<PAGE>   1

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

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

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

                                  FORM 10-K

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

                   For The Fiscal Year Ended June 30, 2000

                                      Or

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

      For the transition period from               to               .
                                    ---------------  ---------------

                         COMMISSION FILE NO.  0-25298

                             OAK TECHNOLOGY, INC.
            (Exact name of Registrant as specified in its charter)

               Delaware                             77-0161486
   (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)



   139 Kifer Court, Sunnyvale, California              94086
  (Address of principal executive offices)           (Zip Code)

   Registrant's telephone number, including area code: (408) 737-0888
    Securities registered pursuant to Section 12(b) of the Act: None
       Securities registered pursuant to Section 12(g) of the Act:

                        Common Stock, $.001 Par Value
                       Preferred Stock Purchase Rights
                          -----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ]

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

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $1,344,644,046 as of September 22, 2000, based
upon the closing price of the Registrant's Common Stock on the Nasdaq National
Market reported for September 22, 2000. Shares of Common Stock held by each
executive officer and Director and by each person who beneficially owns more
than 5% of the outstanding Common Stock have been excluded in that such persons
may under certain circumstances be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.

54,197,235 shares of the Registrant's $.001 par value Common Stock were
outstanding at September 22, 2000.

                     DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 2000 Annual Meeting
of Stockholders.

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

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                             OAK TECHNOLOGY, INC.

                                   INDEX TO

                          ANNUAL REPORT ON FORM 10-K

                         FOR YEAR ENDED JUNE 30, 2000

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
                                    PART I
<S>                                                                      <C>
Item 1.   Business.......................................................   3

Item 2.   Properties.....................................................  17

Item 3.   Legal Proceedings..............................................  18

Item 4.   Submission of Matters to a Vote of Security Holders............  20


                                   PART II

Item 5.   Market for the Registrant's Common Equity and Related
          Stockholder Matters............................................  21

Item 6.   Selected Financial Data........................................  22

Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations..........................................  23

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.....  45

Item 8.   Financial Statements and Supplementary Data....................  45

Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure...........................................  45


                                   PART III

Item 10.  Directors and Executive Officers of the Registrant.............  46

Item 11.  Executive Compensation.........................................  46

Item 12.  Security Ownership of Certain Beneficial Owners and Management.  46

Item 13.  Certain Relationships and Related Transactions.................  46


                                   PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports
          on Form 8-K....................................................  47

          Signatures.....................................................  86

</TABLE>

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                                   PART I


ITEM 1. BUSINESS

Except for the historical financial information contained herein, the matters
discussed in this Annual Report on Form 10-K may be considered "forward-
looking" statements within the meaning of Section 27a of the Securities Act of
1933, as amended, and Section 21e of the Securities Exchange Act of 1934, as
amended. Such statements include declarations regarding the intent, belief or
current expectations of the Company and its management. Such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties. Actual results could differ materially from those
indicated by such forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated are discussed in
the section titled "Factors That May Affect Future Results" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Other risks may also be identified from time to time in the
Company's Reports and Registration Statements filed with the Securities and
Exchange Commission.


General
-------

     Oak Technology, Inc. ("Oak" or the "Company") designs, develops and
markets high performance integrated semiconductors, software and platform
solutions to original equipment manufacturers ("OEMs") worldwide that serve the
optical storage, I-appliance and digital imaging equipment markets. The
Company's products consist primarily of integrated circuits and supporting
software and firmware, all designed to store and distribute digital content,
thereby enabling its OEM customers to deliver cost-effective, powerful systems
to the end user for the home and enterprise The Company contracts with
independent foundries to manufacture all of its products, enabling the Company
to focus on its design strengths, minimize fixed costs and capital expenditures
and gain access to advanced manufacturing facilities. The Company's mission is
to be a leading solution provider for the storage and distribution of digital
content.

     During the year ended June 30, 2000 ("fiscal 2000"), the Company re-
organized its operations along its two market-focused groups: the Optical
Storage Group and the Imaging Group. The Imaging Group comprises the Company's
recent acquisition, Xionics Document Technologies, Inc. ("Xionics") and its
Pixel Magic subsidiary, serving the digital imaging equipment market. The
Company also disbanded its Consumer Group selling its broadband business during
fiscal 2000 to Conexant Systems, Inc. ("Conexant").

     The Company was originally incorporated in California in 1987 and was
reincorporated in Delaware in 1994. Its executive offices and principal
marketing, sales and product development operations are located at 139 Kifer
Court, Sunnyvale, California 94086, telephone number (408) 737-0888. In
addition, the Company has facilities in: Woburn, Massachusetts; Boise, Idaho;
San Diego, California; Austin, Texas; Tucson, Arizona; Taipei, Taiwan; Yokohama
City Kanagawa, Japan; Seoul, Korea; Manchester, England; Dortmund, Germany; and
Shezhen, China.


Historical Corporate Structure
------------------------------

     The Company's earlier operations were structured along three market-
focused groups: the Optical Storage Group, a Consumer Group and the Imaging
Group (comprised of the Company's earlier acquisition of Pixel Magic), serving
the digital imaging equipment market. In 1998 the Company had discontinued its
product development and marketing efforts in its PC audio and 3D graphics
businesses.

     In July 1998, the Company acquired ViewPoint Technology, Inc.
("ViewPoint"), a privately held company that was developing solutions for the
CD-RW ("Read-Writable") drive market. ViewPoint had developed a controller that
supports high encoding speeds for CD-RW drives. The ViewPoint acquisition
provided the Company with a controller to complement the Company's expertise in
the block decoder area, and provided a springboard for the Company's next
generation CD-RW drives.

     In August 1998, the Company acquired Xerographic Laser Images Corporation
("XLI"), a provider of print quality enhancement technology for the digital
imaging equipment markets. XLI was operated as a division of the Company's
wholly owned subsidiary, Pixel Magic, and served to leverage Pixel Magic's
position in the digital equipments market by broadening its expertise in
resolution enhancement technology.  The Company paid approximately $3.7 million
to the XLI shareholders on the effective date of the merger, and at that date,
the shareholders of XLI had the right to receive additional payments of up to
approximately $11.4 million subject to the achievement of certain milestones by
XLI over a three-year period ending December 31, 2000.  Pursuant to a post-
closing audit and related post-closing adjustments set forth in the acquisition
agreement, it was determined that XLI had a net deficit (for purposes of
calculating a contingent cash adjustment, as defined in the acquisition
agreement) of approximately $1.9 million at the acquisition date which resulted
in a contingent cash adjustment of approximately $1.1 million, thereby reducing
the contingent payment amount to approximately $10.3 million.  As of September
2000, XLI results are substantially below the levels required to cause any
additional payments.  Management considers it highly unlikely that the results
for the remaining three months of the three-year period will be sufficient to
cause any additional payments.


Current Acquisitions and Re-organization
----------------------------------------

     In July 1999, the Company entered into an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement") by and among Xionics, Vermont
Acquisition Corporation, a wholly owned subsidiary of the Company ("Merger
Sub"), and the Company, under which Xionics was to merge with and into Merger
Sub, and thus become a wholly owned subsidiary of the Company (the "Merger").
On January 11, 2000, the stockholders of both the Company and Xionics approved
the definitive acquisition agreement. Xionics designs, develops and markets
innovative software and silicon solutions for printing, scanning, copying,
processing and transmitting digital documents to computer peripheral devices
that perform document imaging functions. Such devices include printers,
copiers, scanners, fax machines and multifunction peripherals that perform a
combination of these imaging functions. Under the terms of the acquisition
agreement, Oak issued approximately 9.5 million shares of its common stock and
paid approximately $34.7 million in cash to acquire all of the common stock of
Xionics. Xionics stockholders received $2.94 in cash and 0.8031 shares of
Company common stock for each share of Xionics common stock owned.

     In the fourth quarter of fiscal 2000, the Company, as earlier planned,
abandoned its existing Imaging Group facilities, in favor of a location where
the combined Imaging companies, Pixel Magic and Xionics, could be located. The
Company negotiated a lease for office space in Woburn, Massachusetts for the
combined Imaging business units of Pixel Magic and Xionics in August 2000.

     On January 19, 2000, the Company announced the disbanding of its Consumer
Group, and the sale of the Consumer Group's broadband business, located in the
United Kingdom, and its associated Intellectual Property in the United States,
to Conexant. Under the terms of the agreement, Oak received $24.9 million in
cash and stock from Conexant. Oak's divestiture represents a refocus on two
markets - digital imaging and optical storage - two growing markets fueled by
the Internet, which in turn are driving the demand for connected office
appliances and CD-RW drives.

     During the fourth quarter of fiscal 2000 the Company acquired TCD Labs,
Inc ("TCD"). The acquisition enabled the Company to offer complete, integrated,
retail-ready hardware/software solutions to PC and CD-RW drive makers, and to
leverage TCD's enabling software for compact disk recording technology,
allowing consumers to take full advantage of the data capturing, sharing and
archiving capabilities of the CD-RW format.

     In the first quarter of fiscal 2000, the Company allocated $25.0 million
that is earmarked for venture investments. The Company did not establish a
separate legal "fund" or raise any outside capital. The purpose of


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<PAGE>   5


earmarking internal funds for venture investment is primarily to gain access to
and encourage companies with developing technologies that leverage the
Company's core optical storage and imaging businesses. The Company intends to
primarily make investments that are focused on technologies that will bring
together audio, video, and data content for computing and consumer-electronics
applications and consumer Internet appliances.


Target Markets and Products
---------------------------

     Currently, the Company's target markets include optical storage (including
I-appliance), and digital imaging hardware and software, which correspond to
the Company's Optical Storage Group and Imaging Group, respectively. The
Company's business strategy and product offerings (current and planned for
fiscal 2001) for each of the target market segments are described below.



                               OPTICAL STORAGE

Business Overview/Strategy
--------------------------

     Multimedia computer applications have driven the demand for low-cost,
high-density storage mechanisms in recent years. The adoption of CD-ROM
technology as the mainstream optical storage medium on the desktop was fueled
in large measure by data-intensive, graphics/audio/video-rich applications that
required a universal, high-density storage medium. The Company's Optical
Storage Group is a leading provider of controllers to the optical storage
market and has shipped more than 130 million controllers to date. As a pioneer
in this field with the first IDE/ATAPI CD-ROM controller, the Company has
focused its recent product development efforts on emerging segments of this
industry, namely CD-RW and digital video disk ("DVD") drives. The Company's
Optical Storage Group currently has solutions for CD-RW and DVD drives, and its
core competencies include IDE and alternative interfaces, error correction code
("ECC"), DSP/servo control, disc write encoding, wobble servo, write strategy,
system design, and system software and firmware. The Company's OEM customers
for its optical storage products in fiscal 2000 included LG Electronics,
Samsung, Matsushita, Orion and Tottori Sanyo.

     Currently, the optical storage market is experiencing several transitions
as numerous types of new drive mechanisms emerge. The growth of the sub-$1000
PC and initial lack of DVD-ROM titles has extended the life of CD-ROM drives on
the desktop and had delayed the penetration of DVD-ROM drives in the PC market
through the end of 1999. However, the DVD-ROM growth has regained its momentum
starting in early 2000.  Also, the optical storage market is witnessing an
accelerated adoption of CD-RW drives, driven by the increased popularity of
customized audio CD recordings and the widespread availability of MP3 audio
titles on the Internet.

     The Company has prepared for these market transitions by focusing its
development efforts on the CD-RW and DVD technologies, which provide the
Company the opportunity to offer valuable innovation to its customers in a
growing market faced with technological challenges. The Company's strategy in
increasing its market penetration of its CD-RW and DVD products and
technologies includes technology innovation, protection of intellectual
property, and aggressive marketing/pricing programs including strategic
alliances with drive manufacturers and technology partners.

     The CD-RW market has picked up considerable momentum as more consumers
discover the advantages of this writable and removable medium. Re-writable CD
drives are quickly emerging as the preferred optical storage device,
particularly for the home PC market. Major applications include audio CD
generation, archival and data interchange. Increased consumer demand and the
widespread adoption of CD-RW drives by the PC OEM manufacturers over the next
year are expected to contribute to significant ongoing growth in the CD-RW
market.

     Another interesting development is the recent appearance of the "Combo
Drive", a CD-RW drive with DVD read capability. This drive offers a wide
functionality to the end user and could become a mainstream product if the cost
challenges are successfully addressed by the drive manufacturers. The DVD
writable market will begin to


                                      5

<PAGE>   6

emerge in calendar year 2001. The "Combo Drive" will facilitate the evolution
from CD formats to DVD and DVD recordable.

     The Company expects that ongoing functional integration and continuing
improvements in performance, particularly for the writing speeds, will play an
important role in cost reduction and consumer acceptance of the CD-RW drives,
thereby fueling its mass adoption by PC OEMs. To this end, the Company has
recently announced the OTI-9795, offering the most highly integrated and cost
effective solution for high performance CD-RW drives. The OTI-9795 offers a
three-in-one level of integration, combining on one chip the encoder/decoder
functions, DSP, a full servo sub-system, as well as the write strategy and ATIP
demodulator. In order to provide a complete solution to its customers, the
Company recently introduced the OTI-9071, a highly integrated and low power
analog front-end device designed for the CD-RW market. The OTI-9071 and OTI-
9795, combined with off-the-shelf microcontroller, flash memory and DRAM buffer
memory, comprise the major devices needed for the complete CD-RW drive
electronics. The Company also provides a fast time to market capability to its
customers through the availability of a comprehensive reference design based on
the OTI-9795 and OTI-9071, including the full firmware needed to build a CD-RW
drive. The capability to offer a complete solution places the Company in a
unique competitive position and offers a valuable time-to-market advantage to
its customers. Both the OTI-9795 and OTI-9071 are currently in volume
production.

     The Company is also in production with a chip set for the DVD Player
market. This is comprised of the OTI-9820, providing the servo control of the
DVD drive, and the OTI-226, providing the MPEG-2 Decoder functionality.

     The following table shows the Company's current mix of optical storage
products for fiscal 2000. In addition, the Company also has several next-
generation products currently in development which are generally not disclosed
until the products are developed.


Optical Storage Products
------------------------
<TABLE>
<CAPTION>

      Name                       Description                       Status
      ----                       -----------                       ------
<S>            <C>                                              <C>
OTI-9230......  The Company's four-in-one IDE/ATAPI CD-ROM       End of Life
                controller. Combines four major functions of
                a CD-ROM drive (CD-DSP, Servo, block decoder,
                and 1Mb DRAM)

OTI-9790......  The Company's three-in-one integrated CD-RW      In production
                controller. Integrates encoder/decoder, DSP,
                servo, write strategy and ATIP demodulator.
                8X Write, 32X Read Speed

OTI-9795......  The first integrated 16X controller introduced   In production
                into the market, having the same features as
                the OTI-9790 plus enhanced audio and SDRAM
                support. 16X Write, 40X Read Speed

OTI-9071......  The Company's first analog front end for CD-RW   In production
                Applications 12X Write, 32X Read Speed

OTI-9820......  The Company's three-in-one integrated DVD        In production
                controller. Integrates DVD/CD-ROM decoder, DSP
                and servo functions

OTI-226.......  The Company's integrated MPEG 2 decoder for DVD  In production
                Player applications
</TABLE>

                                      6

<PAGE>   7


     New to Oak is the newly formed Media Software Group, the result of the
acquisition of TCD. The Media Software Group is Oak's first entry into the CD-
RW software and represents an instrumental piece of the Company's CD-RW
strategy. The addition of the TCD software to the Optical Storage product line
allows the Company to provide an integrated, retail-ready software solution to
both drive makers and PC OEMs. The TCD  software uses a CD-RW drive to create
or copy consumer audio, video or computer-data CDs, allowing the Company to
leverage the software in compact disk recording technology, and allow consumers
to take full advantage of the data capturing, sharing and archiving
capabilities of the CD-RW format. The software's drag-and-drop user  interface
is designed to provide ease of recording capability in all Microsoft  Windows-
based environments, and is universally compatible with all CD-RW drives and
controllers.


                                IMAGING GROUP


Business Overview/Strategy
--------------------------

     The Company's Imaging Group is located in Woburn, Massachusetts. The
Imaging Group is a leading provider of application-specific integrated circuits
and IC-based controller technology to the digital imaging market. Through its
acquisition of Xionics, the Company also provides digital page processing
software and technology for the office market, enabling users to print, scan,
copy, process and transmit documents to computer peripherals that perform
document imaging functions.

     The Company's Imaging Group designs high-performance, full-featured
compression codecs, imaging DSPs, resolution enhancement solutions and embedded
controller board solutions for digital copiers, printers, scanners, fax
machines and multifunction peripherals ("MFPs"). The Company also offers
integrated, modular embedded software products, along with firmware and silicon
technology products, intended to provide the performance, output quality and
network connectivity required for today's peripheral market. In addition, the
Company provides complementary personal computer software products, in
particular printer drivers, and standards-based technology to enable original
equipment manufacturers ("OEMs") of peripherals to design and develop
differentiated products.

     Core competencies include strong expertise in color/monochrome image
processing pipelines, dot modulation and resolution enhancement technology, and
high-speed compression/decompression and systems such as its JBIG/JPEG
compression codecs, expertise in high-speed imaging DSPs, XLI's family of
resolution enhancement technology ("RET") products and IPS, a modular,
scalable, layered software and hardware architecture which provides processing
and control of document imaging peripherals based on Xionics' long-standing
expertise in the development of page description language interpreters.  The
Company offers a broad suite of products, including integrated semiconductors
and embedded controller-board solutions, to major OEMs in the digital imaging
equipment market to power a variety of digital imaging systems, such as digital
laser copiers and printers (monochrome and color) and copycentric, faxcentric
and printcentric multifunction peripherals (MFPs). The Company's OEM customers
for these products during fiscal 2000 included Canon, Fujitsu, Fuji-Xerox,
Hewlett-Packard, Kodak, Matsushita, Olivetti, IBM, QMS, Ricoh, Samsung, Sanyo
Seiko Epson, Sharp, Toshiba and Xerox.

     Fundamental shifts are presently occurring in the digital imaging market.
These changes include distributed printing, the emergence of multifunction
peripherals, the increasing use of color and higher resolution images and the
emergence of the Internet as a key communications vehicle.

     Although historically targeting the mid-range of the digital imaging
market, the Company is now also targeting high-volume opportunities, such as
the low- to mid-range laser and inkjet products (including color systems). One
of the new products introduced by the Company in fiscal 2000 was a high-speed,
low-cost imaging DSP (iDSP) for the growing inkjet MFP market.   A new product
initiative for fiscal 2001 is the EmPOWER architecture which combines the power
of Xionics' embedded software with Oak's advanced compression and image
processors.  The EmPOWER architecture is a complete scalable, flexible hardware
and software solution available for the development of digital printers and
multifunction peripherals. For fiscal 2001


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<PAGE>   8

the Imaging Group will continue its efforts to develop new generations of
products combining its software and silicon expertise to offer solutions for
OEMs in the digital imaging market.


Digital Imaging Equipment Products
----------------------------------
<TABLE>
<CAPTION>

     ASICS
     -----

    Product                      Description                         Status
    -------                      -----------                         ------
   <S>      <C>                                                  <C>
    PM-1V    High-speed bitonal image processor providing         In production
             single-pass compression or decompression of
             image data



    PM-2m    40 MHz bitonal JBIG codec with multitasking          In production
             capability. Provides single pass compression or
             decompression, as well as scaling and rotation of
             bitonal image data

    PM-22    75 MHz bitonal JBIG codec with a 32-bit I/O.         In production
             Provides single pass compression or decompression,
             as well as scaling and rotation of bi-tonal image
             data

    PM-36    A fixed function JPEG compression and decompression  Sampling
             processor with a sustained data rate of up to
             75 MHz

    PM-44+   A programmable 85 MHz image processor with four      In production
             data paths

    PM-44i   A programmable 125 MHz image processor with four     In production
             data paths and integrated memory

    PM-48    A programmable 125 MHz image processor with eight    In production
             data paths

    PM-2050, Family of image enhancement processors and pulse     In production
     2060i,  width and pulse position modulators for laser copiers,
    PM 1075  printers and MFPs

</TABLE>


<TABLE>
<CAPTION>

Software
--------
<S>             <C>
IPS............  A software developer package that contains page rendering
                 application components and supporting embedded system
                 service components needed to build printer controllers.
                 The package includes: IPS5e, IPS/5c, IPS/XL IPS/PS2, IPS/PS3.

Printer Drivers  Printer drivers for the PCLXL, PCL5E and PostScript Levels 2
                 and 3 page printing environments for the Microsoft NT and
                 Windows operating systems.
SPS............. Software which provides embedded networking capabilities for
                 printers, copiers, scanners and MFPs.

</TABLE>

Services
--------

     Services. The Imaging Group assists OEMs in deploying its products and
     --------
technology in their devices by providing engineering services, which may
include complete controller design as well as custom engineering for vendor-
specific features that complement the Company's standard technology.  Driver
development and customization is also offered.  In addition, the Company
maintains a network of third-party development partners to give the Imaging
Group and OEM customers the option of using an independent development partner
closely allied with the Imaging Group for development and integration services.


                                      8

<PAGE>   9


     Manufacturing Services.  For OEMs wishing to procure a total turnkey
     ----------------------
controller solution, the Imaging Group from time to time provides manufacturing
management services, including complete project management of the design,
development, and manufacturing start-up, as well as management of the ongoing
product of the OEM's controller board by a third-party manufacturing
contractor.

     OEM Services.  The Imaging Group's OEM Services group provides customer
     ------------
support in every aspect of development, training, and maintenance.  Software
maintenance service is provided on a contract basis, and includes updates of
the licensed software, if any, along with support in the form of telephonic and
electronic mail response to customer questions.  Engineering support services,
in which the Imaging Group's engineers perform or assist with specific
engineering task for OEMs, are available for a fee either on a project specific
or general as needed basis.


                COMPANY'S MANUFACTURING AND DESIGN METHODOLOGY

Manufacturing
-------------

     The Company contracts with independent foundries to manufacture all of its
products, enabling the Company to focus on its design strengths, minimize fixed
costs and capital expenditures and gain access to advanced manufacturing
facilities. The Company is dependent on its foundries to allocate to the
Company a portion of their foundry capacity sufficient to meet the Company's
needs to produce products of acceptable quality and with acceptable
manufacturing yields and to deliver products to the Company in a timely manner.
These foundries fabricate products for other companies and some manufacture
products of their own design. The loss of any of these foundries as a supplier,
the inability of the Company in a period of increased demand for its products
to expand the foundry capacity of its current suppliers or qualify other wafer
manufacturers for additional foundry capacity, any inability to obtain timely
and adequate deliveries from the Company's current or future suppliers or any
other circumstances that would require the Company to seek alternative sources
of supply could delay shipments of the Company's products. Delays in shipments
could damage relationships with its current and prospective customers, provide
an advantage to the Company's competitors and have a material adverse effect on
the Company's business, financial condition and results of operations. Most of
the Company's devices are currently fabricated using complementary metal oxide
semiconductor ("CMOS") process technology with 0.5 micron and 0.35 micron
feature sizes. The Company is currently designing products for 0.25 micron
feature sizes. All of the Company's semiconductor products are assembled and
tested by independent subcontractors.

     The Company's primary supplier of wafers during fiscal year 2000 was TSMC.
The Company also uses wafer fabrication facilities at Chartered and NEC. The
foundries generally are not obligated to supply products to the Company for any
specific period, in any specific quantity or at a specific price, except as may
be provided in a particular purchase order. However, in order to obtain an
adequate supply of wafers, especially wafers manufactured using advanced
process techniques, the Company has entered into and will continue to consider
various possible transactions, including various "take or pay" contracts, such
as those with TSMC and Chartered as described in Note 12 to the consolidated
financial statements, that commit the Company to purchase specified quantities
of wafers over extended periods.

     The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including
the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, quality assurance and
costs. In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general political
risks, such as political and economic instability, potential hostilities,
changes in diplomatic and trade relationships, currency fluctuations,
unexpected changes in, or imposition of, regulatory requirements, tariffs,
import and export restrictions, and other barriers and restrictions,
potentially adverse tax consequences, the burdens of complying with a variety
of foreign laws and other factors beyond the Company's control. Substantially
all of the Company's agreements with its offshore wafer fabrication and
assembly facilities provide for pricing and payment in U.S. dollars.


                                      9

<PAGE>   10

     The design and development of semiconductors is a highly complex and
precise process.  Additionally, the Company's products are particularly complex
and difficult to manufacture. Minute levels of contaminants in the
manufacturing environment, defects in the masks used to print circuits on a
wafer, difficulties in the fabrication process or other factors can cause a
substantial percentage of wafers to be rejected or a significant number of die
on each wafer to be nonfunctional. Many of these problems are difficult to
diagnose, time consuming and expensive to remedy, all of which can affect the
Company's time to market with a particular product. There can be no assurance
that the Company's foundries will not experience irregularities or adverse
yield fluctuations in their manufacturing processes. Any yield or other
production problems or shortages of supply experienced by the Company or its
foundries could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Factors that May
Affect Future Results-Risks of Supply Constraints and Manufacturing Process"
below.


Design Methodology
------------------

     The Company's products compete in markets that are characterized by
rapidly developing technology and evolving industry standards. The Company
addresses these issues with a design environment based on workstations,
dedicated product simulators, system simulation with hardware and software
modeling, and use of a high level design description language in order to
define, develop and deliver new and enhanced products more rapidly. The
Company's engineering and design capabilities are significant to its future
performance, and the Company has invested regularly in new advanced equipment
and software tools in an effort to keep these tools updated with the latest
technology. In addition to the Imaging Group design facilities in Woburn,
Massachusetts and the Optical Storage Group design facilities in the Company's
corporate headquarters in Sunnyvale, California, the Company has established
Design Centers in Austin, Texas; San Diego, California; Boise, Idaho; Tucson,
Arizona; Dortmund, Germany; Manchester, England; and Taipei, Taiwan R.O.C. The
Company's library of core cells is key to its ability to reduce the time needed
to design new products. Examples of core cells include a CD-ROM decoder core,
CD-R/W encoder/decoder core, CD-DSP & CD-Servo core, a parallel, multi-
pipelined microprocessor core, MPEG2 core, DVD-DSP core, a 0.5 and 0.35 micron
memory compiler and a 0.5, 0.25 and .35 micron I/O library. Design methodology,
including equipment and software tools, is a critical factor with respect to
the Company's ability to successfully develop technology and products. There
can be no assurance that the Company will be able to obtain the equipment,
software tools and other resources needed to develop technically advanced
products in a timely manner. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Factors that May Affect Future
Results-New Product Introduction" below.


Marketing and Customers
-----------------------

     From its inception, the Company has been committed to a worldwide
marketing strategy. The Company utilizes a direct sales force in the United
States, Germany, Japan, Taiwan and the Peoples Republic of China and a
worldwide network of manufacturers' representatives and distributors in North
America, Europe and Asia. While customers around the world have many needs in
common, each region has its own requirements. In order to support customers in
key geographic markets, the Company has established sales and support offices
in Woburn, Massachusetts; Yokohama City Kanagawa, Japan; Taipei, Taiwan, Seoul,
Korea and Shenzhen, China, in addition to its corporate headquarters in
Sunnyvale, California. The Company believes that sales and technical support
personnel based in the Company's regional offices understand the technical
needs, business philosophy and culture of their respective customers. On-site
personnel are trained to respond to customer needs efficiently and effectively.

     The Company believes that customer service and technical support are
important competitive factors in the optical storage, consumer electronics and
digital imaging markets. The Company provides technical support to its
customers worldwide. With a global presence, the Company is able to provide
prompt technical support to its customers. In addition, the Company's
representatives travel frequently to customer sites to assist in design-in
activity. The Company provides several other types of technical support,
including software distribution through an electronic bulletin board,
evaluation boards, product demonstration software, engineering design kits and
application


                                      10

<PAGE>   11

notes. The Company works closely with its customers in qualification of its
products and providing needed quality and reliability data. In addition, the
Company makes the latest revision of its software available to its customers
and can customize the Company's software to a customer's specific requirements.

     Sales of the Company's products are made pursuant to purchase orders and
long-term agreements covering licensing, maintenance, engineering services,
royalties and other fees. Purchase orders are subject to price renegotiations
and to changes in quantities of products and delivery schedules in order to
reflect changes in the customers' requirements. In addition, in certain
circumstances, orders may be canceled at the discretion of the buyer without
penalty. The Company's business, consistent with that of others in the
semiconductor industry, is generally characterized by short lead-time orders.
The Company's actual shipments depend on the manufacturing capacity of the
Company's foundries. Therefore, as foundry capacity tightens, the Company may
not be able to meet the customer's requested delivery date or the Company may
have to put its customers on allocation. Due to its dependence on third party
manufacturing capacity, the Company believes that backlog at any particular
date may not be indicative of actual net revenues for any future period.

