY STATEMENT

INFORMATION CONCERNING SOLICITATION AND VOTING

General

The enclosed Proxy is solicited on behalf of the Board of Directors of
Quality Semiconductor, Inc. (the "Company"), for use at the Annual Meeting of
Shareholders to be held on Thursday, February 27, 1997, at 12:15 p.m., local
time, or at any postponement or adjournment(s) thereof, for the purposes set
forth herein and in an accompanying Notice of Annual Meeting of Shareholders.
The Annual Meeting will be held at the Company's principal executive offices,
located at 851 Martin Avenue, Santa Clara, California 95050. The Company's
telephone number at that location is (408) 450-8000.

These proxy solicitation materials were mailed to shareholders on or
about January 23, 1997. The cost of soliciting these proxies will be borne by
the Company.

Revocability of Proxies

Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before its use either (i) by delivering to the
Company (Attention: Stephen Vonderach) a written notice of revocation or a duly
executed proxy bearing a later date or (ii) by attending the meeting of
shareholders and voting in person.

Voting

Generally, each share of Common Stock entitles its holder to one vote
on matters to be acted upon at the meeting, including the election of directors.
However, if, prior to the voting to elect directors, any shareholder gives
notice at the meeting of his or her intention to cumulate his or her votes, and
if the names of the candidate or candidates for whom that shareholder intends to
vote have been placed in nomination prior to the voting, then all shareholders
may cumulate their votes for candidates in nomination. This means that each
shareholder may give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of shares he or she holds, or
such shareholder may distribute that total number of votes among as many
candidates as he or she thinks fit. On all matters except the election of
directors, each share carries one vote. The seven directors receiving the
highest number of votes will be elected.

Record Date and Share Ownership

Only shareholders of record at the close of business on December 31,
1996 are entitled to notice of and to vote at the meeting. At the record date,
5,976,472 shares of the Company's Common Stock were issued and outstanding.

Quorum; Abstentions; Broker Non-Votes

The required quorum for the transaction of business at the Annual
Meeting is a majority of the shares of Common Stock issued and outstanding on
the Record Date. Shares that are voted "FOR," "AGAINST" or "WITHHELD FROM" a
matter are treated as being present at the meeting for purposes of establishing
a quorum and are also treated as shares "represented and voting" at the Annual
Meeting with respect to such matter.

<PAGE>

While there is no definitive statutory or case law authority in
California as to the proper treatment of abstentions, the Company believes that
abstentions should be counted for purposes of determining both (i) the presence
or absence of a quorum for the transaction of business and (ii) the total number
of votes cast with respect to a proposal. In the absence of controlling
precedent to the contrary, the Company intends to treat abstentions in this
manner. Accordingly, abstentions will have the same effect as a vote against a
proposal.

Broker non-votes will be counted for purposes of determining the
presence or absence of a quorum for the transaction of business, but will not be
counted for purposes of determining the number of votes cast with respect to a
proposal.

PROPOSAL NO. 1: ELECTION OF DIRECTORS

Nominees

A board of seven directors will be elected at the meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the nominees named below, regardless of whether any other names are placed
in nomination by anyone other than one of the proxy holders. In the event that
any such nominee is unable or declines to serve as a director at the time of the
Annual Meeting, the proxy holders will vote in their discretion for a substitute
nominee. It is not expected that any nominee will be unavailable. The term of
office of each person elected as a director will continue until the next Annual
Meeting of Shareholders or until his or her successor has been elected and
qualified.

The names of the nominees, their ages as of February 27, 1997, and certain other
information about them are set forth below:

Name of Nominee Age Principal Occupation Director Since

Chun P. Chiu 55 Chairman of the Board of 1988
Directors and Chief Technical Officer
R. Paul Gupta 58 President and Chief Executive Officer 1995
Andrew J. S. Kang 45 Director 1992
Manohar L. Malwah 49 Director 1988
Robert L. Puette 55 Director 1992
Masaharu Shinya 53 Director 1988
David D. Tsang 54 Director 1996

Except as set forth below, each of the nominees has been engaged in his
principal occupation set forth above during the past five years.

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

<PAGE>

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

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

Mr. Kang has served as a director of the Company since 1992. Mr. Kang was
President of Polytronix, Inc., a manufacturer of LCD devices in Richardson,
Texas, from 1992 to 1994. In addition, Mr. Kang has been President of Technology
Associates Corporation, a Taiwanese venture capital management company, since
September 1990.

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

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

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

Board Meetings and Committees

The Board of Directors held a total of nine meetings during the fiscal
year ended September 30, 1996. The Board of Directors has an Audit Committee, a
Compensation Committee, and a Stock Compensation Committee. It does not have a
nominating committee or a committee performing the functions of a nominating
committee.

The Audit Committee of the Board of Directors currently consists of
directors Kang and Puette, and held five meetings during the last fiscal year.
The Audit Committee recommends engagement of the Company's independent auditors,
reviews the scope of the audit, considers comments made by the independent
auditors with respect to the Company's internal control structure, including
systems, procedures and internal accounting controls and the consideration given
thereto by management, and reviews the Company's system of internal controls,
including systems, procedures and internal accounting controls, with the
Company's financial and accounting staff.

<PAGE>

The Compensation Committee of the Board of Directors currently consists
of directors Chiu, Malwah, Kang and Puette, and held one meeting during the last
fiscal year. The Compensation Committee, in conjunction with the Board of
Directors, establishes salaries, incentives and other forms of compensation for
directors, officers and other employees. Mr. Chiu, who is an employee of the
Company, does not participate in deliberations of the Compensation Committee
relating to his compensation.

The Stock Compensation Committee currently consists of directors Kang
and Puette, and held four meetings during the last fiscal year. The Stock
Compensation Committee administers the various incentive compensation and
benefit plans (including the Company's stock purchase and stock option plans)
and recommends policies relating to such plans.

None of the incumbent directors attended fewer than 75% of the
aggregate number of meetings of the Board of Directors and meetings of the
committees of the Board of Directors on which he serves held during the fiscal
year ended September 30, 1996.

Director Compensation

Each non-employee director of the Company receives a fee of $500 ($1000
if traveling from outside California and $2,000 if traveling from outside from
the United States) for each meeting of the Board of Directors or Board
committees attended by such director, and is reimbursed for out-of-pocket
expenses incurred in connection with attendance at meetings of the Board of
Directors and committees. During the fiscal year ended September 30,1996,
Messrs. Kang, Puette and Shinya received aggregate fees of $7,000, $2,000 and
$6,000, respectively, for their services as directors. In addition, Messrs. Kang
and Puette received aggregate fees of $10,000 each for their services as members
of the Audit and Compensation Committees. In addition to certain stock option
grants to directors described below, non-employee directors also are eligible to
receive stock option grants pursuant to the Company's 1993 Directors' Stock
Option Plan (the "1993 Directors' Plan"). During the fiscal year ended September
30,1996, Messrs. Kang, Puette and Shinya each received a stock option to
purchase 2,500 shares of Common Stock and Mr. Tsang received a stock option to
purchase 10,000 shares of common stock under the 1993 Directors' Plan.

Recommendation of the Board of Directors

The Board of Directors recommends a vote FOR all of the nominees listed
above.

