<PAGE>

                                       
                                       
                                       
                      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 DECEMBER 31, 1996
                                       
                                      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 December 31, 1996, there were outstanding 40,404,363 shares of the 
Registrant's Common Stock, par value $0.001 per share.


<PAGE>

                     OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                                       
                                     INDEX
                                       
                                       
                                       
                                       
PART  I - FINANCIAL INFORMATION                                   PAGE

Item 1.   Financial Statements

          Consolidated Balance Sheets as of December 31, 1996
          and June 30, 1996                                         3

          Consolidated Statements of Income for the
          Three Months and Six Months ended
          December 31, 1996 and 1995                                4

          Consolidated Statements of Cash Flows for the
          Six Months Ended December 31, 1996 and 1995               5

          Notes to Consolidated Financial Statements                6

Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations             10
          

PART II - OTHER INFORMATION
          
Item 1.   Legal Proceedings                                         23

Item 6.   Exhibits and Reports on Form 8-K                          24

SIGNATURES                                                          27

EXHIBIT INDEX                                                       28



                                     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)
                                       
                                    ASSETS

<TABLE>
<CAPTION>
                                                       DECEMBER 31,     JUNE 30,
                                                          1996            1996
                                                      -------------    ----------
                                                       (Unaudited)
<S>                                                   <C>              <C>
Current assets: 
 Cash and cash equivalents.........................     $  70,814      $  44,934
 Short-term investments............................        64,358         68,350
 Accounts receivable, net of allowance for 
  doubtful accounts of $631 and $916, respectively.        25,792         20,172
 Inventories.......................................        11,488         14,763
 Current portion of foundry deposits...............        10,460          4,595
 Deferred tax asset................................        13,893         13,889
 Prepaid expenses and other current assets.........         3,245          3,809
                                                        ---------      ---------
  Total current assets.............................       200,050        170,512
Property and equipment, net........................        17,779         18,212
Foundry deposits...................................        32,660         52,000
Investment in joint venture........................        13,696         13,696
Other assets.......................................         1,552          1,888
                                                        ---------      ---------
  Total assets.....................................     $ 265,737      $ 256,308
                                                        ---------      ---------
                                                        ---------      ---------

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Notes payable and current portion of long-term 
  debt.............................................     $   6,333      $  22,062
 Accounts payable..................................        13,928          7,887
 Accrued expenses..................................         4,955          4,824
 Income taxes payable..............................         6,603              -
 Deferred revenue..................................           464          1,053
                                                        ---------      ---------
  Total current liabilities........................        32,283         35,826
Long-term debt.....................................         2,781          2,858
Deferred income taxes..............................         6,435          6,435
Deferred rent......................................           331            362
                                                        ---------      ---------
  Total liabilities................................        41,830         45,481
                                                        ---------      ---------
Stockholders' equity:
 Convertible preferred stock, $0.001 par value; 
   2,000,000 shares authorized; none issued and 
   outstanding as of December 31, 1996 and
   June 30, 1996...................................             -             -
 Common stock, $0.001 par value; 60,000,000 shares 
  authorized; 40,404,363 and 40,196,796 shares issued 
  and outstanding as of December 31, 1996 and 
  June 30, 1996, respectively......................            40             40
 Additional paid-in capital........................       157,296        155,751
 Retained earnings.................................        66,571         55,036
                                                        ---------      ---------
  Total stockholders' equity.......................       223,907        210,827
                                                        ---------      ---------
  Total liabilities and stockholders' equity.......     $ 265,737      $ 256,308
                                                        ---------      ---------
                                                        ---------      ---------
</TABLE>

         See accompanying notes to consolidated financial statements.


                                  3
<PAGE>
                      OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands, except per share data)
                                   (Unaudited)
                                        