     Sales of CD-ROM, CD-R and CD-RW controller products comprised 42%, 65% and
82% of the Company's net revenues in fiscal 2000, 1999 and 1998, respectively.
Sales of CD-ROM and CD-RW controller products are expected to continue to
account for a majority of the Company's total revenues for the foreseeable
future. Sales of the Company's Imaging Group products accounted for 53% of the
Company's net revenue in fiscal 2000. Although the Company has recently
introduced several new products in its attempt to diversify its product and
market base, there can be no assurance that these products will be successfully
designed, accepted by the Company's customers, and brought to production or
that the Company's customer's products will be accepted in the marketplace.

     A substantial majority of the Company's revenues in fiscal 2000, 1999 and
1998 were derived outside of the United States, primarily in Asia.  Including
the results of the Xionics acquisition in fiscal 2000, the geographical areas
accounting for the Company's net revenues in fiscal 2000, 1999, and 1998 are as
follows:

<TABLE>
<CAPTION>
                                                  June 30,
                                        ----------------------------
                                          2000       1999       1998
                                          ----       ----       ----
    <S>                                 <C>        <C>       <C>
     Korea...........................      34%        10%        20%
     Japan...........................      32%        52%        38%
     North America...................      25%        14%         8%
     Other Asia......................       4%        10%        11%
     Europe..........................       4%        11%         9%
     Taiwan..........................       1%         3%        14%
                                         ----       ----       ----
                                          100%       100%       100%
                                         ====       ====       ====

</TABLE>

     Accordingly, the Company is subject to the risks of conducting business
outside of the United States. These risks include unexpected changes in, or
impositions of, legislative or regulatory requirements, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, quotas
and other trade barriers and restrictions, longer payment cycles, greater
difficulty in accounts receivable collection, potentially adverse taxes, the
burdens of complying with a variety of foreign laws and other factors beyond
the Company's control. The Company is also subject to general geopolitical
risks in connection with its international operations, such as political,
social and economic instability, potential hostilities and changes in
diplomatic and trade relationships. There can be no assurance that such factors
will not adversely affect the Company's operations in the future or require the
Company to modify its current business practices. In addition, the laws of
certain foreign countries in which the Company's products are or may be
developed, manufactured or sold, including various countries in Asia, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. Most of the
Company's foreign sales are negotiated in U.S. dollars; however, invoicing is
often done in local currency. As a result, the Company may be subject to the
risks of currency fluctuations. There can be no assurance that one or more of
the


                                      11

<PAGE>   12

foregoing factors will not have a material adverse effect on the Company's
business, financial condition or operating results or require the Company to
modify its current business practices.

     A limited number of customers historically have accounted for a
substantial portion of the Company's net revenues. In fiscal 2000, 1999 and
1998, sales to the Company's top ten customers accounted for approximately 78%,
70% and 81%, respectively, of the Company's net revenues. In fiscal 2000, LG
Electronics accounted for 26% of the Company's net revenues, and Hewlett-
Packard Company accounted for 16% of the Company's net revenues. In fiscal
1999, Yamaha Corporation accounted for 17% and Mitsumi accounted for 10% of net
revenues. In fiscal 1998, Mitsumi accounted for 17% and LG Electronics
accounted for 14% of the Company's net revenues.

     The Company expects that sales to a limited number of customers will
continue to account for a substantial portion of its net revenues for the
foreseeable future. The Company has experienced significant changes from year
to year in the composition of its major customer base and believes this pattern
will continue. In August of 2000 the Company entered into a non-binding
commitment letter with Samsung Electric Co. Ltd. ("Samsung") for the purchase
of the Company's optical storage controllers for CD-RW that could have a
potential value, based on negotiated pricing of $70.0 million dollars. There is
no guarantee however, that Samsung will commit to the purchase volumes that
would reach this value, and given the non-binding nature of the commitment,
Samsung may elect not to purchase the Company's products. The Company does not
have long-term purchase agreements with any of its customers. Customers
generally purchase the Company's products subject to cancelable short-term
purchase orders. The loss of, or a significant reduction in, purchases by
current major customers would have a material adverse effect on the Company's
business, financial condition and results of operations. In fiscal 1998 and
1999 the Company lost a number of its optical storage customers due to
increased competition and the Company's failure to timely develop its next
generation CD-ROM and CD-RW controller products. There can be no assurance that
the Company's current customers will continue to place orders or that existing
orders will not be canceled. If sales to current customers cease or are
reduced, there can be no assurance that the Company will be able to continue to
obtain the orders from new customers necessary to offset any such losses or
reductions. Moreover, there can be no assurance that the Company could qualify
its independent foundries for potential new customers or that it could do so in
a timely manner.

     The Company currently places non-cancelable orders to purchase its
products from independent foundries on an approximately three month rolling
basis. Its customers generally place purchase orders with the Company less than
four weeks prior to delivery that may be rescheduled or under certain
circumstances may be canceled without penalty. Consequently, if anticipated
sales and shipments in any quarter are rescheduled, canceled or do not occur as
quickly as expected, expense and inventory levels could be disproportionately
high and the Company's business, financial condition and results of operations
for that quarter or for the year would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Factors that May Affect Future Results-Risks of Supply Constraints
and Manufacturing Process" below.


Competition
-----------

     The optical storage and imaging markets in which the Company competes, are
intensely competitive and are characterized by rapid technological change,
declining unit average selling price ("ASPs") and rapid product obsolescence.
The Company is currently experiencing intense competition in both the optical
storage and imaging markets, and expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with solutions that may be less costly or provide
higher performance or additional features.  The Company's existing and
potential competitors include many large domestic and international companies
that have substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company.  The Company's competitors also
include a number of emerging companies. Certain of the Company's principal
competitors in the optical storage market maintain their own semiconductor
foundries and may therefore benefit from certain capacity, cost, quality
control and technological advantages. In general, the Company believes that its
ability to compete successfully depends on a number of factors, both within and
outside of its control,

                                      12

<PAGE>   13


including the price, quality and performance of the Company's and its
customers' products, the timing and success of new product introductions by the
Company, its customers and its competitors, the emergence of new industry
standards, the development of technical innovations, the ability to obtain
adequate foundry capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the market acceptance of the products of the
Company's customers, the assertion of intellectual property rights and general
market and economic conditions. There can be no assurance that the Company will
be able to compete successfully in the future.

     The willingness of prospective customers to design the Company's products
into their products depends, to a significant extent, upon the ability of the
Company to have product available at the appropriate market window and to price
its products at a level that is cost effective for such customers. The markets
for most of the applications for the Company's products, particularly the
optical market and the consumer market, a segment which the Company
discontinued in the third quarter of fiscal 2000, are characterized by intense
price competition. As the markets for the Company's products mature and
competition increases, the Company anticipates that ASPs on its products will
decline. If the Company is unable to reduce its costs sufficiently to offset
declines in ASPs or is unable to successfully introduce new higher-performance
products with higher ASPs, the Company's business, financial condition and
result of operations will be materially adversely affected. If the Company
experiences yield or other production problems or shortages of supply that
increase its manufacturing costs, or fails to reduce its manufacturing costs,
the result could have a materially adverse effect on the Company's business,
financial condition and operating results.

     The Company's current optical storage business is focused in the fast
growing CD-RW segment, where the Company currently participates with its high
integration controllers and analog front-end devices. Major competitors in the
high integration controller area include Sanyo and Ricoh, both established
suppliers in this market as well as an anticipated entry into the CD-RW arena
by MediaTek in late 2000. Another competitor in this area is Cirrus Logic,
which offers a lower integration solution comprising only the ENDEC portion of
the functionality.  The Cirrus Logic solution is used by Sony, one of the major
suppliers in the CD-RW drive market. In the analog front end market, the
established competitors include AKM and Sony Semiconductor, with anticipated
new entries in late 2000 from Rohm and MediaTek.

     In the digital imaging market, the Company's primary product offerings
target the niche, mid-range market and the Company's merchant competition does
not offer directly competitive products. In some cases, the merchant
competition offers a subset of the Company's product features. In other cases,
the merchant competition offers a software alternative to the Company's
hardware solution. The Company's competitors in the merchant market are major
semiconductor suppliers such as Conexant, Motorola and Texas Instruments.
However, the Company expects direct merchant competition in the niche, high-end
digital imaging equipment market to emerge in the near future. Despite this
lack of direct competition in the merchant market, the Company does experience
competition with its DSP, compression and resolution enhancement products from
internal design groups within the Company's targeted customers, such as Xerox,
HP, and Canon. As with the merchant market, one of the Company's strengths in
competing with these internal design teams comes from the breadth of the
solution the Company is able to provide. The Company must continue to enhance
and strengthen its software capabilities in order to compete successfully in
this market. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Factors that May Affect Future Results-Competitive
Market" below. As to the new lower-end of products the Company is developing
for the digital imaging equipment market, the Company expects greater direct
competition than it currently experiences in the niche, high-end market.

     In the market for embedded printer systems, the Company through its
Imaging Group's IPS product line has one primary competitor, Adobe Systems
Incorporated ("Adobe"), which has significantly greater resources than the
Company.  Adobe was the developer of the PostScript page description language,
which has a significant brand name image.  While Hewlett-Packard, the Company's
second largest customer, has for the most part discontinued the use of Adobe
PostScript in its printer products, Adobe has recently changed its licensing
practices to make PostScript source code available to certain of its
development partners for the first time. This may enable Adobe to compete more
effectively against the Company.  A few other companies, including Peerless
Systems Corporation

                                      13

<PAGE>   14

and Electronics for Imaging, Inc., offer products and services that compete
with the Company's systems software and integrated controller offerings. The
Company's most significant competitor in the area of controller design remains
OEM's in-house development organizations, and certain large OEMs develop their
own proprietary PDL components as well.

     In the market for printer driver software, the Company competes primarily
with a small number of companies, including Adobe and Software 2000 Limited,
who also offer such software.  In addition, a few OEMs have their own internal
driver development capacity.

     In the market for engineering services and manufacturing services the
Company competes primarily with OEM's internal development and manufacturing
groups, as well as with third-party design houses, contract manufacturers and
the Company's competitors in other markets.


Research and Development
------------------------

     The Company currently invests substantial resources in its product
development efforts. During fiscal 2000, 1999 and 1998, the Company spent
approximately $49.7 million, $46.2 million, and $49.7 million, respectively, on
research and development activities. The Company intends to continue to invest
in the development of products in each of its core technologies and in products
that integrate its core technologies.

     The Company's performance is highly dependent upon the successful
development and timely introduction of new products at competitive price and
performance levels. There can be no assurance that products currently under
development or any other new products will be successfully developed or will
achieve market acceptance. The failure of the Company to introduce new products
successfully or the failure of new products to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations. During most of fiscal 1999, the Company failed to
timely introduce its integrated CD-ROM controller and next generation of CD-RW
controller creating a situation where the Company was selling only mature
optical storage products which continued to decline in unit volume sales and
ASPs. This, combined with other factors including increased competition,
resulted in a significant decline in revenues. The success of new product
introductions is dependent on several factors, including recognition of market
requirements, product cost, timely completion and introduction of new product
designs, quality of new products and achievement of acceptable manufacturing
yields from the Company's contract manufacturers. Due to the design complexity
of its products, the Company has experienced delays in completing development
and introduction of new products, and there can be no assurance that the
Company will not encounter such delays in the development and introduction of
future products. There can be no assurance that the Company will successfully
identify new product opportunities and develop and bring new products to market
in a timely manner, that the Company's products will be selected for design
into the products of its targeted customers or that products or technologies
developed by others will not render the Company's products or technologies
obsolete or noncompetitive. The failure of the Company's new product
development efforts or the failure of the Company to achieve market acceptance
of its new products would have a material adverse effect on the Company's
business, financial condition and results of operations.


Proprietary Rights and Licenses
-------------------------------

     The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company considers its technology to be proprietary
and relies on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect its
intellectual property rights. The Company currently has patents granted,
patents pending, patents in preparation in the United States, and international
patents pending. Oak's first patent was issued in 1996. Currently the Company's
patent position is 37 U.S. patents issued and 156 patent applications on file
in the United States Patent and Trademark Office. Accordingly, the duration of
Oak's material patents are no less than 14 years. The Company intends to seek
additional international patents and additional United States patents on its
technology. There can be no assurance

                                      14

<PAGE>   15

that additional patents will issue from any of the Company's pending
applications or applications in preparation, or be issued in all countries
where the Company's products can be sold, or that any claims allowed from
pending applications or applications in preparation will be of sufficient scope
or strength to provide meaningful protection or any commercial advantage to the
Company. Additionally, competitors of the Company may be able to design around
the Company's patents. There can be no assurance that any patents held by the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company. An
action is currently pending in the Federal District Court for the Northern
District of California seeking to invalidate one of the Company's patents
relating to it's optical storage products (See Legal Proceedings).

     Moreover, while the Company holds or has applied for patents relating to
the design of its products, the Company's products are based in part on
industry standards, and the Company does not hold patents on such standards.
The laws of certain foreign countries in which the Company's products are or
may be manufactured or sold, including various countries in Asia, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. There can be no
assurance that the steps taken by the Company to protect its proprietary
information will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology.

     The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in significant,
often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or
its foundries may, from time to time, be notified of claims that the Company
may be infringing patents or other intellectual property rights owned by third
parties. If it is necessary or desirable, the Company may seek licenses under
such patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
from a third party for technology used by the Company could cause the Company
to incur substantial liabilities and to suspend the manufacture of products or
the use by the Company's foundries of processes requiring the technology.

     Furthermore, the Company may initiate claims or litigation against third
parties for infringement of the Company's proprietary rights or to establish
the validity of the Company's proprietary rights. In fiscal 1997 and again in
fiscal 1998, the Company filed a complaint with the International Trade
Commission ("ITC") against certain Asian manufacturers of optical storage
controller devices based on the Company's belief that such devices infringed
one or more of the Company's patents. The complaint seeks a ban on the
importation into the United States of any infringing CD-ROM controller or
products containing such infringing CD-ROM controllers. (See "Legal
Proceedings"). Litigation by or against the Company could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel, whether or not such litigation results in a favorable
determination for the Company. In the event of an adverse result in any such
litigation, the Company could be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology, discontinue the use of certain processes
or obtain licenses to the infringing technology. There can be no assurance that
the Company would be successful in such development or that such licenses would
be available on reasonable terms, or at all, and any such development or
license could require expenditures by the Company of substantial time and other
resources. Patent disputes in the semiconductor industry have often been
settled through cross-licensing arrangements. Because the Company has a limited
portfolio of patents, the Company may not be able to settle an alleged patent
infringement claim through a cross-licensing arrangement. If a successful claim
is made against the Company or its customers and a license is not made
available to the Company on commercially reasonable terms or the Company is
required to pay substantial damages or awards, the Company's business,
financial condition and results of operations would be materially adversely
affected.

     The Company generally enters into confidentiality agreements with its
employees and confidentiality and license agreements with its customers and
potential customers, and limits access to and distribution of the source and
object code of its software and other proprietary information. Under some
circumstances, the Company grants


                                      15

<PAGE>   16


licenses that give its customers limited access to the source code of the
Company's software which increases the likelihood of misappropriation or misuse
of the Company's technology.  Accordingly, despite precautions taken by the
Company, it may be possible for unauthorized third parties to copy certain
portions of the Company's technology or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company will be adequate to prevent misappropriation of its technology
or to provide an adequate remedy in the event of a breach or misappropriation
by others.

     The Company has licensed technology from third parties for use in its
optical storage and digital imaging equipment business, and pursuant thereto is
required to fulfill confidentiality obligations and in certain cases pay
royalties. Certain of the Company's products require that certain copy
protection software or other software be obtained if the products are to be
marketable and exportable. Should the Company lose its rights to or be unable
to obtain the necessary copy protection software, the Company would be unable
to sell and market certain of its optical storage products geared for the DVD
market. The Company licenses the Sun Microsystems SPARC core for use with a
number of its consumer products for which it is obligated to pay a royalty
based on a percentage of the net selling price of such products.

     The Company has also entered into a number of joint development and supply
arrangements pursuant to which the Company jointly develops a product with
another company or contracts with another company to develop a product or
component for it and then purchases the product or component from such company
for resale with other Company products. In addition, the Company has on
occasion purchased off the shelf products to resell bundled with its own
product. In the future, it may be necessary or desirable for the Company to
seek additional licenses to intellectual property rights held by third parties
or purchase products manufactured and/or sold by third parties with respect to
some or all of its product offerings. There can be no assurance that such
licenses or purchases will be available on terms acceptable to the Company, if
at all. The inability of the Company to enter such license arrangements on
acceptable terms or to maintain its current licenses on acceptable terms could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-The Company May Be Unable to
Protect Its Intellectual Property and Proprietary Rights" and "The Company May
Be Unable to Obtain Third Party Intellectual Property Rights and/or May Be
Liable for Significant Damages" below.

Management
----------

     The executive officers of the Company are elected by and serve at the
discretion of the Board of Directors. During the fourth quarter of fiscal 2000,
the Board of Directors passed a resolution which redefined the Company's
executive officers to include the President and Chief Executive Officer, the
Chief Financial Officer, General Counsel and General Managers. As of August 31,
2000, the Company's executive officers were as follows:

<TABLE>
<CAPTION>

            Name                     Age                 Position
            ----                     ---                 --------
<S>                                  <C>    <C>
Young K. Sohn.......................  44     Chief Executive Officer,
                                             President, and Director

John S. Edmunds.....................  43     Vice President, Finance,
                                             and Chief Financial Officer

William Housley.....................  44     Vice President of Oak, General
                                             Manager of Optical Storage Group

Simon Dolan.........................  41     Vice President of Oak, General
                                             Manager of Imaging Group

David J. Power......................  43     Vice President, General Counsel
                                             and Secretary

</TABLE>

     Mr. Sohn joined the Company as President and Chief Executive Officer in
     --------
February 1999. He has also been a Director of the Company since January 1998.
Prior to joining the Company, and since January 1993, Mr. Sohn


                                      16

<PAGE>   17

was employed by Quantum Corporation, most recently as President of its Hard
Drive Business. From August 1983 to January 1993, he acted as Director of
Marketing at Intel Corporation. Mr. Sohn currently serves on the Board of
Directors of PLX Corporation, Inc. He holds a B.S. in electrical engineering
from the University of Pennsylvania and an M.S. (M.B.A) from Massachusetts
Institute of Technology.

     Mr. Edmunds joined the Company as Vice President of Finance and Chief
     -----------
Financial Officer in January 2000. For a two year period prior to joining Oak,
he served as Corporate Controller and Director of Internal Audit at Electronics
for Imaging ("EFI") in Foster City, California. In addition, he spent 11 years
with Tandem Computers where his last position was VP of Tandem Computers Credit
Corporation. Previously, Mr. Edmunds was a C.P.A. for seven years with Coopers
& Lybrand in both San Francisco and San Jose. Mr. Edmunds holds a B.S. degree
in Business Administration from the University of California.

     Mr. Housley joined the Company as General Manager of the Optical Storage
     -----------
Group in March 1999. Prior to joining Oak, he was Director of Business
Operations at Motorola's Semiconductor Products Sector in Austin, Texas. In
addition, he was Vice President of Motorola's Mass Storage Controller Division.
Mr. Housley holds a B.S. Electronics (Computer Science and Digital emphasis)
from Northeastern State University, Tahlequah, Oklahoma.

     Mr. Dolan became Vice President and General Manager of Oak's Imaging Group
     ---------
in April 2000. He joined Oak as Vice President of Corporate Marketing and
Strategy in October 1999. Before joining Oak, Mr. Dolan was VP of Marketing at
LSI Logic's Consumer Division. Mr. Dolan spent 11 years at LSI Logic in the
U.S., Europe, and Asia. Before that he was VP of Strategic Marketing for LSI's
products group, and VP of Marketing for LSI Logic Europe PLC. Mr. Dolan held
roles in product marketing, field applications, and engineering at Inmos
Corporation before joining LSI in 1988. A native of the UK, Mr. Dolan has
degrees from the Universities of London and Oxford.

     Mr. Power joined the Company as Vice President, General Counsel and
     ---------
Secretary in July of 2000. Prior to joining the Company, he was Vice President,
General Counsel and Secretary for inSilicon Corporation, a semiconductor IP
company that was formed as a subsidiary of Phoenix Technologies Ltd. and spun
off in an IPO in March of 2000. Power holds a B.S. in Engineering from Arizona
State University and a J.D. from The John Marshall Law School in Chicago,
Illinois.


Employees
---------

     As of June 30, 2000, the Company had 513 full-time employees. The Company
believes that its future performance will depend, in part, on its ability to
continue to attract and retain qualified technical and management personnel,
particularly highly skilled design engineers and software programmers involved
in new product development, for whom competition is intense. The Company's
employees are not represented by any collective bargaining unit and the Company
has never experienced a work stoppage. The Company believes that its employee
relations are good.


ITEM 2.     PROPERTIES

The Company's executive offices and its principal marketing, sales and product
development operations are located in approximately 60,000 square feet of
leased space in Sunnyvale, California under a noncancelable operating lease
that expires in December 2001. The Company owns a portion of a building in
Taipei, Taiwan, and leases facilities, primarily for sales, product
development, and technical support, in Andover, Massachusetts; Tokyo, Japan;
Bristol, England; Munich, Germany; Shenzhen, China; and Seoul, Korea.
Subsequent to fiscal year-end, the Company moved it's two existing workforces
in the Boston area into one 82,000 square feet leased facility in Woburn,
Massachusetts primarily for sales, product development, technical support and
administrative functions. Approximately 8,900 square feet of that lease has
been sublet to a third party until September 2003. As a result of the new
Woburn facility, the Company has already released it's 62,000 square foot
facility in Burlington Massachusetts and is currently seeking to either release
or early terminate its other existing lease covering 33,000

                                      17

<PAGE>   18


square feet in Andover, Massachusetts. The Company believes its existing
facilities will be adequate to meet its requirements for at least the next
fiscal year.


ITEM 3.     LEGAL PROCEEDINGS

     The Company and various of its current and former officers and directors
are parties to a consolidated class action lawsuit filed on behalf of all
persons who purchased or acquired the Company's common stock (excluding the
defendants and parties related to them) for the period July 27, 1995 through
May 22, 1996. This state court proceeding, designated IN RE OAK TECHNOLOGY
SECURITIES LITIGATION, Master File No. CV758510 was filed in Santa Clara County
Superior Court in Santa Clara, California. The lawsuit originally named as
defendants several of the Company's venture capital fund investors, two of its
investment bankers and two securities analysts. The plaintiffs alleged
violations of California securities laws and statutory deceit provisions as
well as breaches of fiduciary duty and abuse of control. The plaintiffs sought
unspecified monetary damages. After several rounds of demurrers, the court
dismissed all claims except the California Corporations Code Sections
25400/25500 cause of action against the Company, four officers and the
Company's investment bankers and securities analysts.

     On July 16, 1998, the court provisionally certified a national class of
all persons who purchased the Company's stock during the class period. The
class was provisionally certified with the order held in abeyance pending
resolution of the question of whether a nationwide class may bring a California
Corporations Code Sections 25400/25500 claim. This issue was resolved in favor
of allowing such nationwide class actions by the California Supreme Court, Case
No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES
LITIGATION appeal by the California Supreme Court. On August 5, 2000 the court
granted Company's motion for summary judgment and entered judgment in favor of
the Company. The plaintiffs have filed a notice of their intent to appeal the
court's decision. Based on its current information, the Company believes this
suit to be without merit and will defend its position vigorously. Although it
is possible the court's ruling may be overturned on appeal and the Company may
incur a loss upon an adverse conclusion of these claims, an estimate of any
such loss cannot be made.

     Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE
OAK TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit, which
asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the above described class
actions The plaintiffs are seeking monetary damages, equitable relief and an
accounting for the defendants' sales of shares of the Company's common stock.
Based on its current information, the Company believes the suits to be without
merit and will defend its position vigorously. Although it is reasonably
possible the Company may incur a loss upon conclusion of these claims, an
estimate of any such loss cannot be made.

     If any of the above pending actions are decided adversely to the Company,
it would likely have a material adverse affect on the Company's financial
condition and results of operations.

     On July 21, 1997, the Company filed a complaint with the ITC based on the
Company's belief that certain Asian companies were violating U.S. trade laws by
the unlicensed importing or selling of certain CD-ROM controllers that
infringed one or more of the Company's United States patents. The complaint
seeks a ban on the importation into the United States of the named respondent's
infringing CD-ROM controllers or products containing such infringing CD-ROM
controllers. A formal investigative proceeding was instituted by the ITC
(Investigation No. 337-TA-401) on August 19, 1997, naming as respondents:
Winbond Electronics Corporation (Winbond); Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia
Sendirian Berhad; and Wearnes Peripheal International (Pte.).

     On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and

                                      18

<PAGE>   19


5,581,715 and the Company obtained a nonexclusive, royalty-free license to
several Winbond patents. The settlement agreement provided that the parties
would jointly seek termination and dismissal of investigation No. 337-TA-401 as
to Winbond and its four affiliated companies: Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia
Sendirian Berhad; and Wearnes Peripheal International (Pte.). On April 15,
1998, Investigation No. 337-TA-401 was ordered terminated as to all parties.

     As originally filed with the ITC, the Company's complaint also identified
as proposed respondents: United Microelectronics Corporation (UMC); Lite-On
Group; Lite-On Technology Corp.; Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. Prior to the ITC's institution of the formal investigation
proceeding, the Company and UMC entered into a settlement agreement, effective
July 31, 1997, pursuant to which UMC agreed to cease and desist the manufacture
and/or importation into the United States of its specified CD-ROM controllers,
except under certain limited conditions which expired on January 31, 1998. The
settlement agreement additionally provided for the withdrawal of the Company's
ITC complaint against UMC and the above-named Lite-On and Behavior Tech
companies. In September 1997, October 1997, February 1998 and April 1998, the
Company received $2.6 million, $4.7 million, $0.7 million and $2.6 million,
respectively, pursuant to this settlement. Proceeds from the settlement were
recorded as miscellaneous income and included in nonoperating income for the
periods ended September 30, 1997, December 31, 1997, March 31, 1998 and June
30, 1998, respectively.

     On October 27, 1997, the Company filed a complaint in the United States
District Court, Northern District of California against UMC for breach of
contract, breach of the covenant of good faith and fair dealing and fraud based
on UMC's breach of the settlement agreement arising out of the ITC action, Case
No. C-97-20959. Together with the filing of the complaint, the Company filed a
motion for a preliminary injunction against UMC, seeking to enjoin UMC from
selling the CD-ROM controllers that were the subject of the ITC action and
related settlement agreement, through or to a UMC-affiliated, Taiwanese entity
called MediaTek. On February 23, 1998, the federal court judge denied the
Company's request for a preliminary injunction based on the court's findings
that there was no evidence that UMC was presently engaged in the manufacture of
CD-ROM controllers or other products covered by the settlement agreement. On
December 24, 1997, UMC answered the Company's complaint and counterclaimed by
asserting causes of action for recission, restitution, fraudulent concealment,
mistake, lack of mutuality, interference and declaratory judgment of non-
infringement, invalidity and unenforceability of the Oak patent that was the
subject of the original ITC action filed against UMC. The Company believes
these counterclaims to be without merit and will vigorously defend its patent.
Both the Company and UMC seek compensatory and punitive damages. In addition,
the Company seeks permanent injunctive relief. On June 11, 1998, this case was
consolidated for all purposes with a related case brought against the Company
by MediaTek (described below) under Case No. C-97-20959. On the same date,
pursuant to UMC's request, the federal court judge ordered the consolidated
action stayed under 28 U.S.C. Section 1659, based on the judge's conclusion
that the civil action involves the same issues involved in Investigation No.
337-TA-409 before the International Trade Commission, initiated by Oak
(described below). The stay was to be lifted upon final resolution of
Investigation No. 337-TA-409; however, the judge has ordered that the
consolidated action continue stayed pending the resolution of the parties
appeal of the ITC ruling to the Federal Circuit Court of Appeals. (Described
below.)

     In a related action to the lawsuit that was commenced by the Company
against UMC (described above),  on December 19, 1997, MediaTek, a UMC
affiliated, Taiwanese entity, filed a complaint in the United States District
Court, Northern District of California, against the Company for declaratory
judgment of non-infringement, invalidity and unenforceability of the Oak patent
that was the subject of the original ITC action against UMC, and intentional
interference with prospective economic advantage, Case No. C-97-21126. MediaTek
seeks compensatory damages of not less than $10 million and punitive damages.
The Company filed its answer on January 8, 1998, denying all the allegations.
The Company believes the suit to be without merit and will vigorously defend
its patent. On June 11, 1998, this case was consolidated for all purposes with
a related case brought by the Company against UMC (described above) under Case
No. C-97-20959. On the same date, pursuant to UMC's request, the federal court
judge ordered the consolidated action stayed under 28 U.S.C. Section 1659,
based on the judge's conclusion that the civil action involves the same issues
involved in Investigation No. 337-TA-409 before the International Trade
Commission, initiated by Oak (described below). The stay was to be lifted upon
final resolution of

                                      19

<PAGE>   20

Investigation No. 337-TA-409; however, the judge has ordered that the
consolidated action continue stayed pending the resolution of the parties
appeal of the ITC ruling to the Federal Circuit Court of Appeals. (Described
below.)

