<PAGE>

                                   UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
                                          
                                     FORM 10-Q


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

                    FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

                                          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, INCLUDING ZIP CODE)
                                          
                                   (408) 737-0888
                (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
                                          
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.  YES  X    NO    .
                                        ---      ---

As of March 31, 1998, there were outstanding 42,192,509 shares of the
Registrant's Common Stock, par value $0.001 per share.


<PAGE>

                                          
                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                                          
                                       INDEX

<TABLE>
<CAPTION>

                                                                            PAGE
                                                                            -----
<S>                                                                         <C>
PART  I - FINANCIAL INFORMATION

Item 1.   Financial Statements
               
               Consolidated Balance Sheets as of March 31, 1998
               and June 30, 1997 . . . . . . . . . . . . . . . . . . . . . .  3

               Consolidated Statements of Operations for the
               Three Months and Nine Months ended
               March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . .  4

               Consolidated Statements of Cash Flows for the
               Nine Months Ended March 31, 1998 and 1997 . . . . . . . . . .  5

               Notes to Consolidated Financial Statements. . . . . . . . . .  6

Item 2.        Management's Discussion and Analysis of 
               Financial Condition and Results of Operations . . . . . . . . 13



PART II - OTHER INFORMATION

Item 1.        Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 32

Item 6.        Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 35

SIGNATURES     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

EXHIBIT INDEX  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

</TABLE>

                                       2

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS
                  (in thousands, except share and per share data)
                                    (Unaudited)


                                                         ASSETS
<TABLE>
<CAPTION>
                                                                              March 31,        June 30,
                                                                                1998             1997
                                                                            -----------      ------------
<S>                                                                         <C>              <C>
Current assets:
  Cash and cash equivalents............................................     $    71,508      $    87,609
  Short-term investments...............................................          57,754           57,660
  Accounts receivable, net of allowance for doubtful accounts of 
     $647 and $663, respectively.......................................          20,624           24,872
  Inventories..........................................................           9,137           12,322
  Current portion of foundry deposits..................................          10,098           15,015
  Deferred tax assets..................................................           4,350            4,350
  Prepaid expenses and other current assets............................           7,708            4,107
                                                                            -----------      ------------
     Total current assets..............................................         181,179          205,935
Property and equipment, net............................................          24,342           19,958
Foundry deposits.......................................................          18,231           19,145
Investment in foundry venture..........................................          51,234           39,618
Other assets...........................................................           2,893            2,939
                                                                            -----------      ------------
     Total assets......................................................     $   277,879      $   287,595
                                                                            -----------      ------------
                                                                            -----------      ------------

                                              LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Notes payable and current portion of long-term debt..................     $     7,766      $     7,264
  Accounts payable.....................................................           6,287           16,144
  Accrued expenses.....................................................           8,484            9,882
  Income taxes payable.................................................               -            3,893
  Deferred revenue.....................................................             320              584
                                                                            -----------      ------------
     Total current liabilities.........................................          22,857           37,767
Long-term debt.........................................................              49            2,496
Deferred income taxes..................................................           4,151            6,344
Other long-term liabilities............................................             203            2,291
                                                                            -----------      ------------
     Total liabilities.................................................          27,260           48,898
                                                                            -----------      ------------
Stockholders' equity:
  Preferred stock, $0.001 par value; 2,000,000 shares authorized; 
    none issued and outstanding as of March 31, 1998 and
    June 30, 1997......................................................               -                -
  Common stock, $0.001 par value; 60,000,000 shares authorized;
    42,192,509 and 41,086,754 shares issued and outstanding as of   
    March 31, 1998 and June 30, 1997, respectively.....................              42               41
  Additional paid-in capital...........................................         161,031          159,901
  Retained earnings....................................................          89,546           78,755
                                                                            -----------      ------------
     Total stockholders' equity........................................         250,619          238,697
                                                                            -----------      ------------
     Total liabilities and stockholders' equity........................     $   277,879       $  287,595
                                                                            -----------      ------------
                                                                            -----------      ------------
</TABLE>

            See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                       (in thousands, except per share data)
                                    (Unaudited)
                                          
<TABLE>
<CAPTION>

                                                         Three Months Ended          Nine Months Ended
                                                              March 31,                  March 31,
                                                      ------------------------   -------------------------
                                                         1998         1997          1998          1997
                                                      -----------   ----------   -----------   -----------
<S>                                                   <C>           <C>          <C>           <C>
Net revenues.......................................   $ 35,550      $ 50,634     $ 128,196     $ 117,171
Cost of revenues...................................     21,145        22,829        65,133        48,270
                                                      -----------   ----------   -----------   -----------
     Gross profit..................................     14,405        27,805        63,063        68,901
Research and development expenses..................     12,394         8,552        35,400        24,506
Selling, general and administrative expenses.......      8,823         5,720        22,970        15,100
Restructuring charges..............................      1,766             -         1,766             -
                                                      -----------   ----------   -----------   -----------
     Operating income (loss).......................     (8,578)       13,533         2,927        29,295
Nonoperating income, net...........................      2,342         1,143        12,060         3,127
                                                      -----------   ----------   -----------   -----------
    Income (loss) before income taxes..............     (6,236)       14,676        14,987        32,422
Income taxes expense (benefit).....................     (3,232)        5,136         4,196        11,347
                                                      -----------   ----------   -----------   -----------
    Net income (loss)..............................   $ (3,004)     $  9,540     $  10,791     $  21,075
                                                      -----------   ----------   -----------   -----------
                                                      -----------   ----------   -----------   -----------
Net income (loss) per share:
    Basic..........................................   $  (0.07)     $   0.24     $    0.26     $    0.52
                                                      -----------   ----------   -----------   -----------
                                                      -----------   ----------   -----------   -----------
    Diluted........................................   $  (0.07)     $   0.22     $    0.25          0.49
                                                      -----------   ----------   -----------   -----------
                                                      -----------   ----------   -----------   -----------
Shares used in computing net income (loss)
  per share:
    Basic..........................................     42,000        40,532        41,809        40,469
                                                      -----------   ----------   -----------   -----------
                                                      -----------   ----------   -----------   -----------
    Diluted........................................     42,000        42,801        42,644        42,630
                                                      -----------   ----------   -----------   -----------
                                                      -----------   ----------   -----------   -----------
</TABLE>

            See accompanying notes to consolidated financial statements.

                                       4


<PAGE>


                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (in thousands)
                                    (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended
                                                                                         March 31,
                                                                                --------------------------
                                                                                   1998            1997
                                                                                ----------     -----------
<S>                                                                             <C>            <C>
Cash flows from operating activities:
  Net income............................................................        $  10,791      $  21,075
  Adjustments to reconcile net income to net cash provided by 
     operating activities:
     Depreciation and amortization......................................            5,309          4,020
     Inventory-related adjustments......................................            3,630        (20,154)
     Equity in loss of unconsolidated affiliates........................                -            292
     Restructuring charges..............................................            1,766
     Deferred income taxes..............................................           (2,193)           277
     Foundry deposits utilized..........................................            5,831          3,364
     Changes in operating assets and liabilities:
        Accounts receivable.............................................            4,248         (4,086)
        Inventories.....................................................             (445)        19,002
        Prepaid expenses and other current assets.......................           (1,418)          (805)
        Accounts payable and accrued expenses...........................          (13,962)        11,308
        Income taxes payable, deferred revenue and other liabilities....           (7,165)        11,704
                                                                                ----------     -----------
           Net cash provided by operating activities....................            6,392         45,997
                                                                                ----------     -----------
Cash flows from investing activities:
     Purchases of short-term investments................................          (57,235)       (31,022)
     Proceeds from matured short-term investments.......................           57,141         41,037
     Additions to property and equipment, net...........................           (9,450)        (4,456)
     Investment in foundry venture......................................          (11,616)       (25,922)
     Other assets.......................................................              (97)            26
                                                                                ----------     -----------
           Net cash used in investing activities........................          (21,257)        (20,337)
                                                                                ----------     -----------
Cash flows from financing activities:
  Issuance of debt......................................................           12,497          31,976
  Repayment of debt.....................................................          (14,442)        (34,121)
  Issuance of common stock..............................................            2,496           1,533
  Treasury stock acquisitions...........................................           (1,787)              -
                                                                                ----------     -----------
        Net cash used in financing activities...........................           (1,236)           (612)
                                                                                ----------     -----------
Net increase (decrease) in cash and cash equivalents....................          (16,101)         25,048
Cash and cash equivalents, beginning of period..........................           87,609          44,934
Cash and cash equivalents, end of period................................        $  71,508      $   69,982
                                                                                ----------     -----------
                                                                                ----------     -----------
Supplemental information:
  Cash paid during the period:
     Interest...........................................................        $     246      $      102
                                                                                ----------     -----------
                                                                                ----------     -----------

     Income taxes.......................................................        $  13,654      $    1,508
                                                                                ----------     -----------
                                                                                ----------     -----------

Noncash investing and financing activities:
  Benefit related to stock plans........................................        $     422      $    1,530
                                                                                ----------     -----------
                                                                                ----------     -----------

  Adjustment to foundry commitments.....................................        $   5,342      $  (14,400)
                                                                                ----------     -----------
                                                                                ----------     -----------

  Utilization of foundry deposits.......................................        $     489      $    3,364
                                                                                ----------     -----------
                                                                                ----------     -----------

</TABLE>

            See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)


1.   BASIS OF PREPARATION

     The accompanying unaudited consolidated financial statements have been 
prepared pursuant to the rules and regulations of the Securities and Exchange 
Commission (the "Commission").  In the opinion of management, the 
consolidated financial statements reflect all adjustments considered 
necessary for a fair presentation of the consolidated financial position, 
operating results and cash flows for those periods presented.  The results of 
operations for the interim periods presented are not necessarily indicative 
of the results that may be expected for the full fiscal year or in any future 
period.  This quarterly report on Form 10-Q should be read in conjunction 
with the audited consolidated financial statements and notes thereto for the 
year ended June 30, 1997, included in the Oak Technology, Inc. (the 
"Company") 1997 Annual Report on Form 10-K filed with the Commission.

