<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 DECEMBER 31, 1997

                                      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, 1997, there were outstanding 41,933,225 shares of the 
Registrant's Common Stock, par value $0.001 per share.


                                       1

<PAGE>

                     OAK TECHNOLOGY, INC. AND SUBSIDIARIES

                                     INDEX


Part  I - Financial Information                               Page
                                                              ----

Item 1.  Financial Statements

          Consolidated Balance Sheets as of December 31, 1997
          and June 30, 1997 ..................................  3

          Consolidated Statements of Operations for the
          Three Months and Six Months ended
          December 31, 1997 and 1996..........................  4

          Consolidated Statements of Cash Flows for the
          Six Months Ended December 31, 1997 and 1996.........  5

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

Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations....... 12


Part II - Other Information

Item 1.   Legal Proceedings................................... 29

Item 4.   Submission of Matters to a Vote of Security 
          Holders............................................. 32

Item 6.   Exhibits and Reports on Form 8-K.................... 33

Signatures.................................................... 37

Exhibit Index................................................. 38


                                       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,
                                                           1997           1997
                                                       ------------    ----------
                                                       (Unaudited)
<S>                                                    <C>             <C>
Current assets:
 Cash and cash equivalents............................  $  77,303      $  87,609
 Short-term investments...............................     55,643         57,660
 Accounts receivable, net of allowance for 
   doubtful accounts of $653 and $663, respectively...     27,991         24,872
 Inventories..........................................     12,184         12,322
 Current portion of foundry deposits..................     15,440         15,015
 Deferred tax asset...................................      4,350          4,350
 Prepaid expenses and other current assets............      5,194          4,107
                                                       ----------     ----------
   Total current assets...............................    198,105        205,935
Property and equipment, net...........................     24,892         19,958
Foundry deposits......................................     18,265         19,145
Investment in foundry venture.........................     51,234         39,618
Other assets..........................................      2,881          2,939
                                                       ----------     ----------
   Total assets....................................... $  295,377     $  287,595
                                                       ----------     ----------
                                                       ----------     ----------

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Notes payable and current portion of long-term debt.. $    9,505     $    7,264
 Accounts payable.....................................     14,778         16,144
 Accrued expenses.....................................     11,623          9,882
 Income taxes payable.................................        154          3,893
 Deferred revenue.....................................        453            584
                                                        ---------     ----------
  Total current liabilities...........................     36,513         37,767
Long-term debt........................................         54          2,496
Deferred income taxes.................................      4,151          6,344
Other long-term liabilities...........................        235          2,291
                                                       ----------     ----------
   Total liabilities..................................     40,953         48,898
                                                       ----------     ----------
Stockholders' equity:
 Preferred stock, $0.001 par value; 2,000,000 shares 
  authorized; none issued and outstanding as of 
  December 31, 1997 and June 30, 1997.................          -              -

 Common stock, $0.001 par value; 60,000,000 shares 
  authorized; 41,933,225 and 41,086,754 shares issued
  and outstanding as of December 31, 1997 and June 30,
  1997, respectively..................................         42             41
 Additional paid-in capital...........................    161,832        159,901
 Retained earnings....................................     92,550         78,755
                                                       ----------     ----------
   Total stockholders' equity.........................    254,424        238,697
                                                       ----------     ----------
   Total liabilities and stockholders' equity......... $  295,377     $  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            Six Months Ended
                                                                December 31,                 December 31,
                                                        ------------------------      ------------------------
                                                           1997           1996           1997          1996
                                                        ---------      ---------      ---------     ---------
<S>                                                     <C>            <C>            <C>           <C>
Net revenues..........................................  $  49,353      $  47,611      $  92,646     $  66,537
Cost of revenues......................................     23,233         15,225         43,988        25,441
                                                        ---------      ---------      ---------     ---------
  Gross profit........................................     26,120         32,386         48,658        41,096
Research and development expenses.....................     12,175          7,860         23,006        15,954
Selling, general and administrative expenses..........      7,836          5,087         14,147         9,380
                                                        ---------      ---------      ---------     ---------
  Operating income....................................      6,109         19,439         11,505        15,762
Nonoperating income, net..............................      5,586            850          9,718         1,984
                                                        ---------      ---------      ---------     ---------
  Income before income taxes..........................     11,695         20,289         21,223        17,746
Income taxes..........................................      4,093          7,101          7,428         6,211
                                                        ---------      ---------      ---------     ---------
  Net income..........................................  $   7,602      $  13,188      $  13,795     $  11,535
                                                        ---------      ---------      ---------     ---------
                                                        ---------      ---------      ---------     ---------