     On April 7, 1998, the Company filed a new complaint with the ITC alleging
that five Asian companies are violating U.S. trade laws by the unlicensed
importing or selling of CD-ROM drive controllers that infringe a United States
patent owned by the Company. The Company's complaint is asserted against United
Microelectronics Corp., MediaTek, Inc., Lite-On Group, Lite-On Technology Corp.
and AOpen, Inc. In its complaint, the Company requests the ITC to investigate
the five above-named companies and to enter an order barring imports into the
United States of their allegedly infringing CD_ROM controllers and products
containing them, including CD-ROM drives and personal computers. A formal
investigative proceeding was instituted by the ITC (Investigation No. 337-TA-
409) on May 8, 1998 naming as respondents United Microelectronics Corp.,
MediaTek, Inc., Lite-On Technology Corp. and AOpen, Inc. The following
respondents, all Taiwanese drive manufacturers, were later added to the
proceeding pursuant to an Initial Determination by the Administrative Law Judge
(ALJ) supervising the Investigation following a motion brought by the Company
on August 6, 1998 to add these respondents: Actima Technology Corp., ASUSTek
Computer, Inc., Behavior Tech Computer Corp., Delta Electronics, Inc. Momitsu
Multi Media Technologies, Pan-International Industrial Corp. and Ultima
Electronics Corp. On August 28, 1998, the ALJ entered an Initial Determination
that the investigation be terminated as to respondent UMC. On September 4,
1998, the Company filed a petition with the Commission for review of the
Initial Determination. On October 7, 1998, the Commission reversed the Initial
Determination of the ALJ as the Commission determined that the Company's
complaint against UMC does state an unfair trade practices claim under Section
337 of the Tariff Act. On December 23, 1998, the ALJ issued another Initial
Determination terminating the investigation as to respondent UMC for a second
time. On December 31, 1998, the Company filed a petition with the Commission
for review of the Initial Determination. On February 3, 1999, the Commission
reversed the Initial Determination of the ALJ for a second time on the grounds
that the Company's complaint against UMC does state an unfair trade practices
claim under Section 337 of the Tariff Act. On May 10, 1999, the ALJ issued
another Initial Determination terminating the investigation as to respondent
UMC for a third time, finding that UMC's activities were licensed. On May 17,
1999, the Company filed a petition with the Commission for review of the
Initial Determination and on June 28, 1999, the Commission determined to review
the Initial Determination.

     Trial before the ALJ as to all respondents except UMC commenced on January
11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ entered an
Initial Determination that no unfair trade practices were committed by Mediatek
under Section 337 of the Tariff Act. On May 24, 1999, the Company filed a
petition requesting the Commission to review the Initial Determination and on
June 28, 1999 the Commission determined to review it. On September 27, 1999,
the Commission affirmed the ALJ's finding that there were no unfair trade
practices committed by MediaTek under Section 337 of the Tariff Act as the
Commission determined that there was no infringement of the Company's US Patent
No. 5,581,715. On this same date, the Commission also reversed the ALJ's
findings that the Company's patent was invalid and unenforceable and held that
the Company's US Patent No. 5,581,715 was valid and enforceable. The Commission
took no position on the ALJ's Initial Determination terminating UMC from the
investigation.

     On February 24, 2000, the Company appealed the Commission's ruling that no
unfair trade practices were committed by MediaTek under Section 337 of the
Tariff Act to the Federal Circuit Court of Appeals. No  decision is expected to
be rendered by the Federal Circuit of Appeals for twelve to eighteen months
from the time of appeal. In connection with this proceeding, the Company will
continue to incur legal fees and other expenses.

     If any of the above pending actions with respect to UMC and MediaTek are
decided adversely to the Company, it would likely have a material adverse
affect on the Company's financial condition and results of operations.


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

     None.


                                      20

<PAGE>   21


                                   PART II


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

     The Company's Common Stock trades on the Nasdaq National Market under the
symbol OAKT. The following table indicates the range of the high and low
closing prices as reported by Nasdaq for the past eight fiscal quarters and
June 30, 2000.

<TABLE>
<CAPTION>
                                        High                 Low
                                        ----                 ---
<S>                                   <C>                 <C>
Fiscal 1999
            First Quarter............  $  4.625            $  2.000
            Second Quarter...........  $  4.813            $  1.875
            Third Quarter............  $  4.188            $  2.969
            Fourth Quarter...........  $  4.563            $  2.906

Fiscal 2000
            First Quarter............  $  5.688            $  3.625
            Second Quarter...........  $ 10.438            $  4.438
            Third Quarter............  $ 19.938            $  8.813
            Fourth Quarter...........  $ 22.875            $ 11.875

</TABLE>


     The reported last sale price of the Company's Common Stock on the Nasdaq
National Market on September 22, 2000 was $29.0625. The approximate number of
holders of record of the shares of the Company's Common Stock was 263 as of
September 22, 2000.  This number does not include stockholders whose shares are
held in trust by other entities. This number does not include shareholders
whose shares are held in trust by other entities. The actual number of
shareholders is greater than this number of holders of record.  The Company
estimates that the number of beneficial shareholders of the shares of the
Company's Common Stock as of September 22, 2000 was approximately 16,600.

     The Company has paid no cash dividends on its Common Stock since its
incorporation and anticipates that for the foreseeable future it will continue
to retain any earnings for use in its business. In addition, the Company's bank
arrangements currently prohibit the Company from issuing cash dividends.


                                      21

<PAGE>   22


ITEM 6.  SELECTED FINANCIAL DATA

                    Oak Technology, Inc. and Subsidiaries

                     Selected Consolidated Financial Data
                     (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                               Year Ended June 30,
                                -----------------------------------------------
                                  2000      1999      1998      1997      1996
                                  ----      ----      ----      ----      ----
<S>                             <C>        <C>       <C>      <C>      <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................  $ 86,456  $ 71,051  $157,106 $167,395  $247,984
Gross profit..................    45,536    31,432    74,548   94,181   109,485
Operating income (loss).......   (61,109)  (61,946)   (9,104)  32,848    57,147
Net income (loss).............  $(32,862) $(50,669) $  5,947 $ 23,719  $ 37,133
Diluted income (loss)
   per share (1)..............  $  (0.71) $  (1.24) $   0.14 $   0.55  $   0.87
Shares used in diluted per
   share calculations (1).....    46,057    40,819    42,493   42,757    42,614


                                                  As of June 30,
                                -----------------------------------------------
                                  2000      1999      1998      1997      1996
                                  ----      ----      ----      ----      ----
<S>                             <C>        <C>       <C>      <C>      <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
  short-term investments......  $120,803  $133,203  $117,225 $145,269  $113,284
Working capital...............   137,277   150,936   144,314  168,168   134,686
Total assets..................   236,400   203,841   261,411  287,595   256,308
Long-term debt, excluding
  current portion.............        --         5        27    2,496     2,858
Total stockholders' equity....  $201,310  $189,422  $241,208 $238,697  $210,827

---------------------------
<FN>
(1) Computed on the basis described in Note 2 of Notes to Consolidated
    Financial Statements.
</FN>
</TABLE>

                                      22

<PAGE>   23


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


Except for the historical information contained herein, the matters discussed
in this Report on Form 10-K may be considered "forward-looking" statements
within the meaning of Section 27a of the Securities Act of 1933, as amended,
and Section 21e of the Securities Act of 1934, as amended. Such statements
include declarations regarding the intent, belief or current expectations of
the Company and its management. Such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances after the dates
hereof or to reflect the occurrence of unanticipated events. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are: (i) that the
information is of a preliminary nature and may be subject to further
adjustment, (ii) variability in the Company's quarterly operating results,
(iii) general conditions in the semiconductor industry, (iv) risks related to
pending legal proceedings, (v) development by competitors of new or superior
products or the entry of new competitors into the Company's markets, (vi) the
Company's ability to diversify its product and market base by developing and
introducing new products within designated market windows at competitive price
and performance levels, (vii) willingness of prospective customers to design
the Company's products into their products, (viii) availability of adequate
foundry capacity and access to process technologies, (ix) the Company's ability
to protect its proprietary information and obtain adequate access to third
party technology on acceptable terms, (x) risks related to use of independent
manufacturers and third party assembly and test vendors, (xi) dependence on key
personnel, (xii) reliance on a limited number of large customers, (xiii)
dependence on sales of CD-ROM and CD-RW controller products and the PC market,
(xv) risks related to international business operations, (xvi) ability of the
Company to maintain adequate price levels and margins with respect to its
products, (xvii) risks related to acquisitions, (xviii) the ability to attract
and retain qualified management and technical personnel and (xix) other risks
identified from time to time in the Company's reports and registration
statements filed with the Securities and Exchange Commission.


General
-------

     The Company designs, develops and markets high performance embedded
software and integrated semiconductor solutions to original equipment
manufacturers worldwide that serve the optical storage and digital imaging
markets.  The Company's products consist primarily of embedded software,
integrated circuits and supporting software and firmware to provide a complete
solution for customers, thereby enabling them to deliver cost effective,
powerful systems to end users for home and business use.  The Company's mission
is to be a leading solutions provider for the storage and distribution of
digital content.

     During fiscal 2000, the Company restructured its operations along its two
re-organized market-focused groups: the Optical Storage Group and the Imaging
Group. The Imaging Group comprises the Company's recent acquisition, Xionics
and its Pixel Magic subsidiary, serving the digital imaging equipment market.
The Company also disbanded its Consumer Group selling its broadband business
during fiscal 2000 to Conexant.

     In its press release regarding the results of operations for the fourth
quarter of fiscal 2000, the Company reported a pro forma net loss of $0.8
million, its tenth consecutive quarterly pro forma loss.  As presented in the
Company's press release, pro forma net loss excludes the effects of
restructuring charges, amortization of intangibles, acquired in process
technology and the effects of a gain on the sale of a business unit during
fiscal 2000. Low revenues and continued losses are primarily due to a product
transition in the Company's optical storage business, which historically has
accounted for approximately 80% of the Company's revenues.  Volume shipments of
its next generation CD-RW controllers are currently ramping and are expected to
increase as the Company's OEM customers achieve production volumes. However,
the Company cannot predict the product's ultimate level of customer acceptance,
product life or the impact of that acceptance or product life on future
operating results.

     The Company's quarterly and annual operating results have been, and will
continue to be, affected by a wide variety of factors that could have a
material adverse effect on revenues and profitability during any particular
period, including competitive pressures on selling prices, availability and
cost of foundry capacity and raw materials, fluctuations in yield, loss of any
strategic relationships, the Company's ability to introduce new products in
accordance with OEM design requirements and design cycles, new product
introductions by the Company's competitors and market acceptance of product
sold by both the Company and its customers. To date, Oak has not


                                      23

<PAGE>   24


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


experienced any material delays in its wafer deliveries from its primary
manufacturers.  However, with the current shortage of foundry capacity, which
is expected to continue throughout calendar 2000, there can be no assurance
that delays will not occur in the future.

     In addition, the Company's operating results are subject to fluctuations
in the markets for its customers' products, particularly the consumer
electronics and personal computer markets, which have been extremely volatile
in the past. The Company has devoted a substantial portion of its research and
development efforts in recent quarters to developing chips used in DVD systems,
CD-RW drivers and inkjet multi-function peripherals.  The Company's DVD, CD-RW,
and digital imaging products are subject to the new product risks described in
the preceding paragraph, including in particular the Company's ability to
timely introduce these products and the market's acceptance of them, which
could have a materially adverse effect on its operating results


Results Of Operations
---------------------

     The following table sets forth, as a percentage of net revenues, certain
consolidated statement of operations data for the periods indicated:

<TABLE>
<CAPTION>

                                                        June 30,
                                           ---------------------------------
                                             2000         1999         1998
                                             ----         ----         ----
<S>                                         <C>          <C>          <C>
Revenues:
  Product revenues......................     75.6%        91.4%        98.2%
  Software and other revenues...........     24.4          8.6          1.8
                                           ------       ------       ------
      Total revenues....................    100.0        100.0        100.0
                                           ------       ------       ------
Cost of revenues:
  Cost of product revenues (*)..........     52.9         58.6         52.5
  Cost of software and other revenues (*)    30.0         25.0         55.4
                                           ------       ------       ------
      Total cost of revenues............     47.3         55.8         52.5
                                           ------       ------       ------
Product gross margin (*)................     47.1         41.4         47.5
Software and other gross margin (*).....     70.0         75.0         44.6
                                           ------       ------       ------
      Total gross margin................     52.7         44.2         47.5
Research and development expenses.......     57.5         65.0         31.6
Selling, general and administrative
  Expenses..............................     39.2         49.4         19.7
Amortization of intangibles.............     13.6          7.0           --
Restructuring charge....................      1.5           --          1.1
Acquired in-process research and
  Development...........................     11.6         10.1          0.8
                                           ------       ------       ------
Operating loss..........................    (70.7)       (87.2)        (5.8)
Gain on sale of business unit...........     25.6           --           --
Non-operating income, net...............      7.1          7.8         10.2
                                           ------       ------       ------
(Loss) income before income taxes.......    (38.0)       (79.4)         4.5
Income taxes (benefit) expense..........       --         (8.1)         0.7
                                           ------       ------       ------
Net (loss) income.......................    (38.0)%      (71.3)%        3.8%
                                           ======       ======       ======

(*)  Note "Product" and "Software, service and other" Costs of Revenues and
     Gross Margins are expressed as a percentage of "Product" or "Software,
     service and other" revenues, respectively.  All other line items are
     expressed as a percentage of total revenues.



Fiscal 2000 Compared To Fiscal 1999
-----------------------------------

      Revenues.  Total revenues increased 21.7% to $86.5 million for fiscal
       --------
2000 compared to $71.1 million for fiscal year 1999.  The $15.4 million
absolute increase in revenues is comprised principally by a $25.3 million
increase in Imaging revenues offset by a decline in Optical Storage revenues of
$11.0 million.  The Imaging revenue

                                      24

<PAGE>   25


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

increase was attributable to both the inclusion of post-acquisition software
revenues from business operations acquired from Xionics from January 11, 2000,
the date the acquisition was completed, as well as a substantial year over year
increase in the revenues from sales of integrated semiconductors for the
digital imaging market. The decline in the Optical Storage segment revenues is
the result of a continuing decline during the first six months of fiscal 2000
in unit sales and average selling price ("ASP") of CD-ROM controllers in the
Optical Storage business segment compared to fiscal 1999. The decline was due
to a continuing loss of CD-ROM market share, the maturation of the CD-ROM
market and development delays in the Company's next-generation products.  This
trend was offset in the second half of fiscal 2000 by a strong increase in
Optical Storage revenues from the introduction of a new CD-RW product. In the
second half of fiscal 2000, Optical Storage revenues increased dramatically
from $3.6 million in the first six months, to $32.4 million for the second six
months of fiscal 2000. This increase was directly attributable to the Company's
newly introduced OTI 9790 8X CD-RW controller. Overall for the year, the
increase in Imaging revenues and the success of the OTI 9790 in the second half
of fiscal 2000 resulted in revenues reflecting a steady to slightly increasing
(2%) year-over-year growth rate based on the historical pro forma measurement
of revenue as outlined in footnote 10 to the financial statements.

     For fiscal years 2000, 1999 and 1998, sales to the Company's top ten
customers accounted for approximately 77%, 70% and 81%, respectively, of the
Company's net revenues. Two customers accounted for over 10% of revenues in
fiscal 2000: LG Electronics 26% and Hewlett Packard 16%. LG Electronics
represents 62% of the Optical Storage segment revenues and Hewlett Packard
represents 30% of the Imaging segment revenues. In fiscal 1999 Yamaha
Corporation accounted for 17% and Mitsumi Electronic Co. accounted for 10%. In
fiscal 1998 there were three customers in excess of 10%: Mitsumi Electronics
17%, LG Electronics 14% and NEC Home Electronics 10%. International sales,
principally to Japan and Korea amounted to approximately 75%, 86% and 92% of
the Company's net revenues in fiscal 2000, 1999 and 1998, respectively. See
Note 18 to the Consolidated Financial Statements.

     Gross Margin.  Product cost of revenues includes the cost of wafer
     ------------
fabrication, assembly and testing performed by third-party vendors and direct
and indirect costs associated with the procurement, scheduling and quality
assurance functions performed by the Company.

     Software and other cost of revenues consist of the costs of software
documentation as well as royalties that may be due to third parties and labor
associated with other smaller streams of revenue associated with nonrecurring
engineering services and OEM maintenance and support.

     Gross margins improved to 52.7% in fiscal 2000 from 44.2% in fiscal 1999.
These increases were primarily due to the higher volume of Imaging products
with higher average gross margins in the second half of  fiscal 2000 as a
result of the acquisition of Xionics. In addition, the Company experienced a
shift in semiconductor product mix with relatively more semiconductor coming
from Imaging and less from older Optical Storage products with declining ASP's.
This is what gives rise to the improvement in product gross margins from 41.4%
in fiscal 1999 to 47.1% in fiscal 2000.

     Gross margins for the Optical Storage segment was 42% for fiscal 2000 as
compared to 32% in fiscal 1999. This increase is primarily due to a shift in
product mix from predominantly older generation products with declining ASP's
to newer products with higher gross margins.

     Gross margin for the Imaging business segment was 68% for fiscal 2000,
compared to 69% for fiscal 1999 This was due to a shift in semiconductor
product mix and an expected level of price degradation on older semiconductor
imaging products offset by the inclusion of higher margin Xionics software and
other revenue halfway through the year.

     The Company's overall gross margin is subject to change due to various
factors, including, among others, competitive product pricing, yields, wafer
costs, assembly and test costs and product mix. The Company expects that ASPs
for its existing products will decline over time and that ASPs for each new
product will decline significantly over the life of the product. In addition,
given the extremely competitive nature of the optical storage market, the
Company believes that gross margins for new products in its optical storage
market may be lower than historical levels and that, as a result, gross margins
in general may decline in the future.

                                      25

<PAGE>   26


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

     Research and Development Expenses.  Research and development costs are
     ---------------------------------
expensed as incurred. Research and development expenses were $49.7 million and
$46.2 million, and expressed as a percentage of net revenues were 57.5% and 65%
in fiscal 2000 and 1999, respectively. The absolute dollar increase in research
and development spending for fiscal 2000 compared to fiscal 1999 was primarily
due to the inclusion of Xionics product development expenses in the second half
of the fiscal year, as offset somewhat by the divestiture and sale of the
Broadband business unit to Conexant which closed on January 18, 2000. The
increase in development spending as a percentage of revenues in fiscal 1999 was
largely due to the decline in the Company's revenue base, a trend that began to
reverse in fiscal 2000.

     Selling, General and Administrative Expenses.  Selling, general and
     --------------------------------------------
administrative ("S,G&A") expenses decreased 3% to $33.9 million in fiscal 2000
from $35.1 million in fiscal 1999. The decline is largely due to non-recurring
consulting expenses of $1.6 million and other litigation expenses incurred in
fiscal 1999 that did not recur in fiscal 2000. The decrease in SG&A expenses
due to a streamlining of the historical SG&A cost structure necessitated by the
continued decline in Optical Storage revenues in the first six months of fiscal
2000 was largely offset by increases caused by the acquisition of Xionics.

     Amortization of Intangibles and Acquired In-process Research and
     ----------------------------------------------------------------
Development. Acquisition-related charges include primarily the costs associated
-----------
with the acquisition of Xionics as well as certain other smaller acquisitions
in fiscal 2000.  During the third quarter of fiscal 2000 the Company completed
the acquisition of Xionics and charged $9.9 million to operations for in-
process research and development ("IPR&D"). Additionally, $45.8 million of the
purchase price was allocated to intangible assets and is being amortized to
operations on a straight-line basis over the next five years. Approximately
$5.9 million of the $11.8 million of intangible asset amortization recognized
during fiscal 2000 was related to the Xionics acquisition.

      On January 11, 2000, the shareholders of both the Company and Xionics
Document Technologies, Inc. (Xionics) approved a definitive acquisition
agreement.  Under the terms of the agreement, Oak issued approximately 9.5
million shares of its common stock and approximately $34.7 million in cash to
acquire all of the common stock of Xionics. The transaction has been accounted
for under the purchase method of accounting. The Company recorded a special
charge of approximately $9.9 million against earnings in the third fiscal
quarter of 2000 in order to write off the cost of in-process research and
development acquired in the merger. In addition to the $9.9 million charge
taken, approximately $45.8 million (representing the fair value of net
intangible assets acquired in the merger) has been recorded as intangible
assets on the Company's balance sheet and amortized over three to five years.

     At the acquisition date, Xionics had several in-process research and
development projects in each of its product groups: languages, drivers, MFP's
and its new complementary product for a Tandem copy/print engine. In each
product group there were projects that had not yet achieved technological
feasibility. As image processing represents a very specialized market, it is
unlikely that Xionics' in process technology could be successfully deployed in
alternative market applications. Further, it was determined that there was
significant technological risk and substantial development expenses relating to
each of the products under development. As a result, the Company took a $ 9.9
million charge against earnings in fiscal 2000 in order to reflect an
allocation of the purchase price associated with the value of the in process
research and development which, due to it's uncertain future value at the date
of acquisition, could not be considered an investment in an asset.

     The valuation of the acquired in-process research and development used by
the Company in making the determination as to the amount of in-process research
and development expense was supported by valuation studies. The estimated value
of in-process research and development was derived using the "Income Approach",
which values an asset based on future cash flows that could potentially be
generated by the asset over its estimated useful life. The future cash flows
were discounted to their present value utilizing a discount rate of 14%. The
amounts of the purchase price technology assigned to the fair values of in-
process research and development and purchased technology represent
management's best estimate. The Company did not anticipate any material changes
from historical pricing, margins and expense levels used in its valuation
assumptions.

     Restructuring Charge. During the third quarter of fiscal 2000 the Company
     --------------------
accrued $1.3 million as restructuring charges primarily related to the
abandonment of its leased facility in Andover, Massachusetts.  The


                                      26

<PAGE>   27


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

leased facility had 69 months remaining, however the company had negotiated a
lease buyout. These costs will be paid in fiscal 2001.

     Non-operating Income. During the third quarter of fiscal 2000, the Company
     --------------------
sold its broadband business unit located in the United Kingdom for $24.9
million in cash and stock and recorded a non-operating gain of $22.1 million
related to the sale. Interest income at $6.6 million is higher than the $5.6
million earned in fiscal 1999 due primarily to higher interest rates available
in the market during fiscal 2000.

     The Company also experienced a net loss of $1.9 million on its equity
method investments. This was the result of several factors including a
bankruptcy by one of its older investees and a permanent impairment reserve
against another investment. These losses were offset by a $1.2 million gain on
the sale of an investment in Wavemark, which the Company had indirectly
acquired through the acquisition of Xionics. The investment was valued at fair
market value on the date of acquisition. Subsequent to the acquisition,
significant economic events occurred that resulted in an increase in the fair
value of the investment. The investment was sold prior to year-end, with the
Company recording a gain of $1.2 million.

     Income Taxes.  Management believes that sufficient future taxable income
     ------------
may not be generated in order to realize all the Company's deferred tax assets.
Accordingly, during fiscal 1999 a full valuation allowance against deferred tax
assets was established. Given this, no income tax benefit was recognized with
respect to operating losses for fiscal 2000.


Fiscal 1999 Compared To Fiscal 1998
-----------------------------------

     Revenues.  Total Revenues decreased 55% to $71.1 million for fiscal 1999
     --------
compared to $157.1 million for fiscal 1998. Approximately two-thirds of the
revenue decrease was attributable to a decrease in unit sales of CD-ROM
controllers in the Optical Storage business segment compared to fiscal 1998,
with the remainder of the decrease due to a decline in the average selling
price ("ASP") of the CD-ROM controllers. The decrease in unit sales was due to
a loss of CD-ROM and CD-RW market share, the maturation of the CD-ROM market,
development delays in the Company's next-generation CD-ROM and CD-RW products,
and to a lesser extent, economic downturns in the Asian markets to which a
large majority of the Company's products are sold. Overall, sales of optical
storage products, which accounted for 82% of the Company's revenues in the
prior fiscal year, declined 64% in fiscal year 1999.

     Revenues for the Digital Imaging Equipment business segment were $20.9
million for fiscal 1999, representing a 7.7% increase over the $19.4 million
reported in fiscal 1998. This increase was primarily due to increase revenues
from the segment's resolution enhancement products. Net revenues for the
Consumer business segment were $3.2 million for fiscal 1999, representing a
34.6% decrease from the $4.9 million reported in fiscal 1998. This decrease was
primarily due to decreased revenues from the segment's VCD decoder products.

     For fiscal 1999 and 1998, sales to the Company's top ten customers
accounted for approximately 70% and 81%, respectively, of the Company's net
revenues. Two customers accounted for over 10% of revenues in fiscal 1999,
compared to three customers in fiscal 1998. International sales, principally to
Japan, Korea, Singapore, and Belgium accounted for approximately 86% and 92% of
the Company's net revenues in fiscal 1999 and 1998, respectively. See Note 18
of Notes to Consolidated Financial Statements.

     Included in net revenues for fiscal 1999 and fiscal 1998 were $3.5 million
and $1.2 million, respectively, of nonrefundable technology license fees and
royalties.

     Gross Margin.  Cost of revenues includes the cost of wafer fabrication,
     ------------
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company.

     Software and other cost of revenues consist of the costs of royalties that
may be due to third parties and labor associated with other smaller streams of
revenue associated with nonrecurring engineering services and OEM maintenance
and support.

                                      27

<PAGE>   28


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

     The Company's gross margin decreased to 44.2% in fiscal 1999 as compared
to 47.5% in fiscal 1998. The decrease in gross margin is primarily the result
of a decrease in ASPs for the Company's CD-ROM controller products in the
Optical Storage business segment, which was only partially offset by a decrease
in the Company's unit cost for the same products and an increase of higher
margin royalty revenues. Additionally, fixed cost based operations costs
included in cost of goods sold, which were relatively flat on a dollar basis,
became higher as a percentage of revenues due to the significant decline in
sales volumes.

     Gross margins for the Digital Imaging Equipment business segment were
68.9% for fiscal 1999, representing a decrease from 75.3% gross margin reported
in fiscal 1998. Gross margins for the Consumer business segment were 22.3% for
fiscal 1999, representing a slight increase from 21.2% gross margin reported in
fiscal 1998.

     Gross margin in fiscal 1999 includes a $2.8 million provision for
potential forfeiture of certain foundry deposits with Chartered Semiconductor.
See Footnote 12 to the Consolidated Financial Statements. Gross margin in
fiscal 1998 included the impact of a charge to cost of revenues related to
increases in inventory reserves of $3.3 million recorded during the year as
well as a $3.5 million charge related to the discontinuation of the graphics
and audio/communications businesses. Excluding the impact of these inventory
and foundry-related charges, gross margin would have been 48.2% in fiscal 1999
and 51.8% in fiscal 1998.

     The Company recorded inventory reserves of approximately $3.3 million and
$2.6 million in fiscal 1999 and 1998, respectively. The reserves represented
write-downs of excess and obsolete products, primarily servo chipsets for the
VideoCD market in Asia. These write-downs were the result of management's
assessment that the market for these products had either significantly declined
or no longer exists.

     Research and Development Expenses.  Research and development costs are
     ---------------------------------
expensed as incurred. Research and development expenses were $46.2 million and
$49.7 million, and expressed as a percentage of net revenues were 71.9% and
31.6% in fiscal 1999 and 1998, respectively. The absolute dollar increase in
research and development spending for fiscal 1999 compared to 1998 was
primarily due to the hiring of additional technical personnel. Research and
development expenses increased significantly as a percentage of net revenues
for fiscal 1999. This increase was due to the significant decrease in the
Company's net revenues compared to fiscal 1998.

     Selling, General and Administrative Expenses. S,G&A expenses increased 14%
     --------------------------------------------
to $35.1 million in fiscal 1999 from $30.9 million in fiscal 1998. During the
second quarter of fiscal 1999, the Company incurred approximately $1.6 million
of consulting fees and other expenses related to the evaluation of a buyout
proposal from Gold Acquisition Group. Additionally, legal expenses related to
the complaint the Company filed with the International Trade Commission ("ITC")
on April 7, 1998 and additional litigation were higher in fiscal year 1999
compared to fiscal year 1998. See "Legal Proceedings". The increase in S,G&A
expenses from fiscal 1998 to 1999 was also due to the hiring of additional
management and administrative personnel since the prior year periods, and
associated expenses. S,G&A expenses increased significantly as a percentage of
net revenues for fiscal 1999 compared to fiscal 1998 due primarily to the
significant decrease in the Company's net revenues.

     Amortization of Intangibles and Acquired in-process Research and
     ----------------------------------------------------------------
Development. Acquisition-related charges include the costs associated with the
-----------
acquisitions of Viewpoint and XLI in fiscal 1999 and the acquisition of certain
assets of ODEUM in fiscal 1998. These costs also include amortization of
intangibles, in this case purchased technology related to the ODEUM, ViewPoint
and XLI acquisitions made in the fourth quarter of fiscal 1998 and first
quarter of fiscal year 1999 See Note 10 of Notes to Consolidated Financial
Statements.