PROPOSAL NO. 2: AMENDMENT TO THE 1995 STOCK OPTION PLAN

At the Annual Meeting, the Company's shareholders are being asked to
approve amendments to the Company's 1995 Stock Option Plan (the "1995 Option
Plan") to increase the number of shares available for issuance thereunder by
500,000 shares, to further increase the option pool by up to 200,000 shares
through the repurchase of the Common Stock of the Company in the open market
(142,500 shares have been repurchased as of December 31, 1996) and to require
that all nonstatutory options granted under the 1995 Stock Option Plan must
equal at least 100% of the fair market value of the Common Stock of the Company
on the date of the grant. The following is a summary of principal features of
the 1995 Option Plan. The summary, however, does not purport to be a complete
description of all the provisions of the 1995 Option Plan. Any shareholder of
the Company who wishes to obtain a copy of the actual plan document may do so
upon written request to the Vice President of Finance at the Company's principal
offices in Santa Clara, California.

<PAGE>

General

The 1995 Option Plan was adopted by the Board in November 1995 to
replace the 1989 Stock Option Plan (the "1989 Option Plan"). The Board initially
reserved 275,000 shares of Common Stock for issuance under the 1995 Option Plan.
The 1995 Option Plan was approved by the Company's shareholders at the Company's
1996 Annual Meeting of Shareholders held in February 1996.

As of December 31, 1996, options to purchase an aggregate of 357,056
shares of Common Stock (net of options canceled) had been granted pursuant to
the 1995 Option Plan, options to purchase 2,761 shares had been exercised,
options to purchase 354,295 shares remained outstanding at weighted average
exercise price of $4.25 per share, and 60,444 shares remained available for
future grant (not including the additional 500,000 shares reserved by the Board
of Directors for which shareholder approval is being requested). As of December
31, 1996, the market value of all shares of Common Stock subject to outstanding
options under the 1995 Option Plan was $3,188,655 based upon the closing sale
price of $9.00 for the Company's Common Stock as reported on the Nasdaq Stock
Market on such date. Shares not purchased under an option prior to its
expiration will be available for future option grants under the 1995 Option
Plan.

In February 1996, the Board of Directors approved an amendment to the
1995 Option Plan to increase the number of shares available for issuance
thereunder by up to 200,000 through the repurchase of the Common Stock of the
Company in the open market. As of December 31, 1997, 142,500 shares of Common
Stock had been repurchased pursuant to this authorization. In January, 1997, the
Board of Directors approved an amendment to the 1995 Option Plan to increase the
number of shares reserved for issuance thereunder by an additional 500,000
shares to an aggregate of up to 975,000 shares. The Board believes that, in
order to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the employees and
consultants of the Company and to promote the success of the Company's business,
it is necessary to grant options to purchase Common Stock to the Company's
employees and consultants at an exercise price equal, at least, to the market
price of the Company Common Stock on the date of the grant. Currently, only
approximately 765 shares remain available for issuance pursuant to the Company's
1989 Option Plan and 60,444 shares remain available for issuance pursuant to the
Company's 1995 Option Plan. Accordingly, shareholders are being asked to approve
the amendments to the 1995 Option Plan as approved by the Board of Directors at
the Annual Meeting.

Options granted under the 1995 Option Plan may be either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or nonstatutory stock options at the discretion
of the Board of Directors and as reflected in the terms of the written option
agreement. However, to the extent an optionee would have the right in any
calendar year to exercise for the first time one or more incentive stock options
for shares having an aggregate fair market value (under all plans of the Company
and determined for each share as of the date the option to purchase the share
was granted) in excess of $100,000, any such excess options shall be treated as
nonstatutory stock options. The 1995 Option Plan is not a qualified deferred
compensation plan under Section 401(a) of the Code, and is not subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.

During the fiscal year ended September 30, 1996, (i) options to
purchase 15,000 shares of Common Stock were granted pursuant to the 1995 Option
Plan to all executive officers, who were executive officers on September 30,
1996, (ii) no options were granted pursuant to the 1995 Stock Option Plan to all
current directors who are not executive officers and, (iii) options to purchase
350,817 shares of Common Stock (net of options canceled) were granted pursuant
to the 1995 Option Plan to all employees, excluding executive officers. The
actual benefits, if any, to the holders of stock options issued under the 1995
Option Plan are not determinable prior to exercise as the value, if any, of such
stock options to their holders is represented by the difference between the
market price of a share of the Company's Common Stock on the date of exercise
and the exercise price of a holder's stock option, as set forth below. For
reference purposes, however, grant information with

<PAGE>

respect to options to purchase Common Stock of the Company granted in the fiscal
year ended September 30,1996 under the Company's 1995 Option Plan to the Named
Executive Officers, as a group is set forth under "Executive Compensation Stock
Option/SAR Grants in Fiscal Year 1996."

Purpose

The purposes of the 1995 Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the Employees and Consultants of the Company and to
promote the success of the Company's business.

Administration

The 1995 Option Plan may be administered by the Board of Directors or
by a committee (or subcommittee in certain instances) of the Board of Directors
(the "Administrator"). The 1995 Option Plan is currently being administered by
the Compensation Committee of the Board of Directors. If all members of the
Compensation Committee do not meet the definition of "outside directors" under
Code Section 162(m), a subcommittee of the Compensation Committee consisting of
such "outside directors" will have the exclusive authority to grant stock
options and purchase rights and otherwise administer the 1995 Option Plan with
respect to "covered employees" described in Code Section 162(m) (generally the
Company's highest paid executive officers). Members of the Board of Directors
receive no additional compensation for their services in connection with the
administration of the 1995 Option Plan. All questions of interpretation of the
1995 Option Plan are determined by the Administrator and its decisions are final
and binding upon all participants.

Eligibility

The 1995 Option Plan provides that either incentive stock options or
nonstatutory options may be granted to employees (including officers and
directors who are also employees) of the Company or any subsidiary. In addition,
the 1995 Option Plan provides that nonstatutory options may be granted to
consultants of the Company or any of its subsidiaries. The Administrator selects
the optionees and determines the number of shares to be subject to each option.
The 1995 Option Plan provides that the maximum number of shares of Common Stock
which may be granted under options to any one employee during any fiscal year
shall be 275,000, subject to adjustment as provided in the 1995 Option Plan.

Terms of Options

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

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

(b) Exercise Price. The exercise price of all incentive stock options
and non statutory stock options as amended by this proposal granted under the
1995 Option Plan, or any option granted to "covered employees" under Code
Section 162(m), must be at least equal to the fair market value of the Common
Stock of the Company on the date of grant. The exercise price of any option
granted to an employee who owns stock representing more than 10% of the voting
power of all classes of stock of the Company or any parent or subsidiary of the
Company must equal at least 110% of the fair market value of the Common Stock on
the date of grant. The fair market value per share is equal to the closing price
of the Company's Common Stock on the Nasdaq National Market on the date of
grant.

<PAGE>

(c) Termination of Employment. If the optionee's employment or
consulting relationship terminates for any reason other than disability or
death, options under the 1995 Option Plan may be exercised not later than thirty
days (or such other period of time not exceeding the date of expiration of the
term of such option as set forth in the written option agreement) after such
termination and may be exercised only to the extent the option was exercisable
on the date of termination. In no event may an option be exercised by any person
after the expiration of its term.

(d) Disability. If an optionee is unable to continue his or her
employment or consulting relationship with the Company as a result of his total
and permanent disability, options may be exercised within six months of
termination (or such other period of time not exceeding the date of expiration
of the term of such option as set forth in the written option agreement) and may
be exercised only to the extent the option was exercisable on the date of
termination. In no event may an option be exercised after the expiration of its
term.