<TABLE>
<CAPTION>
                                                           Three Months Ended              Six Months Ended
                                                              December 31,                   December 31,
                                                        ------------------------      -----------------------
                                                            1996          1995            1996         1995
                                                        -----------    ---------      ----------   ----------
<S>                                                     <C>            <C>            <C>          <C>
Net revenues......................................      $  47,611      $  83,735      $  66,537    $  140,207
Cost of revenues..................................         15,225         38,922         25,441        64,058
                                                        ---------      ---------      ---------    ----------
  Gross profit....................................         32,386         44,813         41,096        76,149
Research and development expenses.................          7,860          7,498         15,954        13,403
Selling, general and administrative expenses......          5,087          5,123          9,380         8,862
In-process research and development expenses......              -          4,837              -         4,837
                                                        ---------      ---------      ---------    ----------
  Operating income................................         19,439         27,355         15,762        49,047
Nonoperating income...............................            850          4,076          1,984         4,439
                                                        ---------      ---------      ---------    ----------
  Income before income taxes......................         20,289         31,431         17,746        53,486
Income taxes......................................          7,101         13,214          6,211        22,036
                                                        ---------      ---------      ---------    ----------
  Net income......................................      $  13,188      $  18,217      $  11,535      $ 31,450
                                                        ---------      ---------      ---------    ----------
                                                        ---------      ---------      ---------    ----------
Net income per share..............................      $    0.31      $    0.43      $    0.27      $   0.74
                                                        ---------      ---------      ---------    ----------
                                                        ---------      ---------      ---------    ----------
Shares used in computing net income per share.....         42,701         42,694         42,399        42,680
                                                        ---------      ---------      ---------    ----------
                                                        ---------      ---------      ---------    ----------
</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>
                                                             Six Months Ended
                                                               December 31,
                                                        --------------------------
                                                            1996          1995
                                                        -----------    -----------
<S>                                                     <C>            <C>
Cash flows from operating activities:
 Net income.......................................      $  11,535      $  31,450
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization...................          2,633          1,252
  Inventory related adjustments...................        (16,590)         2,071
  Equity in (income) or loss of unconsolidated 
   affiliates.....................................            141         (1,650)
  In-process research and development.............              -          4,837
  Deferred income taxes...........................            277            135
  Changes in operating assets and liabilities:
   Accounts receivable............................         (5,620)       (36,143)
   Inventories....................................         16,865        (16,621)
   Foundry deposits...............................          2,075              -
   Prepaid expenses and other current assets......            564         (1,706)
   Accounts payable and accrued expenses..........          6,172         19,222
   Income taxes payable, deferred revenue and 
    other liabilities.............................          6,706          7,001
                                                        ---------      ---------
       Net cash provided by operating activities..         24,758          9,848
                                                        ---------      ---------
Cash flows from investing activities:
  Purchases of short-term investments.............        (12,183)       (56,854)
  Proceeds from matured short-term investments....         16,175         14,410
  Additions to property and equipment, net........         (2,030)        (7,055)
  Acquisition of Pixel Magic, Inc., net of cash
    acquired......................................              -         (5,126)
  Investment in foundry deposits..................              -        (40,320)
  Other assets....................................             25         (3,346)
                                                        ---------      ---------
       Net cash provided by (used in) investing 
         activities...............................          1,987        (98,291)
                                                        ---------      ---------
Cash flows from financing activities:
 Issuance of debt.................................         29,706         44,335
 Repayment of debt................................        (31,112)        (9,870)
 Issuance of common stock, net....................            541            937
                                                        ---------      ---------
      Net cash provided by (used in) financing 
        activities................................           (865)        35,402
                                                        ---------      ---------
Net increase (decrease) in cash and cash 
  equivalents.....................................         25,880        (53,041)
Cash and cash equivalents, beginning of period....         44,934        125,136
                                                        ---------      ---------
Cash and cash equivalents, end of period..........      $  70,814      $  72,095
                                                        ---------      ---------
                                                        ---------      ---------
Supplemental information:
 Cash paid during the period:
  Interest........................................      $     268      $     289
                                                        ---------      ---------
                                                        ---------      ---------
  Income taxes....................................      $  (1,692)     $  14,621
                                                        ---------      ---------
                                                        ---------      ---------
Noncash investing and financing activities:
 Cash benefit related to stock plans..............      $   1,004      $   4,280
                                                        ---------      ---------
                                                        ---------      ---------
 Adjustment to foundry commitments................      $ (14,400)     $       -
                                                        ---------      ---------
                                                        ---------      ---------

</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, 1996, included in the Oak Technology, Inc. (the 
"Company") 1996 Annual Report on Form 10-K filed with the Commission.

2.   EQUITY AND NET INCOME PER SHARE

  Net income per share has been computed using the weighted average number of 
shares of common stock and dilutive common equivalent shares from stock 
options and warrants outstanding (using the treasury stock method).  All 
periods presented reflect a two for one stock split that was approved by the 
Company's board of directors and effected as of March 28, 1996.