2.   NET INCOME (LOSS) PER SHARE

     Basic and diluted net income (loss) per share have been computed using 
the weighted average number of shares of common stock and dilutive common 
equivalent shares from stock options and warrants outstanding in accordance 
with Statement of Financial Accounting Standards No. 128, "Earnings per 
Share."  The following table provides a reconciliation of the components of 
the basic and diluted earnings per share computations:

<TABLE>
<CAPTION>
                                            Three Months Ended     Nine Months Ended
                                                 March 31,              March 31,
                                           --------------------   --------------------
                                              1998       1997        1998       1997
                                           ---------   --------   ---------   --------
<S>                                        <C>         <C>        <C>         <C>
Net income (loss).......................   $ (3,004)   $  9,540    $ 10,791   $ 21,075
                                           ---------   --------   ---------   --------
                                           ---------   --------   ---------   --------
Weighted average shares used in
  computing basic net income (loss)
  per share.............................     42,000      40,532      41,809     40,469
                                           ---------   --------   ---------   --------
Weighted average number of dilutive
  common equivalent shares used in
  computing diluted net income (loss)
  per share:
     Options............................          -       2,108         756      2,005
     Warrants...........................          -         161          79        156
                                           ---------   --------   ---------   --------
Weighted average shares used in
  computing diluted net income (loss)
  per share.............................     42,000      42,801      42,644     42,630
                                           ---------   --------   ---------   --------
                                           ---------   --------   ---------   --------
Net income (loss) per share:
     Basic..............................   $  (0.07)   $   0.24    $   0.26   $   0.52
                                           ---------   --------   ---------   --------
                                           ---------   --------   ---------   --------
     Diluted............................   $  (0.07)   $   0.22    $   0.25   $   0.49
                                           ---------   --------   ---------   --------
                                           ---------   --------   ---------   --------
</TABLE>

                                       6

<PAGE>

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                    (UNAUDITED)
                                    (CONTINUED)


3.   INVENTORIES

     Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):

<TABLE>
<CAPTION>

                                                     March 31,    June 30,
                                                      1998         1997
                                                   -----------  ----------
 <S>                                               <C>           <C>
 Purchased parts and work in process.............. $  4,243     $  5,521
 Finished goods...................................    4,894        6,801
                                                   -----------  ----------
                                                   $  9,137     $ 12,322
                                                   -----------  ----------
                                                   -----------  ----------
</TABLE>

     The decrease in inventory is primarily due to a $3.5 million write-off 
of inventory related to the discontinuation of the graphics and 
audio/communications businesses during the quarter ended March 31, 1998.
 
4.   CONTINGENCIES                  
     
     The Company and various of its current and former officers and Directors 
are parties to several lawsuits which purport to be class actions filed on 
behalf of all persons who purchased or acquired the Company's stock 
(excluding the defendants and parties related to them) for the period July 
27, 1995 through May 22, 1996.  The first, a state court proceeding 
designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. 
CV758510 pending in Santa Clara County Superior Court in Santa Clara, 
California, consolidates five putative class actions.  This lawsuit also 
names as defendants several of the Company's venture capital fund investors, 
two of its investment bankers and two securities analysts.  The plaintiffs 
allege violations of California securities laws and statutory deceit 
provisions as well as breaches of fiduciary duty and abuse of control.  On 
December 6, 1996, the state court judge sustained the Oak defendants' 
demurrer to all causes of action alleged in plaintiffs' First Amended 
Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The 
plaintiffs' Second Amended Consolidated Complaint was filed on August 1, 
1997.  On December 3, 1997, the state court judge sustained the Oak 
defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint 
without leave to amend to the causes of action for breach of fiduciary duty 
and abuse of control, and to the California Corporations Code Sections 
25400/25500 claims with respect to the Company, a number of the individual 
officers and directors, and the venture capital investors.  The judge also 
sustained the demurrer with leave to amend to the California Civil Code 
Sections 1709/1710 claims, however plaintiffs elected not to amend this 
claim.  Accordingly, the only remaining claim in the state court, IN RE OAK 
TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code 
Sections 25400/25500 cause of action against four officers of the Company and 
the Company's investment bankers.

                                       7

<PAGE>

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                    (UNAUDITED)
                                    (CONTINUED)


4.   CONTINGENCIES (CONTINUED)

     The Company and various of its current and former officers and Directors 
are also parties to four putative class action lawsuits pending in the U.S. 
District Court for the Northern District of California.  These actions have 
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case 
No. C-96-20552-SW(PVT).  This action alleges certain violations of federal 
securities laws and is brought on behalf of purchasers of the Company's stock 
for the period July 27, 1995 through May 22, 1996.  This action also names as 
a defendant one of the Company's investment bankers.  On July 29, 1997, the 
federal court judge granted the Oak defendants' Motion to Dismiss the 
plaintiffs' First Amended Consolidated Complaint, but granted plaintiffs 
leave to amend most claims.  The plaintiffs' Second Amended Consolidated 
Complaint was filed on September 4, 1997.  Defendants Motion to Dismiss was 
heard on December 17, 1997.  The federal court judge took the matter under 
submission and has not yet issued a ruling.

     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.  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 class actions.

     In all of the putative state and federal class actions, the plaintiffs 
are seeking monetary damages and equitable relief.  In the derivative action, 
the plaintiffs are also seeking an accounting for the defendants' sales of 
Company stock and the payment of monetary damages to the Company.  

     All of these actions are in the early stages of proceedings.  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 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 
Consolidated Financial Statements.   

     In connection with these legal proceedings, the Company has incurred, 
and expects to continue to incur, substantial legal and other expenses.  
Shareholder suits of this kind are highly complex and can extend for a 
protracted period of time, which can substantially increase the cost of such 
litigation and divert the attention of the Company's management.

                                     8

<PAGE>

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                    (UNAUDITED)
                                    (CONTINUED)

5.   FOUNDRY AGREEMENTS 

     In June and November 1995, the Company entered into agreements with 
Taiwan Semiconductor Manufacturing Company ("TSMC") and Chartered 
Semiconductor Manufacturing Pte. Ltd. ("Chartered") to obtain certain 
additional wafer capacity through the year 2001.  The agreements call 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 will be 
determined in the future periods in which specific orders are 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.

     In October 1996, the Company amended its previous agreement with TSMC 
resulting in a reduction of the Company's future wafer purchases required 
under the original agreement and the elimination of required future cash 
prepayments of approximately $73 million.  Under the amended agreement, no 
additional prepayment is required; however the Company must utilize the 
entire amount of the prepayment paid as of October 1996 through a certain 
committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or 
a portion of the prepayment will be forfeited. In March 1998, the Company 
further amended its agreement with TSMC allowing the Company to utilize 
excess wafer purchases in 1997 and 1998 to reduce the Company's committed 
wafer purchases in the following years.  This amendment resulted in the 
Company utilizing calendar 1998 committed wafer purchases beginning in 
calendar 1997 after the committed wafer purchases for calendar 1997 were met. 
 As a result of this amendment, the Company recorded a credit to foundry 
deposits of approximately $5.3 million which was used to offset payables to 
TSMC in the quarter ended March 31, 1998.  In addition, the Company received 
an additional credit of $7.1 million which will be used to offset future 
payments to TSMC.  The Company currently believes the terms and conditions of 
the agreement, as amended, will be met although no assurance can be given in 
this regard.

     In September 1996, April 1997 and September 1997, the Company amended 
its agreement with Chartered.  The amendments resulted in a reduction of the 
Company's future wafer purchase commitments and the elimination of required 
future cash deposits under the original agreement of approximately $36 
million. Under the amended agreement, the required future cash deposits of 
approximately $36 million could be reinstated if certain conditions are not 
met.  The Company currently believes the terms and conditions of the 
agreement, as amended, will be met and that these commitments will not be 
reinstated although no assurance can be given in this regard.

     The deposits and prepayments under the amended foundry agreements described
above are recorded at cost and total approximately $28.3 million as of March 31,
1998.  The Company currently anticipates being able to utilize and fully recover
the value of all foundry prepayments and deposits under the terms of the amended
agreements although no assurance can be given in this regard.

                                       9

<PAGE>

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                    (UNAUDITED)
                                    (CONTINUED)

6.   INVESTMENT IN FOUNDRY VENTURES

     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. As an investor in this venture, the 
Company has rights to a portion of the total wafer capacity for the 
manufacture of its proprietary products.  The Company paid approximately 
$51.2 million for approximately 9.3% of the total outstanding shares of the 
foundry venture.  The investment in UICC has been accounted for under the 
cost method of accounting.