(e) Death. If an optionee should die while employed or retained by the
Company, options may be exercised within six months after the date of death (or
such other period of time not exceeding the date of expiration of the term of
such option as set forth in the written option agreement) and may be exercised
only to the extent the optionee was entitled to exercise the option at the date
of death. In no event may an option be exercised after the expiration of its
term.

(f) Termination of Options. The 1995 Option Plan provides that options
granted have the term provided in the option agreement. In general, these
agreements currently provide for a term of ten years. Incentive stock options
granted to an optionee who, immediately before the grant of such option, owned
more than 10% of the voting power of all classes of stock of the Company or any
parent or subsidiary of the Company, may not in any case have a term of more
than five years. No option may be exercised by any person after its expiration.

(g) Option Not Transferable. An option is nontransferable by the
optionee other than by will or the laws of descent and distribution, and is
exercisable only by the optionee during his or her lifetime or, in the event of
the optionee's death, by a person who acquires the right to exercise the option
by bequest or inheritance or by reason of the death.

(h) Acceleration of Options. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, options granted under the 1995 Option Plan
shall be assumed or an equivalent option shall be substituted by the successor
corporation, unless the Administrator determines, in lieu of such assumption or
substitution, that the optionee shall have the right to exercise the option,
including shares as to which the option would not otherwise be exercisable. If
the Administrator makes an option exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator will
notify the optionee that the option will be exercisable for a period of thirty
(30) days from the date of the notice, and the option will terminate upon the
expiration of such period.

(i) Other Provisions. The option agreement may contain such other
terms, provisions and conditions not inconsistent with the 1995 Option Plan as
may be determined by the Administrator or its committee.

Adjustments Upon Changes in Capitalization

In the event any change, such as a stock split, reverse stock split,
stock dividend, combination or reclassification, is made in the Company's
capitalization that results in an increase or decrease in the number of
outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price of each
outstanding option, the number of shares subject to each option, the annual
limitation on grants to employees, as well as the number of shares available for
issuance under the 1995

<PAGE>

Option Plan. In the event of the proposed dissolution or liquidation of the
Company, each option will terminate unless otherwise provided by the
Administrator.

Amendment and Termination

The Board of Directors may amend the 1995 Option Plan at any time or
from time to time or may terminate it without approval of the shareholders;
provided, however, that shareholder approval is required for any amendment to
the 1995 Option Plan that increases the number of shares subject to the 1995
Option Plan, changes the designation of the class of persons eligible to be
granted Options, changes the limitation on grants to employees or results in a
change which would require shareholder approval to qualify options granted
hereunder as performance-based compensation under Section 162(m) of the Code, or
results in any revision or amendment requiring shareholder approval in order to
preserve the qualification of the Plan under Rule 16b-3. No action by the Board
of Directors or shareholders may alter or impair any option previously granted
under the 1995 Option Plan. The 1995 Option Plan terminates in November 2005
(unless terminated at an earlier date by the Board of Directors), provided that
any options then outstanding under the 1995 Option Plan remain outstanding until
they expire by their terms.

Federal Income Tax Aspects of the 1995 Option Plan

The following is a brief summary of the federal income tax consequences
of transactions under the 1995 Option Plan based on federal income tax laws in
effect on the Record Date. This summary is not intended to be exhaustive and
does not address all matters which may be relevant to a particular optionee
based on his or her specific circumstances. The summary addresses only current
federal income tax law and expressly does not discuss the income tax law of any
state, municipality or non-U.S. taxing jurisdiction or gift, estate or other tax
laws other than federal income tax law. The Company advises all optionees to
consult their own tax advisors concerning tax implications of option grants and
exercises and the disposition of stock acquired upon such exercises under the
1995 Option Plan.

Options granted under the 1995 Option Plan may be either "incentive
stock options," as defined in Section 422 of the Code, or nonstatutory options.
If an option granted under the 1995 Option Plan is an incentive stock option,
under Federal tax laws the optionee will recognize no income upon grant of the
incentive stock option and incur no tax liability due to the exercise unless the
optionee is subject to the alternative minimum tax. The Company will not be
allowed a deduction for Federal income tax purposes as a result of the exercise
of an incentive stock option regardless of the applicability of the alternative
minimum tax. Upon the sale or exchange of the shares more than two years after
grant of the option and one year after exercise of the option by the optionee,
any gain will be treated as long-term capital gain under Federal tax laws. If
these holding periods are not satisfied, the optionee will recognize ordinary
income under Federal tax laws equal to the difference between the exercise price
and the lower of the fair market value of the stock at the date of the option
exercise or the sale price of the stock. A different rule for measuring ordinary
income upon such a premature disposition may apply if the optionee is also an
officer, director, or 10% shareholder of the Company. The Company will be
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee. Any gain recognized on such a premature disposition of the shares
in excess of the amount treated as ordinary income will be characterized under
Federal tax laws as long-term capital gain if the sale occurs more than one year
after exercise of the option or as short-term capital gain if the sale is made
earlier. For individual taxpayers, the current Federal tax rate on long-term
capital gains is capped at 28%, whereas the maximum rate on other income is
39.6%. Capital losses are allowed under Federal tax laws in full against capital
gains plus $3,000 of other income.

The exercise of an incentive stock option may subject the optionee to
the alternative minimum tax under Section 55 of the Code. The alternative
minimum tax is calculated by applying a tax rate of 26% to alternative minimum
taxable income of joint filers up to $175,000 ($87,500 for married taxpayers
filing separately) and 28% to alternative minimum taxable income above that
amount. Alternative minimum taxable income is equal to

<PAGE>

(i) taxable income adjusted for certain items, plus (ii) items of tax preference
less (iii) an exclusion of $45,000 for joint returns and $33,750 for individual
returns. Alternative minimum tax will be due if the tax determined under the
foregoing formula exceeds the regular tax of the taxpayer for the year. In
computing alternative minimum taxable income, shares purchased upon exercise of
an incentive stock option are treated as if they had been acquired by the
optionee pursuant to exercise of an nonstatutory option (see below). As a
result, the optionee recognizes alternative minimum taxable income equal to the
excess of the fair market value of the Common Stock on the date of exercise over
the option's exercise price. Because the alternative minimum tax calculation may
be complex, any optionee who upon exercising an incentive stock option would
recognize (together with other alternative minimum taxable income preference and
adjustment items for the year) alternative minimum taxable income in excess of
the exclusion amount noted above should consult his or her own tax advisor prior
to exercising the incentive stock option. If an optionee pays alternative
minimum tax, the amount of such tax may be carried forward as a credit against
any subsequent year's regular tax in excess of the alternative minimum tax for
such year.

All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income under Federal tax laws at the time he or she is granted a nonstatutory
option. However, upon its exercise, under Federal tax laws the optionee will
recognize ordinary income for tax purposes measured by the excess of the then
fair market value of the shares over the exercise price. In certain
circumstances, where the shares are subject to a substantial risk of forfeiture
when acquired or where the optionee is an officer, director or 10% shareholder
of the Company, the date of taxation under Federal tax laws may be deferred
unless the optionee files an election with the Internal Revenue Service under
Section 83(b) of the Code. The income recognized by an optionee who is also an
employee of the Company will be subject to tax withholding by the Company by
payment by the optionee of the taxes in cash or out of the current earnings paid
to the optionee. Upon resale of such shares by the optionee, any difference
between the sale price and the optionee's tax basis (exercise price plus the
income recognized upon exercise) will be treated under Federal tax laws as
capital gain or loss, and will qualify for long-term capital gain or loss
treatment if the shares have been held for more than one year.