3.   BALANCE SHEET COMPONENTS

  INVENTORIES

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

<TABLE>
<CAPTION>
                                                       December 31,     June 30,
                                                          1996            1996
                                                       ------------     --------
<S>                                                    <C>              <C>
Purchased parts and work in process                    $     7,743      $  5,888
Finished goods                                               3,745         8,875
                                                       ------------     --------
                                                       $    11,488      $ 14,763                                       
                                                       ------------     --------
                                                       ------------     --------
</TABLE>


                                       6

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


4.   INVENTORIES AND RELATED COSTS

     Margins for the quarter ended December 31, 1996 were favorably affected 
by an adjustment to cost of revenues associated with the sale of CD-ROM 
controller products which had been fully reserved in the fourth quarter of 
fiscal 1996.  This adjustment reduced cost of revenues during the quarter by 
approximately $13.0 million. Significant sales of these CD-ROM controllers, 
after December 31, 1996, could result in additional adjustments to cost of 
revenues in future periods. However, no estimate can be made of the amount, 
if any, of any potential adjustments that may be recorded in the future.

     Margins for the quarter and six month period ended December 31, 1996 
were also favorably affected by manufacturing cost adjustments which reduced 
cost of revenues by $1.5 million and $3.0 million, respectively, related to 
the outstanding foundry agreement with Taiwan Semiconductor Manufacturing 
Company.
     
5.   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 as IN RE OAK TECHNOLOGY SECURITIES LITIGATION, 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 breach of 
fiduciary duty and abuse of control.

     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.

     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 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.
     
     
                                      7

<PAGE>

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


5.   CONTINGENCIES (CONTINUED)

     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 and the Company is 
currently investigating the allegations.  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 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.

6.   FOUNDRY AGREEMENTS AND INVESTMENT IN JOINT VENTURE

     In June and November 1995, the Company entered into agreements with 
Taiwan Semiconductor Manufacturing Company ("TSMC") and Chartered 
Semiconductor Manufacturing Ptd. Ltd. ("Chartered") to obtain certain 
additional wafer capacity through the year 2001.  The agreements called for 
the Company 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.
     
     In September and October 1996, respectively, the Company amended its 
previous agreements with Chartered and TSMC.  The amendments resulted in a 
reduction and deferral of the Company's future wafer purchase commitments and 
the elimination of required future cash deposits of approximately $73 million 
under the original foundry arrangements.  The execution of these agreements 
reduced the Company's wafer purchase commitments during the remainder of 
calendar 1996 and resulted in a favorable manufacturing cost adjustment 
recorded to cost of revenues of $1.5 million during each of the quarters 
ended December 31, 1996 and September 30, 1996.
     
     Deposits paid under the amended agreements are recorded at cost and 
total approximately $43.1 million as of December 31, 1996.  Pursuant to the 
terms of the amended agreements, this entire amount represents deposits to be 
used as a portion of the price to be paid for future wafers.  If the Company 
is not able to use, assign, or sell the additional wafer quantities, all or a 
portion of certain deposits may be forfeited which would result in a charge 
to cost of revenues. Under the amended agreements, required future cash 
deposits of approximately $36 million, due under the original agreement with 
Chartered, 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.


                                        8
<PAGE>
                     OAK TECHNOLOGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                  (CONTINUED)
     

6.   FOUNDRY AGREEMENTS AND INVESTMENT IN JOINT VENTURE (CONTINUED)
     
     In October 1995, the Company entered into a series of agreements with 
United Microelectronics Corporation to form, along with other investors, a 
separate Taiwanese company for the purpose of building and managing a 
semiconductor manufacturing facility in the Science Based Industrial Park in 
Hsin Chu City, Taiwan, Republic of China.  The Company has agreed to invest 
approximately $60 million for a 10% equity position in the venture.  In 
January 1996, the Company made an initial payment of $13.7 million and in 
January 1997, the Company made the second payment of $25.9 million due under 
this agreement. The final payment of $15.0 million under this agreement is 
due in fiscal 1998.