     
     In October 1997, a fire damaged the UICC facility.  UICC management has 
advised the Company that a majority of the equipment, majority of the 
inventory and a significant portion of the building were completely destroyed 
at an estimated loss of approximately $331 million (based on current exchange 
rates). UICC management has also advised the Company that approximately 10% 
of the loss to the facility will not be covered by insurance and that there 
is a deductible amount that UICC must pay with respect to the insured 
portion.  Despite any unreimburseable loss, UICC management has represented 
to the Company that it is rebuilding the facility and expects the facility to 
be fully rebuilt and operational by April of 1999.  Given the fire, the 
Company has evaluated its investment in the UICC facility and the potential 
impact of the Company's portion of the unreimburseable loss to determine 
whether there has been an impairment and as the Company believes that 
estimated future cash inflows expected to be generated by the facility and/or 
disposition of the investment are in excess of the carrying amount of the 
investment, no impaired loss has been recognized as of March 31, 1998. 
Representations have been made by UICC management that the facility's foundry 
capacity that has been guaranteed to the Company will be available through 
substitute capacity arrangements.  To date, the Company has not requested 
that UICC make such substitute capacity available to the Company.  Therefore, 
there can be no assurance that such substitute foundry capacity will be 
available to the Company should the Company require it.  Additionally, there 
can be no assurance that a market will develop for the shares representing 
the Company's equity investment at any time in the future.

7.   SETTLEMENT AWARDS

     In September 1997, October 1997 and February 1998, the Company received 
$2.6 million, $4.8 million and $0.7 million, respectively, pursuant to a 
Settlement Agreement entered into on July 31, 1997 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 one of the Company's patents.  Proceeds from this settlement were 
recorded as miscellaneous income and are included in nonoperating income for 
the periods ended September 30, 1997, December 31, 1997 and March 31, 1998, 
respectively.

                                      10

<PAGE>

                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                    (UNAUDITED)
                                    (CONTINUED)

8.   BUSINESS REORGANIZATION

   In January 1998, the Company announced its intention to discontinue its 
graphics and audio/communications businesses and focus on three core markets: 
optical storage, consumer electronics and digital office equipment.  Unable 
to locate a buyer for either its graphics or its audio/communications 
businesses, the Company discontinued all product development, marketing, 
selling and other efforts related to these businesses during the quarter 
ended March 31, 1998.  As a result of the discontinuation of these 
businesses, the Company laid-off 30 employees and recorded a restructuring 
charge to operations related to this reorganization of $1.8 million and an 
inventory-related charge of $3.5 million to cost of revenues during the 
quarter ending March 31, 1998. 

   The following represents the Company's restructuring activities for the
quarter ended March 31, 1998:

<TABLE>
<CAPTION>

                                            Prepaid
                                            Royalties    Severance        Other          Total
                                          -----------   ----------     ----------     ------------
<S>                                       <C>           <C>            <C>            <C>
  Restructuring charges.................  $  948,322    $  611,549     $  206,496     $  1,766,367 
  Noncash items.........................    (948,322)            -       (111,496)      (1,059,818)
                                          -----------   ----------     ----------     ------------
Balance at March 31, 1998...............  $        -    $  611,549     $   95,000     $    706,549
                                          -----------   ----------     ----------     ------------
                                          -----------   ----------     ----------     ------------
</TABLE>

   The remaining restructuring accrual of $0.7 million is included in accrued 
expenses as of March 31, 1998.  Of the remaining restructuring accrual of 
$0.7 million, the Company made $0.6 million in cash payments in April 1998 
and the remaining balance of $0.1 million is anticipated to be paid in the 
first quarter of fiscal year 1999.

9.   BUSINESS ACQUISITIONS

     On January 29, 1998, the Company and its wholly-owned subsidiary Pixel 
Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The 
Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a 
developer of resolution enhancement technology.  Pursuant to the Merger 
Agreement, XLI will become  a wholly-owned subsidiary of Pixel Magic.  The 
Merger Agreement provides for a cash payment of approximately $3.7 million to 
XLI shareholders on the effective date of the merger and the right to receive 
additional payments up to a maximum of approximately $11.3 million subject to 
the achievement of certain milestones by XLI over a three year period ending 
on December 31, 2000.  The merger is subject to the approval of XLI 
shareholders.  The transaction will be accounted for as a purchase 
transaction.  The Company currently anticipates that it will expense a 
significant portion of the purchase price in the period during which the 
acquisition is closed.

                                      11

<PAGE>

                                          
                       OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                    (UNAUDITED)
                                    (CONTINUED)

9.   BUSINESS ACQUISITIONS (CONTINUED)

     On March 20, 1998, the Company entered into an asset purchase agreement 
with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America 
("HEA") pursuant to which the Company agreed to acquire certain assets of 
Odeum for approximately $4.0 million.  With this acquisition, the Company 
acquired two products currently in production, an integrated MPEG-2 
audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK 
demodulator.  Both products are used predominantly in "free to air" satellite 
and cable set-top boxes for MPEG-2 encoded digital television broadcasting.  
The transaction was consummated on April 2, 1998. This transaction will be 
accounted for as a purchase transaction.  The Company anticipates that it 
will expense a significant portion of the purchase price for this acquisition 
in the period ended June 30, 1998.

10.  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.  The repurchase 
program is authorized for one year, unless further extended by the Company's 
Board of Directors.  As of March 31, 1998, the Company has purchased 287,500 
shares for approximately $1.8 million.

11. SUBSEQUENT EVENTS 

     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 is in 
the business of designing, developing and marketing mechatronics modules for 
optical storage drives.  The Company paid $802,124, for its interest, 
representing approximately 20% of  the issued stock of Omni. As a group, the 
three preferred investors own 51% of the issued stock of Omni.  There can be 
no assurance that a market will develop for the shares representing the 
Company's equity investment at any time in the future nor can there be any 
assurance that Omni will successfully develop its products or that if 
developed, its products will be competitive and achieve market acceptance.

                                      12

<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS


EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS 
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q 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 AS OF THE 
DATE HEREOF. 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 DATE HEREOF OR TO REFLECT THE 
OCCURRENCE OF UNANTICIPATED EVENTS.  PROSPECTIVE INVESTORS ARE CAUTIONED THAT 
ANY 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.  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 
LICENSES OF 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) THE COMPANY'S CURRENT DEPENDENCE ON SALES OF CD-ROM 
CONTROLLER PRODUCTS AND THE PC MARKET, (xiv) RISKS RELATED TO INTERNATIONAL 
BUSINESS OPERATIONS AND THE COMPANY'S CURRENT DEPENDENCE ON SALES TO THE 
ASIAN MARKETS, (xv) ABILITY OF THE COMPANY TO MAINTAIN ADEQUATE PRICE LEVELS 
AND MARGINS WITH RESPECT TO ITS PRODUCTS, (xvi) MANAGEMENT OF CHANGING 
OPERATIONS RELATED TO THE COMPANY'S RESTRUCTURING AND MANAGEMENT CHANGES 
ANNOUNCED ON JANUARY 22, 1998, (xvii) RISKS RELATED TO ACQUISITIONS (xviii) 
THE ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT AND TECHNICAL 
PERSONNEL AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S 
REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE 
COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 
30, 1997.

     The Company designs, develops and markets high performance integrated 
semiconductors and related software to original equipment manufacturers 
worldwide that serve the optical storage, consumer electronics and digital 
office equipment markets. The Company's products typically consist of 
hardware, firmware and software to provide a complete solution for customers.

     The Company contracts with independent foundries to manufacture all of 
its hardware products, enabling the Company to focus on its design strengths, 
minimize fixed costs and capital expenditures and gain access to advanced 
manufacturing facilities.  Except pursuant to its agreements with TSMC, 
Chartered and UICC, the Company's foundries generally are not

                                      13

<PAGE>

obligated to supply products to the Company for any specific period, in any 
specific quantity or at a specific price.

     During the quarter ending March 31, 1998, the Company implemented a 
strategy of concentrating its efforts on the markets for optical storage, 
consumer electronics and digital office equipment.  As part of this strategy, 
the Company sought to discontinue its graphics and audio/communications 
businesses and restructure its business to leverage its three core 
technologies: optical storage, MPEG imaging and digital imaging. Unable to 
locate a buyer for either its graphics or its audio/communications 
businesses, the Company discontinued all product development, marketing, 
selling and other efforts related to these businesses during the quarter 
ended March 31, 1998.  As a result of the discontinuation of these 
businesses, the Company laid-off 30 employees and recorded a restructuring 
charge of $1.8 million to operations and a $3.5 million inventory-related 
charge to cost of revenues related to this restructuring during the quarter 
ended March 31, 1998. The $1.8 million charge consisted of $1.0 million 
charges related to a write-off of prepaid royalties, approximately $0.6 
million for severance pay and $0.2 in miscellaneous charges.  

     On April 22, 1998, the Company announced that it expects to incur a loss 
from operations in the quarter ending June 30, 1998 due to a number of 
factors currently affecting its optical storage business, including, but not 
limited to, new competitors entering the market, a maturation of the CD-ROM 
controller market, pressure from the sub-$1000 PC segment for low-cost 
components, uncertain demand for personal computers and delays in new product 
releases. Through the restructuring efforts described above, the Company 
intends to direct and focus Company resources and management time on the 
optical storage, consumer electronics and digital office equipment markets 
with primary emphasis on the optical storage market.  However, there can be 
no assurance that these actions will enable the Company to diminish the 
pressures currently affecting its optical storage business and/or enable the 
Company to successfully transition the business to the emerging CD-R/W and 
DVD markets.   