Required Vote

The approval of the amendments to the 1995 Option Plan, as described in
this Proposal No. 2, requires the affirmative vote of the holders of a majority
of the shares of the Company's Common Stock present at the Annual Meeting in
person or by proxy and entitled to vote.

Recommendation of the Board of Directors

The Board of Directors recommends a vote FOR the approval of the
amendments to the 1995 Option Plan as described in this proposal No. 2.

PROPOSAL NO. 3: APPROVAL OF AUDITORS

The Board of Directors has appointed the firm of Ernst & Young LLP,
independent public accountants, to audit the financial statements of the Company
for the fiscal year ending September 30,1997. In the event the shareholders do
not ratify such appointment, the Board of Directors will reconsider its
selection. Representatives of Ernst & Young LLP are expected to be present at
the Annual Meeting and will have the opportunity to respond to appropriate
questions and to make a statement if they desire.

<PAGE>

Required Vote

The ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors requires the affirmative vote of the holders of a
majority of the shares of the Company's Common Stock present at the Annual
Meeting in person or by proxy and entitled to vote.

Recommendation of the Board of Directors

The Board of Directors recommends a vote FOR ratification of the
approval of Ernst & Young LLP as the Company's independent auditors for the year
ending September 30, 1997.

<PAGE>

MANAGEMENT

Executive Officers

The executive officers of the Company as of September 30, 1996 and their
ages as of February 27, 1997 are as follows:

Name Age Position

Chun P. Chiu 55 Chairman of the Board of Directors and
Chief Technical Officer
R. Paul Gupta 58 President and Chief Executive Officer
Stephen H. Vonderach 62 Vice President of Finance and
Chief Financial Officer
Albert R. Enamait 58 Vice President of Sales and Marketing
Edward J. Bradley, Jr. 54 Vice President of Manufacturing
Jacob H. V. Foraker 45 Vice President of Logic and Memory

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

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

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

Mr. Edward J. Bradley, Jr. joined the Company in January 1993. Before his
appointment to Vice President Marketing in February 1996, Mr. Bradley served as
Director, Manufacturing Operations. Prior to joining the Company, from 1976 to
1993, Mr. Bradley was employed with Harris Semiconductor (formerly GE/Intersil),
a semiconductor manufacturer, where he held various positions in manufacturing
management including Operations Manager, Plant Manager and Director of
Production Control and Test Operations.

<PAGE>

Mr. Jacob Foraker has served as the Company's Vice President Logic and
Memory Products since February 1996 and as Director of Business Development from
September 1995 to February 1996. Before joining the Company, from 1989 to 1995,
Mr. Foraker worked as a management consultant specializing in operations with
his own consulting firm and with Leemak, a management consulting firm. Mr.
Foraker holds a B.A. degree from Widener University.

<PAGE>

SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the Company's
Common Stock as of December 31, 1996 as to (i) each person who is known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's directors serving as of September 30,1996,
(iii) each of the executive officers named in the Summary Compensation Table
beginning on page 16, and (iv) all directors and executive officers as a group.

5% Shareholders, Directors,
Named Executive Officers, Shares Beneficially Owned(1)
---------------------------------------
and Directors and Executive Officers as a Group Number Percent(2)
------------------------------------------------------------------ ---------------- -------------------
<S> <C> <C>

FMR Corp.
82 Devonshire Street
Boston, MA 02109 314,400 5.3%

Chun P. Chiu (3)
c/o Quality Semiconductor
851 Martin Avenue
Santa Clara, CA 95050 435,690
7.3

Manohar L. Malwah (4)
c/o Quality Semiconductor
851 Martin Avenue
Santa Clara, CA 95050
348,844 5.8

Entities affiliated with
Kanematsu Semiconductor Corporation (5)
Masaharu Shinya
6-1, Shintomi 1-Chome
Chuo-ku
Tokyo 104, Japan

179,998 3.0

Andrew J. S. Kang (6) 269,250 4.5

R. Paul Gupta (7) 143,999 2.4

Robert L. Puette (8) 5,000 *

David D. Tsang 20,000 *

Stephen H. Vonderach (9) 42,247 *

Edward J. Bradley, Jr. (10) 11,545 *

Jacob H. V. Foraker (11) 6,582 *

All current officers and directors as a group
(11 persons) (12) 1,463,135 23.5

</TABLE>

- ----------

*Less than 1%

<PAGE>

(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.

(2) As of December 31, 1996, 5,976,472 shares were issued and outstanding,
exclusive of shares held by the Company as treasury stock.

(3) Includes 30,469* shares subject to outstanding stock options
exercisable on or before March 1, 1997.

(4) Includes 14,666* shares subject to outstanding stock options
exercisable on or before March 1, 1997.

(5) Includes 5,000* shares subject to outstanding stock option exercisable
on or before March 1, 1997. Also includes 8,333 shares held by Masuharu Shinya,
a director of the Company. Also includes 99,999 shares held by Kanematsu
Semiconductor Corporation, and 66,666 shares held by Kanematsu Corporation, as
to which Mr. Shinya disclaims beneficial ownership. Mr. Shinya is the president
of Kanematsu Semiconductor Corporation.

(6) Includes 6,999* shares subject to outstanding stock options exercisable
on or before March 1, 1997. Also includes 258,251 shares held by Technology
Associates Corporation, as to which Mr. Kang disclaims beneficial ownership
other than to the extent of his individual proportionate interest. Andrew J.S.
Kang, a director of the Company, is the president of Technology Associates
Corporation.

(7) Includes 137,332* shares subject to outstanding stock options
exercisable on or before March 1, 1997.

(8) Includes 5,000* shares subject to outstanding stock options exercisable
on or before March 1, 1997.

(9) Includes 38,344* shares subject to outstanding stock options
exercisable on or before March 1, 1997.

(10) Includes 9,500* shares subject to outstanding stock options
exercisable on or before March 1, 1997.

(11) Represents 6,562* shares subject to outstanding stock options
exercisable on or before March 1, 1997.

(12) Includes an aggregate of 253,872* shares subject to outstanding stock
options and warrants exercisable on or before , March 1, 1997. Includes shares
described in footnotes 5 and 6 above owned by affiliates of certain of the
Company's directors, as to which such directors may have disclaimed beneficial
ownership.

(*) Assumes no exercises prior to December 31, 1996.

<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table shows the compensation received by the Company's
Chief Executive Officer and the four other most highly compensated executive
officers of the Company for fiscal year 1996.

Long-Term
Annual Compensation Compensation
---------------------
Awards
----------------------------------- ------- ------------- ---------------- ---------------------
All Other
Name and Principal Position Year Salary ($) Bonus ($)(1) Options/SARs (#) Compensation ($)
--------------------------- ---- ---------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Chun P. Chiu 1996 $202,736 $ 72,570 49,000 -
Chairman of the Board and 1995 $167,692 $104,802 34,000 -
Chief Technical Officer 1994 $141,539 $101,284 - -

R. Paul Gupta 1996 $272,025 $108,376 132,500 $4,060 (2)
President and Chief 1995 $201,379 $131,788 87,500 $4,060 (2)
Executive Officer 1994 $156,694 $ 62,062 80,000 -

Stephen H. Vonderach 1996 $148,151 $ 57,157 43,000 -
Vice President of Finance and 1995 $128,500 $ 71,309 28,000 -
Chief Financial Officer 1994 $112,995 $ 14,735 6,666 -

Jacob H. V. Foraker
1996 $137,124 $ 15,000 45,000 -

Edward J. Bradley, Jr. 1996 $111,770 $ 20,000 017,000 -

</TABLE>

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

(1) Includes amounts paid in 1996 for services rendered in 1995. Includes
amounts paid in 1995 for services rendered in 1994. Includes amounts paid in
1994 for services rendered in 1993.