                                        9
<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. 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 ENTRY INTO THE 
COMPANY'S MARKETS OF NEW COMPETITORS, (vi) THE COMPANY'S ABILITY TO DEVELOP 
AND INTRODUCE NEW PRODUCTS 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) 
DEPENDENCE ON SALES OF CD-ROM CONTROLLER PRODUCTS, (xiv) RISKS RELATED TO 
INTERNATIONAL BUSINESS OPERATIONS, (xv) VOLATILITY IN THE COMPANY'S STOCK 
PRICE, (xvi) MANAGEMENT OF CHANGING OPERATIONS, (xvii) RISKS RELATED TO 
PRODUCT DEFECTS, (xviii) THE ABILITY TO ATTRACT AND RETAIN QUALIFIED 
MANAGEMENT AND TECHNICAL PERSONNEL AND (xix) OTHER RISKS IDENTIFIED FROM TIME 
TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE 
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K 
FOR THE YEAR ENDED JUNE 30, 1996.

     The Company designs, develops and markets high performance multimedia 
semiconductors and related software to original equipment manufacturers that 
serve the multimedia PC, digital video consumer electronics and digital 
office equipment markets.  The Company develops semiconductor products based 
on five core technologies: optical storage, MPEG imaging, video/graphics, 
audio/communications and digital imaging.  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 products, enabling the Company to focus on its design strengths, minimize 
fixed costs and capital expenditures and gain access to advanced 
manufacturing facilities.  Except as described in Note 6 of Notes to 
Consolidated Financial Statements, the foundries generally are not obligated 
to supply products to the Company for any specific period, in any specific 
quantity or at a specific price.

     In January 1997, Donald R. Bryson, The Company's Chief Operating 
Officer, resigned as an officer and Director of the Company.  Mr. Bryson will 
continue as an employee of the Company through April 1997, as director of 
special projects.  The Company is in the process of recruiting Mr. Bryson's 
successor.


                                        10
<PAGE>


THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1995
     
     NET REVENUES.  The Company's net revenues in the comparison periods were 
primarily derived from product sales.  Net revenues decreased 43% to $47.6 
million in the three months ended December 31, 1996 from $83.7 million in the 
comparable period of fiscal 1996.  This decrease was primarily attributable 
to a decrease in unit sales and overall average selling prices ("ASPs") of 
CD-ROM controllers. The decrease in unit sales resulted from the Company 
receiving substantially fewer orders for its CD-ROM controller products than 
in the comparable period of fiscal 1996.  The Company believes the decline in 
orders is primarily attributable to a change in the ordering patterns of the 
CD-ROM drive manufacturers, a slowdown in the growth rate of the PC market 
and the continued maturation of the CD-ROM industry.  In addition, the 
Company has continued to experience increased competition in the CD-ROM drive 
and controller market.  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 Company's gross margin increased to 
68.0% in the three month period ended December 31, 1996 as compared to 53.5% 
during the comparable period in the prior year.  Margins for the three month 
period ended December 31, 1996 were favorably affected by adjustments of 
approximately $13.0 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 $1.5 million related to foundry agreements. 
Significant sales of these products, after December 31, 1996, could result in 
additional adjustments to cost of revenues in future periods.  However, no 
estimate can be made of the amount, if any, of any potential adjustments that 
may be recorded in the future.  Excluding the impact of these adjustments, 
gross margin for the three month period ended December 31, 1996 would have 
been approximately 37.6%.  This adjusted gross margin decreased from the 
comparable period in fiscal 1996 primarily as a result of a decrease in the 
ASPs of the Company's CD-ROM controller products.  The Company's overall 
gross margin is subject to change due to various factors, including, among 
others, competitive product pricing, yields, wafer costs, assembly and test 
costs and product mix.  The Company expects that ASPs for its existing 
products will continue to decline over time and that ASPs for each new 
product will decline significantly over the life of the product.  A decline 
in ASPs that is not offset by a reduction in production costs or by sales of 
new products with higher gross margins would decrease the Company's overall 
gross margin and could materially and adversely affect the Company's 
operating results.
     
     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development costs are 
expensed as incurred.  Research and development expenses increased 5% to $7.9 
million in the three months ended December 31, 1996 from $7.5 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 16.5% during the three months ended December 31, 1996 from 9.0% in the 
comparable period in the prior year due primarily to the significant decrease 
in the Company's net revenues in the current period compared to the 
comparable period of fiscal 1996.  The Company will continue to invest 
substantial resources in research and development in an effort to maintain 
its technological leadership in the CD-ROM controller market and diversify 
its product development in its other 

                                        11
<PAGE>

core technologies: video/graphics, MPEG imaging, audio/communication and 
digital imaging.  As a result, the Company expects to incur higher absolute 
research and development expenses in the remainder of fiscal 1997.
     