Net income per share:
  Basic...............................................  $    0.18      $    0.33      $    0.33     $    0.29
                                                        ---------      ---------      ---------     ---------
                                                        ---------      ---------      ---------     ---------
  Diluted.............................................  $    0.18      $    0.31      $    0.32     $    0.27
                                                        ---------      ---------      ---------     ---------
                                                        ---------      ---------      ---------     ---------
Shares used in computing net income per share:
  Basic...............................................     41,824         40,382         41,716        40,348
                                                        ---------      ---------      ---------     ---------
                                                        ---------      ---------      ---------     ---------
  Diluted.............................................     42,643         42,701         42,762        42,399
                                                        ---------      ---------      ---------     ---------
                                                        ---------      ---------      ---------     ---------
</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,
                                                        -------------------------
                                                          1997           1996
                                                        ---------      ---------
<S>                                                     <C>            <C>
Cash flows from operating activities:
 Net income...........................................   $ 13,795      $  11,535
 Adjustments to reconcile net income to net cash 
  provided by operating activities:
  Depreciation and amortization.......................      3,375          2,633
  Inventory-related adjustments.......................        124        (16,590)
  Equity in loss of unconsolidated affiliates.........          -            141
  Deferred income taxes...............................     (2,193)           277
  Foundry deposits utilized...........................        455          2,075
  Changes in operating assets and liabilities:
   Accounts receivable................................     (3,119)        (5,620)
   Inventories........................................         14         16,865
   Prepaid expenses and other current assets..........     (1,199)           564
   Accounts payable and accrued expenses..............     (1,625)         6,172
   Income taxes payable, deferred revenue and other 
    liabilities.......................................     (3,563)         6,706
                                                         --------      ---------
    Net cash provided by operating activities.........      6,064         24,758
                                                         --------      ---------
Cash flows from investing activities:
  Purchases of short-term investments.................    (31,773)       (12,183)
  Proceeds from matured short-term investments........     33,790         16,175
  Additions to property and equipment, net............     (8,139)        (2,030)
  Investment in foundry venture.......................    (11,616)             -
  Other assets........................................          -             25
                                                         --------      ---------
    Net cash provided by (used in) investing 
     activities.......................................    (17,738)         1,987
                                                         --------      ---------
Cash flows from financing activities:
 Issuance of debt.....................................      5,146         29,706
 Repayment of debt....................................     (5,347)       (31,112)
 Issuance of common stock, net........................      1,569            541
                                                         --------      ---------
   Net cash provided by (used in) financing 
    activities........................................      1,368           (865)
                                                         --------      ---------
Net increase (decrease) in cash and cash equivalents..    (10,306)        25,880
Cash and cash equivalents, beginning of period........     87,609         44,934
                                                         --------      ---------
Cash and cash equivalents, end of period..............   $ 77,303      $  70,814
                                                         --------      ---------
                                                         --------      ---------
Supplemental information:
 Cash paid during the period:
  Interest............................................   $    175      $     268
                                                         --------      ---------
                                                         --------      ---------
  Income taxes                                           $ 12,918      $  (1,692)
                                                         --------      ---------
                                                         --------      ---------
Noncash investing and financing activities:
 Benefit related to stock plans.......................   $    363      $   1,004
                                                         --------      ---------
                                                         --------      ---------
 Adjustment to foundry commitments....................   $      -      $ (14,400)
                                                         --------      ---------
                                                         --------      ---------
 Utilization of foundry deposits......................   $    455      $   2,075
                                                         --------      ---------
                                                         --------      ---------
</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 PER SHARE