(2) Represents premiums paid on life insurance policy for the named
individual's benefit.

<PAGE>

The following tables set forth information for the named executive
officers with respect to grants of options to purchase Common Stock of the
Company made in the fiscal year ended September 30,1996 and the value of all
options held by such executive officers on September 30,1996.

Stock Option/SAR Grants in Fiscal Year 1996
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for Option
Individual Grants Term (1)
---------------------------------------------------------------------------------------- ------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
------------------------------------------------------------------------------------------------------ ---------
<S> <C> <C> <C> <C> <C> <C>

Chun P. Chiu 14,000 (2) 1.0% $4.25 7/25/06 $37,419 $94,827
19,500 (2) 1.4% $4.25 7/25/06 $52,120 $132,081
500 (2) * $4.25 7/25/06 $1,336 $3,398
15,000 (3) 1.1% $4.25 7/25/06 $40,092 $101,601

R. Paul Gupta 7,500 (2) * $4.25 7/25/06 $20,046 $50,801
80,000 (2) 5.9% $4.25 7/25/06 $213,824 $541,872
45,000 (3) 3.3% $4.25 7/25/06 $120,276 $304,803

Stephen H. Vonderach 16,000 (2) 1.2% $4.25 7/25/06 $42,764 $108,374
12,000 (2) * $4.25 7/25/06 $32,074 $81,281
15,000 (3) 1.1% $4.25 7/25/06 $40,094 $101,601

Jacob H. V. Foraker 7,500 (2) * $4.25 7/25/06 $20,046 $50,801
17,500 (2) 1.3% $4.25 7/25/06 $46,774 $118,534
10,000 (2) * $4.25 7/25/06 $26,728 $67,734
10,000 (2) * $4.25 7/25/06 $26,728 $67,734

Edward J. Bradley, Jr. 2,000 (2) * $4.25 7/25/06 $5,346 $13,547
5,000 (2) * $4.25 7/25/06 $13,364 $33,867
5,000 (2) * $4.25 7/25/06 $13,364 $33,867
5,000 (2) * $4.25 7/25/06 $13,364 $33,867

</TABLE>

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

(*) Less than one percent.

(1) The 5% and 10% assumed rates of appreciation are suggested by the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price. There
can be no assurance that any of the values reflected in the table will be
achieved. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent upon a number of factors, including the
future performance of the Common Stock, overall market conditions and the
timing of option exercises, if any.

<PAGE>

(2) Stock options were granted pursuant to the 1989 Stock Option Plan ("1989
Option Plan") and 1995 Option Plan and are exercisable in 2.08%
increments monthly commencing 30 days from the date of the grant,
becoming fully vested on the fourth anniversary of the date of the grant.

(3) Stock options were granted pursuant to the 1989 Option Plan and are 50%
exercisable in 2.08% increments monthly commencing 30 days from the date
of the grant, becoming fully vested on the fourth anniversary of the date
of grant and 50% fully vested and exercisable on the fourth anniversary
of the date of the grant but can be exercised earlier if certain
performance criteria are met.

Aggregated Option/SAR Exercises in Fiscal Year 1996 and Option/SAR Values at End
of Fiscal Year 1996

Number of Value of
Securities Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares Fiscal Year-End (#) Fiscal Year-End ($)(2)
Name Acquired on Value Exercisable/ Exercisable/
Exercise (#) Realized($)(1) Unexercisable Unexercisable
------------------------- --------------- ----------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>

Chun P. Chiu - - 22,063 / 53,936 $95,523 / $177,082
R. Paul Gupta - - 112,333 / 176,832 $581,001 / $630,569
Stephen H. Vonderach 1,000 3,175 29,646 / 52,353 $136,301 / $180,394
Edward J. Bradley, Jr. - - 6,165 / 18,334 $30,576 / $ 61,507
Jacob H. V. Foraker - - 1,876 / 43,124 $5,863 / $134,763
</TABLE>

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

(1) Calculated on the basis of the fair value of the underlying securities
at exercise, minus the exercise price.

(2) Calculated on the basis of the fair value of the underlying securities
at year-end minus the exercise price.

<PAGE>

Ten-Year Option/SAR Repricings

The following table sets forth certain information as of September 30,
1996 with respect to the repricing of certain stock options held by the
Company's executive officers.

Number of
Securities Market Length of
underlying price of Exercise original
options/ stock at price at option term
SAR's time of time of remaining at
repriced or repricing or repricing or New date of
amended amendment amendment exercise repricing or
Name Date (#) (1) ($) ($) price ($) amendment
- --------------------------- ----------- -------------- --------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>

Chun P. Chiu 7/25/96 14,000 $4.25 $ 7.92 $4.25 3.3 years
7/25/96 19,500 $4.25 $11.50 $4.25 8.4 years
7/25/96 500 $4.25 $11.50 $4.25 8.4 years

R. Paul Gupta 7/25/96 7,500 $4.25 $ 7.20 $4.25 3.3 years
7/25/96 80,000 $4.25 $11.50 $4.25 8.4 years

Stephen H. Vonderach 7/25/96 16,000 $4.25 $ 7.20 $4.25 3.3 years
7/25/96 12,000 $4.25 $11.50 $4.25 8.4 years
7/25/96 7,500 $4.25 $ 8.00 $4.25 8.4 years

Jacob H.V. Foraker 7/25/96 17,500 $4.25 $ 8.00 $4.25 8.4 years
7/25/96 10,000 $4.25 $ 6.75 $4.25 9.6 years

Edward J. Bradley, Jr. 7/25/96 2,000 $4.25 $ 7.20 $4.25 3.3 years
7/25/96 5,000 $4.25 $ 8.00 $4.25 8.4 years
7/25/96 5,000 $4.25 $ 6.75 $4.25 9.6 years
</TABLE>

(1) In order to improve the incentive provided by certain previously awarded
options, the Compensation Committee of the Board of Directors, in July
1996, approved an option exchange for all employees holding options with
an exercise price in excess of $4.25 entitling each such employees to
cancel their outstanding options in exchange for new options with an
exercise price of $4.25 per share, the fair market value of the company's
stock on the date of Board approval. The new options were subject to the
same vesting schedule as the canceled options, including the same
original vesting commencement date, except for officers' new options
which began vesting on July 25, 1996, the date of the grant.

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following report shall
not be incorporated by reference into any such filings.

Report of Compensation Committee and Stock Compensation Committee

In fiscal year 1996, executive officer compensation had two primary
elements: cash compensation (divided into a base salary component and a bonus
component) and equity-based compensation. The Compensation Committee of the
Board of Directors (the "Committee") is responsible for setting and
administering

<PAGE>

the policies which govern the annual cash compensation of executive officers and
other key employees. Mr. Chiu does not participate in deliberations of the
Committee relating to his compensation. The Stock Compensation Committee is
responsible for administering the various equity-based incentive compensation
and benefit plans (including the Company's stock purchase and stock option
plans). After review and approval by the Committee and the Stock Compensation
Committee, all issues relating to executive compensation are submitted to the
entire Board for approval, with any interested directors absent and abstaining.
The Company maintains compensation programs designed to attract, retain, and
motivate management with incentives linked to Company performance that enhances
shareholder value.