     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and 
administrative expenses in the three months ended December 31, 1996 was $5.1 
million which is unchanged from the comparable three months in fiscal 1996. 
However, selling, general and administrative expenses increased as a 
percentage of net revenues to 10.7% in the three months ended December 31, 
1996 from 6.1% during the comparable period in fiscal 1996, due primarily to 
a significant decrease in the Company's net revenues in the comparison 
periods.  As a result of the continuing efforts to develop the Company's 
support infrastructure, the Company expects to incur higher absolute 
administrative expenses in the remainder of fiscal 1997.
     
     IN-PROCESS RESEARCH AND DEVELOPMENT. 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 is 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 the 
quarter ended December 31, 1995.
     
     NONOPERATING INCOME.  During the three months ended December 31, 1996, 
nonoperating income decreased to $0.9 million from $4.1 million during the 
comparable three months in fiscal 1996.  This decrease was primarily the 
result of foreign currency transaction losses recorded in the second quarter 
of fiscal 1997 compared to foreign currency transaction gains recorded in the 
comparable period in fiscal 1996 both attributable primarily to the Japanese 
Yen.   In addition, the Company recognized a gain of approximately $0.7 
million during the three months ended December 31, 1995 on an equity 
investment in an unconsolidated affiliate which did not recur in the current 
period.
     
     INCOME TAXES. The overall effective tax rate for the three months ended 
December 31, 1996 was 35.0%.  The effective tax rate for the comparable 
period of the prior fiscal year was approximately 42.0%.  The decrease in the 
effective tax rate from the comparable period of the prior year is primarily 
attributable to the effect of the reinstituted research and development tax 
credit on fiscal 1997 results as well as a geographical shift in the sources 
of taxable income from the comparable quarter of fiscal 1996.

SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 
1995
     
     NET REVENUES.  The Company's net revenues in the comparison periods were 
primarily derived from product sales.  Net revenues decreased 53% to $66.5 
million in the six months ended December 31, 1996 from $140.2 million in the 
comparable period of fiscal 1996.  This decrease was primarily attributable 
to a decrease in unit sales and overall ASPs of CD-ROM controllers. The 
decrease in unit sales resulted from the Company receiving substantially 
fewer orders for its CD-ROM controller products than in the comparable period 
of fiscal 1996. The Company believes the decline in orders is primarily 
attributable to a change in the ordering patterns of the CD-ROM drive 
manufacturers, a slowdown in the growth rate of the PC market and the 
continued maturation of the CD-ROM industry.  In addition, the Company has 
continued to experience increased competition in the CD-ROM drive and 
controller market.  See "Factors That May Affect Future Results" below.


                                        12
<PAGE>
     
     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 increased to 
61.8% in the six month period ended December 31, 1996 as compared to 54.3% 
during the comparable period in the prior year.  Margins for the six month 
period ended December 31, 1996 were favorably affected by adjustments of 
approximately $13.6 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. 
Significant sales of these products, after December 31, 1996, could result in 
additional adjustments to cost of revenues in future periods.  However, no 
estimate can be made of the amount of any potential adjustments that may be 
recorded in the future.  Excluding the impact of these adjustments, gross 
margin for the six month period ended December 31, 1996 would have been 
approximately 36.9%.  This adjusted gross margin decreased from the 
comparable period in fiscal 1996 primarily as a result of a decrease in ASPs 
of the Company's CD-ROM controller products. The Company's overall gross 
margin is subject to change due to various factors, including, among others, 
competitive product pricing, yields, wafer costs, assembly and test costs and 
product mix. The Company expects that ASPs for its existing products will 
continue to decline over time and that ASPs for each new product will decline 
significantly over the life of the product.  A decline in ASPs that is not 
offset by a reduction in production costs or by sales of new products with 
higher gross margins would decrease the Company's overall gross margin and 
could materially and adversely affect the Company's operating results.
     