          On January 29, 1998, the Company and its wholly-owned subsidiary 
Pixel Magic, Inc. signed a Plan of Reorganization and Agreement of Merger 
("The Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a 
developer of resolution enhancement technology.  Pursuant to the Merger 
Agreement, XLI will become  a wholly-owned subsidiary of Pixel Magic.  The 
Merger Agreement provides for a cash payment of approximately $3.7 million to 
XLI shareholders on the effective date of the merger and the right to receive 
additional payments up to a maximum of approximately $11.3 million subject to 
the achievement of certain milestones by XLI over a three year period ending 
on December 31, 2000.  The merger is subject to the approval of XLI 
shareholders.  The transaction will be accounted for as a purchase 
transaction.  The Company currently anticipates that it will expense a 
significant portion of the purchase price in the period during which the 
acquisition is closed.

          On March 20, 1998, the Company entered into an asset purchase 
agreement with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics 
America ("HEA") pursuant to which the Company agreed to acquire certain 
assets of Odeum for approximately $4.0 million.  With this acquisition, the 
Company acquired two products currently in production, an integrated MPEG-2 
audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK 
demodulator. Both products are used predominantly in "free to air" satellite 
and cable set-top boxes for MPEG-2 encoded digital television broadcasting.  
The transaction was consummated

                                      14

<PAGE>

on April 2, 1998. This transaction will be accounted for as a purchase 
transaction.  The Company anticipates that it will expense a significant 
portion of the purchase price for this acquisition in the period ended June 
30, 1998.

          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 
is in the business of designing, developing and marketing mechatronics 
modules for optical storage drives.  The Company paid $802,124, for its 
interest, representing approximately 20% of the issued stock of Omni. As a 
group, the three preferred investors own 51% of the issued stock of Omni.  
There can be no assurance that a market will develop for the shares 
representing the Company's equity investment at any time in the future nor 
can there be any assurance that Omni will successfully develop its products 
or that if developed, its products will be competitive and achieve market 
acceptance.        

          On February 27, 1998, the Company incorporated a wholly-owned 
subsidiary, Oak Technology, Ltd. in Bristol, England.  The subsidiary will 
employ primarily technical personnel who will develop products for the 
Company's consumer products business.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 
1997

     NET REVENUES.  The Company's net revenues in the comparison periods were 
primarily derived from sales of its CD-ROM controller products which 
comprised 77% and 86% of the Company's net revenues in the three months ended 
March 31, 1998 and 1997 respectively.  Net revenues decreased 29.8% to $35.6 
million in the three months ended March 31, 1998 from $50.6 million in the 
comparable period of fiscal 1997.  This decrease was primarily attributable 
to a decrease in unit sales and overall average selling price ("ASP") of 
CD-ROM controllers, in relatively equal proportion, partially offset by an 
increase in sales of digital office equipment controllers.  In the three 
months ended March 31, 1998 and 1997, sales to the Company's top ten 
customers accounted for approximately 76% and 78%, respectively, of the 
Company's net revenues.  International sales, principally to Japan, Taiwan, 
Korea and Belgium accounted for approximately 87% and 98% of the Company's 
net revenues in the three months ended March 31, 1998 and 1997, respectively. 
This decrease in international sales, as a percentage of total sales, is 
primarily attributable to a decrease in international revenues as well as an 
increase in domestic revenues in the comparison quarters.  Sales of products 
related to the graphics and audio/communications businesses which the Company 
discontinued in the quarter ended March 31, 1998 accounted for less than 3% 
and 1% of the Company's net revenues in each of the three months ended March 
31, 1998 and 1997, respectively. Although the Company is attempting to 
diversify its revenue product base in the three core markets of optical 
storage, consumer electronics and digital office equipment, it anticipates 
that CD-ROM controller sales will continue to account for a substantial 
majority of its revenue in the foreseeable future.  As the Company has been 
experiencing continued pressure on CD-ROM controller ASPs, increased 
competition, a maturation of the CD-ROM controller market and development 
delays in the Company's next generation CD-ROM product, the Company does not 
anticipate year over year growth in CD-ROM controller unit sales and revenue 
to continue at the same rate, if at all, in the foreseeable future.  See 
"Factors That May Affect Future Results" below.

     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.  The

                                      15

<PAGE>


Company's gross margin decreased to 40.5% in the three month period ended 
March 31, 1998 as compared to 54.9% during the comparable period in the prior 
year. Gross margin in the three month period ended March 31, 1998 includes 
the impact of a $3.5 million inventory-related charge to cost of revenues 
related to the discontinuation of the graphics and audio/communications 
businesses.  Excluding the impact of the discontinuation of these businesses, 
gross margin in the three months ended March 31, 1998 would have been 50.5%. 
Gross margin in the three month period ended March 31, 1997 included the 
impact of favorable adjustments of approximately $5.2 million to cost of 
revenues associated with the sale of products which had been fully reserved 
in a prior period.  Excluding the effect of this adjustment, gross margin in 
the three month period ended March 31, 1997 would have been 44.7%. The 
increase in gross margin during the comparison periods, excluding the impact 
of the adjustments recorded during the three months ended March 31, 1998 and 
March 31, 1997, is primarily the result of a product mix shift to higher 
margin CD-ROM controllers and the CD-R/W controller. Gross margins related to 
the graphics and audio/communications businesses which the Company 
discontinued in the quarter ended March 31, 1998 accounted for approximately 
2% and less than 1% of the Company's total gross margin contribution in each 
of the three months ended March 31, 1998 and 1997, respectively. 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, product design changes and product mix.  The Company 
expects that ASPs for its existing products will continue to decline over 
time and that ASPs for each new product will decline significantly over the 
life of the product.  The Company is currently experiencing severe price 
pressure on its CD-ROM controller and MPEG products and expects such price 
erosion to continue.   A decline in ASPs that is not offset by cost 
reductions through product design changes, manufacturing process changes, 
yield improvement, savings negotiated with its manufacturing subcontractors 
or by sales of new products with higher gross margins would decrease the 
Company's overall gross margin and could materially adversely affect the 
Company's operating results.  The Company does not believe that it can 
achieve cost reductions or sales of new products with higher gross margins 
which fully offset the expected price declines of its CD-ROM and MPEG 
products and therefore, it expects gross margin percentages to decline for 
such products. In addition, the Company believes that gross margins for new 
products in its optical storage and consumer markets will be lower than 
historical levels and that, as a result, gross margins in general will 
decline in the future.

     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development costs are 
expensed as incurred.  Research and development expenses increased 44.9% to 
$12.4 million in the three months ended March 31, 1998 from $8.6 million in 
the comparable period in the prior year.  Additionally, research and 
development expenses increased as a percentage of net revenues to 34.9% 
during the three months ended March 31, 1998 from 16.9% in the comparable 
period in the prior year.  The increased spending related to research and 
development activities was principally the result of the hiring of additional 
technical personnel and associated expenses during the comparison periods.  
The Company will continue to invest substantial resources in research and 
development, including hiring additional technical personnel, in an effort to 
maintain its technological leadership in the optical storage market and 
diversify its product development in its other core markets: consumer 
electronics and digital office equipment. Although the Company expects 
research and development expenses to decrease as a result of the 
discontinuation of its graphics and audio/communications businesses, the 
increase in the investment in the remaining core businesses may partially, if 
not fully, offset this decrease. As a result, no assurance can be given that 
absolute research and development expenses for the remainder of fiscal 1998 
will decrease. 

                                      16

<PAGE>

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and 
administrative expenses include costs related to salaries, commissions, legal 
fees, consulting and other costs related to the sales, marketing and 
administrative functions of the Company.  Selling, general and administrative 
expenses increased 54.2% to $8.8 million in the three months ended March 31, 
1998 from $5.7 million in the comparable period in the prior year. 
Additionally, selling, general and administrative expenses increased as a 
percentage of net revenues to 24.8% in the three months ended March 31, 1998 
from 11.3% during the comparable period in fiscal 1997.  This increase was 
principally the result of the hiring of additional management and 
administrative personnel and associated expenses, an increase in legal 
expenses as well as a decrease in the Company revenues in the comparison 
periods.  The increase in legal expenses relates primarily to a complaint the 
Company filed with the International Trade Commission on July 21, 1997 ("ITC 
Complaint")  and additional litigation related to a settlement agreement with 
one of the parties in the ITC Complaint. See "Legal Proceedings".  Although 
the Company may experience a decrease in selling, general and administrative 
expenses as a result of the discontinuation of its graphics and 
audio/communications businesses, any such decrease is expected to be offset 
by the continuing efforts to develop the Company's support infrastructure and 
hire additional senior management personnel. As a result, the Company expects 
to incur higher absolute selling, general and administrative expenses in the 
remainder of fiscal 1998.

     RESTRUCTURING CHARGES.   During the three months ended March 31, 1998, 
the Company discontinued its graphics and audio/communications businesses and 
incurred a charge to operations of $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 for miscellaneous charges.  

     NONOPERATING INCOME.  During the three months ended March 31, 1998, 
nonoperating income increased to $2.3 million from $1.1 million during the 
comparable three months of fiscal 1997.  This increase was primarily the 
result of the receipt of approximately $0.7 million related to the settlement 
agreement between the Company and United Microelectronics Corporation in 
connection with a complaint the Company filed with the International Trade 
Commission on July 21, 1997.  See "Legal Proceedings".

     INCOME TAXES. The overall effective tax rate for the three months ended 
March 31, 1998 was 52% and 35% for the period ended March 31, 1997.  The 
change in the tax rate was the result of the loss recorded in the quarter 
ended March 31, 1998 and the resultant impact on total anticipated fiscal 
1998 net income.

NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997

     NET REVENUES.  The Company's net revenues in the comparison periods were 
primarily derived from sales of its CD-ROM controller products which 
comprised 81% and 86% of the Company's net revenues in the nine months ended 
March 31, 1998 and 1997 respectively.  Net revenues increased 9.4% to $128.2 
million in the nine months ended March 31, 1998 from $117.2 million in the 
comparable period of fiscal 1997. This increase was primarily attributable to 
an increase in unit sales of CD-ROM controllers from the comparable period of 
fiscal 1997 partially offset by a decline in the average selling price 
("ASP") of the CD-ROM controllers. The increase in unit sales of the CD-ROM 
controllers is primarily the result of the relatively low unit sales in the 
comparable period of fiscal 1997 resulting from customer decisions to reduce 
inventory, an overall slowdown in the PC market and a shift in the CD-ROM 
industry from 4x

                                      17

<PAGE>

speed drives to 6x and 8x speed drives. In the nine months ended March 31, 
1998 and 1997, sales to the Company's top ten customers accounted for 
approximately 80% and 77%, respectively, of the Company's net revenues.  
International sales, principally to Japan, Taiwan, Korea and Belgium 
accounted for approximately 93% and 98% of the Company's net revenues in the 
nine months ended March 31, 1998 and 1997, respectively.  Sales of products 
related to the graphics and audio/communications businesses that the Company 
discontinued accounted for approximately 3% of the Company's net revenues in 
the nine months ended March 31, 1998 and approximately 2% in the nine months 
ended March 31, 1997.

     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.  The Company's gross margin decreased to 
49.2% in the nine month period ended March 31, 1998 as compared to 58.8% 
during the comparable period in the prior year. Gross margin in the nine 
month period ended March 31, 1998 includes the impact of a $3.5 million 
inventory-related charge to cost of revenues related to the discontinuation 
of the graphics and audio/communications businesses.  Excluding the impact of 
these discontinued businesses, gross margin in the nine month period ended 
March 31, 1998 would have been 52.0%.  Margins for the nine month period 
ended March 31, 1997 were favorably affected by adjustments of approximately 
$18.7 million to cost of revenues associated with the sale of products which 
had been fully reserved in a prior period as well as manufacturing cost 
adjustments of $3.0 million related to foundry agreements.  Excluding the 
impact of these adjustments, gross margin for the nine month period ended 
March 31, 1997 would have been 40.0%.  The increase in gross margin during 
the comparison periods, excluding the impact of the adjustments recorded 
during the nine months ended March 31, 1998 and the nine months ended March 
31, 1997, is primarily the result of a product mix shift to higher margin 
CD-ROM controllers and the CD-R/W controller. Gross margins related to the 
graphics and audio/communications businesses that the Company discontinued 
accounted for approximately 2% and (4%) of the Company's total gross margin 
contribution in the nine months ended March 31, 1998 and 1997, respectively.

     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development costs are 
expensed as incurred.  Research and development expenses increased 44.4% to 
$35.4 million in the nine months ended March 31, 1998 from $24.5 million in 
the comparable period in the prior year.  This increase was principally the 
result of the hiring of additional personnel and associated expenses.  
Research and development expenses increased as a percentage of net revenues 
to 27.6% during the nine months ended March 31, 1998 from 20.9% in the 
comparable period in the prior year. This increase was principally the result 
of the hiring of additional technical personnel and associated expenses 
during the comparison periods.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and 
administrative expenses include costs related to salaries, commissions, legal 
fees, consulting and other costs related to the sales, marketing and 
administrative functions of the Company.  Selling, general and administrative 
expenses increased 52.1% to $23.0 million in the nine months ended March 31, 
1998 from $15.1 million in the comparable nine months in fiscal 1997. 
Additionally, selling, general and administrative expenses increased as a 
percentage of net revenues to 17.9% in the nine months ended March 31, 1998 
from 12.9% during the comparable period in fiscal 1997.  This increase was 
principally the result of the hiring of additional management and 
administrative personnel and associated expenses as well as increases in 
legal expenses. The increase in legal expenses relates primarily to a 
complaint the Company filed with the

                                      18

<PAGE>

International Trade Commission on July 21, 1997 ("ITC Complaint")  and 
additional litigation related to a settlement agreement with one of the 
parties in the ITC Complaint. See "Legal Proceedings."

     NONOPERATING INCOME.  During the nine months ended March 31, 1998, 
nonoperating income increased to $12.1 million from $3.1 million during the 
comparable nine months in fiscal 1997. This increase was primarily the result 
of the receipt of approximately $8.1 million related to the settlement 
agreement between the Company and United Microelectronics Corporation in 
connection with a complaint the Company had filed with the International 
Trade Commission on July 21, 1997.  See "Legal Proceedings".

     INCOME TAXES. The overall effective tax rate for the nine months ended 
March 31, 1998 was 28% and 35% for the nine months ended March 31, 1997.  The 
change in the tax rate was the result of the loss recorded in the quarter 
ended March 31, 1998 and the resultant impact on total anticipated fiscal 
1998 net income.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     The Company's operating results are subject to quarterly and other 
fluctuations due to a variety of factors, including the gain or loss of 
significant customers, increased competitive pressures, the timing of new 
product introductions by the Company or its competitors and market acceptance 
of new or enhanced versions of the Company's and its customers' products.  
Other factors include the availability of foundry capacity, fluctuations in 
manufacturing yields, availability and cost of raw materials, the cyclical 
nature of both the semiconductor industry, the market for PCs and the other 
markets addressed by the Company's products, seasonal customer demand, the 
Company's ability to diversify its product offerings, the competitiveness of 
the Company's customers, the timing of significant orders and order 
cancellations or rescheduling, significant increases in expenses associated 
with the expansion of operations and development of the Company's support 
infrastructure, and changes in pricing policies by the Company, its 
competitors or its suppliers, including decreases in ASPs of the Company's 
products.  In addition, the Company's quarterly operating results could be 
materially adversely affected by legal expenses incurred in connection with, 
or any adverse judgment in, the Company's ongoing shareholder legal 
proceedings.  The Company's operating results could also be adversely 
affected by economic conditions generally in various geographic areas where 
the Company or its customers do business.  These factors are difficult to 
forecast, and these or other factors could materially affect the Company's 
quarterly or annual operating results.  The Company's operating results in 
the remainder of fiscal 1998 are likely to be affected by these factors as 
well as others.  Accordingly, there can be no assurance as to the level of 
sales or earnings that may be attained by the Company in any given period in 
the future.

     The Company currently places noncancelable orders to purchase its 
products from independent foundries on an approximately three month rolling 
basis and is currently committed with two of its foundries for certain 
minimum amounts of capacity through the end of calendar 1999, while 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 significant penalty.  Consequently, if 
anticipated sales and shipments in any quarter are

                                      19

<PAGE>

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 
fiscal year would be materially adversely affected.

     The semiconductor industry has historically been characterized by rapid 
technological change, cyclical market patterns, significant price erosion, 
periods of over-capacity and production shortages, variations in 
manufacturing costs 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.  The Company may 
experience substantial period-to-period fluctuations in operating results due 
to conditions affecting the Company's specific markets or to general 
semiconductor industry conditions.

     The Company's success is highly dependent upon its ability to develop 
new, technically advanced products, to introduce them to the marketplace 
ahead of the competition, and to have them selected for design into products 
of leading OEM manufacturers.  Both revenues and margins may be affected 
quickly if new product introductions are delayed or if the Company's products 
are not designed into successive generations of products of the Company's 
customers.  These factors have become increasingly important to the Company's 
results of operations because the rate of change in the markets served by the 
Company continues to accelerate.  In an effort to attempt to increase its 
competitiveness in the Company's core markets, the Company recently 
implemented a strategy to concentrate its efforts on the markets for optical 
storage, consumer electronics and digital office equipment.  As part of this 
strategy, the Company discontinued its graphics and audio/communications 
businesses and is restructuring its business to leverage its three core 
technologies: optical storage, MPEG imaging and digital imaging.  As a result 
of the decision to discontinue its graphics and audio/communications 
businesses the Company recorded a charge to operations related to this 
restructuring during the quarter ended March 31, 1998 of $1.8 million and an 
inventory-related charge to cost of revenues of $3.5 million.  See "Notes to 
Consolidated Financial Statements".

     The Company and various of its current and former officers and Directors 
are parties to certain legal proceedings.  See "Legal Proceedings".  All of 
these actions are in the early stages of proceedings.  Based on its current 
information, the Company believes the suits to be without merit and will 
defend its position vigorously.  No provision for any liability that may 
result has been made in the Company's Consolidated Financial Statements.  In 
connection with these legal proceedings, the Company has incurred, and 
expects to continue to incur, substantial legal and other expenses.  
Shareholder suits of this kind are highly complex and can extend for a 
protracted period of time, which can substantially increase the cost of such 
litigation and divert the attention of the Company's management.

     The markets in which the Company competes are intensely competitive and 
are characterized by rapid technological change, declining unit ASPs and 
rapid product obsolescence.  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.  Competition 
typically occurs at the design stage, where the customer evaluates 
alternative design approaches that require integrated circuits such as those 
offered by the Company.  Because of shortened product life cycles and even 
shorter design-in cycles, particularly in the CD-ROM controller market, the 
Company's competitors have increasingly frequent opportunities to

                                      20

<PAGE>

achieve design wins in next generation systems or, in the CD-ROM controller 
market, in the next generation drive.  In the event that competitors succeed 
in supplanting the Company's products, the Company's market share may not be 
sustainable and revenue, gross margin and earnings would be adversely 
affected.  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 as well as some of the Company's own customers and 
suppliers. Certain of the Company's principal competitors maintain their own 
semiconductor foundries and may therefore benefit from certain capacity, cost 
and technological advantages.  The Company believes that its ability to 
compete successfully depends on a number of factors, both within and outside 
of its control, 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 PC and other market 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 Company's customer's products, the number and nature of the 
Company's competitors in a given market, 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 storage market and the consumer 
electronics market, 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 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, or fails to reduce 
its manufacturing costs, the result would be a material adverse effect on the 
Company's business, financial condition and operating results.