In accordance with recently adopted rules designed to enhance
disclosure of companies' policies toward executive compensation, the following
is a report submitted by the members of the above listed committees in their
capacity as the Board's Committee and Stock Compensation Committee, addressing
the Company's compensation policy as it related to the Company's executive
officers for fiscal 1996.

Compensation Policy

The goal of the Company's executive compensation policy is to ensure
that an appropriate relationship exists between executive pay and the creation
of shareholder value, while at the same time motivating and retaining key
employees. To achieve this goal, the Company's executive compensation policies
integrate annual base compensation, bonuses based on corporate performance, and
stock option grants. All executive officers as well as senior-level managerial
and technical employees are eligible for and do participate in these
compensation plans.

Base Salary

The Committee evaluates the performance and sets the salary of the
Company's Chief Executive Officer, R. Paul Gupta on an annual basis. Mr. Gupta
evaluates the performance of all other executive officers and recommends salary
adjustments which are reviewed and approved by the Committee. Survey data is
drawn from comparable companies participating in semiconductor executive
compensation surveys. Within this framework, executive salaries are determined
based on individual performance, level of responsibility, the Company's overall
salary structure, and the financial condition of the Company. The Company's
compensation policy is designed to maintain executive officer base salaries
within a range approximating the median of such salary data for like
characteristics.

Bonuses

The Company seeks to provide cash-based annual incentives and rewards
to executives who make contributions of outstanding value, contingent upon the
performance of the Company as a whole.

The Company's annual bonus program is funded by the attainment of
specific revenue and profit goals, with individual payouts based on performance
relative to both additional corporate objectives and specific objectives for
each executive's division. The revenue and profit goals and the corporate
objectives are recommended by the Chief Executive Officer and approved by the
Committee and the full Board.

Both the target amount and potential range of bonuses available to
executive officers are set annually by the Committee. Bonus awards are weighted
so that high-end bonuses are available when the Company's performance exceeds
corporate target, up to a defined maximum, and proportionally smaller or no
awards are made when the Company does not meet corporate target.

Stock Options

The Stock Compensation Committee believes that equity ownership
provides significant additional motivation to executives to maximize value for
the Company's shareholders, and therefore approves both annual

<PAGE>

and periodic grants of stock options under the Company's 1995 and 1989 Option
Plans. The Company's option grants are generally approved on an annual basis
largely in recognition of individual performance during the fiscal year. In
addition, the Company generally approves option grants in connection with the
hiring of new employees. The amounts of grants are determined relative to
guidelines derived from an industry survey of executive stock compensation. In
determining individual grants, the Stock Compensation Committee also considers
individual performance, current stock option holdings, and grants to others
within the Company. Additional grants may be given during the fiscal year in
recognition of promotions or exemplary performance achievements.

Stock options are granted at the prevailing market price and will only
have value if the Company's stock price increases over the exercise price. The
Stock Compensation Committee believes that the performance-based value of stock
options serves to align the interests of executive officers closely with those
of other shareholders.

In addition to providing an opportunity for increased equity ownership,
stock options also create an incentive for officers and key employees to remain
with the Company for the long term, as such options become exercisable over time
for so long as the officer or key employee continues his or her employment
relationship with the Company.

Deductibility of Executive Compensation

The Committee has considered the impact of Section 162(m) of the
Internal Revenue Code adopted under the Omnibus Budget Reconciliation Act of
1993, which section disallows a deduction for any publicly held corporation for
individual compensation exceeding $1 million in any taxable year for the Chief
Executive Officer and four other most highly compensated executive officers,
unless such compensation meets the requirements for the "performance-based"
exception to the general rule. Since the cash compensation paid by the Company
to each of its executive officers is expected to be well below $1 million and
the Committee believes that options granted under the 1995 and 1989 Option Plans
will meet the requirements for qualifying as performance-based, and the
Committee believes that this section will not affect the tax deductions
available to the Company. It will be the Committee's policy to qualify, to the
extent reasonable, the executive officers' compensation for deductibility under
applicable tax law.

Chief Executive Officer Compensation

For fiscal 1996, the compensation of R. Paul Gupta, the Chief Executive
Officer of the Company, consisted of base salary and a bonus. Mr. Gupta did not
participate in any decisions related to his compensation.

After careful review of the Company's performance as measured against
the annual operating goals and objectives, the Committee determined that 114% of
the operating goal was achieved and that 100% of all corporate objectives were
realized in fiscal 1995. The Committee found Mr. Gupta's target bonus award of
40% to be appropriate relative to his total compensation package and what other
executive officers in related industries can achieve. On the basis of the
Company's performance during fiscal 1995, an incentive bonus of approximately
54% of base salary, or 135% of target award, was awarded in the amount of
$108,376.

Report on Repriced Stock Options

In July 1996, the Board of Directors' Compensation Committee determined
that it was in the best interest of the Company to offer to reprice the
then-existing stock option grants of the Company with exercise prices in excess
of the then-current fair market value of the Company's Common Stock. Included in
the repricing actions were options held by the Company's executive officers.

The objectives of the company's Stock Option Plans (the "Stock Option
Plans") are to promote the interests of the company by providing employees,
certain directors, and certain consultants or independent contractors an
incentive to acquire a proprietary interest in the Company and to continue to
render services to the

<PAGE>

Company. It was the view of the Committee that such options with exercise prices
substantially above the current market price of the Company's Common Stock were
viewed negatively by most optionees of the company, and provided little, if any,
equity incentive to the optionees. The committee thus concluded that such option
grants seriously undermined the specific objectives of the Stock Options Plans
and should properly be repriced. In making this decision, the Committee also
considered the fairness of such a determination in relation to other
shareholders. In the opinion of the Committee, the shareholders' long-term best
interests were clearly served by the retention and motivation of optionees.

In this context, the Committee decided that effective July 25, 1996
(the "Grant Date") all optionees holding stock options with exercise prices in
excess of the fair market value of the Company's Common Stock could receive a
one-for-one repricing of their then-existing unexercised stock options with a
new exercise price set at $4.25 per share, the fair market value of the
Company's Common Stock on the Grant Date. The Company completed this repricing
through a one-for-one stock option exchange of stock options with an exercise
price in excess of $4.25 per share for all optionees. The new options were
subject to the same vesting schedule as the canceled options, except for
officers' new options which began vesting on July 25, 1996, the date of the
grant. The exchange was completed in July 1996.

It is the opinion of the Board of Directors that this program helped
build optionee morale and provided new incentives for the Company's employees
and management.

Compensation Committee Stock Compensation Committee

Chun P. Chiu Andrew J.S. Kang
Manohar L. Malwah Robert L. Puette
Andrew J.S. Kang
Robert L. Puette

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Company's Board of Directors consists of
Messrs. Chiu, Malwah, Kang and Puette. Mr. Chiu is the Chairman of the Board of
Directors of the Company. Mr. Chiu does not participate in deliberations of the
Compensation Committee relating to his compensation.

<PAGE>

Performance Graph

The following graph compares, for the period of time that the
Company's Common Stock has been registered under Section 12 of the Securities
Exchange Act of 1934, the cumulative total shareholder return for the Company,
the NASDAQ Stock Market - U.S., and the Hambrecht & Quist Semiconductor Index.
The stock price performance on the following graph is not necessarily indicative
of future stock price performance. Comparison of Total Return*

Performance Graph Data

Measurement Period Quality. NASDAQ H&Q
Fiscal Year Covered Semiconductor, Inc Market-US Semiconductor
- ------------------------ ----------------------- ------------- -----------------
<S> <C> <C> <C> <C>

11/17/94 100.00 100.00 100.00
FYE 9/24/95 189.00 137.00 185.00
FYE 9/29/96 82.00 163.00 138.00

</TABLE>

Assumes $100 invested on November 17, 1994, the date of the Company's
initial public offering, in the Common Stock of Quality Semiconductor, Inc., and
$100 invested on October 31, 1994 in the NASDAQ Stock Market - U.S. and the
Hambrecht & Quist Semiconductor Index. The above graph further assumes
reinvestment of dividends.