     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development costs are 
expensed as incurred.  Research and development expenses increased 19% to 
$16.0 million in the six months ended December 31, 1996 from $13.4 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 24.0% during the six months ended December 31, 1996 from 9.6% in the 
comparable period in the prior year due primarily to the significant decrease 
in the Company's net revenues in the current period compared to the 
comparable period of fiscal 1996.  The Company will continue to invest 
substantial resources in research and development in an effort to maintain 
its technological leadership in the CD-ROM controller market and diversify 
its product development in its other core technologies: video/graphics, MPEG 
imaging, audio/communication and digital imaging.  As a result, the Company 
expects to incur higher absolute research and development expenses in the 
remainder of fiscal 1997.
     
     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and 
administrative expenses increased 6% to $9.4 million in the six months ended 
December 31, 1996 from $8.9 million in the comparable six months in fiscal 
1996. This increase was primarily the result of the hiring of additional 
personnel and associated expenses.  Selling, general and administrative 
expenses increased as a percentage of net revenues to 14.1% in the six months 
ended December 31, 1996 from 6.3% during the comparable period in fiscal 
1996, due primarily to a significant decrease in the Company's net revenues 
in the comparison periods.  As a result of the continuing efforts to develop 
the Company's support infrastructure, the Company expects to incur higher 
absolute administrative expenses in the remainder of fiscal 1997.


                                        13
<PAGE>
     
     IN-PROCESS RESEARCH AND DEVELOPMENT. 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 is 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 the 
quarter ended December 31, 1995.
     
     NONOPERATING INCOME.  During the six months ended December 31, 1996, 
nonoperating income decreased to $2.0 million from $4.4 million during the 
comparable six months in fiscal 1996.  This decrease was primarily the result 
of a gain of approximately $1.5 million recorded during the six months ended 
December 31, 1995 on an equity investment in an unconsolidated affiliate 
which did not recur in the current period as well as a decrease of 
approximately $0.9 million in interest income resulting from a lower average 
cash balance and lower interest rates during the comparison periods.
     
     INCOME TAXES. The overall effective tax rate for the six months ended 
December 31, 1996 was 35.0%.  The effective tax rate for the comparable 
period of the prior fiscal year was approximately 41.2%.  The decrease in the 
effective tax rate from the comparable period of the prior year is primarily 
attributable to the effect of the reinstituted research and development tax 
credit on fiscal 1997 results as well as a geographical shift in the sources 
of taxable income from the comparable period in fiscal 1996.

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 announcements and 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, changes in the mix of products sold, the cyclical nature of  the 
semiconductor industry, the market for PCs and the 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, significant increases in 
expenses associated with the expansion of operations, 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, or 
by order cancellations or rescheduling.  These factors are difficult to 
forecast, and these or other factors could materially affect the Company's 
quarterly or annual operating results.  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.


                                        14
<PAGE>

     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 for the next several years, while its customers 
generally place purchase orders with the Company less than four weeks prior 
to delivery that may be canceled without significant penalty.  Consequently, 
if anticipated sales and shipments in any quarter are canceled or do not 
occur as quickly as expected, expense and inventory levels could be 
disproportionately high and the Company's business, financial condition and 
results of operations for that quarter or for the year would be materially 
adversely affected.

     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 general semiconductor industry conditions.

     The Company and various of its current and former officers and Directors 
are parties to certain legal proceedings.  See Note 5 of Notes to 
Consolidated Financial Statements.  All of these actions are in the early 
stages of proceedings and the Company is currently investigating the 
allegations.  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 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.

     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.  The Company's 
existing and potential competitors include many large domestic and 
international companies that have substantially greater financial, 
manufacturing, technical, marketing, distribution and other resources, 
broader product lines and longer standing relationships with customers than 
the Company.  The Company's competitors also include a number of emerging 
companies.  Certain of the Company's principal competitors 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 standards, the development of technical innovations, the 
ability to obtain adequate foundry capacity and sources of raw materials, the 
efficiency of production, the rate at which the Company's customers design 
the Company's products into their products, the market acceptance of the 
products of the Company's customers, the number and nature of the Company's 
competitors in a given market, the assertion of intellectual property rights 


                                        15
<PAGE>

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 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 PC market and the digital video 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.  
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.  In an effort to 
diversify its product and market base, the Company has invested substantial 
resources in optical storage as well as a number of other core technologies: 
video/graphics, MPEG imaging, audio/communication and digital imaging.  There 
can be no assurance that products currently under development in these new 
core technologies and optical storage 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 product and market 
bases.  The failure of the Company to introduce new products successfully or 
the failure of new products to achieve market acceptance would have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  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 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'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 two 
patents 


                                        16
<PAGE>

granted, eight patents pending and ten patents in preparation in the United 
States and intends to seek 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 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 States and thus make the 
possibility of piracy of the Company's technology and products more likely.  
There can be no assurance that the steps taken by the Company to protect its 
proprietary information will be adequate to prevent misappropriation of its 
technology or that the Company's competitors will not independently develop 
technologies that are substantially equivalent or superior to the Company's 
technology.