Viewpoint Technology
--------------------

     In the first quarter of fiscal year 1999, the Company acquired ViewPoint,
a privately held development stage company focused on developing high
performance solutions for the growing compact disc-read write market,
specifically a controller device to support high encoding speeds for next-
generation CD-RW drives, which was its only technology. At the date of
acquisition, ViewPoint had yet to introduce its first product in the market
place and was in the process of developing its VPT8008 product, but still
required key firmware, drivers, design changes and


                                      28

<PAGE>   29


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

silicon testing prior to achieving technological feasibility. ViewPoint's
technology was only valuable when integrated into the Company" server
technology and physically redesigned to add significant key features. Based on
discussions with ViewPoint technical personnel, it was determined that there
were no alternative uses for their CD-RW technology and that approximately $2.6
million in additional engineering and development expenses would be required to
bring a product to market in fiscal year 2000. The ViewPoint technology has
enabled the Company to develop a CD-RW controller product, the 9790, which will
support up to 32x read and 8x write speeds. Management believes that this
product could provide in excess of 50% of the Company's revenues in FY2001. The
Company has commenced development of derivative products incorporating
Viewpoint's base technology.

     The Company paid $10.1 million in cash for all the outstanding shares of
ViewPoint. The purchase method of accounting was used to record the acquisition
and approximately $4.8 million of the purchase price was allocated to in-
process research and development, which was charged to operations in the
quarter ended September 30, 1998. The remaining costs of the acquisition were
recorded on the Company's balance sheet. Approximately $4.4 million of the
purchase price was allocated to purchased technology and other intangible
assets and is being amortized to operations on a straight-line basis over three
years, and $0.9 million was allocated to cash, fixed assets and other tangible
assets.

     The valuation of the acquired in-process research and development used by
the Company in making the determination as to the amount of in-process research
and development expense was supported by valuation studies. The estimated value
of in-process research and development was derived using the "Income Approach",
which values an asset based on future cash flows that could potentially be
generated by the asset over its estimated useful life. The future cash flows
were discounted to their present value utilizing a discount rate of 28%. The
amounts of the purchase price technology assigned to the fair values of in-
process research and development and purchased technology represent
management's best estimate. The Company did not anticipate any material changes
from historical pricing, margins and expense levels in its valuation
assumptions.


     XLI
      ---

     During the first quarter of fiscal 1999, the Company acquired Xerographic
Laser Images Corporation (XLI), a provider of print quality enhancement
technology for the digital office equipment market. At the date of acquisition,
XLI had developed one product, the XLI-2050 image enhancer, and was also in the
process of developing other high-performance products for digital copiers,
multi-function devices, scanners and display markets. The Company acquired XLI
in order to gain access to imaging technology and expertise that would
complement its own image process solutions. XLI had a number of products in the
development stage, none of which had reached the level of prototype or working
sample. Three primary projects in process at the date of acquisition were 1)
the 2050CP which enables printers to have more precise dot positioning and
modulation and thereby, more accurately apply the color on the paper; 2) the
1016P, a black and white printer enhancement chip; and 3) a family of products
for the emerging flat panel display market. Based on discussions with XLI's
technical personnel, it was determined that there were no alternative uses for
their specific technologies outside of the digital office market and that
approximately $1.0 million in additional engineering and development expenses
would be required to bring in-process products to market beginning in fiscal
year 2000. The Company expected that about 20% of its future revenues could be
derived from products integrating XLI's technologies. However, subsequent to
the acquisition the Company has experienced some development delays and has
adjusted future estimates accordingly. The Company's management does not
believe that failure to complete in-process products will have a material
adverse impact on the Company's business, results of operations or financial
condition.

     The Company paid $3.7 million in cash for all the outstanding shares of
XLI. The purchase method of accounting was used to record the acquisition and
approximately $2.4 million was allocated to in-process research and
development, which was charged to operations in the quarter ended September 30,
1998. The remaining costs of the acquisition were recorded on the Company's
balance sheet and are being amortized to operations on a straight-line basis
over three years.

     In addition to the purchase price, XLI shareholders have the right to
receive additional payments subject to the achievement of certain milestones by
XLI. Under the terms of the merger agreement, revenue levels from products
utilizing XLI's technologies in excess of a base amount of $3.7 million each
year of a three year period

                                      29

<PAGE>   30


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

ending December 31, 2000 must be attained for XLI to receive additional
contingency payments, up to the maximum amount of $10.3 million. To date, these
milestones have not been achieved and no additional payments have been made to
XLI shareholders. Such payments would be recorded on the Company's balance
sheet as an adjustment to the purchase price of XLI.

     The valuation of the acquired in-process research and development used by
the Company in making the determination as to the amount of in-process research
and development was supported by valuation studies. The estimated value of in-
process research and development was derived using the "Income Approach". The
future cash flows were discounted to their present value utilizing a discount
rate of 25%. The amounts of the purchase price technology assigned to the fair
values of in-process research and development and purchased technology
represent management's best estimate. The Company did not anticipate any
material changes from historical pricing, margins and expense levels in its
valuation assumptions.


     ODEUM
     -----

     In the fourth quarter of fiscal year 1998, the Company acquired certain
assets of ODEUM Microsystems, Inc. ("ODEUM"), a subsidiary of Hyundai
Electronics America. With the acquisition, the Company acquired an integrated
MPEG-2 audio/video decoder and transport demultiplexor and a DVB-S compliant
QSPK demodulator as well as a core group of hardware and software engineers.
The products acquired from ODEUM are used predominantly in "free to air"
satellite and cable set-top boxes for MPEG-2 encoded digital television
broadcasting and therefore, represented the Company's first step in expanding
its Consumer business segment and serving the digital television market. The
Company has recently introduced its first products into the set-top broadcast
market incorporating ODEUM's technologies.

     Based on discussions with ODEUM's technical personnel, it was determined
that there were no alternative uses for their specific technologies outside the
digital broadcast market and that approximately $3.0 million in additional
engineering and development expenses would be required to bring in-process
products to market beginning in fiscal year 2000. The Company expected that
approximately 15% of its future revenues could be derived from products
integrating ODEUM's technologies.

     The assets OF ODEUM were acquired for $4.1 million in cash. The
acquisition was accounted for using the purchase method of accounting and the
product acquired was integrated into the Company's product offerings from the
date of acquisition. Approximately $1.3 million of the purchase price was
allocated to in-process research and development with the remaining amount was
allocated to purchased technology. The estimated value of in-process research
and development was derived using the "Income Approach". The future cash flows
were discounted to their present value utilizing a discount rate of 35%. The
amounts of the purchase price technology assigned to the fair values of in-
process research and development and purchased technology represent
management's best estimate. The Company did not anticipate any material changes
from historical pricing, margins and expense levels in its valuation
assumptions.

     Restructuring Charges.  During 1998, the Company discontinued its graphics
     ---------------------
and audio/communications businesses and incurred a charge to operations of
approximately $1.8 million related to these discontinued businesses. The $1.8
million charge consisted of $1.0 million related to a write-off of prepaid
royalties, approximately $0.6 million for severance pay and $0.2 million for
miscellaneous charges. See Note 17 of Notes to Consolidated Financial
Statements.

     Non-operating Income.  For fiscal 1999, non-operating income, net,
     --------------------
consisted primarily of net interest income of $5.6 million. For fiscal 1998,
non-operating income, net, included net interest income of $7.4 million, net
foreign currency exchange losses of $2.5 million and approximately $10.6
million related to the settlement agreement between the Company and United
Microelectronics Corporation in connection with a complaint the Company filed
with the ITC on July 21, 1997. The decrease in net interest income was due
primarily to a reduction in the Company's invested cash balance for most of
fiscal 1999 (prior to the receipt of the proceeds of the sale of the UICC
investment discussed in Note 12 of Notes to Consolidated Financial Statements).
The Company recorded a small net foreign currency exchange gain in fiscal 1999,
due to strengthening of the Japanese yen as compared to the exchange loss in
fiscal 1998.

                                      30
<PAGE>   31


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

     Income Taxes.  The effective tax benefit rate for fiscal 1999 was 10.2%.
     ------------
The benefit rate was significantly less than statutory rates due to limitations
on net operating loss carryback benefits available to the Company, as well as
an increase to the valuation allowance against the Company's deferred tax
asset. The Company's effective tax rate was 15.0% in fiscal 1998, which was
lower than statutory rates as a result of research and development credits
earned by the Company becoming a higher percentage of the Company's' lower
taxable income. See Note 11 of Notes to Consolidated Financial Statements.


Recently Issued Accounting Standards
------------------------------------

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which will be effective for the Company's fiscal year 2001. SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company has assessed the impact of this new
statement and does not expect the adoption of SFAS No. 133 to have a material
effect on its consolidated financial position or results of operations.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," as amended by SAB 101A and 101B, which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies.  The Company is currently assessing the impact of
this new Staff Accounting Bulletin on its consolidated financial position,
liquidity and results of operations.

     In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25. FIN 44 clarifies certain elements of APB
Opinion No. 25. Among other issues, this interpretation clarifies: the
definition of employee for purposes of applying APB Opinion No. 25, the
criteria for determining whether a plan qualifies as non-compensatory, the
accounting consequences of various modifications to the terms of a previously
fixed stock option award, and the accounting for an exchange of stock
compensation in a business combination. This interpretation is effective for
the Company in fiscal 2001. The Company does not believe that the adoption of
this interpretation will have a material impact on the Company's financial
position or results of operations.


Liquidity and Capital Resources
-------------------------------

     Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt.  The Company's principal sources of
liquidity as of June 30, 2000 consisted of approximately $120.8 million in
cash, cash equivalents and short-term investments.  The Company also has
approximately $8.7 million in lines of letters of credit with Taiwanese
financial institutions, all of which were available at June 30, 2000.  The
Company had outstanding commitments to purchase capital equipment of
approximately $1.2 million at June 30, 2000.  Additionally, the Company
repurchased 381,000 shares of its common stock during the first four months of
fiscal 2000, for a total of approximately  $1.8 million.

     The Company's working capital decreased by $14.3 million to $136.6 million
as of June 30, 2000 from $150.9 million as of June 30, 1999. The decrease was
primarily attributable to decreases in cash, cash equivalents and short-term
investments of $12.4 million and foundry deposits of $9.1 million, and
increases in accounts payable of $16.4 million, accrued expenses of $2.9
million and deferred revenue of $2.5 million which were partially offset by
increases in inventories of $18.3 million and accounts receivable of $10.0
million. The Company's short-term investments were principally invested in
investment grade, interest-bearing securities.

                                      31

<PAGE>   32


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

     The Company's cash flows used in operating activities increased to $18.6
million for fiscal 2000 from $10.5 million for fiscal 1999 primarily as a
result of increased inventories and accounts receivable, partially offset by a
decrease in net loss in fiscal 2000. The Company's cash flows used in operating
activities in fiscal 2000 were primarily attributable to a net loss of $22.5
million after adding back non-cash activities, and an $18.3 million increase in
inventories, combined with a $5.2 million increase in accounts receivable which
were partially offset by increases in accounts payable and accrued expenses of
$18.0 million and a $9.1 million decrease in foundry deposits. The Company has
invested in building inventory and allowed for the growth in receivables and
expects to continue to do due to the increasing volume of business driven by
new products, particularly in Optical Storage.

     The Company's investing activities during fiscal 2000 used cash of $12.6
million as compared to $26.3 million of cash used for investing activities
during fiscal 1999. Cash used in investing activities during fiscal 2000
resulted primarily from the purchase of Xionics for $9.5 million, net of cash
acquired, $4.6 million in additions to property and equipment, and $4.3 million
for the purchase of other equity investments which were partially offset by net
proceeds from matured short-term investments of $26.0 million and $4.9 million
in proceeds from the sale of a business unit. The acquisition of Xionics also
involved the non-cash elements of issuing $36.8 million in common stock and
assuming outstanding stock options valued at $8.4 million. Proceeds from the
sale of a business unit also included the non-cash element of 293,794 shares of
common stock in Conexant Systems, Inc. valued at $20.0 million at the date of
divestiture. This amount is reflected in short-term investments on the balance
sheet, which also includes a non-cash valuation reserve of $6.0 million, the
offset of which is included in the equity section of the balance sheet.

     The Company's financing activities during fiscal 2000 provided cash of
approximately $5.6 million as compared to cash used of $3.5 million during
fiscal 1999. Cash provided by financing activities during fiscal 2000 was the
result of $7.4 million in proceeds from the issuance of common stock through
the exercise of employee stock options and employee stock purchase plan
activity, which was partially offset by $1.8 million in the acquisition of
treasury stock.

     In the first quarter of fiscal 2000, the Company allocated $25.0 million
that is earmarked for venture investments. The Company did not establish a
separate legal "fund" or raise money independent of Company funds for these
purposes. The primary purpose of the fund is to invest in companies with
developing technologies that leverage the Company's core optical storage and
imaging businesses. The Company intends to make investments that are focused on
technologies that will bring together audio, video, and data content for
computing and consumer-electronics applications and consumer Internet
appliances. The Company may also make investments outside of these focused
areas.

     The Company believes that its existing cash, cash equivalents, short-term
investments and credit facilities will be sufficient to provide adequate
working capital and to fund operations over the next twelve months.  If,
however, during the next twelve to eighteen month period the Company fails to
increase its revenue or is unable to reduce its expenses below its revenues,
then the Company may be in a position where it will need to seek additional
financing.  However, there can be no assurance that the Company will not be
required to seek other financing sooner or that such financing, if required,
will be available on terms satisfactory to the Company.  The Company may also
utilize cash to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies.  From time to time, in the
ordinary course of business, the Company evaluates potential acquisitions of
such businesses, products or technologies.  However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies, other than those
disclosed above or elsewhere in this Annual Report on Form 10-K.


Factors That May Affect Future Results
--------------------------------------

The following factors should be carefully considered in evaluating the Company
and its business.

     Expected Benefits of the Merger with Xionics May Not Be Achieved. In order
     ----------------------------------------------------------------
to realize the benefits of the merger, the Company will have to effectively
integrate the operations and management acquired in the merger, together with
technical research and development, sales and marketing, business development
efforts and also retain key personnel in this process. The successful execution
of these events will involve considerable risk and may not be

                                      32

<PAGE>   33


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

successful. If the Company is not successful in accomplishing this integration,
then the objectives of the merger, including improved operating results will
not be realized. A key benefit of the merger is perceived to be the Company's
opportunity to transition from being an integrated circuits provider to a
complete solutions provider for the growing digital office market, and thereby,
gain a larger share of the products outsourced by the Company's original
equipment manufacturer, or OEM, customers. The Company believes that it will
have the resources and technology necessary to be a leading supplier to the
digital office market and will offer one of this industry's most integrated and
flexible platforms. However, if the integration is not successful or is
unexpectedly delayed or more expensive than contemplated, the Company will not
realize these benefits to the fullest extent possible.

     If the benefits of the merger to Company stockholders do not exceed the
costs associated with the merger, which costs include integration costs and the
dilution to the Company's stockholders resulting from the issuance of shares in
connection with the merger, then the financial results of the Company,
including earnings per share, could be adversely affected.

     The market price of the Company's common stock could decline as a result
of the merger if:

     o  The integration is unsuccessful or proves to be more expensive or time-
        consuming than expected;

     o  The Company does not achieve the perceived benefits of the merger as
        rapidly or to the extent anticipated by third party and other financial
        analysts; or

     o  The effect of the merger on the Company's financial results are not
        consistent with the expectations of third party and other financial
        analysts.

     The Company's Future Financial Results Will Be Adversely Impacted By the
     ------------------------------------------------------------------------
Costs of The Merger With Xionics and May Be Further Adversely Impacted By the
-----------------------------------------------------------------------------
Accounting Treatment of the Merger. The Company took a charge of approximately
----------------------------------
$9.9 million against earnings in the third fiscal quarter of 2000 in order to
write off the cost of in-process research and development acquired in the
merger. The Securities and Exchange Commission scrutinizes large in-process
research and development write-offs. In addition to the $9.9 million charge
taken, approximately $45.8 million (representing the fair value of net
intangible assets acquired in the merger) has been recorded on the Company's
balance sheet and is being amortized over three to five years.

     The Company Has Experienced and Expects To Continue To Experience
     -----------------------------------------------------------------
Significant Period-To-Period Fluctuations in Its Revenues and Operating
-----------------------------------------------------------------------
Results, Which May Result In Volatility in the Price of Its Stock. The
-----------------------------------------------------------------
Company's quarterly revenues and operating results have varied significantly in
the past and are likely to vary substantially from quarter to quarter in the
future. Accordingly, you should not rely on period-to-period comparisons as an
indication of future performance. In addition, these variations may cause the
Company's stock price to fluctuate. If quarterly results fail to meet public
expectations, the price of the Company's stock may decline.

     The Company's revenues and operating results are affected by a wide
variety of factors, including factors that generally affect everyone in its
industry and factors that are more specific to its business and product lines.
The principal risk the Company faces in its business and one which has had, and
is expected to continue to have, a significant effect on its revenues and
operating results, is its dependence on the optical storage market. Other
factors specific to its business and product lines include the following:

     o  The Company's ability to diversify its product offerings and the
        markets for its products;

     o  The current market for its products;

     o  The loss or gain of important customers;

     o  The timing of significant orders and order cancellations or
        reschedulings;

     o  Pricing policy changes by the Company and its competitors and
        suppliers;

                                      33

<PAGE>   34


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

     o  The potential for significant inventory exposure;

     o  The timing of the development and introduction of new products or
        enhanced versions of existing products;

     o  Market acceptance of new products;

     o  Increased competition in product lines;

     o  Barriers to entry into new product lines;

     o  The competitiveness of the Company's customers; and

     o  The inability to obtain foundry capacity.

     The Company is in the process of diversifying its business so that its
product offerings include not only integrated circuits, but also embedded
software and platform solutions. However, a significant portion of the
Company's revenue will continue to come from its semiconductor product
offerings. The semiconductor industry historically has been characterized by
rapid technological change and product obsolescence, cyclical market patterns
and seasonal customer demand, significant price erosion, periods of over-
capacity and under-capacity, periods of production shortages, variations in
manufacturing costs, including raw materials, and yields, and significant
expenditures for capital equipment and product development. In addition, the
industry has experienced significant economic downturns at various times,
characterized by diminished product demand and accelerated erosion of product
prices. Any downturns in the industry may cause the Company's business,
financial condition and results of operations to suffer.

     The Company has experienced in the past and may in the future experience
substantial period-to-period fluctuations in operating results due to these
general semiconductor industry conditions. The downturns in the industry often
occur in connection with, or in anticipation of, maturing product cycles (of
both the semiconductor companies and their customers) and declines in general
economic conditions. These downturns have been characterized by abrupt
fluctuations in product demand, production over-capacity and subsequent
accelerated erosion of average selling prices, and in some cases have lasted
for more than a year. Even if customers' aggregate demand were not to decline,
the availability of additional capacity can adversely impact pricing levels,
which can also depress revenue levels.

     In addition, the Company's quarterly operating results could be materially
adversely affected by legal expenses incurred in connection with, or any
judgment or settlement in, the Company's ongoing stockholder legal proceedings.
See "The Company is a Defendant in Several Lawsuits."

     The Company Has a Recent History of Operating Losses and May Not Become or
     --------------------------------------------------------------------------
Remain Profitable. Although the Company experienced periods of profitability
-----------------
following its reincorporation in Delaware in October 1994 in connection with
its initial public offering (the Company was first incorporated in California
in 1987), the Company has at times sustained significant losses since the
initial public offering and may not become profitable in the future. While the
Company had net income of $5.9 million in fiscal 1998, its current loss trend
began in calendar year 1998, resulting in an operating loss of $9.1 million for
fiscal 1998, an operating loss of $61.9 million for fiscal 1999, and an
operating loss of $61.1 million for fiscal 2000 (in each case before
adjustments for non-operating income or loss, or income tax expense or
benefit). The Company's operating losses generally have been due to its
dependence on its optical storage business, which historically has accounted
for approximately 80% of its business. In fiscal 1998, the Company failed to
timely and/or adequately develop its integrated CD-ROM controller product and
second generation CD-RW product. Consequently, for fiscal 1999, the Company was
dependent on mature CD-ROM products and its first generation CD-RW product for
its revenue. These mature products continued to decline in both unit sales
volume and average sales price in each successive quarter. In the third quarter
of fiscal 2000, the Company achieved volume production with its next generation
CD-RW product. However, given certain evolving dynamics in the CD-RW market,
including the rate of adoption of this technology, competition and selling
prices,

                                      34

<PAGE>   35


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

the Company cannot accurately predict the product's impact on operating results
nor can any assurance be given that revenue from this product will enable the
Company to return to profitability.

     The Company expects that the ASP's for its optical storage products will
continue to decline over time and that ASPs for each new optical storage
product will decline significantly over the life of the product. In addition,
given the extremely competitive nature of the optical storage market, the
Company believes that gross margins for new products in its optical storage
market will be lower than historical levels. However, the Company believes that
with the additional planned software and solution product offerings from the
Company's Optical and Imaging Groups, gross margins in general will increase in
the future.

     If the Company incurs additional losses or fails to achieve profitability
in the future, this will significantly harm its business and may affect the
trading price of its common stock.

     The Company's Financial Performance is Highly Dependent on the Timely and
     -------------------------------------------------------------------------
Successful Introduction of New Products. The markets for the Company's products
---------------------------------------
are characterized by evolving industry standards, rapid technological change
and product obsolescence. The Company's financial performance is highly
dependent upon timely and successful execution of next generation and new
products, including those from acquired businesses, particularly in light of
the Company's past failure to timely develop new products for the optical
storage market in fiscal 1998 and 1999. The failure to timely and successfully
introduce next generation and new products that achieve market acceptance in
the future could seriously damage the Company's business, financial condition
and results of operations. Specifically, the Company's performance is highly
dependent upon the successful development and timely introduction of its next
generation CD-RW controller, combination DVD and CD-RW controller, MPEG-2
decoder for the DVD player market, and embedded imaging processing solutions
for the digital office market, in particular, embedded digital color copier
technology and image processing chips for multifunction peripherals.

     In the optical storage market, particularly DVD, a variety of standards
and formats are being proposed, making it difficult to develop product to
market requirements, and making it even more difficult for the market to
develop. Product delay's in the Company's Optical Storage Group have resulted
primarily from difficulties in allocating engineering personnel among competing
projects, engineering resource limitations, and unanticipated engineering
complexity. Although recently, the Company timely introduced its next
generation CD-RW product and refocused its Optical Storage Group on a defined
product roadmap, there can be no assurance that these or other factors will not
contribute to future delays. In the digital office market in which the
Company's recent acquired business competed with software products and the
Company with integrated circuits, the Company will need to address a variety of
other factors related to that market with respect to new product development.
Product delays in the past in both the Company's Imaging Group and its recently
acquired business have resulted from numerous factors such as changing OEM
customer product specifications, difficulties in allocating engineering
personnel among competing projects, other resource limitations, difficulties
with independent contractors, changing market or competitive requirements and
unanticipated engineering complexity. There can be no assurance that these or
other factors will not contribute to future delays; that OEM customers will
tolerate those delays; or that delayed office devices, once introduced, will
meet with market acceptance or success. Among other technological changes,
embedded PDF and color capability are rapidly emerging as market requirements
for printers and other imaging devices. Some of the Company's competitors have
the capacity to supply these solutions, and some of their solutions are well-
received in the marketplace. The Company faces the challenges of developing
products that will require greater color and image complexity capability
including web-based documents, and to work with higher performing devices in
networked environments. Any significant inability to meet these challenges with
the development of products that can effectively compete in the OEM software
and solutions market could cause future results of operations to differ
materially from current expectations.

     Due to the design complexity of the Company's products, especially with
the increased levels of integration that are required, the Company has
previously experienced delays in completing development and introduction of new
products for the optical storage and the digital office markets. In addition,
in light of the short product life cycles associated in the markets related to
acquired businesses, any delay or unanticipated difficulty associated with new
product development or introduction could result in a material adverse effect
on the Company's business, results of operations and financial condition.

                                      35

<PAGE>   36


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

     No assurance can be given that the Company will successfully identify new
product opportunities and develop and bring new products to market in a timely
manner or that its products will be selected for design into the products of
its targeted customers. Also, there can be no assurance that the products of
the Company's customers will be successfully introduced into the market. If the
Company fails in its new product development efforts or its products fail to
achieve market acceptance, its revenues will decline and its business,
financial condition and results of operations will be severely damaged.

     The Company's Future Revenues Are Highly Dependent On Sales of Its CD-RW
     ------------------------------------------------------------------------
Controller Product. The Company's future revenue generation is highly dependent
------------------
on its recently introduced and next generation CD-RW product as well as its
combination DVD and CD-RW product. The Company is no longer developing any CD-
ROM controllers, but since the early part of fiscal 1999 has been instead
focusing its development efforts on controllers for CD-RW and DVD drives. If
the Company's recently introduced CD-RW product fails to achieve market
acceptance, it will need other sources of revenue to offset the previous
discontinuation of sales of its CD-ROM controllers. In fiscal 2000, revenue
generated from the Company's optical storage CD-ROM business declined 94%
primarily due to the lack of a next-generation integrated CD-ROM device and
revenue generated from the Company's optical storage CD-RW business increased
by 90%, compared to the previous year, primarily due to the introduction of a
new CD-RW product.  In fiscal 1999, revenue generated from the Company's
optical storage CD-ROM and CD-R/RW businesses declined 73% and 36%,
respectively, compared to the previous year, primarily due to delays in the
development of the next-generation integrated CD-ROM device and CD-RW product.

     Although the Company was a leading supplier of CD-RW controllers, due to
product delays in its second generation CD-RW product, the Company lost its
leadership in this market. While the Company is currently in production with
its next generation CD-RW product with a few customers, no assurance can be
given this product or its successor will be competitive in the marketplace or
carried into production by targeted customers. In addition, even if this
product proves to be competitive and is accepted by targeted customers, there
is no assurance that the Company's customers will be successful.

     The Company also faces increased competition in the emerging CD-RW and DVD
markets in both the PC and consumer segments. In addition, the current trend
toward integrating increased functionality on the CD-RW or DVD controller
potentially adds to the development and manufacturing costs of producing the
controller. The Company's revenues and gross margins from its optical storage
controller products will be dependent on the Company's ability to introduce
integrated products for the CD-RW and DVD markets in a commercially competitive
manner.

     The decrease in the overall level of sales of, and prices for, the
Company's CD-ROM and older generation CD-RW controller product due to
introductions of newer products by competitors, the decline in demand for CD-
ROM controller products generally, product obsolescence and delays in the
Company's integrated CD-ROM controller product and its next generation CD-RW
product, have had a material adverse effect on the Company's business,
financial condition and results of operations, and will continue to have that
effect if the Company fails to successfully introduce new and next generation
products to the optical storage market.

     The Company also anticipates that the royalty streams derived from OEMs'
shipments of office equipment containing the Company's products, and the sale
of related products and services to manufacturers of office equipment will
account for a significant portion of its revenue for the foreseeable future,
although not as significant as CD-RW for the remainder of fiscal 2000 and
possibly fiscal 2001. In order to assure that the Company will derive future
royalty streams from the shipment of OEM devices, the Company and its OEMs are
required to develop and release in a regular and timely manner new office
products with increased speed, enhanced output resolutions, reduced memory
requirements, multiple functions, and network connectivity. The Company's OEMs
are under tremendous pressure to continually shorten the development cycles of
these products, leading to increased complexity and cost of development to the
Company and its OEMs. The Company's success will depend on, among other things:
the rate at which OEMS serving the digital office market outsource their
technology needs, market acceptance of the Company's technology and products
and the office devices of the Company's OEMs; the ability of the Company and
its OEMs to meet industry changes and market demands in a timely manner;
achievement of new design wins by the Company; successful implementation of the
Company's technology and products in new office devices being developed by its
OEMs; and successful marketing of those devices by the OEMs. Revenues from the
office equipment market will depend heavily on the Company's ability to
integrate its recent acquired business,

                                      36

<PAGE>   37


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

Xionics Document Technologies, successfully in order to develop complete
product solutions and compete more effectively and successfully against other
suppliers and outsourcers as well as its own OEM customers and other
manufacturers.