     Basic and diluted net income 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           Six Months Ended
                                                               December 31,                 December 31,
                                                        ------------------------      -----------------------
                                                           1997          1996           1997           1996
                                                        ---------      ---------      ---------     ---------
<S>                                                     <C>            <C>
Net income...........................................    $  7,602      $  13,188      $  13,795     $  11,535
                                                         --------      ---------      ---------     ---------
                                                         --------      ---------      ---------     ---------
Weighted average number of common
 shares outstanding..................................      41,824         40,382         41,716        40,348
                                                         --------      ---------      ---------     ---------
Shares used in computing basic net income per share..      41,824         40,382         41,716        40,348
                                                         --------      ---------      ---------     ---------
Weighted average number of dilutive common
 equivalent shares used in computing diluted net
 income per share:
   Options...........................................         733          2,162            925         1,899
   Warrants..........................................          86            157            121           152
                                                         --------      ---------      ---------     ---------
Shares used in computing diluted net income per 
  share..............................................      42,643         42,701         42,762        42,399
                                                         --------      ---------      ---------     ---------
                                                         --------      ---------      ---------     ---------
Net income per share:
  Basic..............................................    $   0.18      $    0.33      $    0.33     $    0.29
                                                         --------      ---------      ---------     ---------
                                                         --------      ---------      ---------     ---------
  Diluted............................................    $   0.18      $    0.31      $    0.32     $    0.27
                                                         --------      ---------      ---------     ---------
                                                         --------      ---------      ---------     ---------
</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>
                                                       December 31,    June 30,
                                                           1997          1997
                                                       ------------    --------
<S>                                                    <C>             <C>
Purchased parts and work in process.................     $  5,488       $  5,521
Finished goods......................................        6,696          6,801
                                                         --------       --------
                                                         $ 12,184       $ 12,322
                                                         --------       --------
                                                         --------       --------
</TABLE>

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 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 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 to date through a certain committed 
amount of wafer purchases in calendar years 1997, 1998, and 1999 or a portion 
of the prepayment will be forfeited.  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 $33.7 million as 
of December 31, 1997.  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 VENTURE

     In October 1995, the Company entered into a series of agreements with 
United Microelectronics Corporation ("UMC") to form, along with other 
investors, a separate Taiwanese company, United Integrated Circuits 
Corporation ("UICC"), for the purpose of building and managing a 
semiconductor manufacturing facility in the Science Based Industrial Park in 
Hsin Chu City, Taiwan, Republic of China. 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.  In January 1996, the Company made 
an initial payment of $13.7 million and in January 1997, the Company made a 
second payment of $25.9 million due under this agreement. The Company made 
the final payment of $11.6 million in December 1997.  The total value of the 
investment in the foundry venture as of December 31, 1997 was approximately 
$51.2 million which represents an investment of approximately 9.3% of the 
total available shares of the venture.

     On October 3, 1997, a fire damaged the UICC facility causing damage to 
the manufacturing equipment and to the building. UICC management has 
indicated that all of the equipment and a significant portion of the building 
were completely destroyed.  Additionally, representations by UICC management 
indicate the losses are covered by insurance.  However until the claim has 
been settled, no assurance can be given that no uninsured losses will be 
recorded by UICC as a result of the fire.  Any uninsured losses recorded by 
UICC as a result of the fire may have a significant impact on the value of 
the investment and could have a material adverse effect on the Company's 
business, operating results and financial condition.  No charge to reflect 
any impairment of the investment has been recorded as of December 31, 1997. 
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.  However there can be no assurance that 
such substitute foundry capacity will be available to the Company.  
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 and October 1997, the Company received $2.6 million and 
$4.7 million, respectively, pursuant to a Settlement Agreement entered into 
on July 31, 1997 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 based on the Company's belief that certain 
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 and December 31, 
1997, 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 divest its graphics
and audio/communications businesses and focus on three core markets: optical
storage, consumer electronics and digital office equipment.  As a result of the
decision to divest these businesses, and to the extent not offset by any
proceeds received from any sale of these businesses, the Company expects to
record a charge to operations related to this decision during the quarter
ending March 31, 1998.

9.   MERGER AGREEMENT

  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 the cash payment of $3,675,000 to XLI shareholders on the
effective date of the merger and the right to receive up to an additional
$11,325,000 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.  It is currently anticipated that XLI will be
operated as a division of Pixel Magic following the merger.

10.  STOCK REPURCHASE PLAN

  On January 12, 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.  The Company has not purchased any shares since the commencement of
the repurchase program.