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


                                        17
<PAGE>

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

     Certain technology used in the Company's products is licensed from third 
parties.  There can be no assurance that such licenses will continue to be 
available on terms acceptable to the Company, if at all.  The inability of 
the Company to enter 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 products, enabling the Company to focus on its design strengths, minimize 
fixed costs and capital expenditures and gain access to advanced 
manufacturing facilities.  The Company is dependent on its foundries to 
allocate to the Company a portion of their foundry capacity sufficient to 
meet the Company's needs to produce products of acceptable quality and with 
acceptable manufacturing yields and to deliver products to the Company in a 
timely manner.  These foundries fabricate products for other companies and 
some manufacture products of their own design.  The loss of any of these 
foundries as a supplier, the inability of the Company in a period of 
increased demand for its products to expand the foundry capacity of its 
current suppliers or qualify other wafer manufacturers for additional foundry 
capacity, any inability to obtain timely and adequate deliveries from the 
Company's current or future suppliers or any other circumstances that would 
require the Company to seek alternative sources of supply could delay 
shipments of the Company's products, 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 results of operations.

     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.


                                        18
<PAGE>

     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 86% and 91% 
of the Company's net revenues in the three months ended December 31, 1996 and 
1995, 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 has 
begun to mature and, therefore, it is expected that sales of such products 
will be influenced by the traditional seasonality associated with the PC 
market and will not continue to grow at historical rates.   In addition, 
there can be no assurance that the Company will be able to sustain the 
current level of such product sales and 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.  It is anticipated that the introduction of the 
digital video decoder will impact the demand for CD-ROM controller products. 
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.


                                        19
<PAGE>

     International sales, principally to Taiwan, Japan, Korea and Singapore, 
accounted for approximately 95% and 99% of the Company's net revenues in the 
three months ended December 31, 1996 and 1995, respectively.  A substantial 
portion of the Company's international revenues in the comparison periods 
were derived from Japanese, Taiwanese and Korean manufacturers of CD-ROM 
drives.  Accordingly, the Company is subject to the risks of conducting 
business outside of the United States.  These risks include unexpected 
changes in, or impositions of, legislative or regulatory requirements, delays 
resulting from difficulty in obtaining export licenses for certain 
technology, tariffs, quotas and other trade barriers and restrictions, longer 
payment cycles, greater difficulty in accounts receivable collection, 
potentially adverse tax rates, the burdens of complying with a variety of 
foreign laws and other factors beyond the Company's control.  The Company is 
also subject to general geopolitical risks in connection with its 
international operations, such as political, social and economic instability, 
potential hostilities and changes in diplomatic and trade relationships.  
There can be no assurance that such factors will not adversely affect the 
Company's operations in the future or require the Company to modify its 
current business practices.  In addition, the laws of certain foreign 
countries in which the Company's products are or may be developed, 
manufactured or sold, including various countries in Asia, may not protect 
the Company's products or intellectual property rights to the same extent as 
do the laws of the United States and thus make the possibility of piracy of 
the Company's technology and products more likely.  Most of the Company's 
foreign sales are negotiated in U.S. dollars; however, invoicing is often 
done in local currency.  As a result, the Company may be subject to the risks 
of currency fluctuations.  There can be no assurance that one or more of the 
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 has accounted for a 
substantial portion of the Company's net revenues.  In the three months ended 
December 31, 1996 and 1995, sales to the Company's top ten customers 
accounted for approximately 79% and 84%, 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.  In addition, 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.


                                        20
<PAGE>

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 December 31, 1996 consisted of approximately $135.2 million 
in cash, cash equivalents and short-term investments, approximately $25.0 
million in lines of credit with two Japanese financial institutions, of which 
$19.2 million was available as of December 31, 1996 and approximately $11.3 
million in lines of letters of credit with Taiwanese financial institutions, 
of which approximately $10.2 million was available as of December 31, 1996.