     The Company's Future Revenues Related To Its Imaging Group Are Highly
     ---------------------------------------------------------------------
Dependent on Its Relationship with Hewlett-Packard. Historically, contracts and
--------------------------------------------------
licenses with Hewlett-Packard generated a significant portion (66% in fiscal
1999) of the revenues related to the digital office equipment business of
Xionics Document Technologies, the Company acquired in the third quarter of
fiscal 2000. In addition, the Company's Imaging Group has sold integrated
circuits to Hewlett-Packard in the past. For fiscal 2000, sales of integrated
circuits to Hewlett-Packard represented 30% of Oak's Imaging revenue. It is
anticipated that revenue from Hewlett-Packard will constitute a significant
portion of the Company's overall revenues going forward. Therefore, any
significant disruption or deterioration of its relationship with Hewlett-
Packard would have a material adverse effect on the Company's business, results
of operations and financial condition. The Company has met all of its
obligations necessary to secure the right to receive ongoing payments from
Hewlett-Packard various agreements with Hewlett- Packard, and is also current
in performing its obligations under these various agreements. However, there
can be no assurance that the Company will continue to meet all such obligations
in the future. Hewlett- Packard has the right to terminate each of its
agreements with the Company if the Company materially breaches its obligations
under that agreement and does not cure such breach within 30 days. In addition,
competitors of the Company, including without limitation Adobe Systems Inc.,
Peerless Systems Corporation, Electronics for Imaging, Inc. and Texas
Instruments are continuously engaged in efforts to expand their business
relationship with Hewlett-Packard at the Company's expense, and are likely to
continue those efforts in the future. There can be no assurance that one or
more of the Company's competitors will not be successful in competing with the
Company for some or all of Hewlett-Packard's business. Further, although
Hewlett-Packard has shown a strong tendency to outsource embedded systems
software and development for its office products over the past several years,
there can be no assurance that this trend will continue or that Hewlett-
Packard's internal development groups will not compete successfully for some or
all of this outsourced business in the future. Finally, any adverse change in
Hewlett-Packard's business, results of operations or financial condition could
in turn have a material adverse effect on the Company's business, results of
operations and financial condition.

     The Company's Markets Are Intensely Competitive and Experience Rapid
     --------------------------------------------------------------------
Technological Change. The markets in which the Company competes are intensely
--------------------
competitive and are characterized by rapid technological change, declining
average unit sales prices and rapid product obsolescence. If the Company cannot
successfully respond to the technological advances of others or if its new
products or product enhancements do not achieve market acceptance, the
Company's business, operating results and financial condition could be
seriously harmed. The Company expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with solutions that may be less costly or provide
higher performance or additional features. The Company's principal competitors
in the optical storage market are MediaTek, Toshiba and Ricoh; its principal
competitors in the digital office market are Adobe Systems, Inc., Peerless
Systems Corporation, Electronics for Imaging, Inc., and in-house, captive
suppliers, and the Company expects increased competition from the merchant
market in the future. Many of these existing competitors as well as those
customers expected to compete in the future have substantially greater
financial, manufacturing, technical, marketing, distribution and other
resources, broader product lines and longer standing relationships with
customers than the Company. In addition, much of the Companies success is
dependent on the success of its OEM customers. The Company's OEM customers in
both the optical storage, and digital office markets compete fiercely with one
another for market share in a market characterized by rapid development cycles,
short product life cycles and ever-increasing consumer demand for greater
performance and functionality at reduced prices.

     The markets for most of the applications for the Company's products,
 especially in the optical storage market, are characterized by intense price
competition. As the markets for these products mature and competition
increases, as has been the trend for the optical storage, the Company
anticipates that average sales prices on products will decline. If the Company
is unable to reduce costs sufficiently to offset declines in average sales
prices or is unable to successfully introduce new higher performance products
with higher average sales prices, operating results will be materially
adversely affected.

     The future growth of the digital office market is highly dependent on
OEMs' continuing to outsource an increasing portion of their product
development work. While the trend toward outsourcing on the part of the

                                       37

<PAGE>   38


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

Company's OEM customers has accelerated in recent years, any reversal of this
trend could have a material adverse effect on the Company's business, financial
condition, and results of operations. Similarly, significant market trends
leading to changes in the way the Company's competitors do business may enable
them to compete more effectively against the Company than they have in the
past. For example, in response to market demand, Adobe Systems, Inc. has
recently begun licensing the source code of its PostScript page description
language interpreters to certain development partners, including competitors of
the Company. These changes, if they enable competitors to compete more
effectively for business from the Company's customers, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, changes in strategy by the Company's competitors, for
example price reductions, new product introductions or new
marketing/distribution methods, could make it more difficult for the Company to
compete effectively, cause reduced market demand for the Company's products
and/or render the Company's products obsolete.

     There can be no assurance that the Company or its OEM customers will be
able to compete successfully against current or future competitors, or that
competitive pressures faced by it and its customers will not result in reduced
revenues and profit margins and otherwise seriously harm its business,
financial condition and results of operations.

     The Company May Be Unable To Protect Its Intellectual Property and
     ------------------------------------------------------------------
Proprietary Rights, Which May Affect Its Ability to Compete. The Company's
-----------------------------------------------------------
ability to compete is affected by its ability to protect its proprietary
information. The Company considers its technology to be proprietary and relies
on a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect its
intellectual property rights. However, these measures afford only limited
protection. The Company's competitors may be able to effectively design around
the Company's patents. There can be no assurance that any of the Company's
patents will not be challenged, invalidated or circumvented, or that the rights
granted under those patents will provide competitive advantages to the Company.
Moreover, while the Company holds or has applied for patents relating to the
design of its products, some of its products are based in part on standards,
for which it does not hold patents or other intellectual property rights. In
addition, the laws of certain foreign countries in which the Company's products
are or may be manufactured or sold, including various countries in Asia, may
not protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. There can be no
assurance that the steps taken by the Company to protect its proprietary
information will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Moreover,
the Company intends to seek additional international and United States patents
on its technology. There can be no assurance that additional patents will issue
from any of the Company's pending applications or applications in preparation,
or be issued in all countries where the Company's products can be sold, or that
any claims allowed from pending applications or applications in preparation
will be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company.

     The Company also generally enters into confidentiality agreements with its
employees and consultants and confidentiality and license agreements with its
customers and potential customers, and limits access to and distribution of the
source and object code of its software and other proprietary information. With
respect to its page description language software and drivers for the digital
office market and in limited circumstances with respect to firmware and drivers
for its optical storage products, the Company grants licenses that give its
customers access to and restricted use of the source code of the Company's
software which increases the likelihood of misappropriation or misuse of the
Company's technology. Accordingly, despite the Company's precautions, it may be
possible for unauthorized third parties to copy certain portions of the
Company's technology or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the steps the Company takes will
be adequate to prevent misappropriation of its technology or to provide an
adequate remedy in the event of a breach or misappropriation by others.

     Furthermore, the Company may initiate claims or litigation against third
parties for infringement of the Company's proprietary rights or to establish
the validity of its proprietary rights and in the past has incurred significant
legal expenses in connection with claims of this type it has initiated. Any
litigation by or against the Company could result in significant expense to the
Company and divert the efforts of its technical and management personnel,
whether or not that litigation results in a favorable determination for the
Company. In the event of an

                                      38

<PAGE>   39


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

adverse result in any litigation, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of certain processes or obtain licenses to the infringing
technology. There can be no assurance that the Company would be successful in
developing new technology or that those licenses would be available on
reasonable terms, or at all, and any development or license could require the
Company's expenditures of substantial time and other resources.

     The Company May Be Unable to Obtain Third Party Intellectual Property
     ---------------------------------------------------------------------
Rights and/or May Be Liable For Significant Damages. Certain technology used in
---------------------------------------------------
the Company's products is licensed from third parties, and in connection with
these licenses, the Company is required to fulfill confidentiality obligations
and, in some cases, pay royalties. Some of the Company's products, require
various types of copy protection software that the Company must license from
third parties. Should the Company lose its rights to, or be unable to obtain
the necessary copy protection software, the Company would be unable to sell and
market certain of its products. The Company's agreements with third parties
often have no specified term and may be terminated by either party in the event
of breach by the other. The Company's business could be adversely affected by
the loss for any reason of these third-party agreements. Given the trend to
include increasing levels of functionality on a chip, in the future it may be
necessary or desirable for the Company to seek additional licenses to
intellectual property rights held by third parties or purchase products
manufactured and/or sold by third parties with respect to some or all of its
product offerings. There can be no assurance that those licenses or purchases
will be available on terms acceptable to the Company, if at all. The inability
of the Company to enter into those license arrangements on acceptable terms or
to maintain its current licenses on acceptable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.

     In addition, the semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights, which has resulted in
significant, often protracted and expensive litigation. The Company or its
foundries may, from time to time, be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third
parties. If it is necessary or desirable, the Company may seek licenses under
those patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
from a third party for technology used by the Company could cause the Company
to incur substantial liabilities and suspend the manufacture of products or the
use by the Company's foundries of processes requiring the technology.

     The Company has historically indemnified its customers for certain costs
and damages of patent infringement in circumstances where the Company's product
is the factor creating the customer's infringement exposure. This practice
generally excludes coverage in circumstances where infringement arises out of
the combination of the Company's products with products of others or where
infringement arises based on modifications made by the customer to the
Company's products. This indemnification practice, however, could have a
material adverse effect on the results of operations.

     Although patent disputes in the semiconductor industry have often been
settled through cross-licensing arrangements, the Company may not be able in
any or every instance, to settle an alleged patent infringement claim through a
cross-licensing arrangement. The Company has a more limited patent portfolio
than many of its competitors. If a successful claim is made against the Company
or its customers and a license is not made available to the Company on
commercially reasonable terms or the Company is required to pay substantial
damages or awards, the Company's business, financial condition and results of
operations would be materially adversely affected.

     The Company Depends on Third Party Foundries and Vendors to Manufacture
     -----------------------------------------------------------------------
Products. The Company contracts with independent foundries to manufacture a
--------
majority of its products and with independent vendors to assemble and test
these products. The Company's failure to adequately manage its relationships
with these foundries and vendors could negatively impact its ability to
manufacture and sell its products and its results of operations.

     The Company relies on its foundries to allocate to the Company a portion
of their foundry capacity sufficient to meet its needs to produce products of
acceptable quality and with acceptable manufacturing yield and to deliver
products to the Company in a timely manner. These foundries fabricate products
for other companies and some manufacture products of their own design. If these
foundries fail or are unable to satisfy the Company's

                                      39

<PAGE>   40


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

product, quality and other requirements, the Company's business, financial
condition and results of operation could suffer.

      The Company also relies on third-party subcontractors to assemble and
test its products. The failure of any of these subcontractors to meet the
Company's production requirements could cause the Company's business, financial
condition and operating results to suffer.

     The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including:

     o The loss of any foundry as a supplier;

     o Inability to expand foundry capacity in a period of increased demand for
       the Company's products;

     o Inability to obtain timely and adequate deliveries from current or
       future suppliers;

     o Delays in shipments of the Company's products;

     o Disruption of operations at any of the Company's manufacturing
       facilities;

     o Product defects and the difficulty of detecting and remedying product
       defects;

     o The unavailability of, or interruption in access to, certain process
       technologies; and

     o Reduced control over delivery schedules, quality assurance and costs.

     As the Company generally does not use multiple services of supply for its
products, the consequences of these factors occurring is magnified.

     During the third calendar quarter of 1999, Taiwan, the location of the
Company's primary wafer manufacturer, Taiwan Semiconductor Manufacturing
Company, experienced a severe earthquake. To date, the Company has not
experienced any material delays of its wafer deliveries from its primary
manufacturer. However, there is a current shortage of foundry capacity that is
expected to last at least through calendar 2000. Although the Company believes
it has sufficient capacity to meet its needs through calendar 2000, the Company
has no firm commitments in place, and therefore, there is no assurance that the
Company will be able to secure capacity for its manufacturing needs and/or not
experience delays in the future.

     The Company's Failure to Accurately Forecast Demand for Its Products Could
     --------------------------------------------------------------------------
Negatively Impact Its Results of Operations. Under its foundry agreements, the
-------------------------------------------
Company is required to place non-cancelable orders and purchase its products on
an approximately three-month rolling basis. The Company's customers, on the
other hand, generally place purchase orders with the Company less than four
weeks prior to delivery that may be rescheduled or under certain circumstances
may be cancelled, without significant penalty. This limits the Company's
ability to react to fluctuations in demand for its products. If the Company
overestimates the product necessary to fill orders, or fails to foresee a
technology change that could render a product obsolete, it will build excess
inventories which could harm its gross margins and operating results. If the
Company underestimates the product necessary to fill orders, it may not be able
to obtain an adequate supply of products which could harm its revenues. The
Company has experienced inventory write-offs of its optical storage products in
the past primarily due to unforeseen and rapid changes in its customers'
demand, in particular speed changes, and consequently experienced rapid product
obsolescence.

     Product supply and demand fluctuations common to the semiconductor
industry are historically characterized by periods of manufacturing capacity
shortages immediately followed by periods of overcapacity, which are caused by
the addition of manufacturing capacity in large increments. The industry has
moved from a period of capacity shortages in 1995 to what has been a period of
excess capacity for approximately the last twelve months,

                                      40

<PAGE>   41


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

and has now returned to a capacity shortage situation. No assurance can be
given that the Company can or will achieve timely, cost-effective access to
that capacity when needed.

     The Company Derives A Large Portion of Its Revenues from International
     ----------------------------------------------------------------------
Sales, Depends on Foreign Subcontractors and Is Subject to the Risks of Doing
-----------------------------------------------------------------------------
Business in Foreign Countries. A large portion of the Company's revenues are
-----------------------------
derived from international sales. International sales, principally to Korea,
Japan, Singapore and Europe, accounted for approximately 75%, 86% and 92%, of
the Company's net revenues for fiscal 2000, 1999 and 1998, respectively. The
Company also depends on foreign subcontractors for the manufacture of its
products. Most of the Company's foreign sales and purchases are negotiated in
US dollars, although invoicing is often done in local currency. As a result,
the Company may be subject to the risks of currency fluctuations in the foreign
countries in which it does business.

     The Company also is subject to other risks of conducting business outside
of the United States. These risks include:

     o Unexpected changes in, or impositions of, foreign legislative or
       regulatory requirements;

     o Delays resulting from difficulty in obtaining export licenses for
       certain technology;

     o Tariffs, quotas and other trade barriers and restrictions;

     o Longer payment cycles;

     o Greater difficulty in collecting accounts receivable;

     o Potentially adverse taxes and adverse tax consequences;

     o The burdens of complying with a variety of foreign laws;

     o Political, social and economic instability;

     o Potential hostilities;

     o Changes in diplomatic and trade relationships; and

     o Fluctuations in foreign currencies

     The Company's significant investment in foundry capacity in Taiwan is a
prime example of its exposure to these types of risks. Due to this investment,
the Company is subject to the risk of political instability in Taiwan,
including the potential for conflict between Taiwan and the People's Republic
of China. In addition, the fact that China is the primary market for the
Company's consumer DVD products is another example. Any political or economic
instability in China could significantly reduce the demand for these products.

     In addition, the Company has several significant OEM customers in Japan,
South Korea, and other parts of Asia. Although the adverse economic
circumstances recently prevailing in Japan and elsewhere in Asia have begun to
show signs of abating, they could still affect these customers' willingness or
ability to do business with the Company in the future or their success in
developing and launching in particular office devices containing the Company's
products.

     While these factors or the impact of these factors are difficult to
forecast, any one or more of these factors could adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.

     The Company Depends on a Limited Number of Customers for a Substantial
     ----------------------------------------------------------------------
Portion Of Its Revenues, and a Loss Of, Or A Significant Reduction in Purchases
-------------------------------------------------------------------------------
By, Current Major Customers Would Significantly Reduce Its
----------------------------------------------------------


                                      41

<PAGE>   42


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


Revenues. The Company has derived a substantial portion of its net revenues
--------
from a limited number of customers and expects this concentration to continue.
For fiscal 2000, 1999 and 1998 sales to the Company's top ten customers
accounted for approximately 78%, 70% and 81% of the Company's net revenues,
respectively. In addition, the Company has experienced significant changes from
year to year in the composition of its major customer base and the Company
believes this pattern of significant change may continue. Customers generally
purchase the Company's products pursuant to short-term purchase orders, and the
Company has no long term purchase agreements with any of its customers. The
loss of, or significant reduction in purchases by, current major customers of
the Company would significantly reduce its revenues.

     The Company Is A Defendant in Several Lawsuits. The Company and various of
     ----------------------------------------------
its current and former officers and directors are parties to a consolidated
class action lawsuit filed on behalf of all persons who purchased or acquired
the Company's common stock for the period from July 27, 1995 to May 22, 1996,
alleging state securities law and other violations. Additionally, various of
the Company's current and former officers and directors are defendants in three
consolidated derivative actions which allege a breach of fiduciary duty and a
claim under California securities laws. Based on its current information, the
Company believes the class action and derivative suits to be without merit and
will defend its position vigorously. Although it is reasonably possible the
Company may incur losses upon resolution of these claims, an estimate of loss
or range of loss cannot be made. No provision for any liability that may result
upon adjudication has been made in the Company's financial statements. The
Company is also a party to various other legal proceedings, including a number
of patent-related matters. In the opinion of management, these patent related
legal proceedings will not result in any material liability to the Company. In
connection with these lawsuits, however, management time has been, and will
continue to be, expended and the Company has incurred, and expects to continue
to incur, substantial legal and other expenses.

     The Company Must Continue To Make Significant Capital Investments, And The
     --------------------------------------------------------------------------
Inability to Raise the Additional Capital Necessary to Fund These Investments
-----------------------------------------------------------------------------
On Acceptable Terms Could Seriously Harm the Company's Business. In order to
---------------------------------------------------------------
remain competitive, the Company must continue to make investments in new
facilities and capital equipment, and significant amounts of capital additions
could be required in subsequent years. Additionally, in order to obtain an
adequate supply of wafers, especially wafers manufactured using advanced
process techniques, the Company has entered into and will continue to consider
various possible transactions, including various "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods. Manufacturing arrangements such as these may require substantial
capital investment, which may require the Company to seek additional financing.
The Company believes that existing liquid resources and funds generated from
operations, if any, combined with its ability to borrow funds will be adequate
to meet its operating and capital requirements and obligations into the
foreseeable future. The Company believes that the level of a Company's
financial resources is an important factor in its industry. Accordingly, the
Company may from time to time seek additional equity or debt financing. There
can be no assurance that those funds will be available on terms acceptable to
the Company when needed. Any future equity financing will also lead to dilution
to existing shareholders.

     The Company May Make Future Acquisitions or Enter into Joint Ventures That
     --------------------------------------------------------------------------
May Not Be Successful. In the future, the Company may acquire additional
---------------------
businesses, products and technologies, or enter into joint venture
arrangements, that could complement or expand its business. Acquisitions
involve numerous risks including:

     o Difficulties in integration of the operations, technologies, and
       products of the acquired companies;

     o Diverting management's attention from normal daily operations of the
       business;

     o Entering markets in which there is limited direct prior experience and
       where competitors have stronger market positions;

     o Coordination of sales, marketing and research and development;

     o Potential loss of key employees; and

     o The maintenance of corporate culture, controls, procedures and policies.

                                      42

<PAGE>   43


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

     In addition, investments in emerging technology present risks of loss of
value of one or more of the investments due to failure of the technology to
gain the predicted market acceptance. Also, any future acquisitions could
require the Company to issue dilutive equity securities, incur debt or
contingent liabilities, amortize goodwill and other intangibles, or write-off
in-process research and development and other acquisition-related expenses.
Further, the Company may not be able to integrate acquired businesses, products
or technologies with its existing operations. If the Company is unable to fully
integrate an acquired business, product or technology, it may not receive the
intended benefits of that acquisition.

     The Company Will Depend On Key Personnel To Manage Its Business, and the
     ------------------------------------------------------------------------
Loss of Any Key Personnel Could Seriously Harm Its Business.  The Company's
-----------------------------------------------------------
future performance depends, to a significant degree, on the retention and
contribution of members of the Company's senior management as well as other key
personnel including highly skilled engineering and technical employees.
Specifically, it is important for the Company to retain the services of Young
K. Sohn, the Company's current president and chief executive officer. The
Company is in the process of recruiting financial, technical and operational
personnel. Competition for these people is intense because of this limited
number of candidates and the growth of high-tech companies, and there can be no
assurance that the Company will be able to attract and retain qualified
replacements or additional technical or operational personnel. Moreover, none
of the key technical or senior management personnel of the recently acquired
Xionics Document Technologies are bound by long-term employment arrangements.
There is no assurance that the Company will be able to find suitable
replacements for any senior management personnel who may leave the Company.

     Provisions in The Company's Charter Documents And Rights Plan Could Make
     ------------------------------------------------------------------------
It More Difficult To Acquire The Company And May Reduce The Market Price Of The
-------------------------------------------------------------------------------
Company's Stock. The Company's board of directors has the authority to issue up
---------------
to 2.0 million shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of
the holders of common stock, may be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of common stock. The Company has no present plans to issue
shares of preferred stock. Further, certain provisions of the Company's charter
documents, including provisions eliminating the ability of stockholders to take
action by written consent and limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have
the effect of delaying or preventing changes in control or management of the
Company, which could have an adverse effect on the market price of the stock.
In addition, the Company's charter documents do not permit cumulative voting
and provide that its board of directors will be divided into three classes,
each of which serves for a staggered three-year term, which may also make it
more difficult for a third-party to gain control of the board of directors.

     In addition, 400,000 shares of the Company's preferred stock are
designated as series A junior participating preferred stock under a rights
plan, commonly referred to as a "poison pill". Under certain circumstances
involving a proposed change-in-control of the Company, the rights related to
the series A junior participating preferred stock may be triggered, the effect
of which may delay or prevent a third party from gaining control of or
acquiring the Company.

     Pricing Issues.  The willingness of prospective customers to design the
     --------------
Company's products into their products depends, to a significant extent, upon
the ability of the Company to have product available at the appropriate market
window and to price its products at a level that is cost effective for such
customers. The markets for most of the applications for the Company's products,
especially in the consumer electronics market and the optical storage market,
are characterized by intense price competition. As the markets for the
Company's products mature and competition increases, as has been the trend for
the optical storage and digital video disk segment of the consumer electronics
market, the Company anticipates that ASPs on its products will decline. The
Company continually attempts to pursue cost reductions, including process
enhancements, in order to maintain acceptable gross profit margins. Gross
profit margins also vary reflecting the impact of changes in the general
condition of the economy, capacity utilization levels in the semiconductor
industry, customer acceptance of new technologies and products, product
functionality and capabilities, shifts in product mix, manufacturing yields and
the effect of ongoing manufacturing cost reduction activities. If the Company
is unable to reduce its costs sufficiently to offset

                                      43

<PAGE>   44


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

declines in ASPs or is unable to successfully introduce new higher performance
products with higher ASPs, the Company's operating results will be materially
adversely affected. In addition, if the Company experiences yield or other
production problems or shortages of supply that increase its manufacturing
costs, fails to reduce its manufacturing costs, or fails to utilize its prepaid
deposits with the TSMC and Chartered foundries, the result would be a material
adverse effect on the Company's business, financial condition and operating
results.

     Limited Customer Base.  The Company has derived a substantial portion of
     ---------------------
its net revenues from a limited number of customers and expects this
concentration to continue. These customers were all purchasers of the Company's
CD-ROM and CD-RW products. (Please see the discussion above under the heading
"Dependence on CD-ROM and CD-RW Controller Product" for a description of the
decline in revenues the Company has experienced in connection with sales of our
CD-ROM product.) At June 30, 2000, three customers accounted for approximately
17%, 11% and 11% of accounts receivable, respectively. At June 30, 1999, one
international customer accounted for approximately 40% of accounts receivable.
In addition, the Company has experienced significant changes from year to year
in the composition of its major customer base, including the loss in the past
year of two customers who combined were responsible for approximately 24% of
the Company's sales in fiscal year 1998. The Company believes this pattern may
continue. Customers generally purchase the Company's products pursuant to
short-term purchase orders, and the Company has no long term purchase
agreements with any of its customers. The loss of or significant reduction in
purchases by, current major customers of the Company would have a material
adverse effect on the Company's business, financial condition and operating
results.


                                      44

<PAGE>   45


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Most of the Company's foreign sales are negotiated in US dollars; however,
invoicing is often done in local currency. As a result, the Company may be
subject to the risks of currency fluctuations. Assets and liabilities which are
denominated in non-functional currencies are remeasured into the functional
currency on a monthly basis and the resulting gain or loss is recorded within
non-operating income in the statement of operations. Many of the Company's non-
functional currency receivables and payables are hedged through managing net
asset positions, product pricing and other means. The Company's strategy is to
minimize its non-functional currency net assets or net liabilities in its
foreign subsidiaries. The Company's policy is not to speculate in financial
instruments for profit on the exchange rate price fluctuations, trade in
currencies for which there are not underlying exposures, or enter into trades
for any currency to intentionally increase the underlying exposure. As of June
30, 2000, the Company had foreign currency forward exchange contracts to
exchange Yen for approximately $2,350,000 and $1,030,000, respectively. The
Company uses financial instruments, including local currency debt arrangements,
to offset the gains or losses of the financial instruments against gains or
losses on the underlying operations cash flows or investments. If foreign
currency rates fluctuate by 10% from rates at June 30, 2000 and 1999, the
effect on the Company's consolidated financial statements would not be
material. However, there can be no assurance that there will not be a material
impact in the future.

     The Company's cash equivalents and short-term investments ("debt and
equity investments") are exposed to financial market risk due to fluctuation in
interest rates, which may affect its interest income and the fair values of its
investments. The Company manages the exposure to financial market risk by
performing ongoing evaluation of its investment portfolio and investing in
short-term investment grade corporate securities and U.S. government and other
agencies' obligations, which mature within the next 24 months. In addition, the
Company does not use investments for trading or other speculative purposes. Not
withstanding the foregoing, due to the divestiture of the Broadband business in
January 2000, the Company is in the unusual position of also holding an
investment in 293,794 shares of Conexant Systems Inc. common stock which had an
original book value of $68.05 per share. This investment is classified as being
held as an available-for-sale security, and accordingly, the reduction in the
market value of the investment at June 30, 2000 of approximately $6.0 million
has been recorded as an item of comprehensive loss. This is a highly volatile
equity security with market valuations in the range of $26.00 to $132.00 since
mid January 2000. The original shares were not registered and available for
sale until early March 2000. The Company intends to convert these shares into
cash over time.

     Due to the short maturities of its investments, the carrying values
generally approximate the fair value. If market interest rates were to increase
immediately and uniformly by 10% from levels as of June 30, 2000 and 1999, the
decline in the fair value of the portfolio would not be material. Further, the
Company has the ability to hold its fixed income investments until maturity
and, therefore, the Company would not expect to recognize such an adverse
impact in income or cash flows.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Financial Statements and Supplementary Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).



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

     Not applicable.


                                      45

<PAGE>   46




                                   PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item concerning the Company's directors
is incorporated by reference to the sections captioned "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement related to the Company's 2000 Annual Meeting of
Stockholders, to be filed by the Company with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year pursuant to
General Instruction G(3) of Form 10-K (the "Proxy Statement"). Certain
information required by this item concerning executive officers is set forth in
Part I of this Report in "Business - Management" and certain other information
required by this item is incorporated by reference from the section captioned
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Proxy Statement.


ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference to the
sections captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to the
sections captioned "Executive Compensation - Compensation Committee Interlocks
and Insider Participation" and "Certain Relationships and Related Transactions"
contained in the Proxy Statement.

                                      46

<PAGE>   47



                                   PART IV


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

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


</TABLE>
<TABLE>
<CAPTION>

                                                                       Page
                                                                       ----
<S>                                                                   <C>
1 Financial Statements.
  --------------------

  Independent Auditors' Report........................................  52



  Consolidated Balance Sheets - As of June 30, 2000 and 1999..........  53

  Consolidated Statements of Operations - For the Three Year Period
    Ended June 30, 2000...............................................  54

  Consolidated Statements of Stockholders' Equity - For the Three Year
    Period Ended June 30, 2000........................................  55

  Consolidated Statements of Cash Flows - For the Three Year Period
    Ended June 30, 2000...............................................  56

  Notes to Consolidated Financial Statements..........................  57


2 Financial Statement Schedule. The following Financial Statement
  ----------------------------
  Schedule of the Registrant is filed as part of this report:

  Schedule II--Valuation and Qualifying Accounts......................  85


  All other schedules are omitted because they are not applicable or
  the required information is shown in the Consolidated Financial
  Statements or notes thereto.