                                       11
<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 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) DEPENDENCE ON SALES OF CD-ROM CONTROLLER PRODUCTS, (xiv) 
RISKS RELATED TO INTERNATIONAL BUSINESS OPERATIONS, (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) 
CURRENT DEPENDENCE ON SALES TO THE ASIAN MARKETS AND THE GENERAL ECONOMIC 
CONDITIONS IN ASIA, (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 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 and 
Chartered, the Company's foundries generally are not obligated to supply 
products to the Company for any specific period, in any specific quantity or 
at a specific price.

                                       12
<PAGE>

     In January 1998, the Company began implementation of 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 has decided to divest its graphics and audio/communications businesses
and restructure its business to leverage its three core technologies: optical
storage, MPEG imaging and digital imaging.  As a result of the decision to
divest its graphics and audio/communications businesses, and to the extent not
offset by any proceeds received from any sale of these businesses,  the Company
expects to record a charge to operations related to this restructuring during
the quarter ended March 31, 1998.  No adjustments have been recorded related to
this decision as of December 31, 1997.

     As part of its restructuring program, in January 1998, the Company made 
a change in management by electing a member of its Board of Directors, 
Richard B. Black, to the position of President.  David D. Tsang will continue 
as the Company's Chief Executive Officer focusing on strategic direction for 
the Company and customer relations.  The Company also elected a new member to 
its Board of Directors, Mr. Young Sohn.  Mr. Sohn is currently President of 
Quantum Corporation's Enterprise and Personal Storage Group.

     On January 22, 1998, the Company announced that it expects to incur a 
loss from operations in the quarter ending March 31, 1998 due to a number of 
factors affecting its optical storage business, including, but not limited 
to, new competitors entering the market, a maturation of the CD-ROM market as 
it transitions to DVD, pressure from the sub-$1000 PC segment for low-cost 
components, the economic problems in Asia and the associated effects of a 
strong dollar versus Asian currencies and lower PC unit demand after the 
holiday season.  Through the restructuring efforts described above, the 
Company intends to direct and focus Company resources and management time on 
its optical storage, consumer electronics and digital office equipment 
markets with specific attention focused on its optical storage business in an 
effort to preserve the Company's leadership position in the optical storage 
market and transition the business into the DVD market.  However, there can 
be no assurance that these actions will enable the Company to diminish the 
pressures currently affecting its optical storage business.

     In addition to the restructuring program, in January 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.

THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996
     
     NET REVENUES.  The Company's net revenues in the comparison periods were 
primarily derived from sales of its CD-ROM controller products which 
comprised 80% and 86% of the Company's net revenues in the three months ended 
December 31, 1997 and 1996 respectively.  Net revenues increased 4% to $49.4 
million in the three months ended December 31, 1997 from $47.6 million in the 
comparable period of fiscal 1997.  This increase was primarily attributable 
to an increase in revenues from digital office equipment and other products 
partially offset by a decrease in revenues from sales of CD-ROM controllers.  
Unit sales of CD-ROM controllers increased from the comparable period of 
fiscal 1997 , however the increase in unit sales was offset by a decline in 
the average selling price ("ASP") of the CD-ROM controllers.  In the three 
months ended December 31, 1997 and 1996, sales to the Company's top ten 
customers accounted for approximately 83% and 79%, respectively, of the 
Company's net revenues.  International sales,

                                       13
<PAGE>

principally to Taiwan, Japan, Korea and Singapore, accounted for 
approximately 94% and 95% of the Company's net revenues in each of the three 
months ended December 31, 1997 and 1996, respectively.  Sales of products 
related to the graphics and audio/communications businesses which the Company 
announced it intends to divest accounted for approximately 4% and 2% of the 
Company's net revenues in each of the three months ended December 31, 1997 
and 1996, 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 and a 
maturation of the CD-ROM controller market, 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 Company's gross margin decreased to 
52.9% in the three month period ended December 31, 1997 as compared to 68.0% 
during the comparable period in the prior year.  Gross margin in the three 
month period ended December 31, 1996 included the impact of favorable 
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 a favorable manufacturing cost adjustment of $1.5 million related to 
foundry agreements.  Excluding the effect of these adjustments, gross margin 
in the three month period ended December 31, 1996 would have been 37.6%. The 
increase in gross margin during the comparison periods, excluding the impact 
of the adjustments recorded during the three months ended December 31, 1996, 
is primarily the result of a product mix shift to higher margin CD-ROM 
controllers including the CD-Recordable/Rewritable controller. Gross margins 
related to the graphics and audio/communications businesses which the Company 
announced it intends to divest accounted for approximately 4% and 6% of the 
Company's total gross margin contribution in each of the three months ended 
December 31, 1997 and 1996, 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 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 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 adversely affect the Company's operating results.  In 
addition, the Company believes that gross margins for new products in its 
core 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 55% to 
$12.2 million in the three months ended December 31, 1997 from $7.9 million 
in the comparable period in the prior year.  Additionally, research and 
development expenses increased as a percentage of net revenues to 24.7% 
during the three months ended December 31, 1997 from 16.5% 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.  The Company will continue