     During the six months ended December 31, 1996, operating activities 
provided net cash of approximately $24.8 million.  This cash resulted 
primarily from net income of $11.5 million and a significant decrease in 
inventory levels. Investing and financing activities provided cash of 
approximately $1.1 million consisting primarily of net proceeds from matured 
short term investments of $4.0 million and proceeds from the issuance of 
common stock of $0.5 million partially offset by purchases of property and 
equipment of $2.0 million and a net increase in debt of $1.5 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 1997 are anticipated to be approximately $6.0 
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.  However, the Company has no present 
understandings, commitments or agreements with respect to any material 
acquisition of other businesses, products or technologies.

     In June and November 1995, the Company entered into agreements with 
Taiwan Semiconductor Manufacturing Company ("TSMC") and Chartered 
Semiconductor Manufacturing Ptd. Ltd. ("Chartered") to obtain certain 
additional wafer capacity through the year 2001.  The agreements called for 
the Company 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.
     
     In September and October 1996, respectively, the Company amended its 
previous agreements with Chartered and TSMC.  The amendments resulted in a 
reduction and deferral of the Company's future wafer purchase commitments and 
the elimination of required future cash deposits of approximately $73 million 
under the original foundry arrangements. The execution of these agreements 
reduced the Company's wafer purchase commitments during the remainder of 
calendar 1996 and resulted in a favorable manufacturing cost adjustment 
recorded to cost of revenues of $1.5 million during each of the quarters 
ended December 31, 1996 and September 30, 1996.
     
     Deposits paid under the amended agreements are recorded at cost and 
total approximately $43.1 million as of December 31, 1996.  Pursuant to the 
terms of the amended agreements, this entire amount represents deposits to be 
used as a portion of the price to be paid for future wafers.  If the Company 
is not able to use, assign, or sell the additional wafer quantities, all or a 
portion of 


                                        21
<PAGE>

certain deposits may be forfeited which would result in a charge to cost of 
revenues. Under the amended agreements, required future cash deposits of 
approximately $36 million, due under the original agreement with Chartered, 
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.
     
     In October 1995, the Company entered into a series of agreements with 
United Microelectronics Corporation to form, along with other investors, a 
separate Taiwanese company for the purpose of building and managing a 
semiconductor manufacturing facility in the Science Based Industrial Park in 
Hsin Chu City, Taiwan, Republic of China.  The Company has agreed to invest 
approximately $60 million for a 10% equity position in the venture.  In 
January 1996, the Company made an initial payment of $13.7 million and in 
January 1997, the Company made the second payment of $25.9 million due under 
this agreement.  The final payment of $15.0 million under this agreement is 
due in fiscal 1998.


                                        22

<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 as IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, 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 breach of fiduciary duty and abuse of control.

     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.

     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 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.

     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 and the Company is 
currently investigating the allegations. 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 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.

                                       23

<PAGE>



ITEM 6. EXHIBITS AND REPORTS ON FORM  8-K

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

          Exhibit
          Number      Exhibit Title
          -------     -------------
          
          3.01        The Company's Restated Certificate of Incorporation,
                      amended (1)

          3.02        The Company's Restated Bylaws (2)

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

          4.02        Amended and Restated Registration Rights Agreement
                      dated as of Oct. 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)

          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)

                                       24

<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. Perry 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)

                                       25

<PAGE>

          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)**

          11.01       Statement regarding computation of net income per share

          27.01       Financial Data Schedule

-------------------------
(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 in 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.
(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.

*    Indicates Management incentive plan.
**   Confidential treatment requested as to portions of the exhibit.

      (b) The Company did not file any reports on Form 8-K during the three 
          months ended December 31, 1996.


                                       26

<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:  February 7, 1997
                                   /S/ SIDNEY S. FAULKNER
                                   ----------------------
                                   Sidney S. Faulkner
                                   Vice President, Finance,
                                   Chief Financial Officer and Secretary
                                   (Principal Financial and Accounting Officer
                                   and Duly Authorized Officer)

                                       27

<PAGE>

                              EXHIBIT INDEX
                                   
          
         Exhibit
         Number      Exhibit Title
         -------     -------------

          11.01       Statement regarding computation of net income per share

          27.01       Financial Data Schedule




                                      28