3 Exhibits. The following Exhibits are filed as part of, or
  --------
            incorporated by reference into, this report:

</TABLE>

<TABLE>
<CAPTION>

Exhibit
 Number                         Exhibit Title
 ------                         -------------
<S>    <C>

  3.01  The Company's Restated Certificate of Incorporation, amended(1)

  3.02  The Company's Restated Bylaws(2)

  3.03  Certificate of Correction to the Restated Certificate of Incorporation
        of the Company(16)


  4.01  Form of Specimen Certificate for the Company's Common Stock(3)

  4.02  Amended and Restated Registration Rights Agreement dated as of October
        15, 1993 among the Company and various investors(3)

  4.03  The Company's Restated Certificate of Incorporation, as amended (See
        Exhibit 3.01)

  4.04  The Company's Restated Bylaws (See Exhibit 3.02)


  4.05  Form of Certificate of Designation of Series A Junior Participating
        Preferred Stock of the Company dated August 18, 1997(16)

  4.06  Rights Agreement between the Company and BankBoston, N.A. dated August
        19, 1997(16)

 10.01  1988 Stock Option Plan, as amended and related documents(3)*



                                      47

<PAGE>   48


 10.02  1994 Stock Option Plan and related documents(3) and amendment thereto
        dated February 1, 1996(4)*

 10.03  1994 Outside Directors' Stock Option Plan and related documents(3)*

 10.04  1994 Employee Stock Purchase Plan(3)*

 10.05  401(k) Plan and related documents(3) and Amendment Number One and
        Supplemental Participation Agreement thereto(5)*

 10.07  Lease Agreement dated August 22, 1994 between John Arrillaga, Trustee,
        or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Separate
        Property Trust) as amended and Richard T. Peery, Trustee, or his
        Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate
        Property Trust) as amended, and Justin Jacobs, Jr., dba Siri-Kifer
        Investments, a joint venture, and the Company (lease agreement for 140
        Kifer Court, Sunnyvale, California)(3), and amendment thereto dated
        June 15, 1995(5)

 10.08  Form of Indemnification Agreement, between the Company and each of its
        Directors and executive officers(14)


 10.09  VCEP Agreement dated July 30, 1990 between the Company and Advanced
        Micro Devices, Inc.(3)


 10.1   Product License Agreement dated April 13, 1993 between the Company and
        Media Chips, Inc., as amended September 16, 1993(3)


 10.11  Resolutions of the Board of Directors of the Company dated July 27,
        1994 setting forth the provisions of the Executive Bonus Plan(3)(12)*

 10.12  Employee Incentive Plan effective January 1, 1995(3)*

 10.13  Option Agreement between Oak Technology, Inc., and Taiwan Semiconductor
        Manufacturing Co., Ltd. dated as of August 8, 1996(14)**

 10.14  Foundry Venture Agreement between the Company and United
        Microelectronics Corporation dated as of October 2, 1995(6)(12)

 10.15  Fab Ven Foundry Capacity Agreement among the Company, Fab Ven and
        United Microelectronics Corporation dated as of October 2, 1995(7)(12)

 10.16  Written Assurances Re: Foundry Venture Agreement among the Company,
        United Microelectronics Corporation and Fab Ven dated as of October 2,
        1995(8)(12)

 10.17  Lease Agreement dated June 15, 1995 between John Arrillaga, Trustee, or
        his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Separate
        Property Trust) as amended and Richard T. Peery, Trustee, or his
        Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate
        Property Trust) as amended, and the Company (lease agreement for 130
        Kifer Court, Sunnyvale, California)(9), and amendments thereto dated
        June 15, 1995 and August 18, 1995(10)

 10.18  Deposit Agreement dated November 8, 1995 between Chartered
        Semiconductor Manufacturing Ltd. and the Company(11), and Amendment
        Agreement (No. 1) thereto dated September 25, 1996(13)**

 10.19  Amendment Agreement (No. 2) dated April 7, 1997 to Deposit Agreement
        dated November 8, 1995 between Chartered Semiconductor Manufacturing
        Ltd. and the Company(15) and addendum thereto dated September 26,
        1997(17)**

 10.2   First Amendment to Plan of Reorganization and Agreement of Merger dated
        October 27, 1995 among the Company, Oak Acquisition Corporation, Pixel
        Magic, Inc. and the then shareholders of Pixel dated June 25, 1996 and
        Second Amendment thereto dated June 13, 1997(16)**


                                      48

<PAGE>   49

 10.21  First Amendment to Non-Compete and Technology Transfer Agreement by and
        among the Company, Pixel Magic, Inc. and Peter D. Besen dated June 13,
        1997(16)**

 10.22  Agreement of Termination of Employment Agreement between Pixel Magic,
        Inc. and Peter D. Besen dated June 13, 1997(16)

 10.23  Agreement of Termination of Employment Agreement between Pixel Magic,
        Inc. and Don Schulsinger dated June 13, 1997(16)

 10.24  Release and Settlement Agreement between the Company and United
        Microelectronics Corporation dated July 31, 1997(16)**

 10.25  Sublease Agreement dated December 1, 1997 between Global Village
        Communication, Inc. and the Company (lease agreement for 1150 East
        Arques Avenue, Sunnyvale, California) and accompanying lease and
        amendment thereto(18)

 10.26  Amendment to Option Agreement be and between Taiwan Semiconductor
        Manufacturing Co., Ltd., and the Company(19)**

 10.27  Settlement Agreement between Winbond Electronics Corporation and the
        Company(19)**

 10.28  Amendment Agreement (No. 3) to Deposit Agreement dated November 8, 1995
        between Chartered Semiconductor Manufacturing Ltd. and Oak Technology
        Inc.(20)

 10.29  Employment Agreement between Oak Technology Inc. and Young K. Sohn
        dated February 27, 1999(21)

 10.3   Loan agreement between Oak Technology Inc. and Young K. Sohn dated
        February 27, 1999(21)

 10.31  Oak Technology Inc. Executive Stock Option Plan(21)

 10.32  Letter Agreement dated January 22, 1999 between the Special Committee
        of the Board of Directors of Oak Technology, Inc. and David T. Tsang
        and Ta-Lin Hsu(21)

10.33   Amendment to Option Agreement dated June 30, 1999 between Oak
        Technology Inc. and Taiwan Semiconductor Manufacturing Co., Ltd.

10.34   Agreement and Plan of Merger and Reorganization between Oak Technology,
        Inc., Vermont Acquisition Corp. and Xionics Document Technologies, Inc.
        dated July 29, 1999.

23.1    Consent of Independent Auditors.

24.1    Power of Attorney (signature page).

27.1    Financial Data Schedule.

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

<FN>
(1)  Incorporated herein by reference to exhibit 3.01 of the Company's
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.

(2)  Incorporated herein by reference to exhibit 3.05 filed with the Company's
     Registration Statement on Form S-1 (File No. 33-87518) declared effective
     by the Securities and Exchange Commission on February 13, 1995 (the
     "February 1995 Form S-1").

(3)  Incorporated herein by reference to the exhibit with the same number filed
     with the February 1995 Form S-1.

(4)  Incorporated herein by reference to Exhibit 10.1 filed with the Company's
     Registration Statement on Form S-8 (File No. 333-4334) on May 2, 1996.

                                      49

<PAGE>   50


(5)  Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Annual Report on Form 10-K for the year ended June 30,
     1996.

(6)  Incorporated herein by reference to Exhibit 2.1 filed with the Company's
     Form 8-K dated October 2, 1995 (the "October 1995 form 8-K").

(7)  Incorporated herein by reference to Exhibit 2.2 filed with the October
     1995 Form 8-K.

(8)  Incorporated herein by reference to Exhibit 2.3 filed with the October
     1995 Form 8-K.

(9)  Incorporated herein by reference to Exhibit 10.08 filed with the Company's
     Annual Report on Form 10-K for the year ended June 30, 1995.

(10) Incorporated herein by reference to Exhibit 10.08 filed with the Company's
     Annual Report on Form 10-K for the year ended June 30, 1996.

(11) Incorporated herein by reference to Exhibit 10.04 filed with the Company's
     Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.

(12) Confidential treatment has been granted with respect to portions of this
     exhibit.

(13) Incorporated herein by reference to Exhibit 10.17 filed with the Company's
     Annual Report on Form 10-K for the year ended June 30, 1996.

(14) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Quarterly Report on Form 10-Q for the quarter ended
     September 30, 1996.

(15) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Quarterly Report on Form 10-Q for the quarter ended
     March 31, 1997.

(16) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Annual Report on Form 10-K for the year ended June 30,
     1997.

(17) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Quarterly Report on Form 10-Q for the quarter ended
     September 30, 1997.

(18) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Quarterly Report on Form 10-Q for the quarter ended
     December 31, 1997.

(19) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Quarterly Report on Form 10-Q for the quarter ended
     March 31, 1998.

(20) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Quarterly Report on Form 10-Q for the quarter ended
     December 31, 1998.

(21) Incorporated herein by reference to the exhibit with the same number filed
     with the Company's Quarterly Report on Form 10-Q for the quarter ended
     March 31, 1999.

+    Previously Filed

*    Indicates Management incentive plan.

**   Confidential treatment granted and/or requested as to portions of the
     exhibit.
</FN>
</TABLE>

                                      50

<PAGE>   51


(b) Reports on Form 8-K.

     The Company did not file any Current Reports on Form 8-K for the quarter
ended June 30, 2000.


Trademark Acknowledgments

     Oak Technology, Inc. and the Oak logo are registered trademarks of the
Company. Pixel Magic, XLI Corporation, iDSP, iCodec, and iRET, are trademarks
of the Company.

     All other brand names or trademarks appearing in the Annual Report on Form
10-K are the property of their respective owners.

                                      51

<PAGE>   52



                        INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders


Oak Technology, Inc.:


We have audited the accompanying consolidated balance sheets of Oak Technology,
Inc. and subsidiaries (the Company) as of June 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 2000. In
connection with our audits of the consolidated financial statements, we have
also audited the consolidated financial statement schedule II "Valuation and
Qualifying Accounts", insofar as it relates to the three-year period ended June
30, 2000. These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oak Technology,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.



                                                     KPMG LLP


Mountain View, California
July 24, 2000


                                      32

<PAGE>   33



                     OAK TECHNOLOGY, INC. AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS
               (in thousands, except per share and share data)

<TABLE>
<CAPTION>
                                                               June 30,
                                                        ---------------------
                                                          2000         1999
                                                          ----         ----
<S>                                                     <C>        <C>
                                   ASSETS

Current assets:
  Cash and cash equivalents............................. $  19,100  $  19,500
  Short-term investments................................   101,704    113,703
  Accounts receivable, net of allowance for
    doubtful accounts of $671 and $555, respectively....    18,294      8,251
  Inventories...........................................    20,137      1,819
  Current portion of foundry deposits...................        --      9,061
  Prepaid expenses and other current assets.............    11,658     11,120
                                                          --------   --------
      Total current assets..............................   170,893    163,455
Property and equipment, net.............................    19,738     22,039
Foundry deposits........................................        --      7,760
Intangible assets, net..................................    44,053      7,569
Other assets............................................     1,716      3,018
                                                          --------   --------
Total assets............................................  $236,400   $203,841
                                                          ========   ========


                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Notes payable and current portion of long-term debt...  $      7   $     25
  Accounts payable......................................    20,062      3,648
  Accrued expenses......................................    11,357      8,467
  Deferred revenue......................................     2,857        379
                                                          --------   --------
      Total current liabilities.........................    34,283     12,519
Long-term debt..........................................        --          5
Deferred income taxes...................................       697      1,438
Other long-term liabilities.............................       110        457
                                                          --------   --------
Total liabilities.......................................    35,090     14,419
                                                          --------   --------
Commitments and contingencies (Notes 13 and 14)

Stockholders' equity:
  Preferred stock, $0.001 par value; 2,000,000 shares
    authorized; none issued and outstanding as of
    June 30, 2000 and 1999..............................        --         --
  Common stock, $0.001 par value; 130,000,000 shares
    authorized at June 30, 2000 and 60,000,000 shares
    authorized at June 30, 1999; 55,059,984 shares
    issued and 52,677,504 shares outstanding as
    of June 30, 2000; and 42,916,721 shares issued and
    40,915,241 shares outstanding as of June 30, 1999...        55         42
  Additional paid-in capital............................   217,357    164,784
  Treasury stock........................................   (11,257)    (9,437)
  Retained earnings.....................................     1,171     34,033
  Accumulated other comprehensive loss..................    (6,016)        --
                                                          --------   --------
      Total stockholders' equity........................   201,310    189,422
                                                          --------   --------
Total liabilities and stockholders' equity..............  $236,400   $203,841
                                                          ========   ========

</TABLE>

See accompanying notes to consolidated financial statements.


                                      53

<PAGE>   54


                     OAK TECHNOLOGY, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>

                                                    Year Ended June 30,
                                              --------------------------------
                                                2000        1999        1998
                                                ----        ----        ----
<S>                                          <C>          <C>        <C>
Revenues:
  Product revenues........................... $ 65,348    $ 64,965    $154,290
  Software and other revenues................   21,108       6,086       2,816
                                              --------    --------    --------
    Total  revenues..........................   86,456      71,051     157,106
                                              --------    --------    --------
Cost of revenues:
  Cost of product revenues...................   34,577      38,095      80,998
  Cost of software and other.................    6,343       1,524       1,560
                                              --------    --------    --------
    Total cost of revenues...................   40,920      39,619      82,558
                                              --------    --------    --------
    Gross profit.............................   45,536      31,432      74,548
Research and development expenses............   49,726      46,165      49,658
Selling, general, and administrative expenses   33,863      35,110      30,905
Amortization of intangibles..................   11,778       4,942          --
Restructuring charges........................    1,270          --       1,766
Acquired in-process research and development.   10,008       7,161       1,323
                                              --------    --------    --------
    Operating loss...........................  (61,109)    (61,946)     (9,104)
                                              --------    --------    --------
Gain on sale of business unit................   22,075          --          --
Non-operating income, net....................    6,172       5,530      16,101
                                              --------    --------    --------
    (Loss) income before income taxes........  (32,862)    (56,416)      6,997
Income taxes (benefit) expense...............       --      (5,747)      1,050
                                              --------    --------    --------
Net (loss) income............................ $(32,862)   $(50,669)   $  5,947
                                              ========    ========    ========
Net (loss) income  per share:
    Basic.................................... $  (0.71)   $  (1.24)   $   0.14
                                              ========    ========    ========
    Diluted.................................. $  (0.71)   $  (1.24)   $   0.14
                                              ========    ========    ========

Weighted average common and potential common
  shares used in computing net (loss) income
  per share:
    Basic....................................   46,057      40,819      41,739
                                              ========    ========    ========
    Diluted..................................   46,057      40,819      42,493
                                              ========    ========    ========

</TABLE>

See accompanying notes to consolidated financial statements.


                                      54

<PAGE>   55



                     OAK TECHNOLOGY, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (in thousands)

<TABLE>
<CAPTION>


                                                                                        Accumulated
                            Common Stock      Additional              Treasury Stock       Other          Total
                        -------------------                         -------------------
                        Number of $.001 Par    Paid-In    Retained   Number of          Comprehensive  Stockholders' Comprehensive
                         Shares    Value       Capital    Earnings    Shares    Cost    Income (Loss)     Equity     Income (Loss)
                         ------    -----       -------    --------    ------    ----    ------------      ------     -------------
<S>                     <C>      <C>         <C>        <C>         <C>      <C>         <C>          <C>            <C>

Balances, July 1, 1997.. 41,087   $  41       $159,901    $ 78,755       --   $    --      $     --     $ 238,697
Net income and
  comprehensive income..     --      --             --       5,947       --        --            --         5,947       $  5,947
                                                                                                                        ========
Exercise of warrants....    150      --             --          --       --        --            --            --

Repurchase of common stock   --      --             --          --   (1,142)  $(6,708)           --        (6,708)
Exercise of stock options   799       1          1,196          --       --        --            --         1,197
Employee stock purchase
  Plan....................  255      --          1,555          --       --        --            --         1,555
Tax benefit on exercise
  of stock options.......    --      --            520          --       --        --            --           520
                         ------   -----       --------    --------   ------   -------      --------      --------
Balances, June 30, 1998  42,291      42        163,172      84,702   (1,142)   (6,708)           --       241,208

Net loss and
  comprehensive loss.....    --      --             --     (50,669)      --        --            --       (50,669)      $(50,669)
Repurchase of common
  Stock..................    --      --             --          --     (859)   (2,729)           --        (2,729)
Exercise of stock options   346      --            713          --       --        --            --           713
Employee stock purchase
  Plan...................   280      --            899          --       --        --            --           899
                         ------   -----       --------    --------   ------   -------      --------      --------
Balances, June 30, 1999  42,917      42        164,784      34,033   (2,001)   (9,437)           --       189,422
Comprehensive income -
  net loss                   --      --             --     (32,862)      --        --            --       (32,862)      $(32,862)
Other comprehensive
 income - change in net
 unrealized loss on
 investments.............    --      --             --          --       --        --        (6,016)       (6,016)        (6,016)
                                                                                                                        --------
Comprehensive loss                                                                                                      $(38,878)
                                                                                                                        ========
Repurchase of common
  Stock..................    --      --             --          --     (381)   (1,820)           --        (1,820)
Issuance of common stock
  in connection with
  purchase of Xionics
  Document Technologies.. 9,483      10         45,163          --       --        --            --        45,163
Exercise of stock options 2,216       2          6,058          --       --        --            --         6,060
Employee stock purchase
  Plan...................   444       1          1,353          --       --        --            --         1,354
                         ------   -----       --------    --------   ------  --------      --------      --------
Balances, June 30, 2000..55,060   $  55       $217,357    $  1,171   (2,382) $(11,257)      $(6,016)     $201,310
                         ======   =====       ========    ========   ======  ========       =======      ========

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

                                      55

<PAGE>   56



                     OAK TECHNOLOGY, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (in thousands)

<TABLE>
<CAPTION>

                                                    Year Ended June 30,
                                             ----------------------------------
                                                2000        1999        1998
                                                ----        ----        ----
<S>                                          <C>         <C>         <C>
Cash flows from operating activities:
Net income (loss)............................ $ (32,862)  $ (50,669)  $  5,947
Adjustments to reconcile net income to net
  cash provided by operating activities:
  Depreciation and amortization..............    17,984      12,411      7,386
  Gain on sale of business...................   (22,075)         --         --
  Acquired in-process technology.............    10,008       7,161      1,323
  Loss on Equity method investments, net.....     1,863         194         --
  Restructuring charges......................     1,270          --      1,047
  Foundry deposit reserve adjustments........       700       2,800         --
  Loss on disposal of fixed assets...........     1,381       1,293         --
  Deferred income taxes......................      (741)      4,187     (4,743)

Changes in operating assets and liabilities:
  Accounts receivable........................    (5,247)      9,354      7,267
  Inventories................................   (18,318)      5,739      4,764
  Foundry deposits...........................     9,061       1,554     12,985
  Prepaid expenses and other current assets..     1,606        (153)    (3,056)
  Accounts payable, accrued expenses and
   deferred revenue..........................    16,909      (4,382)   (21,437)
                                               --------    --------   --------
Net cash provided by (used in) operating
  Activities.................................   (18,551)    (10,511)    12,215
                                               --------    --------   --------
Cash flows from investing activities:
Purchases of short-term investments..........  (193,870)   (114,021)   (65,290)
Proceeds from matured short-term investments.   219,853      57,740     65,528
Additions to property and equipment, net.....    (4,566)     (5,998)   (12,035)
Other acquisitions and equity investments....    (4,281)         --         --
Proceeds from sale of business unit..........     4,900          --         --
Acquisition of Xionics, net of cash acquired.    (9,453)         --         --
Acquisition of ViewPoint, Inc., net of cash
  Acquired...................................        --      (9,467)        --
Acquisition of XLI Inc. common stock.........        --      (3,675)        --
Payment of certain XLI, Inc. liabilities at
  acquisition date...........................        --      (2,094)        --
Acquisition of ODEUM Microsystems............        --          --     (4,010)
Investment in Omni Peripherals Pte. Ltd......        --          --       (802)
Proceeds from sale of (investment in) foundry
  Venture....................................        --      51,234    (11,616)
                                               --------    --------   --------

Net cash provided by (used in) investing
  Activities.................................    12,583     (26,281)   (28,957)
                                               --------    --------   --------
Cash flows from financing activities:
Issuance of debt.............................        --       3,773     12,544
Repayment of debt............................      ( 23)     (6,167)   (19,652)
Treasury stock acquisition...................    (1,820)     (2,729)    (6,708)
Issuance of common stock.....................     7,411       1,612      2,752
                                               --------    --------   --------
Net cash provided by (used in) financing
  activities.................................     5,568      (3,511)   (11,064)
                                               --------    --------   --------
Net decrease in cash and cash equivalents....     ( 400)    (40,303)   (27,806)
Cash and cash equivalents, beginning
  of period..................................    19,500      59,803     87,609
                                               --------    --------   --------
Cash and cash equivalents, end of period.....  $ 19,100    $ 19,500   $ 59,803
                                               ========    ========   ========

Supplemental information:
Cash paid during the period:
  Interest...................................  $     --    $     52   $    280
                                               ========    ========   ========
  Income taxes...............................  $     --    $     --   $ 14,548
                                               ========    ========   ========
Equity securities received in sale of
  Business...................................  $ 20,000    $     --   $     --
                                               ========    ========   ========
Net unrealized losses on available-for-sale
  Securities.................................  $  6,016    $     --   $     --
                                               ========    ========   ========
Fair value of stock options assumed in
  Xionics acquisition........................  $  8,380    $     --   $     --
                                               ========    ========   ========
Fair value of stock issued for
  Xionics acquisition........................  $ 36,793    $     --   $     --
                                               ========    ========   ========

</TABLE>

See accompanying notes to consolidated financial statements.


                                      56

<PAGE>   57


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  THE COMPANY

     Oak Technology, Inc. and subsidiaries (the "Company"), a Delaware
corporation, is engaged in the design, development and marketing of high
performance multimedia semiconductors and related software to the optical
storage and imaging markets.  The Company commenced operations in August 1987,
as a California corporation. The Company has subsidiaries in Taiwan, Japan,
United Kingdom and Germany.



(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


     Basis of Presentation and Preparation
     -------------------------------------

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.


     Use of Estimates
     ----------------

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


     Cash Equivalents and Investments
     --------------------------------

     The Company's policy is to invest cash in excess of operating requirements
in interest-bearing investments. Securities purchased with remaining maturities
of three months or less at the date of acquisition are considered to be cash
equivalents. Securities purchased with remaining maturities greater than three
months at the date of acquisition are included in short-term investments.

     The Company accounts for its investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale"
or "trading" and establishes accounting and reporting requirements for each
classification. The Company has classified all securities held at June 30, 2000
and June 30, 1999 as available-for-sale securities. Such securities are
reported at fair value with unrealized gains or losses, if material, included
in other comprehensive income and reported as a separate component of
stockholders' equity.


     Fair Value of Financial Instruments
     -----------------------------------

     The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, foreign currency forward exchange
contracts and notes payable and long-term debt approximates fair value. Cash
and cash equivalents and accounts receivable approximate fair value due to
their short-term nature. Notes payable and long-term debt approximate fair
market value as interest rates on these notes approximate market rates.


                                      57

<PAGE>   58


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Derivative Financial Instruments
     --------------------------------

     The Company periodically enters into foreign forward currency exchange
contracts primarily to hedge the value of accounts receivable denominated in
foreign currencies against fluctuations in exchange rates until such
receivables are collected. The Company does not enter into foreign forward
currency exchange contracts for speculative or trading purposes. The Company's
accounting policies for these contracts are based on the Company's designation
of the contracts as hedges of firm foreign currency commitments. Gains and
losses on forward currency foreign exchange contracts are deferred and
recognized in income in the same period as losses and gains on the underlying
transactions are recognized and generally offset.


     Concentrations of Credit Risk
     -----------------------------

     Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents, short-
term investments and accounts receivable. The Company's cash equivalents and
short-term investments are primarily in money market accounts, certificates of
deposit, corporate notes and US government obligations. The Company's short-
term investments have maturities ranging from 2000 through 2002. Also included
in cash and cash equivalents as of June 30, 2000 and 1999, are approximately
$4,000,000 and $2,600,000, respectively, in accounts with foreign banks and
financial institutions primarily in Taiwan and Japan. The Company periodically
discounts notes receivable with recourse due from some customers with banks in
Japan. As of June 30, 2000 and 1999, the Company had no discounted notes
receivable outstanding.

     Generally, the Company requires no collateral on trade receivables,
although a substantial portion of export sales are guaranteed by letters of
credit. The Company believes that any credit risks are substantially mitigated
by its credit evaluation process and its maintenance of reserves for estimated
credit losses.


     Inventories
     -----------

     Inventories are stated at the lower of cost (first in, first out) or
market. The Company periodically reviews its inventories for potential slow-
moving or obsolete items and writes down specific items to net realizable value
as appropriate.


     Depreciation and Amortization
     -----------------------------

     Property and equipment is stated at cost. Depreciation is computed using
the straight-line method. Useful lives of three to five years are used for
computer equipment, purchased software and furniture and fixtures; useful lives
of up to five years are used for leasehold improvements and a useful life of 60
years is used for a building.


     Amortization of Intangible Assets
     ---------------------------------

     Goodwill, Purchased technology and other intangible assets are amortized
on a straight-line basis over periods of 3 to 5 years.


                                      58

<PAGE>   59


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Foundry Deposits Paid Under Agreements
     --------------------------------------

     Deposits and prepayments paid under agreements to secure wafer capacity
are carried at the lesser of cost or net realizable value.


     Equity Investments
     ------------------

     Where the Company has investments in which it has the ability to exercise
significant influence over operating and financial policies, these investments
are accounted for using the equity method.  Accordingly, the Company's share of
the income/(loss) in these investments is included in other operating income.


     Long Lived Assets
     -----------------

     The Company reviews its long-lived assets, including its intangible
assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets held and used is measured by a comparison of the carrying amount of an
asset to the future undiscounted net cash flows expected to be generated by
such asset. If the carrying amount is in excess of the future undiscounted net
cash flows of such assets, an impairment is recognized and is measured by the
amount by which the carrying value of the asset exceeds its fair value. Assets
to be disposed of are reported at the lower of their carrying amount or fair
value less cost to sell.


     Revenue Recognition
     -------------------

     Product revenue is recognized upon shipment to credit worthy customers.

     Software and other revenues include software license fees, services,
software maintenance and royalty revenues. Software and other revenues
originate primarily from the business operations which were acquired from
Xionics on January 11, 2000.

     Revenue from transactions involving the Company's software products is
accounted for in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," SOP 98-4 "Deferral of Effective Date of 97-2," and SOP
98-9, "Software Revenue Recognition with Respect to Certain Arrangements".
Revenue from Software is recognized upon shipment of software and related
documentation, based upon fixed price purchase orders from customers provided
there are no obligations remaining and collectibility of the receivable is
probable. When the Company does not have evidence of the fair value for one or
more of the delivered elements in a multiple-element arrangement, the residual
method is applied to recognize revenue. When the Company does not have evidence
of the fair value for all elements in a multiple-element arrangement, all
revenue from the arrangement is deferred until such evidence exists or until
all elements are delivered. Revenue from software maintenance contracts is
deferred and recognized ratably as it is earned over the term of the contract,
generally one year. Unearned software maintenance revenue is included in
deferred revenue. In addition, deferred revenue includes certain prepaid
royalties and advance billings under software development contracts for
services not yet performed. Service revenue and royalty revenue are recognized
as the service is performed and the royalty is earned. The Company recognized
revenue under agreements for Nonrecurring Engineering services as provided for
in either per diem contracts or by using the percentage of completion method of
accounting based on the ratio of actual labor hours incurred to total estimated
labor hours for individual fixed price contracts. Provisions for any estimated
losses on uncompleted contracts are made in the period in which such losses
become evident or estimatable. During the period from the acquisition of
Xionics on January 11, 2000 until the end of fiscal 2000, no material contract
loss reserves for uncompleted contracts have been provided.


                                      59

<PAGE>   60

                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Foreign Currency Translation and Transactions
     ---------------------------------------------

     The majority of the Company's purchasing and sales transactions are
denominated in US dollars, which is considered to be the functional currency of
the Company and its subsidiaries. Certain sales to customers in Japan and
Taiwan are invoiced in local currencies. Monetary assets and liabilities of the
Company's foreign subsidiaries are remeasured into U.S. dollars from the local
currency at rates in effect at period-end and non-monetary assets and
liabilities are remeasured at historical rates. Revenues and expenses are
remeasured at average rates during the period. Gains and losses arising from
the remeasurement of local currency financial statements are included in non-
operating income.

     The Company enters into foreign forward currency exchange contracts to
hedge certain exposures related to certain foreign currency transactions. Gains
and losses on contracts are recognized in the same period as the transactions
being hedged and are charged to non-operating income. As of June 30, 2000 and
1999, the Company had forward currency exchange contracts to exchange yen for
approximately $2,350,000 and $1,030,000, respectively.


     Stock-Based Compensation
     ------------------------

     The Company accounts for stock option grants, as permitted by Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting For Stock-Based
Compensation, in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting For Stock Issued To Employees. As such,
compensation expense is recorded on the date of grant if the current market
price of the underlying stock exceeds the exercise price. In accordance with
SFAS No. 123 the Company discloses pro forma net income/loss and pro forma
earnings (loss) per share amounts assuming the Company had accounted for
employee stock option grants using the fair value-based method defined in SFAS
No. 123.


     Income Taxes
     ------------

     The Company records income taxes using an asset and liability approach
that results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized
differently in the Company's consolidated financial statements and tax returns.
In estimating future tax consequences, all expected future events other than
enactment of changes in tax laws or rates are considered. A valuation allowance
is established when necessary to reduce deferred tax assets to amounts expected
to be realized. Under certain provisions of the Internal Revenue Code of 1986,
as amended, the availability of the Company's net operating loss and tax credit
carryforwards may be subject to limitation if it should be determined that
there has been a change in ownership of more than 50% of the value of the
Company's stock. Such determination could limit the utilization of net
operating loss and tax credit carryforwards.

     US income taxes are provided on income from foreign subsidiaries to the
extent the Company plans to repatriate such income.