                                       14
<PAGE>

to invest substantial resources in research and development, including hiring 
additional technical personnel, in an effort to maintain its technological 
leadership in the CD-ROM controller 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 decision to divest 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.
     
     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and 
administrative expenses increased 54% to $7.8 million in the three months 
ended December 31, 1997 from $5.1 million in the comparable period in the 
prior year. Additionally, selling, general and administrative expenses 
increased as a percentage of net revenues to 15.9% in the three months ended 
December 31, 1997 from 10.7% 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 an 
increase in legal expenses.  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 decision to 
divest 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.
     
     NONOPERATING INCOME.  During the three months ended December 31, 1997, 
nonoperating income increased to $5.6 million from $0.9 million during the 
comparable three months of fiscal 1997.  This increase was primarily the 
result of the receipt of approximately $4.7 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 
December 31, 1997 and 1996 was 35.0%.

                                       15
<PAGE>

SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
     
     NET REVENUES.  The Company's net revenues in the comparison periods were 
primarily derived from sales of its CD-ROM controller products which 
comprised 83% and 84% of the Company's net revenues in the six months ended 
December 31, 1997 and 1996 respectively.  Net revenues increased 39% to $92.6 
million in the six months ended December 31, 1997 from $66.5 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 speed drives to 6x and 8x speed drives. In the six months 
ended December 31, 1997 and 1996, sales to the Company's top ten customers 
accounted for approximately 83% and 77%, respectively, of the Company's net 
revenues.  International sales, principally to Taiwan, Japan, Korea and 
Singapore, accounted for approximately 95% and 94% of the Company's net 
revenues in the six months ended December 31, 1997 and 1996, respectively. 
Sales of products related to the graphics and audio/communications businesses 
which the Company announced it intends to divest accounted for approximately 
3% of the Company's net revenues in both the six months ended December 31, 
1997 and 1996.

     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 
52.5% in the six month period ended December 31, 1997 as compared to 61.8% 
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. 
Excluding the impact of these adjustments, gross margin for the six month 
period ended December 31, 1996 would have been 36.9%.  The increase in gross 
margin during the comparison periods, excluding the impact of the adjustments 
recorded during the six months ended December 31, 1996, is primarily the 
result of a product mix shift to higher margin CD-ROM controllers including 
the CD-Recordable/Rewritable controller. Gross margins related to the 
graphics and audio/communications businesses which the Company announced it 
intends to divest accounted for approximately 2% and 3% of the Company's 
total gross margin contribution in each of the six months ended December 31, 
1997 and 1996, respectively.

     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development costs are 
expensed as incurred.  Research and development expenses increased 44% to 
$23.0 million in the six months ended December 31, 1997 from $16.0 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 24.8% during the six months ended December 31, 1997 from 24.0% 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 increased 51% to $14.1 million in the six months ended
December 31, 1997 from $9.4

                                       16
<PAGE>

million in the comparable six months in fiscal 1997. Additionally, selling, 
general and administrative expenses increased as a percentage of net revenues 
to 15.2% in the six months ended December 31, 1997 from 14.0% 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 
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 six months ended December 31, 1997, 
nonoperating income increased to $9.7 million from $2.0 million during the 
comparable six months in fiscal 1997. This increase was primarily the result 
of the receipt of approximately $7.3 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 six months ended
December 31, 1997 and 1996 was 35.0%.

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

                                       17
<PAGE>

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 
rescheduled, canceled, or do not occur as quickly as expected, expense and 
inventory levels could be disproportionately high and the Company's business, 
financial condition and results of operations for that quarter or for the 
year would be materially adversely affected.