     The markets for the Company's products are characterized by evolving 
industry standards, rapid technological change and product obsolescence.  The 
Company's performance is highly dependent upon the successful development and 
timely introduction of new products at competitive price and performance 
levels. Currently, the Company's financial performance is dependent upon the 
Company's level of success in the CD-ROM controller market.  The Company has 
recently experienced some product development delays in this area.  In an 
effort to diversify its product and market base, the Company has invested 
substantial resources in optical storage as well as in its other core 
technologies for the consumer and digital office equipment markets.  There 
can be no assurance that products currently under development in these core 
technologies or any other new products will be successfully developed or will 
achieve market acceptance, thereby affecting the Company's ability to achieve 
diversification of its products and markets, and thereby revenue 
diversification.  The failure of the Company to introduce new products 
successfully or the failure of new products to achieve market acceptance 
would have a

                                      21

<PAGE>

material adverse effect on the Company's business, financial condition and 
results of operations.  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, securing 
sufficient foundry capacity for volume manufacturing of wafers, 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 or changing industry standards 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 
operating results.

     The Company has begun to pursue, and will continue to pursue, 
opportunities to acquire key technology to augment its technical capabilities 
or to achieve faster time to market as alternatives to internally developing 
such technology. Acquisitions involve numerous risks, including difficulties 
in integration of the operations, technologies, and products of the acquired 
companies; the risk of diverting management's attention from normal daily 
operations of the business; risks of entering markets in which the Company 
has no or limited direct prior experience and where competitors in such 
markets have stronger market positions; the coordination of sales, marketing 
and research and development; and the potential loss of key employees of the 
acquired company. The Company must also maintain its ability to manage any 
such growth effectively.  Failure to manage growth effectively and 
successfully integrate acquisitions made by the Company could adversely 
affect the Company's business and operating results.  In addition, with such 
acquisitions, there is the risk that future operating performance may be 
unfavorably impacted due to acquisition related costs such as, but not 
limited to, in-process research and development charges, additional 
development expenses, lower gross margins generated by the sales of acquired 
products and restructuring costs associated with duplicate facilities.

     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 six 
patents granted, thirty patents pending, thirty-two patents in preparation in 
the United States, and fifteen international patents pending.  The Company 
intends to seek additional international patents and additional 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 manufactured or 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. 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

                                      22

<PAGE>

States and thus make the possibility of piracy of the Company's technology 
and products more likely.  On April 7, 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".

     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 and certain of its 
customers and foundries have, from time to time, been notified that they may 
be infringing patents or other intellectual property rights owned by third 
parties. In addition, customers have been named in suits alleging 
infringement of patents or other intellectual property rights by customer 
products.  Certain components of these products have been purchased from the 
Company and may be subject to indemnification provisions made by the Company 
to its customers.   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.  As the Company's products become more integrated 
and offer increased functionality, there is a likelihood that more of these 
claims will occur.  The Company cannot accurately predict the eventual 
outcome of any suit or other alleged infringement of intellectual property.  
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.   The Company recently 
initiated such litigation by filing a complaint with the International Trade 
Commission.  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 if the Company is required 
to pay substantial damages or awards, the Company's business, financial 
condition and operating results 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 licenses that give its customers

                                      23

<PAGE>

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.

     Certain technology used in the Company's products is licensed from third 
parties.  Some of the Company's products, particularly those targeted for the 
DVD market, require certain types of copy protection software that the 
Company must license from third parties.  In addition, if the Company is to 
successfully design and develop technologically advanced products, it must 
license a variety of software design and development tools from third 
parties.  There can be no assurance that such licenses, or licenses of other 
third party technology, will be available or can be renewed on terms 
acceptable to the Company, if at all. The inability of the Company to obtain 
or renew such license arrangements on acceptable terms could have a material 
adverse effect on the Company's business, financial condition and results of 
operations.

     The Company contracts with independent foundries to manufacture all of 
its hardware products, enabling the Company to focus on its design strengths, 
minimize fixed costs and capital expenditures and gain access to advanced 
manufacturing facilities.  Certain of the Company's foundry agreements 
require up-front, nonrefundable prepayments or deposits and these fixed costs 
could affect the Company's operating margins if the Company is unable to 
utilize the minimum number of wafers required under the agreements.  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.  While the Company believes there is adequate foundry capacity 
available to meet its current requirements, there can be no assurance that 
the Company will continue to have access to sufficient capacity to meet its 
needs in the future.  If there is a decrease in available foundry capacity it 
is likely that the lead time required to manufacture the Company's products 
will increase.  In addition, the Company had anticipated that it would be 
able to satisfy a small portion of its manufacturing requirements from UICC; 
however due to the October 1997 fire at UICC the Company will not be able to 
utilize this foundry in the foreseeable future.  UICC management has 
indicated that capacity will be available through substitute capacity 
arrangements, however no assurance can be given as to the availability of 
such capacity. 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, which 
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 operating results.

     In October 1997, a fire damaged the UICC facility.  UICC management has 
advised the Company that a majority of the equipment, majority of the 
inventory and a significant portion of the building were completely destroyed 
at an estimated loss of approximately $331 million (based on

                                      24

<PAGE>

current exchange rates). UICC management has also advised the Company that 
approximately 10% of the loss to the facility will not be covered by 
insurance and that there is a deductible amount that UICC must pay with 
respect to the insured portion.  Despite any unreimburseable loss, UICC 
management has represented to the Company that it is rebuilding the facility 
and expects the facility to be fully rebuilt and operational by April of 
1999. Given the fire, the Company has evaluated its investment in the UICC 
facility and the potential impact of the Company's portion of the 
unreimburseable loss to determine whether there has been an impairment and 
as the Company believes that estimated future cash inflows expected to be 
generated by the facility and/or disposition of the investment are in excess 
of the carrying amount of the investment, no impaired loss has 
been recognized as of March 31, 1998.  Representations have been made by UICC 
management that the facility's foundry capacity that has been guaranteed to 
the Company will be available through substitute capacity arrangements.  To 
date, the Company has not requested that UICC made such substitute capacity 
available to the Company.  Therefore, there can be no assurance that such 
substitute foundry capacity will be available to the Company should the 
Company require it.  Additionally, there can be no assurance that a market 
will develop for the shares representing the Company's equity investment at 
any time in the future.

     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.

     The manufacture of semiconductors is a highly complex and precise 
process. 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 and time 
consuming or expensive to remedy. The Company's products are particularly 
complex and difficult to manufacture. 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.

     Sales of the Company's CD-ROM controller products comprised 77% and 86% 
of the Company's net revenues in the three months ended March 31, 1998 and 
1997, respectively.  Sales of CD-ROM controller products are expected to 
continue to account for a substantial portion of the Company's total revenues 
for the foreseeable future.  The market for CD-ROM controller products 
continues to mature and therefore, it is expected that sales of such products 
will not necessarily continue to grow at historical rates and will be 
influenced by the traditional seasonality and volatility associated with the 
PC market.  It is further anticipated that the proliferation of DVD-ROM 
drives will impact the demand for CD-ROM controller products.  Due to the 
backward

                                      25

<PAGE>

compatibility of DVD-ROM drives, it is critical that the Company maintain its 
CD-ROM customer base throughout this transition to DVD-ROM.  As the CD-ROM 
market has begun to mature and transition toward the emerging CD-R/W and 
DVD-ROM market, there have been a number of new competitors entering the 
market.  This increased competition combined with pressure from the sub-$1000 
PC segment for lower cost components have caused tremendous price erosion on 
CD-ROM controller prices.  In addition, as a majority of the new competitors 
are located in Asia, together with a majority of the Company's customers, the 
Company currently is hampered in its ability to effectively compete given the 
effects of the strong dollar versus Asian currencies.  Furthermore, there is 
currently a trend toward integrating increased functionality on the CD-ROM 
controller.  Therefore, the Company's revenues and its gross margins from its 
CD-ROM controller products will be dependent on the Company's ability to 
introduce such integrated products in a commercially competitive manner.  The 
Company has not previously offered an integrated CD-ROM controller product 
that provides functions that had traditionally been supplied by separate, 
single function chips.  The Company is currently experiencing development 
delays with its first integrated CD-ROM controller product.  To provide 
integrated CD-ROM controller products, the Company has been and will continue 
to be required to expand the scope of its research and development efforts to 
provide these new functions, which will require the hiring of engineers 
skilled in the respective areas and additional management coordination among 
the Company engineering and marketing groups. Alternatively, the Company may 
find it necessary or desirable to license or acquire technology to enable the 
Company to provide these functions, and there can be no assurance that any 
such technology will be available for license or purchase on acceptable terms 
to the Company.  In addition, with new functions being added to the CD-ROM 
controller product, companies that historically provided chips with these 
functions are now entering the CD-ROM controller market with integrated 
products containing these functions as well as the controller function.  
Accordingly, given the above-stated factors, there can be no assurance that 
the Company will be able to sustain the current level of such product sales 
or current operating margins.  In addition, there can be no assurance that 
the market for CD-ROM controller products in general, or the Company's CD-ROM 
controller products in particular, will support the Company's planned 
operations in the future. Any decrease in the overall level of sales of, or 
the prices for, the Company's CD-ROM controller products, due to 
introductions of products by present or future competitors, a decline in 
demand for CD-ROM controller products, product obsolescence or any other 
reason would have a material adverse effect on the Company's business, 
financial condition and results of operations.