                                      60

<PAGE>   61

                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Net Income (Loss) Per Share
     ---------------------------

     Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period, using the
treasury stock method for options and warrants. The computation of diluted net
loss per share excludes common equivalent shares since they are anti-dilutive
in a loss period. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share ("EPS") computations
for the periods presented (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                    Years Ended June 30,
                                              ---------------------------------
                                                  2000       1999       1998
                                                  ----       ----       ----
<S>                                           <C>        <C>         <C>
Net (loss) income............................. $(32,862)  $(50,669)   $  5,947
Shares:
  Weighted average common shares..............   46,057     40,819      41,739
  Dilutive stock options and other common
    stock equivalents.........................       --         --         754
                                               --------   --------    --------
      Dilutive potential common shares........   46,057     40,819      42,493
                                               --------   --------    --------
(Loss) earnings per share:
  Basic....................................... $  (0.71)  $  (1.24)   $   0.14
                                               ========   ========    ========
  Diluted..................................... $  (0.71)  $  (1.24)   $   0.14
                                               ========   ========    ========

</TABLE>

     For fiscal year 2000, approximately 12,582,969 of stock options were
excluded from the loss per share computation since they were anti-dilutive
during the loss period. For fiscal year 1999, approximately 4,753,875 of stock
options were excluded from the loss per share computation since they were anti-
dilutive during the loss period.  For fiscal year 1998, the number of anti-
dilutive shares excluded from the diluted EPS computations, representing
options outstanding with an exercise price greater than the average market
price for the periods, was 1,694,000.


     Reclassifications
     -----------------

     Certain items have been reclassified to be consistent with current
presentation. The reclassifications have no effect on previously disclosed net
income or stockholders' equity.


     Recently Issued Accounting Standards
     ------------------------------------

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which will be effective for the Company's fiscal year 2001. SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company has assessed the impact of this new
statement and does not expect the adoption of SFAS No. 133 to have a material
effect on its consolidated financial position or results of operations.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," as amended by SAB 101A and 101B, which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed

                                      61

<PAGE>   62


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


with the SEC. SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies.  The Company is currently assessing the impact of this new Staff
Accounting Bulletin on its consolidated financial position, liquidity and
results of operations.

     In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25. FIN 44 clarifies certain elements of APB
Opinion No. 25. Among other issues, this interpretation clarifies: the
definition of employee for purposes of applying APB Opinion No. 25, the
criteria for determining whether a plan qualifies as non-compensatory, the
accounting consequences of various modifications to the terms of a previously
fixed stock option award, and the accounting for an exchange of stock
compensation in a business combination. This interpretation is effective for
the Company in fiscal 2001. The Company does not believe that the adoption of
this interpretation will have a material impact on the Company's financial
position or results of operations.



(3)  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     As of June 30, 2000, all investments were considered available-for-sale
securities and consisted of the following (in thousands):


<TABLE>
<CAPTION>
                                                                  Estimated
                                                  Unrealized         Fair
                                     Cost         Gain/(Loss)       Value
                                     ----         -----------       -----
<S>                               <C>             <C>            <C>

Money market funds................ $ 18,649        $    --        $ 18,649
Certificates of deposit...........      532             --             532
Corporate notes...................   46,477           (263)         46,214
US government obligations.........   41,162            (39)         41,123
Equity securities.................   20,000         (5,714)         14,286
                                    --------        -------        --------
                                   $126,820        $(6,016)       $120,804
                                   ========        =======        ========

</TABLE>

     As of June 30, 2000, approximately $21.1 million of these investments had
contractual maturities within one year and approximately $98.4 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):


<TABLE>
<CAPTION>

<S>                                <C>
Cash and cash equivalents......... $ 19,100
Short-term investments............  101,704
                                   --------
                                   $120,804
                                   ========

</TABLE>

     As of June 30, 1999, all investments were considered available-for-sale
securities and consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  Estimated
                                                  Unrealized         Fair
                                     Cost         Gain/(Loss)       Value
                                     ----         -----------       -----
<S>                                <C>             <C>            <C>
Money market funds................  $ 19,500        $    --        $ 19,500
Certificates of deposit...........       714             --             714
Corporate notes...................    53,226             --          53,226
US government obligations.........    59,763             --          59,763
                                    --------        -------        --------
                                    $133,203        $    --        $133,203
                                    ========        =======        ========

</TABLE>

                                      62

<PAGE>   63


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     As of June 30, 1999, approximately $72.1 million of these investments had
contractual maturities within one year and approximately $63.1 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):

<TABLE>
<CAPTION>

<S>                                <C>
Cash and cash equivalents.........  $ 19,500
Short-term investments............   113,703
                                    --------
                                    $133,203
                                    ========

</TABLE>

(4)  INVENTORIES

     Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>

                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>            <C>
Purchased materials and work in process.........    $16,193        $   124
Finished goods..................................      3,944          1,695
                                                    -------        -------
                                                    $20,137        $ 1,819
                                                    =======        =======

</TABLE>

(5)   PROPERTY AND EQUIPMENT

      Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>

                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>           <C>
Land............................................    $  3,487      $  3,487
Building and leasehold improvements.............       2,509         2,741
Computers, equipment and purchased software.....      44,526        36,891
Furniture and fixtures..........................       1,584         1,587
                                                    --------      --------
                                                      52,106        44,707
Less accumulated depreciation and amortization..      32,368        22,667
                                                    --------      --------
                                                    $ 19,738      $ 22,039
                                                    ========      ========

</TABLE>

                                      63

<PAGE>   64


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(6)  INTANGIBLE ASSETS

     Intangible assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>           <C>
Purchased technology............................    $ 29,094      $ 11,446
Goodwill........................................      20,328            --
Other intangibles...............................       6,309            --
                                                    --------      --------
                                                      55,731        11,446
Accumulated amortization........................     (11,678)       (3,877)
                                                    --------      --------
                                                    $ 44,053      $  7,569
                                                    ========      ========

</TABLE>

     At June 30, 2000, intangible assets consisted of Purchased Technology,
Goodwill and other miscellaneous intangibles acquired via a series of
acquisitions including Xionics, Viewpoint and XLI. The June 30, 1999 balance
consisted of intangible assets, which arose from the acquisition of Viewpoint,
XLI and ODEUM. Purchased technology and other specific intangibles such as
acquired workforce, patents, tradename and other miscellaneous acquisition
expenses have been identified via independent fair value appraisals. Goodwill
represents the excess purchase price over the fair value of assets acquired.
See Note 11 for a more in-depth discussion of each acquisition. All intangible
assets are being amortized over a period of three to five years from the
respective dates of acquisition.



(7)  OTHER ASSETS

     Other assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>           <C>
Note receivable from officer (see Note 21)......    $  1,333      $  2,000
Investment in Omni Peripherals..................          --           434
Deposits........................................         383           425
Other...........................................          --           159
                                                    --------      --------
                                                    $  1,716      $  3,018
                                                    ========      ========
</TABLE>

                                      64

<PAGE>    65


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(8)  ACCRUED EXPENSES

     Accrued expenses consisted of the following (in thousands):


<TABLE>
<CAPTION>
                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>           <C>
Compensation and benefits related items.........    $  4,420      $  3,922
Accrued legal and other fees....................       1,017         1,456
Taxes payable...................................         140           825
Royalties.......................................       1,353           750
Restructuring (see Note 18).....................       1,270            --
Other...........................................       3,157         1,515
                                                    --------      --------
                                                    $ 11,357      $  8,467
                                                    ========      ========

</TABLE>

(9)  NON-OPERATING INCOME

     Non-operating income, net consisted of the following (in thousands):

<TABLE>
<CAPTION>

                                                    Year Ended June 30,
                                          ------------------------------------
                                              2000        1999        1998
                                              ----        ----        ----
<S>                                        <C>         <C>         <C>
Interest income..........................   $ 6,555     $ 5,617     $ 7,665
Interest expense.........................       (32)        (52)       (286)
Foreign currency gain (loss).............       760         147      (2,521)
Loss on equity method investments........    (1,863)       (368)         --
Settlement proceeds......................        --          --      10,589
Other income (expense)...................       752         186         654
                                            -------     -------     -------
                                            $ 6,172     $ 5,530     $16,101
                                            =======     =======     =======

</TABLE>

     During the year ended June 30, 1998 the Company recorded as non-operating
income the proceeds from a Settlement Agreement entered into on July 31, 1997.
The settlement agreement was between the Company and United Microelectronics
Corporation ("UMC") in connection with a complaint the Company had filed with
the International Trade Commission on July 21, 1997 based on the Company's
belief that certain UMC CD-ROM controllers infringed on one of the Company's
patents.



(10)     NOTES PAYABLE AND LONG-TERM DEBT

     The Company has established a revolving credit line with two Taiwanese
financial institutions.  Under these arrangements, the Company may borrow up to
an aggregate amount of approximately $8.7 million subject to annual renewal
without collateral.  As of June 30, 2000 and 1999, there were no borrowings
outstanding at any financial institution.


                                      65

<PAGE>   66

                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Notes payable and long-term debt consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>          <C>
Capital lease obligations.......................      $   7        $  30
Less current portion............................          7           25
                                                      -----        -----
                                                      $  --        $   5
                                                      =====        =====

</TABLE>

     Future principal payments under all outstanding obligations as of June 30,
2000 are approximately $7,000, all of which is due in fiscal 2001.



(11)  ACQUISITIONS, DIVESTITURES AND INVESTMENTS

     Acquisitions
     ------------

     On April 24, 2000 the Company signed an Asset Purchase Agreement by and
between Oak, TCD Labs and the shareholders of TCD Labs.  Under the agreement,
the Company paid $1.5 million in cash for the net assets of TCD and may be
liable for an additional $1.5 million in contingent payments for the
achievement of specific milestones, as well as a percentage of the direct
contribution margins, both of which may be earned over the next three years.

     On January 11, 2000, the shareholders of both the Company and Xionics
Document Technologies, Inc. (Xionics) approved a definitive acquisition
agreement. Xionics designs, develops and markets innovative software and
silicon solutions for printing, scanning, copying, processing and transmitting
digital documents to computer peripheral devices that perform document imaging
functions. Such devices include printers, copiers, scanners and multifunction
peripherals that perform a combination of these imaging functions.

     Under the terms of the acquisition agreement, Oak issued approximately 9.5
million shares of its common stock and paid approximately $34.7 million in cash
to acquire all of the common stock of Xionics. The Company recorded a charge of
approximately $9.9 million against earnings in the third fiscal quarter of 2000
in order to write off the cost of in-process research and development acquired
in the merger.

     At the acquisition date, Xionics had several in-process research and
development projects in each of its product groups: languages, drivers, MFP's
and its new complementary product for a Tandem copy/print engine. In each
product group there were projects that had not yet achieved technological
feasibility. As image processing represents a very specialized market, it is
unlikely that Xionics' in process technology could be successfully deployed in
alternative market applications. Further, it was determined that there was
significant technological risk and substantial development expenses relating to
each of the products under development. As a result, the Company took a $9.9
million charge against earnings in fiscal 2000 in order to reflect an
allocation of the purchase price associated with the value of the in process
research and development which, due to it's uncertain future value at the date
of acquisition, could not be considered an investment in an asset.

     The valuation of the acquired in-process research and development used by
the Company was supported by independent fair valuation studies. The estimated
value of in-process research and development was derived using the "Income
Approach", which values an asset based on future cash flows that could
potentially be generated by the asset over its estimated useful life. The
future cash flows were discounted to their present value utilizing a discount
rate of 14%. The amounts of the purchase price technology assigned to the fair
values of in-process research and development and purchased technology
represent management's best estimate. The Company did not anticipate any
material changes from historical pricing, margins and expense levels in its
valuation assumptions.

                                      66

<PAGE>   67


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     In addition to the $9.9 million charge taken, approximately $45.8 million
(representing the fair value of net intangible assets acquired in the merger)
has been recorded as intangible assets on the Company's balance sheet and is
being amortized over three to five years. The $ 45.8 million is made up of $
18.6 million in purchased technology, $ 18.9 million in Goodwill and $ 8.3
million in other miscellaneous intangible assets including Acquired Workforce,
Patents, Tradename and certain acquisition costs. The transaction has been
accounted for under the purchase method of accounting, and accordingly, the
financial statements include the results of operations of Xionics from the date
of acquisition.

     The amounts and components of the purchase price and the allocation of the
purchase price to assets purchased are as follows:

<TABLE>
<S>                                                     <C>
Cash..................................................    $34,715
Common stock..........................................     36,793
Fair value of Xionics stock options assumed...........      8,380
                                                         -------
   Total purchase price...............................    $79,888
                                                          =======

Fair value of net tangible assets of Xionics..........    $25,187
Intangible assets and goodwill........................     45,843
Purchase of in-process research and development.......      9,858
                                                          -------
   Total net tangible and intangible assets acquired..    $79,888
                                                          =======
</TABLE>


     The following unaudited pro forma financial information presents the
combined results of operations of the Oak and Xionics as if the acquisition had
occurred as of the beginning of fiscal 2000 and 1999, after giving effect to
certain adjustments, including amortization of intangibles. The unaudited pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the combined companies constituted a
single entity during such periods, and is not necessarily indicative of results
which may be obtained in the future.


<TABLE>
<CAPTION>
                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>          <C>
In thousands except for per share data:
Pro forma revenues..............................    $104,721     $102,454
Pro forma net loss..............................     (35,682)     (59,575)
                                                    --------     --------
Pro forma basic and diluted loss per share......    $  (0.68)    $  (1.18)
                                                    ========     ========
</TABLE>


     On July 2, 1998, the Company paid $10.1 million for all the outstanding
shares of ViewPoint Technology, Inc. The purchase method of accounting was used
to record the acquisition and approximately $4.8 million of the purchase price
was allocated to in-process research and development. Approximately $4.4
million of the purchase price was allocated to purchased technology and other
intangible assets and is being amortized to operations on a straight-line basis
over three years, and $0.9 million was allocated to cash, fixed assets and
other tangible assets.

     On August 11, 1998, the Company signed a merger agreement with Xerographic
Laser Images Corporation "XLI"). Under the terms of a merger agreement the
Company may be obligated to pay up to an additional $10.3 million if revenues
from products utilizing XLI's technologies are in excess of a base amount of
$3.7 million for each year of a 3 year period ending December 31, 2000. To
date, revenues have not exceeded the base amount and, accordingly, no
additional payments to XLI have been made or accrued for.

     On April 2, 1998, the Company paid $4.1 million in cash to acquire certain
assets from ODEUM Microsystems, Inc., a subsidiary of Hyundai Electronics
America. The acquisition was accounted for using the


                                      67

<PAGE>   68


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


purchase method of accounting and approximately $1.3 million of the purchase
price was allocated to in-process research and development with the remaining
amount allocated to purchased technology.

     The purchased technology and other intangible assets acquired from
ViewPoint, XLI and ODEUM are being amortized over three years. The amounts of
the purchase price assigned to the fair value of such assets and in-process
research and development represent Company management's best estimate.


     Equity Investments
     ------------------

     On April 30, 1998, the Company entered into several agreements with Omni
Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other
investors pursuant to which the Company acquired a preferred equity interest in
Omni. Omni was incorporated in Singapore on January 2, 1996, and has been in
the business of designing, developing, and marketing mechatronics modules for
optical storage drives. As of June 30, 2000 the Company had ceased operations
and was in the process of liquidating it's assets. Oak continues to have an
interest and rights in a portion of the Intellectual property of Omni. However,
the book value of these assets has now been fully reserved.

     During the second quarter of fiscal 2000 the Company made an equity
investment in a start-up venture, Earjam.com, with a first payment of
approximately $1.0 million for a minority equity position. The Company recorded
a charge of $0.2 million against earnings in the second fiscal quarter of 2000
to write-off the amount of the investment allocated to in-process research and
development. In January 2000, the Company made an additional $2.0 million
payment in Earjam.com during the third quarter of fiscal 2000 and recorded an
additional special charge of $0.3 million in the third fiscal quarter of 2000
to write-off the remaining amount of the investment allocated to in-process
research and development. The amounts allocated to the in-process research and
development charges during the second and third quarters of fiscal 2000 were
determined through an established valuation technique used in the high
technology industry. The amount allocated to in-process research and
development was expensed upon acquisition, because technological feasibility
had not been established and no alternative uses exist. The investment has been
accounted for under the equity method of accounting. Although the companies are
continuing to work together,  as of June 30, 2000, due to a shift in the
sentiment of the equity markets toward financing internet based start-up
ventures, the Company decided to record a permanent impairment reserve against
the remaining book value of this investment.


                                      68

<PAGE>   69


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Divestiture
     -----------

     On June 21, 2000, the Company received notice that a company in which it
held a small equity investment had been sold. The Company had indirectly
acquired this equity interest through the acquisition of Xionics and valued it
at fair market value on the date of acquisition. Subsequent to the acquisition,
significant economic events occurred that resulted in an increase in the fair
value of the investment. Under the terms of the sales agreement, Oak recorded a
receivable for $2.6 million in other current assets and a gain in other income
of $1.2 million.

     On January 19, 2000, the Company announced the sale of its broadband
business group located in the United Kingdom and associated Intellectual
Property in the United States to Conexant Systems, Inc. Under the terms of the
agreement, Oak received $24.9 million in cash and stock from Conexant. The
Company realized a gain of $22.1 million from the sale.


(12)  INCOME TAXES

     The components of the income tax expense (benefit) are as follows (in
thousands):


<TABLE>
<CAPTION>

                                                    Year Ended June 30,
                                          ------------------------------------
                                              2000        1999        1998
                                              ----        ----        ----
<S>                                        <C>         <C>         <C>
Current:
  Federal and state....................... $     2      $(10,259)   $ 2,448
  Foreign.................................     739           325      2,825
Deferred:
  Federal and state.......................      --         5,366     (1,146)
  Foreign.................................    (741)       (1,179)    (3,597)
  Charge in lieu of taxes attributable to
    Employee stock option plans...........      --            --        520
                                           -------      --------    -------
Total tax provision (benefit)............. $    --      $ (5,747)   $ 1,050
                                           =======      ========    =======

</TABLE>


A reconciliation between the income tax provision (benefit) computed at the
federal statutory rate and the effective tax rate is as follows (in thousands):

<TABLE>
<CAPTION>

                                                    Year Ended June 30,
                                          ------------------------------------
                                              2000        1999        1998
                                              ----        ----        ----
<S>                                        <C>         <C>         <C>
Expense (benefit) at federal statutory
  tax rate................................  $(11,502)   $(19,181)   $ 2,379
State income tax, net of federal benefit..         2         867        300
Rate differential on foreign income.......        (2)        428       (538)
Research credit...........................        --          --     (1,650)
Change in valuation allowance.............        --       4,501         --
Change in estimate........................        --      (2,806)        --
Net operating loss not utilized...........    11,502      10,444         --
Other.....................................        --          --        559
                                            --------    --------    -------
Total tax provision (benefit).............  $     --    $ (5,747)   $ 1,050
                                            ========    ========    =======

</TABLE>

                                      69

<PAGE>   70


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities are as follows (in thousands):


<TABLE>
<CAPTION>
                                                           June 30,
                                                  --------------------------
                                                      2000          1999
                                                      ----          ----
<S>                                                <C>          <C>
Various reserves and accruals....................   $   3,978    $   2,963
Acquired intangibles.............................       5,992        4,395
Net operating loss carryforwards.................      26,488        7,474
Tax credits......................................      11,636        6,996
Other foreign deferred asset.....................          --          756
Other............................................         256          194
                                                    ---------    ---------
Total gross deferred tax assets..................      48,350       22,778
Less valuation allowance.........................     (38,835)     (21,694)
                                                    ---------    ---------
                                                        9,515        1,084
Acquired intangibles.............................      (8,682)         --
Fixed assets depreciation differences............        (833)      (1,074)
Other foreign liabilities........................        (697)      (1,448)
                                                    ---------    ---------
Total gross deferred tax liabilities.............     (10,212)      (2,552)
                                                    ---------    ---------
Net deferred tax liabilities.....................   $    (697)   $  (1,438)
                                                    =========    =========

</TABLE>

     The Company has set up a valuation allowance of $38,835,000 as of June 30,
2000. Based upon the results of the current year operations, the Company's
projected operating results, and all other available objective information, the
Company's management does not believe it is more likely that not that
sufficient future taxable income will be generated to sufficiently realize all
of the net deferred tax assets.  Included in the valuation allowance as of June
30, 2000 are tax benefits attributable to noncompensatory stock options of
$9,055,000 and $2,492,000 which, when realized, will be a credit to additional
paid-in-capital.

     As of June 30, 2000, the Company has federal and state net operating loss
("NOL") carryforwards of approximately $67,005,000 and $31,486,000,
respectively, available to reduce future income subject to income taxes. The
federal net operating loss carryforwards expire in fiscal years 2019 through
2020. Included is approximately a $17,700,000 net operating loss attributable
to Xionics which is subject to an annual limitation from ownership change of
$5,000,000.  State net operating loss carryforwards expire in fiscal years 2004
through 2005.

     As of June 30, 2000 the Company has federal research and experimentation
credit carryforwards of approximately $5,726,000 which expire from 2013 to
2020. The Company also has state tax credit carryforwards of approximately
$4,673,000; if not utilized, approximately $426,000 of these credits will
expire beginning in 2002 through 2003. As of June 30, 2000 and 1999, the
cumulative amount of unremitted earnings of non-US subsidiaries on which the
Company had not provided US taxes approximated $9,962,000 and $11,658,000,
respectively. The additional taxes that could arise if those earnings were to
be remitted to the US would not be material after consideration of existing
foreign tax credits. It is management's intent that these earnings will remain
indefinitely invested.


                                      70

<PAGE>   71


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(13) FOUNDRY AGREEMENTS AND INVESTMENTS IN FOUNDRY VENTURE

     Foundry Agreements

     In June and November 1995, the Company entered into agreements with Taiwan
Semiconductor Manufacturing Company, Ltd. (TSMC) and Chartered Semiconductor
Manufacturing Ltd. (Chartered) to obtain certain additional wafer capacity
through the year 2001. The original agreements called for the Company to commit
to certain future wafer purchases and to deposit funds with the suppliers as
either a portion of the price of the additional wafers in advance of their
delivery or as a non-interest bearing deposit to secure the availability of
additional wafers. The price of such wafers would be determined in the future
periods in which specific orders were actually placed. If the Company is not
able to use, assign, or sell the additional wafer quantities, all or a portion
of the deposits may be forfeited.

     The Company has subsequently twice amended its previous agreement with
TSMC. The most recent amendment, dated June 1999, addressed $16.8 million of
wafer deposits held by TSMC as of that date. These deposits were subsequently
all consumed through purchases in fiscal 2000. No additional deposits with TSMC
have been requested or made in fiscal 2000.

     As of June 30, 1999, the Company had $3.5 million of deposits with
Chartered. The Company's current agreement with Chartered, as amended, allows
the deposits to be utilized in increments until December 31, 2002. Based upon
previous forecasts, the Company had recorded a reserve of $2.8 million against
this deposit as of June 30, 1999. As a result of updating those forecasts in
fiscal 2000, the remaining balance of $0.7 million was fully reserved.


     Investment In Foundry Venture
     -----------------------------

     In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") to form, along with other
investors, a separate Taiwanese company, United Integrated Circuits Corporation
("UICC"), for the purpose of building and managing a semiconductor
manufacturing facility in the Science Based Industrial Park in Hsin Chu City,
Taiwan, Republic of China. The Company paid approximately $51.2 million for
approximately 9.3% of the total outstanding shares of the foundry venture. The
Company accounted for the investment under the cost method.

     In March 1999, the Company entered into an agreement to sell all of its
shares in the joint venture to UMC, at the shares' carrying cost as recorded by
the Company. Accordingly, no gain or loss was recorded related to this
transaction.


(14) COMMITMENTS

     Leases
     ------

     The Company leases its US headquarters and certain facilities and
equipment under non-cancelable operating leases. The Company is responsible for
its share of expenses under the terms of certain of the leases.


                                      71

<PAGE>   72


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Future minimum lease payments under non-cancelable operating leases are as
follows:

<TABLE>

      Year Ending June 30,
      -------------------
     <S>                                                     <C>
      2001..................................................  $ 3,208
      2002..................................................    2,712
      2003..................................................    2,087
      2004..................................................    2,090
      2005..................................................    2,067
      Thereafter............................................    4,015
                                                              -------
                                                              $16,179
                                                              =======

</TABLE>

     Rent expense was approximately $2,602,000, $3,467,000 and $2,498,000 for
the years ended June 30, 2000, 1999 and 1998, respectively.


     Inventory Purchase Commitments
     ------------------------------

     The Company subcontracts all of its manufacturing to independent
foundries. As of June 30, 2000 and 1999, the Company had approximately $16.4
million and $1.6 million, respectively, in non-cancelable purchase commitments
with various wafer fabrication subcontractors.


     Capital Expenditure Commitments
     -------------------------------

     The Company had outstanding commitments to purchase capital equipment of
approximately $1.2 million at June 30, 2000.


(15)  CONTINGENCIES

     The Company and various of its current and former officers and Directors
are parties to a consolidated class action lawsuit filed on behalf of all
persons who purchased or acquired the Company's common stock (excluding the
defendants and parties related to them) for the period July 27, 1995 through
May 22, 1996. This state court proceeding, designated IN RE OAK TECHNOLOGY
SECURITIES LITIGATION, Master File No. CV758510 was filed in Santa Clara County
Superior Court in Santa Clara, California. The lawsuit originally named as
defendants several of the Company's venture capital fund investors, two of its
investment bankers and two securities analysts. The plaintiffs alleged
violations of California securities laws and statutory deceit provisions as
well as breaches of fiduciary duty and abuse of control. The plaintiffs sought
unspecified monetary damages. After several rounds of demurrers, the court
dismissed all claims except the California Corporations Code Sections
25400/25500 cause of action against the Company, four officers and the
Company's investment bankers and securities analysts.

     On July 16, 1998, the court provisionally certified a national class of
all persons who purchased the Company's stock during the class period. The
class was provisionally certified with the order held in abeyance pending
resolution of the question of whether a nationwide class may bring a California
Corporations Code Sections 25400/25500 claim. This issue was resolved in favor
of allowing such nationwide class actions by the California Supreme Court, Case
No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES
LITIGATION appeal by the California Supreme Court. On August 5, 2000 the court
granted Company's motion for summary judgment and entered judgment in favor of
the Company. The plaintiffs have filed a notice of their intent to appeal the
court's decision. Based on its current information, the Company believes this
suit to be without merit and will defend its position vigorously. Although it
is possible the court's

                                      72

<PAGE>   73


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

ruling may be overturned on appeal and the Company may incur a loss upon an
adverse conclusion of these claims, an estimate of any such loss cannot be
made.

     Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE
OAK TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit, which
asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the above described class
actions The plaintiffs are seeking monetary damages, equitable relief and an
accounting for the defendants' sales of shares of the Company's common stock.
Based on its current information, the Company believes the suits to be without
merit and will defend its position vigorously. Although it is reasonably
possible the Company may incur a loss upon conclusion of these claims, an
estimate of any such loss cannot be made.

     If any of the above pending actions are decided adversely to the Company,
it would likely have a material adverse affect on the Company's financial
condition and results of operations.

     On July 21, 1997, the Company filed a complaint with the ITC based on the
Company's belief that certain Asian companies were violating U.S. trade laws by
the unlicensed importing or selling of certain CD-ROM controllers that
infringed one or more of the Company's United States patents. The complaint
seeks a ban on the importation into the United States of the named respondent's
infringing CD-ROM controllers or products containing such infringing CD-ROM
controllers. A formal investigative proceeding was instituted by the ITC
(Investigation No. 337-TA-401) on August 19, 1997, naming as respondents:
Winbond Electronics Corporation (Winbond); Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia
Sendirian Berhad; and Wearnes Peripheal International (Pte.).

     On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the
Company obtained a nonexclusive, royalty-free license to several Winbond
patents. The settlement agreement provided that the parties would jointly seek
termination and dismissal of investigation No. 337-TA-401 as to Winbond and its
four affiliated companies: Winbond Electronics North America Corporation;
Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian
Berhad; and Wearnes Peripheal International (Pte.). On April 15, 1998,
Investigation No. 337-TA-401 was ordered terminated as to all parties.

     As originally filed with the ITC, the Company's complaint also identified
as proposed respondents: United Microelectronics Corporation (UMC); Lite-On
Group; Lite-On Technology Corp.; Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. Prior to the ITC's institution of the formal investigation
proceeding, the Company and UMC entered into a settlement agreement, effective
July 31, 1997, pursuant to which UMC agreed to cease and desist the manufacture
and/or importation into the United States of its specified CD-ROM controllers,
except under certain limited conditions which expired on January 31, 1998. The
settlement agreement additionally provided for the withdrawal of the Company's
ITC complaint against UMC and the above-named Lite-On and Behavior Tech
companies. In September 1997, October 1997, February 1998 and April 1998, the
Company received $2.6 million, $4.7 million, $0.7 million and $2.6 million,
respectively, pursuant to this settlement. Proceeds from the settlement were
recorded as miscellaneous income and included in non-operating income for the
periods ended September 30, 1997, December 31, 1997, March 31, 1998 and June
30, 1998, respectively.