     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 system 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 decided to divest its graphics and audio/communications 
businesses and restructure its business to leverage its three core 
technologies: optical storage, MPEG imaging and digital imaging.  As a result 
of the decision to divest its graphics and audio/communications businesses, 
and to the extent not offset by any proceeds received from any sale of these 
businesses, the Company expects to record a charge to operations related to 
this restructuring during the quarter ended March 31, 1998.

     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 ASP's 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

                                       18
<PAGE>

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 achieve design wins 
in next generation systems or, in the CD-ROM controller market, in the next 
level of drive speed.  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 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.  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

                                       19
<PAGE>

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 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.  To this end, the Company expects that it will continue its
regular involvement in licensing arrangements and will increase its joint
venture relationships and acquisition activities.  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 three
patents granted, twenty-two patents pending, twenty-three patents in
preparation in the United States, and six 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

                                       20
<PAGE>

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.  On July 21, 1997, 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.

                                       21
<PAGE>

     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 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 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 recent 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.

                                       22
<PAGE>

     On October 3, 1997, a fire damaged the UICC facility causing an 
undetermined amount of damage to the manufacturing equipment and to the 
building. UICC management has indicated that all of the equipment and a 
significant portion of the building were completely destroyed.  Additionally, 
representations by UICC management indicate the losses are covered by 
insurance. However, until the claim has been settled, no assurance can be 
given that no uninsured losses will be recorded by UICC as a result of the 
fire.  Any uninsured losses recorded by UICC as a result of the fire may have 
a significant impact on the value of the investment and could have a material 
adverse effect on the Company's business, operating results and financial 
condition.  No charge to reflect any impairment of the investment has been 
recorded as of December 31, 1997. 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. 
However, there can be no assurance that such substitute foundry capacity will 
be available to the Company.

     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 80% and 86% 
of the Company's net revenues in the three months ended December 31, 1997 and 
1996, 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 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 
DVD-ROM market, there have been a number of new competitors

                                       23
<PAGE>

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.   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 Taiwan, Japan, Korea and Singapore, 
accounted for approximately 94% and 95% of the Company's net revenues in each 
of the three months ended December 31, 1997 and 1996, respectively.  A 
substantial portion of the Company's international revenues in the comparison 
periods were derived from Taiwanese, Japanese, Korean and Singaporean 
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.  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.  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 have accounted for a 
substantial portion of the Company's net revenues.  In the three months ended 
December 31, 1997 and 1996, sales to the Company's top ten customers 
accounted for approximately 83% and 79%, 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

                                       24
<PAGE>

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, 
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.

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, 1997 consisted of approximately $132.9 million 
in cash, cash equivalents and short-term investments, approximately $25.0 
million in lines of credit with two Japanese financial institutions, of which 
$16.5 million was available as of December 31, 1997 and approximately $12.5 
million in lines of credit with Taiwanese financial institutions of which 
approximately $11.6 million was available as December 31, 1997.

     During the six months ended December 31, 1997, operating activities
provided net cash of approximately $6.1 million.  This cash resulted primarily
from net income of $13.8 million and non-cash adjustments to net income of $1.8
million, partially offset by net changes in operating assets and liabilities of
$9.5 million. Net income includes the impact of the receipt of approximately
$7.3 million recorded during the six months ended December 31, 1997 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. Investing and financing
activities utilized cash of approximately $16.4 million consisting primarily of
an investment in the UICC foundry venture of $11.6 million, purchases of

                                       25
<PAGE>

property and equipment of $8.1 million and net repayment of debt of $0.2 
million, partially offset by net proceeds from matured short term investments 
of $2.0 million and proceeds from issuance of common stock of $1.6 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 $8.6 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.

     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 the 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. It is currently anticipated that XLI will be operated as a 
division of Pixel Magic following the merger.

     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.  The Company has not purchased any shares since the 
commencement of the repurchase program.

     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

                                       26
<PAGE>

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 to date through a certain committed 
amount of wafer purchases in calendar years 1997, 1998, and 1999 or a portion 
of the prepayment will be forfeited. 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 $33.7 million as 
of December 31, 1997.  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.  In January 1996, the Company made 
an initial payment of $13.7 million and in January 1997, the Company made a 
second payment of $25.9 million due under this agreement. The Company made 
the final payment of $11.6 million 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 December 31, 1997 was 
approximately $51.2 million which represents an investment of approximately 
9.3% of the total available shares of the venture.