     International sales, principally to Japan, Taiwan, Korea and Belgium 
accounted for approximately 87% and 98% of the Company's net revenues in the 
three months ended March 31, 1998 and 1997, respectively. A substantial 
portion of the Company's international revenues in the comparison periods 
were derived from Taiwanese, Japanese, Korean and Belgian manufacturers of 
CD-ROM drives. Most of the Company's foreign sales are negotiated in U.S. 
dollars; however, invoicing is often done in local currency.  Assets and 
liabilities which are denominated in non-functional currencies are translated 
to the functional currency on a monthly basis and the resulting gain or loss 
is recorded within nonoperating 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.  The Company uses financial instruments, including 
local currency debt arrangements, to offset the gains or losses of the 

                                      26

<PAGE>

financial instruments against gains or losses on the underlying operations 
cash flows or investments.  The Company expects that there could be hedges of 
anticipated transactions or investments in foreign subsidiaries in the 
future.  The Company is also subject to the additional 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 tax rates, the burdens of complying with a variety of 
foreign laws and other factors beyond the Company's control.  With the 
current economic problems in Asia and the strengthening of the dollar, the 
Company has recently experienced a more conservative buying pattern from its 
customers and increased price pressure on its products.  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.  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 foregoing factors will not have a material adverse effect on the 
Company's business, financial condition or results of operations 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 the three months ended 
March 31, 1998 and 1997, sales to the Company's top ten customers accounted 
for approximately 76% and 78%, respectively, 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. The Company does not have long-term purchase agreements with any of 
its customers.  Customers generally purchase the Company's products pursuant 
to cancelable short-term purchase orders.  The loss of, or 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.  There can be no assurances 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.

     The Company's future performance depends, to a significant degree, on 
the continued retention and contribution of members of the Company's senior 
management as well as other key personnel.  The Company is in the process of 
recruiting additional senior managers and technical personnel.  Competition 
for these persons is intense and there can be no assurance that the Company 
will be able to attract and retain qualified managers and other personnel.  
The loss of the services of one or more of these key personnel could 
adversely affect the Company.

     Many currently installed computer systems and software products are 
coded to accept only two digit entries in the date code field.  These date 
code fields will need to accept four digit entries to distinguish 21st 
century dates from 20th century dates.  As a result, in less than two years, 

                                      27

<PAGE>

computer systems and/or software used by many companies may need to be 
upgraded to comply with such "Year 2000" requirements.  The Company is 
currently installing various new internal information systems in connection 
with operating its business.  These systems are believed to be Year 2000 
compliant. The Company is currently evaluating the impact of the Year 2000 on 
its products, suppliers and customers, but has not yet completed the process. 
As a result, the Company has no reasonable basis to conclude that the Year 
2000 will not materially affect the Company's operations.

     Since its inception, the Company has experienced significant growth in 
the number of its employees and in the scope of its operating and financial 
systems. To manage growth effectively, the Company will need to continue to 
improve its operational, financial and marketing information systems, 
procedures and controls, and expand, train, and manage its employee base.  
The Company is in the final stages of implementing a new management 
information system.  Any problems encountered with the new system could 
materially adversely affect the Company's 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 March 31, 1998 consisted of approximately $129.3 million in 
cash, cash equivalents and short-term investments, approximately $25.0 
million in lines of credit with two Japanese financial institutions, of which 
$17.8 million was available as of March 31, 1998 and approximately $12.5 
million in lines of credit with Taiwanese financial institutions of which 
approximately $12.1 million was available as of March 31, 1998.

     During the nine months ended March 31, 1998, operating activities 
provided net cash of approximately $6.4 million.  This cash resulted 
primarily from net income of $10.8 million, non-cash adjustments to net 
income of $6.7 million, utilization of foundry deposits of $5.8 million and 
restructuring related charges of $1.8 million, partially offset by net 
changes in accounts payable of $14.0 million and other operating assets and 
liabilities of $4.7 million. Net income includes the impact of the receipt of 
approximately $8.1 million recorded during the nine months ended March 31, 
1998 related to the settlement agreement between the Company and United 
Microelectronics Corporation in connection with a complaint the Company had 
filed with the International Trade Commission on July 21, 1997.  See "Legal 
Proceedings".  Investing and financing activities utilized cash of 
approximately $22.5 million consisting primarily of an investment in the UICC 
foundry venture of $11.6 million, purchases of property and equipment of $9.5 
million and net repayment of debt of $1.9 million and treasury stock 
acquisitions of $1.8 million, partially offset by proceeds from issuance of 
common stock of $2.5 million. 

     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 necessary purchases of property and 
equipment through at least the next twelve months.  Capital expenditures for 
the remainder of fiscal 1998 are anticipated to be approximately $3.2 
million.  

     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. 

                                      28

<PAGE>

     In November 1995, the Company acquired Pixel Magic, a privately-held 
company based in Andover, Massachusetts for $10.5 million in cash, of which 
$5.0 million was contingent upon the achievement of certain performance 
criteria over a three-year period.  Approximately $4.8 million of the initial 
cash payment was allocated to in-process research and development and was 
charged to operations in fiscal 1996.  In June 1997, the Company waived 
certain of the performance criteria and agreed to pay the contingent amount 
of $5.0 million in two installments during calendar 1998.  The $5.0 million 
amount was expensed by the Company in the quarter ended June 30, 1997.  The 
first payment of $3.0 million was paid in January 1998 and the second payment 
of $2.0 million is due in December 1998.

     On January 29, 1998, the Company and its wholly-owned subsidiary Pixel 
Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The 
Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a 
developer of resolution enhancement technology.  Pursuant to the Merger 
Agreement, XLI will become  a wholly-owned subsidiary of Pixel Magic.  The 
Merger Agreement provides for a cash payment of approximately $3.7 million to 
XLI shareholders on the effective date of the merger and the right to receive 
additional payments up to a maximum of approximately $11.3 million subject to 
the achievement of certain milestones by XLI over a three year period ending 
on December 31, 2000.  The merger is subject to the approval of XLI 
shareholders. The transaction will be accounted for as a purchase 
transaction.  The Company currently anticipates that it will expense a 
significant portion of the purchase price in the period during which the 
acquisition is closed.

     On March 20, 1998, the Company entered into an asset purchase agreement 
with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America 
("HEA") pursuant to which the Company agreed to acquire certain assets of 
Odeum for $4.0 million.  With this acquisition, the Company acquired two 
products currently in production, an integrated MPEG-2 audio/video decoder 
and transport demultiplexer and a DVD-5 compliant QPSK demodulator.  Both 
products are used predominantly in "free to air" satellite and cable set-top 
boxes for MPEG-2 encoded digital television broadcasting.  The transaction 
was consummated on April 2, 1998. This transaction will be accounted for as a 
purchase transaction.  The Company anticipates that it will expense a 
significant portion of the purchase price for this acquisition in the period 
ended June 30, 1998.

     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. Accordingly, the 
Company may utilize cash to repurchase its common stock.  The repurchase 
program is authorized for one year, unless further extended by the Company's 
Board of Directors.  As of March 31, 1998, the Company has purchased 287,500 
shares for approximately $1.8 million.

     In June and November 1995, the Company entered into agreements with TSMC 
and Chartered to obtain certain additional wafer capacity through the year 
2001. The agreements call 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 will be determined in the future periods in which 
specific orders are 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.

                                      29

<PAGE>

     In October 1996, the Company amended its previous agreement with TSMC 
resulting in a reduction of the Company's future wafer purchases required 
under the original agreement and the elimination of required future cash 
prepayments of approximately $73 million.  Under the amended agreement, no 
additional prepayment is required; however, the Company must utilize the 
entire amount of the prepayment paid as of October 1996 through a certain 
committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or 
a portion of the prepayment will be forfeited.  In  March 1998, the Company 
further amended its agreement with TSMC allowing the Company to utilize 
excess wafer purchases in 1997 and 1998 to reduce the Company's committed 
wafer purchases in the following years.  This amendment resulted in the 
Company utilizing calendar 1998 committed wafer purchases beginning in 
calendar 1997 after the committed wafer purchases for calendar 1997 were met. 
As a result of this amendment the Company recorded a credit to foundry 
deposits of approximately $5.3 million which was used to offset payables to 
TSMC in the quarter ended March 31, 1998.  In addition, the Company received 
an additional credit of $7.1 million which will be used to offset future 
payments to TSMC.  The Company currently believes the terms and conditions of 
the agreement, as amended, will be met although no assurance can be given in 
this regard.

     In September 1996, April 1997 and September 1997, the Company amended 
its agreement with Chartered.  The amendments resulted in a reduction of the 
Company's future wafer purchase commitments and the elimination of required 
future cash deposits under the original agreement of approximately $36 
million. Under the amended agreement, the required future cash deposits of 
approximately $36 million could be reinstated if certain conditions are not 
met.  The Company currently believes the terms and conditions of the 
agreement as amended will be met and that these commitments will not be 
reinstated although no assurance can be given in this regard.
     