     On October 27, 1997, the Company filed a complaint in the United States
District Court, Northern District of California against UMC for breach of
contract, breach of the covenant of good faith and fair dealing and fraud based
on UMC's breach of the settlement agreement arising out of the ITC action, Case
No. C-97-20959. Together with the filing of the complaint, the Company filed a
motion for a preliminary injunction against UMC, seeking to enjoin UMC from
selling the CD-ROM controllers that were the subject of the ITC action and
related settlement agreement, through or to a UMC-affiliated, Taiwanese entity
called MediaTek. On February 23, 1998, the federal court judge denied the
Company's request for a preliminary injunction based on

                                      73

<PAGE>   74


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


the court's findings that there was no evidence that UMC was presently engaged
in the manufacture of CD-ROM controllers or other products covered by the
settlement agreement. On December 24, 1997, UMC answered the Company's
complaint and counterclaimed by asserting causes of action for recission,
restitution, fraudulent concealment, mistake, lack of mutuality, interference
and declaratory judgment of non-infringement, invalidity and unenforceability
of the Oak patent that was the subject of the original ITC action filed against
UMC. The Company believes these counterclaims to be without merit and will
vigorously defend its patent. Both the Company and UMC seek compensatory and
punitive damages. In addition, the Company seeks permanent injunctive relief.
On June 11, 1998, this case was consolidated for all purposes with a related
case brought against the Company by MediaTek (described below) under Case No.
C-97-20959. On the same date, pursuant to UMC's request, the federal court
judge ordered the consolidated action stayed under 28 U.S.C. Section 1659,
based on the judge's conclusion that the civil action involves the same issues
involved in Investigation No. 337-TA-409 before the International Trade
Commission, initiated by Oak (described below). The stay was to be lifted upon
final resolution of Investigation No. 337-TA-409; however, the judge has
ordered that the consolidated action continue stayed pending the resolution of
the parties appeal of the ITC ruling to the Federal Circuit Court of Appeals.
(Described below.)

     In a related action to the lawsuit that was commenced by the Company
against UMC (described above),  on December 19, 1997, MediaTek, a UMC
affiliated, Taiwanese entity, filed a complaint in the United States District
Court, Northern District of California, against the Company for declaratory
judgment of non-infringement, invalidity and unenforceability of the Oak patent
that was the subject of the original ITC action against UMC, and intentional
interference with prospective economic advantage, Case No. C-97-21126. MediaTek
seeks compensatory damages of not less than $10 million and punitive damages.
The Company filed its answer on January 8, 1998, denying all the allegations.
The Company believes the suit to be without merit and will vigorously defend
its patent. On June 11, 1998, this case was consolidated for all purposes with
a related case brought by the Company against UMC (described above) under Case
No. C-97-20959. On the same date, pursuant to UMC's request, the federal court
judge ordered the consolidated action stayed under 28 U.S.C. Section 1659,
based on the judge's conclusion that the civil action involves the same issues
involved in Investigation No. 337-TA-409 before the International Trade
Commission, initiated by Oak (described below). The stay was to be lifted upon
final resolution of Investigation No. 337-TA-409; however, the judge has
ordered that the consolidated action continue stayed pending the resolution of
the parties appeal of the ITC ruling to the Federal Circuit Court of Appeals.
(Described below.)

     On April 7, 1998, the Company filed a new complaint with the ITC alleging
that five Asian companies are violating U.S. trade laws by the unlicensed
importing or selling of CD-ROM drive controllers that infringe a United States
patent owned by the Company. The Company's complaint is asserted against United
Microelectronics Corp., MediaTek, Inc., Lite-On Group, Lite-On Technology Corp.
and AOpen, Inc. In its complaint, the Company requests the ITC to investigate
the five above-named companies and to enter an order barring imports into the
United States of their allegedly infringing CD_ROM controllers and products
containing them, including CD-ROM drives and personal computers. A formal
investigative proceeding was instituted by the ITC (Investigation No. 337-TA-
409) on May 8, 1998 naming as respondents United Microelectronics Corp.,
MediaTek, Inc., Lite-On Technology Corp. and AOpen, Inc. The following
respondents, all Taiwanese drive manufacturers, were later added to the
proceeding pursuant to an Initial Determination by the Administrative Law Judge
(ALJ) supervising the Investigation following a motion brought by the Company
on August 6, 1998 to add these respondents: Actima Technology Corp., ASUSTek
Computer, Inc., Behavior Tech Computer Corp., Delta Electronics, Inc. Momitsu
Multi Media Technologies, Pan-International Industrial Corp. and Ultima
Electronics Corp. On August 28, 1998, the ALJ entered an Initial Determination
that the investigation be terminated as to respondent UMC. On September 4,
1998, the Company filed a petition with the Commission for review of the
Initial Determination. On October 7, 1998, the Commission reversed the Initial
Determination of the ALJ as the Commission determined that the Company's
complaint against UMC does state an unfair trade practices claim under Section
337 of the Tariff Act. On December 23, 1998, the ALJ issued another Initial
Determination terminating the investigation as to respondent UMC for a second
time. On December 31, 1998, the Company filed a petition with the Commission
for review of the Initial Determination. On February 3, 1999, the Commission
reversed the Initial Determination of the ALJ for a second time on the grounds
that the

                                      74

<PAGE>   75


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Company's complaint against UMC does state an unfair trade practices claim
under Section 337 of the Tariff Act. On May 10, 1999, the ALJ issued another
Initial Determination terminating the investigation as to respondent UMC for a
third time, finding that UMC's activities were licensed. On May 17, 1999, the
Company filed a petition with the Commission for review of the Initial
Determination and on June 28, 1999, the Commission determined to review the
Initial Determination.

     Trial before the ALJ as to all respondents except UMC commenced on January
11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ entered an
Initial Determination that no unfair trade practices were committed by Mediatek
under Section 337 of the Tariff Act. On May 24, 1999, the Company filed a
petition requesting the Commission to review the Initial Determination and on
June 28, 1999 the Commission determined to review it. On September 27, 1999,
the Commission affirmed the ALJ's finding that there were no unfair trade
practices committed by MediaTek under Section 337 of the Tariff Act as the
Commission determined that there was no infringement of the Company's US Patent
No. 5,581,715. On this same date, the Commission also reversed the ALJ's
findings that the Company's patent was invalid and unenforceable and held that
the Company's US Patent No. 5,581,715 was not invalid or enforceable. The
Commission took no position on the ALJ's Initial Determination terminating UMC
from the investigation.

     On February 24, 2000, the Company appealed the Commission's ruling that no
unfair trade practices were committed by MediaTek under Section 337 of the
Tariff Act to the Federal Circuit Court of Appeals. No decision is expected to
be rendered by the Federal Circuit of Appeals for twelve to eighteen months
from the time of appeal. In connection with this proceeding, the Company will
continue to incur legal fees and other expenses.

     If any of the above pending actions with respect to UMC and MediaTek are
decided adversely to the Company, it would likely have a material adverse
affect on the Company's financial condition and results of operations.


(16) STOCKHOLDER EQUITY

     The Company is authorized to issue two classes of stock, preferred stock
and common stock, each with a par value of $0.001 per share.


     Stock Repurchase Plan
     ---------------------

     On January 22, 1998, the Company announced that its board of directors had
authorized the repurchase of up to 2.0 million shares of its common stock
either in the open market or in private transactions. As of June 30, 1999 the
Company had repurchased all 2.0 million shares for approximately $ 9.4 million.
On July 29, 1999 the Company announced that its Board of Directors had approved
a stock repurchase plan authorizing up to an additional four million shares of
the Company. Repurchase was to be made from time to time at certain price
thresholds over a one-year period. In fiscal 2000, the Company repurchased an
additional 381,000 of its common stock for $1.8 million at $4.78 per share. As
of June 30, 2000, the Company was holding approximately 2.4 million shares in
treasury stock for approximately $11.2 million.


     Preferred Stock
     ---------------

     The Company's Board of Directors has authorized 2,000,000 undesignated
shares of preferred stock; none of these preferred shares have been issued. The
Board is authorized, subject to any limitations prescribed by Delaware law, to
provide for the issuance of shares of preferred stock in one or more series, to
establish the number of shares to be included in each series, and to fix the
powers, preferences and rights of the shares.


                                      75

<PAGE>   76

                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Stock Options
     -------------

     Upon the re-incorporation of the Company in Delaware in February 1995, the
Company assumed the obligations of its predecessor under the 1988 Stock Option
Plan (the "1988 Plan"), as amended and restated. The Company does not intend to
issue any additional options under the 1988 Plan.

     In December 1994, the Board of Directors approved the 1994 Stock Option
Plan (the "1994 Plan") under which 6,000,000 shares of Common Stock, determined
after the effect of a two for one stock split, were reserved for issuance.
6,000,000 additional shares were approved in November 1998. Under the 1994
Plan, either incentive or non-qualified options to purchase the Company's
common stock may be granted to employees as determined by the Board of
Directors at prices generally at market value at the date of grant (110% in
certain cases of non-qualified options). Non-qualified options may be granted
to employees and consultants as determined by the Board of Directors at prices
not lower than 85% of market value at the date of grant. The Board of Directors
also has the authority to set exercise dates (generally no longer than five
years from date of grant), payment terms and other provisions for each grant.

     In December 1994 the Board of Directors also approved the 1994 Outside
Directors' Stock Option Plan (the "Directors Plan"), under which 500,000 shares
of Common Stock were reserved for issuance. The Directors Plan provides for the
automatic grant of options to purchase shares of Common Stock to non-employee
Directors of the Company.

     On August 12, 1998, the Company repriced 2,638,750 options under the 1994
Plan to $3.25, the fair market value as of that date. The repriced options were
treated as cancelled and regranted and did not retain their original vesting
terms.

     Stock options are subject to vesting, generally over 50 months. Under the
1988 Plan, shares are exercisable prior to vesting and are held in escrow until
vested; however, unvested shares are subject to a right of repurchase by the
Company at their original purchase price upon termination of employment.
Unexercised options expire 90 days after termination of employment with the
Company.

A summary of all the Company's stock option plans is set forth below:

<TABLE>
<CAPTION>


                                         Weighted                    Weighted
                                         Average                     Average
                            Options      Exercise      Options       Exercise
                          Outstanding     Price      Exercisable      Price
                          -----------     -----      -----------      -----
<S>                       <C>           <C>          <C>             <C>
Balances, July 1, 1997...   3,781,996     $  5.91      1,459,573       $3.33
Granted..................   2,730,900        8.29
Exercised................    (798,330)       1.50
Canceled.................  (1,352,928)       7.83
                          ----------     -------      ---------       -----
Balances, June 30, 1998..   4,361,638     $  7.61      1,153,658       $6.06
Granted..................  10,973,478        3.14
Exercised................    (346,504)       2.35
Canceled.................  (4,637,448)       6.73
                           ----------     -------      ---------       -----
Balances, June 30, 1999..  10,351,164     $  3.44      2,417,486       $3.90
Granted..................   7,509,503        7.29
Exercised................  (2,216,406)       2.64
Canceled.................  (2,397,369)       3.76
                           ----------     -------      ---------       -----
Balances, June 30, 2000..  13,246,892     $  5.70      5,005,923       $3.25
                           ==========     =======      =========       =====
</TABLE>

                                      76

<PAGE>   77

                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     In connection with the Company's acquisition during fiscal 2000 of
Xionics, the Company assumed all outstanding options granted by Xionics prior
to the acquisition date which converted into 3.3 million Company options.

     The weighted average fair market values of options granted in fiscal years
2000, 1999 and 1998 were $5.19, $4.60 and $3.82, respectively.

     The following table summarizes information about the stock options
outstanding as of June 30, 2000:

<TABLE>
<CAPTION>
                            Options Outstanding           Options Exercisable
                      --------------------------------  -----------------------
                                   Weighted
                                   Average      Weighted               Weighted
                    Options at     Remaining     Average    Shares at   Average
                     June 30,  Contractual Life Exercise     June 30,  Exercise
Exercise Prices        2000        (Years)       Price         2000     Price
---------------        ----         -----        -----         ----     -----
<S>                <C>            <C>         <C>          <C>        <C>
$ 0.13 to $ 2.88    2,009,655      7.65        $   2.11     1,260,836  $ 1.93
$ 2.97 to $ 3.00    4,108,120      8.78            3.00     2,376,250    3.00
$ 3.02 to $ 3.63    2,764,237      7.69            3.29       942,782    3.28
$ 3.75 to $13.38    3,546,980      9.26           10.40       383,295    7.41
$13.81 to $25.00      817,900      9.58           15.91        42,760   18.67
                   ----------     -----        --------     ---------  ------
$ 0.13 to $25.00   13,246,892      8.56        $   5.70     5,005,923  $ 3.25
                   ==========     =====        ========     =========  ======
</TABLE>

     Stock Purchase Plan
     -------------------

     In December 1994, the Board of Directors approved the 1994 Stock Purchase
Plan (the "Stock Purchase Plan") under which 600,000 shares of common stock
were reserved for issuance with the stock split; 1,000,000 additional shares
were approved in November 1998. The Stock Purchase Plan permits eligible
employees to purchase shares at a price equal to 85% of the lower of the market
value at the beginning or end of each six-month offering period. Under the
Stock Purchase Plan, 444,012, 279,668 and 254,726 shares were issued in fiscal
years 2000, 1999 and 1998 at weighted average prices of $3.05, $2.68 and $6.10,
and weighted average fair values of $1.51, $1.16 and $2.94, respectively.

     On August 19, 1997 the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock, par value $0.001 per share (the "Common Stock") of the
Company. The dividend was payable on August 29, 1997 (the "Record Date") to the
stockholders of record on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share (a "Unit") of Series
A Junior Participating Preferred Stock, par value $0.001 per share of the
Company at a price of $60.00 per Unit subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement dated as of August
19, 1997 between the Company and BankBoston, N.A., as Rights Agent. The Rights
expire on August 19, 2007.

                                      77

<PAGE>   78

                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Fair Value Information
     ----------------------

     The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock options plans. As the fair value of the options at the
date of grant were equivalent to the exercise price, no compensation cost has
been recognized for its stock option plans or its Stock Purchase Plan. Had
compensation cost for the Company's option plans been determined consistent
with FASB Statement No. 123, the Company's net income (loss) and net income
(loss) per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data)




<TABLE>
<CAPTION>

                                           2000          1999         1998
                                           ----          ----         ----
<S>                                    <C>           <C>            <C>
Net income (loss):
  As reported.......................... $(32,862)     $(50,669)      $5,947
  Pro forma............................ $(44,009)     $(57,765)      $ (197)

Basic net income (loss) per share:
  As reported.......................... $  (0.71)     $  (1.24)      $ 0.14
  Pro forma............................ $  (0.96)     $  (1.42)      $ 0.00

Diluted net income (loss) per share:
  As reported.......................... $  (0.71)     $  (1.24)      $ 0.14
  Pro forma............................ $  (0.96)     $  (1.42)      $ 0.00

</TABLE>

     The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with a dividend yield of zero
percent and the following weighted average assumptions:

<TABLE>
<CAPTION>

                          Stock Option Plans             Stock Purchase Plan
                      --------------------------   ----------------------------
                        2000     1999     1998        2000     1999     1998
                        ----     ----     ----        ----     ----     ----
<S>                    <C>     <C>      <C>         <C>      <C>      <C>
Expected life (years).  3.760   3.760    3.760       0.500    0.500    0.500
Expected volatility...  79%     75%      70%         79%      75%      70%
Risk-free interest rate 6.11%   5.18%    5.73%       6.11%    5.02%    5.51%

</TABLE>

(17) EMPLOYEE BENEFIT PLAN

     In July 1990, the Company adopted a 401(k) Profit Sharing Plan ("401(k)
Plan") which is intended to qualify under section 401(k) of the Internal
Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all of
the Company's US employees. Participants may elect to contribute a percentage
of their compensation to this plan, up to the statutory maximum amount. The
Company makes contributions to the 401(k) Plan based on 25% of an employee's
contribution up to a maximum of 1.25% of total compensation; approximately
$326,000, $242,000 and $288,000 in matching contributions were recorded during
fiscal years 2000, 1999 and 1998, respectively.


(18) RESTRUCTURING

     During fiscal 2000, the Company accrued $1.3 million as restructuring
charges for the abandonment of its leased facility in Andover, Massachusetts,
in respect of which the Company has negotiated a lease buyout. These costs will
be paid during fiscal 2001.


                                      78

<PAGE>   79


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     During the third quarter of 1998, the Company completed a thorough review
of its operations and market opportunities. The Company concluded it was
necessary to write-down assets dedicated to the Audio division, primarily
prepaid royalties, and to reduce headcount due to the Company's decision to
exit the Audio and Graphics businesses.

     In connection with the reorganization, the Company recorded a charge of
$1.8 million, which included non-cash expense of $1.0 million and cash expense
of $0.8 million. The non-cash charge was related to prepaid royalties, which
will not be utilized. This write-off was completed by the end of the third
quarter of fiscal 1999. Cash outlays related to the headcount reduction of 56
individuals. As of June 30, 1999 all amounts have been paid and there is no
accrual remaining relating to the restructuring.


(19) SEGMENT INFORMATION

     SFAS No. 131 establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision-
maker is considered to be the chief executive officer ("CEO").

     For the first two quarters of fiscal year 2000, Oak Technology had three
reportable segments offering different product lines to each of its target
markets: Optical Storage, Imaging and Consumer. The Optical Storage Group
provides high-performance controllers for CD-ROM and CD-RW to OEM's who serve
the optical storage market. The Imaging Group provides high-performance imaging
systems for the digital imaging environment, including products used in digital
laser copiers and printers as well as multifunction peripherals. The Consumer
Group targeted its products for the digital entertainment system market, with
focus on integrated circuits for video disk player systems (DVD and VCD) and
digital broadcast applications. With the sale of the broadband business to
Conexant in early January 2000, the Company has two remaining reportable
segments: Optical Storage and Imaging.  The Company evaluates operating segment
performance based on net revenues and direct operating expenses of these
segments. The accounting policies of the operating segments are the same as
those described in the summary of accounting policies. Imaging segment
information reported for the fiscal year ended June 30, 2000 includes the
effects of the Xionics acquisition completed on January 11, 2000.  The Company
does not allocate assets to its individual operating segments. No reportable
segments have been aggregated.

                                      79

<PAGE>   80


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Information about reported segment income or loss is as follows for the
years ended June 30, 2000, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>

                                       2000        1999         1998
                                       ----        ----         ----
<S>                                 <C>        <C>           <C>

Net revenues
  Optical Storage................    $36,035    $ 46,992      $129,170
  Imaging........................     46,157      20,897        19,406
  Consumer.......................      4,264       3,162         4,912
  PC Audio and 3D Graphics.......         --          --         3,618
                                     -------    --------      --------
                                     $86,456    $ 71,051      $157,106
                                     =======    ========      ========


Cost of goods sold and direct
 operating expenses, less
 depreciation:


Optical Storage..................    $43,764    $ 39,582      $ 73,263
Imaging..........................     37,119      19,131        11,866
Consumer.........................      9,843      20,817        13,946
PC Audio and 3D Graphics.........         --          --        12,946
                                     -------    --------      --------
                                     $92,490    $ 79,530      $112,021
                                     =======    ========      ========

Depreciation
  Optical Storage................    $   933    $  2,043      $    364
  Imaging........................        609       1,626           499
  Consumer.......................        222       1,487           277
  PC Audio and 3D Graphics.......         --          --           768
                                     -------    --------      --------
                                     $ 1,764    $  5,156      $  1,908
                                     =======    ========      ========

Contribution Margin:
  Optical Storage................    $(8,662)   $  5,366      $ 55,543
  Imaging........................      8,429         140         7,041
  Consumer.......................     (5,801)    (19,142)       (9,311)
  PC Audio and 3D Graphics.......         --          --       (10,096)
                                     -------    --------      --------
                                     $(6,034)   $(13,636)     $ 43,177
                                     =======    ========      ========
</TABLE>

                                      80

<PAGE>   81


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)





     For the fiscal years ended June 30, 2000, 1999 and 1998, the "Other"
revenue category consists of various corporate revenues. A reconciliation of
the totals reported for the operating segments to the applicable line items in
the consolidated financial statements for the fiscal years ended June 30, 2000,
1999 and 1998 is as follows (in thousands):


                                      81

<PAGE>   82


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)





<TABLE>
<CAPTION>

                                       2000        1999         1998
                                       ----        ----         ----
<S>                                 <C>        <C>           <C>
Contribution margin from
  operating segments.............    $ (6,034)  $(13,636)     $43,177
Indirect costs of goods sold
  and expenses...................      32,019     36,207       49,192
Amortization of intangibles......      11,778      4,942           --
Acquired in-process research
  and development................      10,008      7,161        1,323
Restructuring expenses...........       1,270         --        1,766
                                     --------   --------     --------
Total operating loss.............     (61,109)   (61,946)      (9,104)
Gain on sale of business.........      22,075         --           --
Other income.....................       6,172      5,530       16,101
                                     --------   --------     --------
(Loss) income before taxes.......    $(32,862)  $(56,416)    $  6,997
                                     ========   ========     ========

</TABLE>

     Indirect costs of goods sold and operating expenses includes all costs and
expenses not specifically charged to the operating segments in the financial
information reviewed by the Company's chief decision making officer. These
include inventory reserve provisions and adjustments; operating overhead
included in consolidated cost of goods sold; corporate research and development
expenses; and most of the Company's selling, general and administrative
expenses.

     The Company maintains operations in the United States, Taiwan, Japan,
United Kingdom, Korea and Germany. Activities in the United States consist of
corporate administration, product development, logistics and worldwide sales
management. Foreign operations consist of regional sales and limited board-
level manufacturing.

     The following distribution of net revenues, identifiable assets by
geographic areas, and property and equipment for the years ended June 30, 2000,
1999 and 1998 are as follows (in thousands):


<TABLE>
<CAPTION>

                                       2000        1999         1998
                                       ----        ----         ----
<S>                                 <C>        <C>           <C>
Revenue from unaffiliated
  customers originating from:
  North America.................. $  21,881     $  10,147     $ 13,155
  Japan..........................    27,856        36,728       60,360
  Korea..........................    29,429         7,002       31,364
  Taiwan.........................       932         2,104       21,414
  Other Asia.....................     3,425         6,962       16,823
  Europe.........................     2,933         8,108       13,990
                                  ---------     ---------     --------
                                  $  86,456     $  71,051     $157,106
                                  =========     =========     ========

Identifiable assets:

  United States.................. $208,562       $181,699
  Japan..........................    9,544          7,750
  Taiwan.........................   12,036          8,917
  Europe.........................    6,258          5,475
                                  --------       --------
                                  $236,400       $203,841
                                  ========       ========

Property and equipment, net:
  United States.................. $ 13,820       $ 15,472
  Japan..........................      430            551
  Taiwan.........................    5,089          5,175
  Europe.........................      399            841
                                  --------       --------
                                  $ 19,738       $ 22,039
                                  ========       ========

</TABLE>

The following table summarizes the annual percentage contribution to net
revenues by customers when sales to such customers exceeded 10% of net revenues
and the associated percentage of total accounts receivable due from these
customers. Customers included herein were primarily from the Optical Storage
business segment.

                                      82

<PAGE>   83


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






<TABLE>
<CAPTION>

                                          Percentage Of Net Revenues
                                                Year Ended June 30,
                                         ------------------------------
                                            2000      1999      1998
                                            ----      ----      ----
<S>                                       <C>       <C>       <C>
LG Electronics.......................       26%        --        14%
Hewlett-Packard Corporation..........       16%        --        --
Yamaha Corporation...................       --         17%       --
Mitsumi Electronic Co., Ltd..........       --         10%       17%
NEC Home Electronics, Ltd............       --         --        10%


                                               Percentage of Total
                                               Accounts Receivable
                                         ------------------------------
                                                  As of June 30,
                                         ------------------------------
                                            2000      1999      1998
                                            ----      ----      ----
<S>                                       <C>       <C>       <C>
LG Electronics.......................       17%        --        --
Hewlett Packard Corporation..........       11%        --        --
Matsushita...........................       11%        --        --
Yamaha Corporation...................       --         21%       --
Mitsumi Electronic Co., Ltd..........       --         10%       19%
NEC Home Electronics, Ltd............       --         --        13%

</TABLE>


(20) COMPREHENSIVE INCOME

     The components of comprehensive income, as required by SFAS 130 in fiscal
2000 are due entirely to net unrealized losses on short-term investments (see
Note 3) and as presented in the Statement of Stockholder's Equity. In fiscal
1999, there were no differences between comprehensive income and net loss.



(21) RELATED PARTY TRANSACTION

     At June 30, 2000 and 1999, the Company had a full recourse outstanding
note receivable from one of its officers with balances outstanding of $1.3
million and $2.0 million, respectively. The note incurs interest at 4.62% per
annum, and is payable in three equal annual installments (plus interest), due
on the anniversary dates of the note.


                                      83

<PAGE>   83


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)





(22) QUARTERLY RESULTS - UNAUDITED

<TABLE>
<CAPTION>

                                                                 Three Months Ended
                           --------------------------------------------------------------------------------------
                           Sept. 30,   Dec. 31,  Mar. 31,   June 30,   Sept. 30,   Dec. 31,   Mar. 31,  June 30,
                             1998       1998       1999       1999       1999        1999      2000       2000
                           ---------   --------  --------   --------   ---------   --------   --------  --------
<S>                        <C>        <C>         <C>       <C>         <C>         <C>        <C>       <C>
                                                    (In Thousands, Except Per Share Data)

Net revenues............   $ 19,967    $ 21,861   $ 15,965  $ 13,258    $ 10,142    $ 11,029  $ 28,502  $ 36,782
Gross profit............   $  9,501    $ 10,302   $  7,375  $  4,248    $  5,071    $  4,418  $ 15,935  $ 20,111
Operating loss..........   $(19,188)   $(11,669)  $(13,791) $(17,304)   $(14,531)   $(20,074) $(20,315) $  6,189)
Net income (loss).......   $(14,179)   $ (9,693)  $(11,045) $(15,752)   $(12,186)   $(18,292) $  2,645  $ (5,029)
Diluted income (loss)
  per share (1).........   $  (0.35)   $  (0.24)  $  (0.27) $  (0.38)   $  (0.30)   $  (0.45) $   0.04  $  (0.10)
Shares used in diluted per
 share calculations (1).     40,928      40,679     40,768    40,902      41,086      40,925    59,573    52,364

-----------------
<FN>
(1) Computed on the basis described in Note 2 of Notes to Consolidated
    Financial Statements.
</FN>
</TABLE>

                                         84

<PAGE>   85


                                                                 SCHEDULE II


                   OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                     VALUATION AND QUALIFYING ACCOUNTS
                             (In thousands)

<TABLE>
<CAPTION>

                                             Additions
                                             Charged To
                                 Beginning    Costs and    Deductions  Ending
                                  Balance     Expenses     Write-offs  Balance
                                  -------     --------     ----------  -------
<S>                               <C>         <C>           <C>        <C>
Allowance For Doubtful Accounts
-------------------------------

Year ended June 30, 2000.........  $ 555       $ 155         $  (39)     $671

Year ended June 30, 1999.........    809          --           (254)      555

Year ended June 30, 1998.........    663         353           (207)      809


</TABLE>


<PAGE>


                                SIGNATURES

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

Date: September 28, 2000                        OAK TECHNOLOGY, INC.

                                         By:     /s/ YOUNG K. SOHN
                                            ----------------------------
                                                   Young K. Sohn,

                                        President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Young K. Sohn and John S. Edmunds, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to sign any and all amendments (including
post-effective amendments) to this Annual Report on Form 10-K and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto each of  said
attorneys-in-fact and agents,  full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that each of said attorneys-in-
facts and agents, or his substitute or substitutes, or any of them, shall do or
cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
          Name                     Title                           Date
          ----                     -----                           ----
<S>                   <C>                                  <C>
 /s/ DAVID D. TSANG    Chairman of the Board of Directors   September 28, 2000
---------------------
  David D. Tsang


 /s/ YOUNG K. SOHN     President, Chief Executive Officer,  September 28, 2000
---------------------  and Director(Principal Executive
   Young K. Sohn       Officer)

 /s/ JOHN S. EDMUNDS   Vice President and Chief Financial   September 28, 2000
---------------------  Officer (Principal Financial
  John S. Edmunds      and Accounting Officer)


 /s/ RICHARD B. BLACK  Director                             September 28, 2000
----------------------
  Richard B. Black


   /s/ TA-LIN HSU      Director                             September 28, 2000
---------------------
     Ta-Lin Hsu

 /s/ PETER J. SIMONE   Director                             September 28, 2000
---------------------
   Peter J. Simone

/s/ TIMOTHY TOMLINSON  Director                             September 28, 2000
----------------------
  Timothy Tomlinson

 /s/ ALBERT Y. C. YU   Director                             September 28, 2000
----------------------
  Albert Y. C. Yu


</TABLE>