     On October 3, 1997, a fire damaged the UICC facility causing an 
undetermined amount of damage to the manufacturing equipment and to the 
building. UICC management has indicated that all of the equipment and a 
significant portion of the building were completely destroyed.  Additionally, 
representations by UICC management indicate the losses are covered by 
insurance. However, until the claim has been settled, no assurance can be 
given that no uninsured losses will be recorded by UICC as a result of the 
fire.  Any uninsured losses recorded by UICC as a result of the fire may have 
a significant impact on the value of the investment and could have a material 
adverse effect on the Company's business, operating results and financial 
condition.  No charge to reflect any impairment of the investment has been 
recorded as of December 31, 1997. 


                                       27

<PAGE>

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, however there can be no assurance that such 
substitute foundry capacity will be available to the Company.  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. 


                                       28

<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 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 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.

                                       29
<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 as of December 31, 1997.

     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 on August 19, 1997, 
naming as respondents: Winbond Electronics Corporation; Winbond Electronics 
North America Corporation; Wearnes Technology (Private) Ltd.; and Wearnes 
Electronics Malaysia Sendirian Berhad.  Discovery proceedings are now ongoing 
and a full hearing of the matter is scheduled to occur in April 1998.  In 
connection with this legal proceeding, the Company has incurred and will 
continue to incur substantial legal and other expenses.

     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.  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 expire 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 and October 1997, the Company received 
$2.6 million and $4.7 million, respectively pursuant to this settlement 
between the Company and United Microelectronics Corporation. Proceeds from 
this settlement were recorded as miscellaneous income and are included in 
nonoperating income for the periods ended September 30, 1997 and December 31, 
1997, 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 controllers, that were the subject of the ITC action and related 
settlement agreement, through or to a UMC affiliated, Taiwanese entity called 
MediaTek. The preliminary injunction motion is scheduled to be heard on 
February 13, 1998.  On December 24, 1997, UMC answered and counterclaimed 
asserting causes of action for recission, restitution, fraudulent 
concealment, mistake, lack of mutuality, interference and declaratory 
judgment of noninfringment, 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.

                                       30
<PAGE>

Both the Company and UMC seek compensatory and punitive damages.  In 
addition, the Company seeks permanent injunctive relief. No trial date has 
yet been set.  In connection with this proceeding, the Company has incurred 
and will continue to incur substantial legal and other expenses.

     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.

     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.

                                       31
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

1.   (a)  The Company's Annual Meeting was held on November 25, 1997.

     (b)  The following Directors were elected at the meeting:


          <TABLE>
          <CAPTION>


          <S>               <C>                     <C>

                                For            Authority Withheld
                                ---            ------------------
          Richard B. Black  38,608,508              485,733
          David D. Tsang    38,683,969              410,272

          </TABLE>

     The following Directors remained on the Board of Directors subsequent to
the meeting:

          Richard B. Black
          David D. Tsang
          Ta-Lin Hsu
          Timothy Tomlinson

     (c)  Other matters voted on at the meeting were the following:

          To ratify the appointment of KPMG Peat Marwick LLP as independent
          accountants:

          <TABLE>
          <CAPTION>


          <S>     <C>                        

          For     38,902,569
          Against    133,608
          Abstain     58,064

          </TABLE>
                                       32

<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)


                                      33
<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)**


                                      34
<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

     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 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.

(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.

                                      35
<PAGE>

(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.

__________________
*    Indicates Management incentive plan.
**   Confidential treatment granted and/or requested as to portions of the
     exhibit.

 (b) Reports on Form 8-K

     The Company did not file any reports on Form 8-K during the three months
     ended December 31, 1997.
                                       

                                      36
<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 11, 1998
                                       /S/ SIDNEY S. FAULKNER
                                       Sidney S. Faulkner
                                       Vice President, Finance,
                                       Chief Financial Officer and Secretary
                                       (Principal Financial and Accounting 
                                       Oficer and Duly Authorized Officer)


                                      37
<PAGE>

                              EXHIBIT INDEX
                                   
<TABLE>
<CAPTION>
     Exhibit
     Number    Exhibit Title
     --------  --------------
     <S>       <C>

        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

        11.01  Statement regarding computation of net income per share

        27.01  Financial Data Schedule
</TABLE>