     The deposits and prepayments under the amended foundry agreements 
described above are recorded at cost and total approximately $28.3 million as 
of March 31, 1998.  The Company currently anticipates being able to utilize 
and fully recover the value of all foundry prepayments and deposits under the 
terms of the amended agreements although no assurance can be given in this 
regard.

     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. As an investor in this venture, the 
Company has rights to a portion of the total wafer capacity for the 
manufacture of its proprietary products. The Company paid for its investment 
in the foundry venture in three installments: $13.7 million in January 1996, 
$25.9 in January 1997 and $11.6 in December 1997. This final payment was made 
by the Company after receiving representations from UICC management that the 
losses from the October fire (discussed below) would be covered by insurance 
and that the facility would be rebuilt to its fully operational state.  
Investment in the foundry venture as of March 31, 1998 was approximately 
$51.2 million which represents an investment of approximately 9.3% of the 
total outstanding shares of the foundry venture.
          
     In October 1997, a fire damaged the UICC facility.  UICC management has 
advised the Company that a majority of the equipment, majority of the inventory 
and a significant portion of the building were completely destroyed at an 
estimated loss of approximately $331 million (based on

                                      30

<PAGE>

current exchange rates). UICC management has also advised the Company that 
approximately 10% of the loss to the facility will not be covered by 
insurance and that there is a deductible amount that UICC must pay with 
respect to the insured portion.  Despite any unreimburseable loss, UICC 
management has represented to the Company that it is rebuilding the facility 
and expects the facility to be fully rebuilt and operational by April of 
1999.  Given the fire, the Company has evaluated its investment and the 
potential impact of the Company's portion of the unreimburseable loss in the 
UICC facility to determine whether there has been an impairment and as the 
Company believes that estimated future cash inflows expected to be generated 
by the facility and/or disposition of the investment are in excess of the 
carrying amount of the investment, no impaired loss has been recognized as of 
March 31, 1998. Representations have been made by UICC management that the 
facility's foundry capacity that has been guaranteed to the Company will be 
available through substitute capacity arrangements.  To date, the Company has 
not requested that UICC make such substitute capacity available to the 
Company.  Therefore, there can be no assurance that such substitute foundry 
capacity will be available to the Company should the Company require it.  
Additionally, there can be no assurance that a market will develop for the 
shares representing the Company's equity investment at any time in the future.

                                      31

<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     The Company and various of its current and former officers and Directors 
are parties to several lawsuits which purport to be class actions filed on 
behalf of all persons who purchased or acquired the Company's stock 
(excluding the defendants and parties related to them) for the period July 
27, 1995 through May 22, 1996.  The first, a state court proceeding 
designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. 
CV758510 pending in Santa Clara County Superior Court in Santa Clara, 
California, consolidates five putative class actions.  This lawsuit also 
names as defendants several of the Company's venture capital fund investors, 
two of its investment bankers and two securities analysts.  The plaintiffs 
allege violations of California securities laws and statutory deceit 
provisions as well as breaches of fiduciary duty and abuse of control.  On 
December 6, 1996, the state court judge sustained the Oak defendants' 
demurrer to all causes of action alleged in plaintiffs' First Amended 
Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The 
plaintiffs' Second Amended Consolidated Complaint was filed on August 1, 
1997. On December 3, 1997, the state court judge sustained the Oak 
defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint 
without leave to amend to the causes of action for breach of fiduciary duty 
and abuse of control, and to the California Corporations Code Sections 
25400/25500 claims with respect to the Company, a number of the individual 
officers and directors, and the venture capital investors.  The judge also 
sustained the demurrer with leave to amend to the California Civil Code 
Sections 1709/1710 claims, however plaintiffs elected not to amend this 
claim.  Accordingly, the only remaining claim in state court, IN RE OAK 
TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code 
Sections 25400/25500 cause of action against four officers of the Company and 
the Company's investment bankers.

     The Company and various of its current and former officers and Directors 
are also parties to four putative class action lawsuits pending in the U.S. 
District Court for the Northern District of California.  These actions have 
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case 
No. C-96-20552-SW(PVT).  This action alleges certain violations of federal 
securities laws and is brought on behalf of purchasers of the Company's stock 
for the period July 27, 1995 through May 22, 1996.  This action also names as 
a defendant one of the Company's investment bankers.  On July 29, 1997, the 
federal court judge granted the Oak defendants' Motion to Dismiss the 
plaintiff's First Amended Consolidated Complaint, but granted plaintiffs 
leave to amend most claims.  The plaintiffs' Second Amended Consolidated 
Complaint was filed on September 4, 1997.  Defendants' Motion to Dismiss was 
heard on December 17, 1997.  The federal court judge took the matter under 
submission and has not yet issued a ruling.

     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.  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 class actions.

     In all of the putative state and federal class actions, the plaintiffs 
are seeking monetary damages and equitable relief.  In the derivative action, 
the plaintiffs are also seeking an accounting for the defendants' sales of 
Company stock and the payment of monetary damages to the Company.  

                                      32

<PAGE>

     All of these actions are in the early stages of proceedings.  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 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 Consolidated 
Financial Statements.   

     In connection with these legal proceedings, the Company has incurred, 
and expects to continue to incur, substantial legal and other expenses.  
Shareholder suits of this kind are highly complex and can extend for a 
protracted period of time, which can substantially increase the cost of such 
litigation and divert the attention of the Company's management. 

     On July 21, 1997, the Company filed a complaint with the International 
Trade Commission ("ITC") based on the Company's belief that certain CD-ROM 
controllers 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 product containing such infringing CD-ROM controller.  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 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 and February 1998, the 
Company received $2.6 million, $4.8 million and $0.7 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 and March 31, 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. 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

                                      33

<PAGE>

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 
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 April 14, 1998, the Company filed a Motion to Bifurcate UMC's 
patent counterclaims from the contract-related claim's and counterclaims.  
The Motion to Bifurcate is scheduled to be heard on May 22, 1998.  If an 
order is granted bifurcating the UMC patent counterclaims, a trial on the 
contract-related issues is scheduled for December of 1998.  If the Company's 
Motion to Bifurcate is not granted, it is expected that a trial on all claims 
and counterclaims will occur in the second calendar quarter of 1999.

     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.  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 April 7, 1998, the Company filed a new complaint with the 
International Trade Commission ("ITC") alleging that five Asian companies, 
are violating U.S. trade laws by importing or selling 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 products 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.  In most cases, the ITC decides 
within 12 to 15 months after the filing of a complaint whether or not to 
issue an order excluding foreign products that allegedly infringe U.S. 
patents. In connection with this legal proceeding, the Company will incur 
substantial legal and other expenses.

     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.

                                      34

<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  The following exhibits are filed herewith or incorporated by reference 
     herein.

<TABLE>
<CAPTION>

     Exhibit
     Number      Exhibit Title
     ------      -------------
     <S>         <C>
     3.01        The Company's Restated Certificate of Incorporation, as 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)*

     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)*

     10.06       Lease Agreement dated August 3, 1988 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, as amended June 1, 1990, and Consent
                 to Alterations dated March 26, 1991 (lease agreement for 139 Kifer
                 Court, Sunnyvale, California) (3), and amendments thereto dated
                 June 15, 1995 and July 19, 1995 (5)

                                      35

<PAGE>

     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)

     10.10       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)**

                                      36

<PAGE>

     10.20       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)

     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 by and between Taiwan Semiconductor
                 Manufacturing Co., Ltd, and the Company. **

     10.27       Settlement Agreement between Winbond Electronics Corporation and the
                 Company. **

     11.01       Statement regarding computation of net income per share

     27.01       Financial Data Schedule

</TABLE>

-------------------
(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.
(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.

                                      37

<PAGE>

(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.

-------------------
*    Indicates Management incentive plan.
**   Confidential treatment granted and/or requested as to portions of the
     exhibit.
     
(b)  Reports on Form 8-K
     
          A report on Form 8-K was filed on January 28, 1998 reporting the
     business restructuring that was announced with the release of the Company's
     second fiscal quarter results.  Pursuant to the restructuring plan, the
     Company would discontinue its graphics and audio/communications businesses
     and focus on three core markets: optical storage, consumer electronics and
     digital office equipment.  The Company also appointed Mr. Richard Black, a
     Director of the Company since 1987, to the executive management team as
     president and added Mr. Young Sohn, president of Quantum Corporation's
     Enterprise and Personal Storage Group, to its Board of Directors.  The form
     8-K also reported that its Board of Directors approved a stock repurchase
     plan.

                                      38

<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.

                                    OAK TECHNOLOGY, INC.
                                    (Registrant)




Date:  May 14, 1998                 /S/ SIDNEY S. FAULKNER
                                    -----------------------------
                                    Sidney S. Faulkner
                                    Vice President, Finance 
                                    Chief Financial Officer 
                                    (Principal Financial and Accounting Officer
                                    and Duly Authorized Officer)


                                      39

<PAGE>


                                EXHIBIT INDEX

<TABLE>
<CAPTION>

     Exhibit
     Number      Exhibit Title
     ------      -------------
     <S>         <C>
     10.26       Amendment to Option Agreement by and between Taiwan 
                 Semiconductor Manufacturing Co., Ltd, and the Company.**

     10.27       Settlement Agreement between Winbond Electronics Corporation
                 and the Company. **
     
     11.01       Statement regarding computation of net income per share
     
     27.01       Financial Data Schedule

</TABLE>
     -------------------
     ** Confidential treatment requested as to portions of the exhibit


                                      40