<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since October 1, 1993, the Company has entered into certain
transactions with Kanematsu Semiconductor Corporation ("Kanematsu"), a greater
than five percent shareholder of the Company, whose affiliate, Mr. Shinya,
serves on the Company's Board of Directors. In June 1990, the Company entered
into a sales agreement pursuant to which Kanematsu acts as an intermediary in
the purchase of products from the Company's wafer fabrication facilities. The
Company pays a commission for this service and in return receives extended
payment terms, foreign exchange services, and inventory handling services. Under
this arrangement, the Company paid approximately $278,000 during fiscal 1996 in
commissions. Pursuant to a distribution agreement entered into with Kanematsu in
November 1991, the Company sold products to Kanematsu totaling approximately
$4.9 million in fiscal 1996. During fiscal 1992 and 1993, the Company issued
promissory notes to Kanematsu USA, Inc., an affiliate of Kanematsu, to finance
approximately $1,104,000 and $365,000, respectively, of capital equipment, at
annual interest rates ranging from twelve to fourteen percent. The Company paid
the balance due on these notes during fiscal year 1996. On March 28, 1996, the
Company entered into an agreement with Kanematsu USA Inc., an affiliate of
Kanematsu Semiconductor Corporation, a shareholder of the Company, to finance
approximately $8.0 million of wafer fabrication equipment for installation at
Quality Semiconductor Australia Pty. Limited ("QSA"), a subsidiary of the
Company. The agreement expires March 31, 2001 and the borrowings bear interest
at a rate of 8.5%. As of September 30, 1996, there were borrowings of $3.7
million against this agreement, of which $3.5 million was outstanding.

In November 1996, Technology Associates Corporation ("Technology
Associates"), whose president, Mr. Kang, serves on the Company's Board of
Directors, purchased an unsecured convertible/redeemable note in principal
amount of approximately $1 million (the "Note") of QSA. The Note is convertible
into and can be redeemed for 146,586 shares of the Common Stock of QSA or
146,586 shares of the Common Stock of the Company. In December 1996, QSA
notified Technology Associates that it was redeeming the Note for 146,586 shares
of the Common Stock of the Company.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely upon review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1995 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.

<PAGE>
OTHER MATTERS

The Board of Directors knows of no other matters to be submitted to the
meeting. If any other matters properly come before the meeting, then the persons
named in the enclosed form of proxy will vote the shares they represent in such
manner as the Board may recommend.

<PAGE>

SHAREHOLDER PROPOSALS

Proposals of shareholders of the Company that are intended to be
presented by such shareholders at the Company's 1998 Annual Meeting of
Shareholders must be received by the Company no later than September 26, 1997 in
order that they may be considered for inclusion in the proxy statement and form
of proxy relating to that meeting.

THE BOARD OF DIRECTORS

Dated: January 23, 1997

<PAGE>

APPENEIX I

QUALITY SEMICONDUCTOR, INC.

1995 STOCK OPTION PLAN

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

Options granted hereunder may be either Incentive Stock
Options (as defined under Section 422 of the Code) or Nonstatutory Stock
Options, at the discretion of the Board and as reflected in the terms of the
written option agreement.

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

(a) "Administrator" shall mean the Board or any of its Committees appointed
pursuant to Section 4 of the Plan

(b) "Affiliate" shall mean an entity in which the Company owns an equity
interest.

(d) "Board" shall mean the Board of Directors of the Company.

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

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

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

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

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

<PAGE>

(j) "Continuous Status as an Employee or Consultant" shall mean the absence
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interrupted in the case of sick leave, military leave, or any other leave of
absence approved by the Administrator; provided that such leave is for a period
of not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute. For purposes of this Plan, a change in status
from an Employee to a Consultant or from a Consultant to an Employee will not
constitute a termination of employment.

(k) "Director" shall mean a member of the Board.

(l) "Employee" shall mean any person, including Named Executives, Officers
and Directors employed by the Company or any Parent, Subsidiary or Affiliate of
the Company. The payment by the Company of a director's fee to a Director shall
not be sufficient to constitute "employment" of such Director by the Company.

(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

(n) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a
national market system including without limitation the National Market of the
National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq")
System, its Fair Market Value shall be the closing sales price for such stock as
quoted on such system on the date of determination (if for a given day no sales
were reported, the closing bid on that day shall be used), as such price is
reported in The Wall Street Journal or such other source as the Administrator
deems reliable;

(ii) If the Common Stock is quoted on the Nasdaq System (but not on the
National Market thereof) or regularly quoted by a recognized securities dealer
but selling prices are not reported, its Fair Market Value shall be the mean
between the bid and asked prices for the Common Stock or;

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

(o) "Incentive Stock Option" shall mean an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.

<PAGE>

(p) "Named Executive" shall mean any individual who, on the last day of the
Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four highest compensated officers of the
Company (other than the chief executive officer). Such officer status shall be
determined pursuant to the executive compensation disclosure rules under the
Exchange Act.

(q) "Nonstatutory Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.

(r) "Officer" shall mean a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

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

(t) "Optioned Stock" shall mean the Common Stock subject to an Option.

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

(v) "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.

(w) "Plan" shall mean this 1995 Stock Option Plan.

(x) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act
as the same may be amended from time to time, or any successor provision.

(y) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.

(z) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan. Subject to the provisions of Section 14 of
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 975,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock.

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

<PAGE>

4. Administration of the Plan.

(a) Composition of Administrator.

(i) Multiple Administrative Bodies. If permitted by Rule 16b-3, and by the
legal requirements relating to the administration of incentive stock option
plans, if any, of applicable securities laws and the Code (collectively, the
"Applicable Laws"), the Plan may (but need not) be administered by different
administrative bodies with respect to Directors, Officers who are not directors
and Employees who are neither Directors nor Officers.

(ii) Administration with respect to Directors and Officers. With respect to
grants of Options to Employees or Consultants who are also Officers or Directors
of the Company, the Plan shall be administered by (A) the Board, if the Board
may administer the Plan in compliance with Rule 16b-3 as it applies to a plan
intended to qualify thereunder as a discretionary plan and Section 162(m) of the
Code as it applies so as to qualify grants of Options to Named Executives as
performance-based compensation, or (B) a Committee designated by the Board to
administer the Plan, which Committee shall be constituted in such a manner as to
permit the Plan to comply with Rule 16b-3 as it applies to a plan intended to
qualify thereunder as a discretionary plan, to qualify grants of Options to
Named Executives as performance-based compensation under Section 162(m) of the
Code and otherwise so as to satisfy the Applicable Laws.

(iii) Administration with respect to Other Persons. With respect to grants
of Options to Employees or Consultants who are neither Directors nor Officers of
the Company, the Plan shall be administered by (A) the Board or (B) a Committee
designated by the Board, which Committee shall be constituted in such a manner
as to satisfy the Applicable Laws.

(iv) General. If a Committee has been appointed pursuant to subsection (ii)
or (iii) of this Section 4(a), such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time the
Board may increase the size of any Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies (however caused) and remove all members of
a Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws and, in the case of a Committee appointed under
subsection (ii), to the extent permitted by Rule 16b-3 as it applies to a plan
intended to qualify thereunder as a discretionary plan, and to the extent
required under Section 162(m) of the Code to qualify grants of Options to Named
Executives as performance-based compensation.

(b) Powers of the Administrator. Subject to the provisions of the Plan and
in the case of a Committee, the specific duties delegated by the Board to such
Committee, the Administrator shall have the authority, in its discretion:

<PAGE>

(i) to determine the Fair Market Value of the Common Stock, in accordance
with Section 2(m) of the Plan;

(ii) to select the Employees and Consultants to whom Options may from time
to time be granted hereunder;

(iii) to determine whether and to what extent Options are granted
hereunder;

(iv) to determine the number of shares of Common Stock to be covered by
each such award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vi) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any award granted hereunder (including, but not limited to, the
share price and any restriction or limitation, or any vesting acceleration or
waiver of forfeiture restrictions regarding any Option and/or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator shall determine, in its sole discretion);

(vii) to determine whether, to what extent and under what circumstances
Common Stock and other amounts payable with respect to an award under this Plan
shall be deferred either automatically or at the election of the participant
(including providing for and determining the amount, if any, of any deemed
earnings on any deferred amount during any deferral period); and

(viii) to reduce the exercise price of any Option to the then current Fair
Market Value if the Fair Market Value of the Common Stock covered by such Option
shall have declined since the date the Option was granted;

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

5. Eligibility.

(a) Recipients of Grants. Nonstatutory Stock Options may be granted to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees, provided, however, that Employees of an Affiliate shall not be
eligible to receive Incentive Stock Options. An Employee or Consultant who has
been granted an Option may, if he or she is otherwise eligible, be granted an
additional Option or Options.

<PAGE>

(b) Type of Option. Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee during any calendar year (under
all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such
excess Options shall be treated as Nonstatutory Stock Options. For purposes of
this Section 5(b), Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair Market Value of the Shares shall
be determined as of the time the Option with respect to such Shares is granted.

(c) No Employment Rights. The Plan shall not confer upon any Optionee any
right with respect to continuation of employment or consulting relationship with
the Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.

6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board or its approval by the shareholders of the Company
as described in Section 20 of the Plan. It shall continue in effect for a term
of ten (10) years unless sooner terminated under Section 16 of the Plan.

7. Term of Option. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.

8. Limitation on Grants to Employees. Subject to adjustment as provided in
this Plan, the maximum number of Shares which may be subject to options granted
to any one Employee under this Plan for any fiscal year of the Company shall be
275,000.

9. Option Exercise Price and Consideration.

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

(i) In the case of an Incentive Stock Option

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

<PAGE>

(B) granted to any other Employee, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option

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

(B) granted to any other person, the per share Exercise Price shall be no
less than 100% of the Fair Market Value on the date of grant.

(b) Permissible Consideration. The consideration to be paid for the Shares
to be issued upon exercise of an Option, including the method of payment, shall
be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case
of Shares acquired upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) authorization from the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, (7) delivery
of an irrevocable subscription agreement for the Shares that irrevocably
obligates the option holder to take and pay for the Shares not more than twelve
months after the date of delivery of the subscription agreement, (8) any
combination of the foregoing methods of payment, or (9) such other consideration
and method of payment for the issuance of Shares to the extent permitted under
Applicable Laws. In making its determination as to the type of consideration to
accept, the Administrator shall consider if acceptance of such consideration may
be reasonably expected to benefit the Company.

10. Exercise of Option.

(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.

<PAGE>

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

An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.

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

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

(c) Disability of Optionee. Notwithstanding Section 10(b)
above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his or her total and permanent disability
(as defined in Section 22(e)(3) of the Code), he or she may, but only within six
(6) months (or such other period of time not exceeding twelve (12) months as is
determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) from the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set forth in the Option Agreement), exercise his or
her Option to the extent he or she was entitled to exercise it at the date of
such termination. To the extent that he or she was not entitled to exercise the
Option at the date of termination, or if he does not exercise such Option (which
he was entitled to exercise) within the time specified herein, the Option shall
terminate.

<PAGE>

(d) Death of Optionee. In the event of the death of an Optionee:

(i) during the term of the Option who is at the time of his death an
Employee or Consultant of the Company and who shall have been in Continuous
Status as an Employee or Consultant since the date of grant of the Option, the
Option may be exercised, at any time within six (6) months (or such other period
of time, not exceeding six (6) months, as is determined by the Administrator,
with such determination in the case of an Incentive Stock Option being made at
the time of grant of the Option) following the date of death (but in no event
later than the date of expiration of the term of such Option as set forth in the
Option Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance but only to the extent of
the right to exercise that would have accrued had the Optionee continued living
and remained in Continuous Status as an Employee or Consultant six (6) months
(or such other period of time as is determined by the Administrator as provided
above) after the date of death, subject to the limitation set forth in Section
5(b); or

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

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

11. Withholding Taxes. As a condition to the exercise of Options granted
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.

12. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current

<PAGE>

compensation, (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
Date").

Any surrender by an Officer or Director of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:

(a) the election must be made on or prior to the applicable Tax Date;

(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;

(d) if the Optionee is an Officer or Director, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such Optionee
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.

<PAGE>

13. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a beneficiary
by an Optionee will not constitute a transfer. An Option may be exercised,
during the lifetime of the Optionee, only by the Optionee or a transferee
permitted by this Section 13.

14. Adjustments Upon Changes in Capitalization; Corporate Transactions.

(a) Adjustment. Subject to any required action by the shareholders of the
Company, the number of shares of Common Stock covered by each outstanding
Option, the number of shares of Common Stock that have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, the maximum number of shares of Common Stock for which Options may be
granted to any employee under Section 8 of the Plan, and the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.

(b) Corporate Transactions. In the event of the proposed dissolution or
liquidation of the Company, the Option will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Administrator. The Administrator may, in the exercise of its sole discretion in
such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any part of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Administrator
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to some or all of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable. If the Administrator makes an
Option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option shall be exercisable for a period of fifteen (15) days from the date of
such notice, and the Option will terminate upon the expiration of such period.

<PAGE>

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

16. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable; provided
that, the following revisions or amendments shall require approval of the
shareholders of the Company in the manner described in Section 20 of the Plan:

(i) any increase in the number of Shares subject to the Plan, other than an
adjustment under Section 14 of the Plan;

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

(iii) any change in the limitation on grants to employees as described in
Section 8 of the Plan or other changes which would require shareholder approval
to qualify options granted hereunder as performance-based compensation under
Section 162(m) of the Code; or

(iv) any revision or amendment requiring shareholder approval in order to
preserve the qualification of the Plan under Rule 16b-3.

(b) Shareholder Approval. If any amendment requiring shareholder approval
under Section 13(a) of the Plan is made subsequent to the first registration of
any class of equity securities by the Company under Section 12 of the Exchange
Act, such shareholder approval shall be solicited as described in Section 20 of
the Plan.

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

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

<PAGE>

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

18. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.

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

20. Shareholder Approval.

(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. Such shareholder approval shall be obtained in the manner
and to the degree required under applicable federal and state law and the rules
of any stock exchange upon which the Shares are listed.

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

(c) If any required approval by the shareholders of the Plan itself or of
any amendment thereto is solicited at any time otherwise than in the manner
described in Section 20(b) hereof, then the Company shall, at or prior to the
first annual meeting of shareholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:

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

<PAGE>

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

21. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company.