OAK TECHNOLOGY INC, 10-K, 1999-09-28

OAK TECHNOLOGY INC
10-K, 1999-09-28
SEMICONDUCTORS & RELATED DEVICES

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

FORM 10-K

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

For The Fiscal Year Ended June 30, 1999

/ / 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 of organization) Identification No.)

139 KIFER COURT 94086
SUNNYVALE, CALIFORNIA (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (408) 737-0888
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
-------------------------------

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /

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

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $148,996,000 as of August 31, 1999, based upon the
closing price of the Registrant's Common Stock on the Nasdaq National Market
reported for August 31, 1999. Shares of Common Stock held by each executive
officer and Director and by each person who beneficially owns more than 5% of
the outstanding Common Stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.

41,189,586 shares of the Registrant's $.001 par value Common Stock were
outstanding at August 31,1999

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or portions thereof) are incorporated by reference into
the Parts of this Form 10-K noted:

Part III incorporates by reference from the definitive proxy statement
for the Registrant's 1999 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.

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PART I

ITEM 1. BUSINESS

GENERAL

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

During the third quarter of fiscal 1998, the Company restructured its
operations along three market-focused groups: Optical Storage Group, the
Consumer Group, and the Imaging Group (Pixel Magic, serving the digital imaging
equipment market), and at the same time, discontinued its product development
and marketing efforts in its PC audio and 3D graphics businesses.

On August 11, 1998, the Company acquired Xerographic Laser Images
Corporation ("XLI"), a provider of print quality enhancement technology for the
digital imaging equipment market. XLI operates as a division of the Company's
wholly owned subsidiary, Pixel Magic, and serves to leverage Pixel's position in
the digital imaging equipment market by broadening its expertise in resolution
enhancement technology. The Company paid $3,675,000 to the XLI shareholders on
the effective date of the merger, and at that date, the shareholders had the
right to receive additional payments of up to $11,365,000 subject to the
achievement of certain milestones by XLI over a three-year period ending
December 31, 2000. Pursuant to a post-closing audit and related post-closing
adjustment set forth in the acquisition agreement, it was determined that XLI
had a net deficit (for purposes of calculating a contingent cash adjustment,
as defined in the acquisition agreement) of $1,937,673 at the acquisition
date which resulted in a contingent cash adjustment of $1,112,673, thereby
reducing the contingent payment amount to $10,252,327. The transaction was
also accounted for under the purchase method of accounting, and XLI's
operations have been included in the Company's consolidated financial
statements from the date of acquisition.

On July 29, 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") by and among Xionics Document
Technologies, Inc. ("Xionics"), Vermont Acquisition

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Corporation, a wholly-owned subsidiary of the Company ("Merger Sub"), and the
Company, whereunder Xionics will merger with and into Merger Sub and thus become
a wholly-owned subsidiary of the Company (the "Merger"). Completion of the
Merger is contingent upon Xionics' stockholders approving the Merger at a
special meeting to be announced in a Joint Proxy Statement expected to be mailed
to Xionics and Company stockholders during October 1999; the Company's
stockholders approving the issuance of new shares of Company common stock to be
exchanged for Xionics common stock; and the satisfaction of waiver of other
closing conditions contained in the Merger Agreement. In the Merger, Xionics
stockholders will receive $2.94 in cash and 0.8031 shares of Company Common
Stock for each share of Xionics Common Stock owned.

Along with the ODEUM Microsystems acquisition and a joint venture
investment in Omni Peripherals Pte, Ltd. completed in fiscal 1998, these recent
acquisitions aimed at expanding the potential product offerings for the three
targeted markets.

As a leading merchant supplier of controllers for CD-ROM and CD-R/W
drives, the Company has expanded its product offerings for its three targeted
market segments to include controllers for DVD drives; MPEG-2 audio/video
decoders for DVD players; integrated circuits for digital broadcast systems; and
multitasking imaging and compression processors for the emerging class of
digital imaging equipment. The Company spent the majority of fiscal 1999
developing its next generation CD-RW controllers, an imaging processor for the
inkjet multifunction peripheral market and further generations of imaging
processors, compression codecs and resolution enhancement solutions, its next
generation MPEG-2 audio/video decoder for DVD players and first generation
products for the terrestrial segment of the digital broadcast market.

For the twelve months ended June 30, 1999, net sales for the Company
totaled $71.1 million as compared to sales of $157.1 million in the prior year.
The Company reported a net loss of $50.7 million for fiscal year 1999 as
compared to a net income of $5.9 million in fiscal 1998. The current loss trend
began in the third quarter of fiscal 1998 and has continued for each quarter of
fiscal 1999. The Company's operating losses generally have been due to the
significant decline in the sales volume in its optical storage business, which
historically has accounted for approximately 80% of the Company's net
revenues. In fiscal 1998, the Company failed to timely and adequately develop
its integrated CD-ROM controller product and second generation CD-RW product.
Consequently, for fiscal 1999, the Company was dependent on mature CD-ROM
products and its first generation CD-RW product for its revenue. These mature
products have continued to decline in both unit sales volumes and average
sales price in each successive quarter throughout fiscal 1999. Although the
Company is currently sampling its next generation CD-RW product, it does not
expect to be in mass production with this product until the second half of
fiscal 2000.

On February 2, 1999, the Company announced the appointment of Young K.
Sohn to the office of President and Chief Executive Officer. Mr. Sohn has
initiated a comprehensive review of all aspects of the Company and has put in
place a new management team whose charter is to architect and execute a
turnaround plan for the Company. The Company is expected to formally announce
its turnaround plan in the second half of fiscal 2000.

The Company was originally incorporated in California in 1987 and was
reincorporated in Delaware in 1994. Its executive offices and principal
marketing, sales and product development operations are located at 139 Kifer
Court, Sunnyvale, California 94086, telephone number (408) 737-0888. In
addition, the Company has facilities in Andover, Massachusetts; Taipei, Taiwan;
Tokyo, Japan; Bristol, England; Munich, Germany; and Shezhen, China.

TARGET MARKETS AND PRODUCTS

Currently, the Company's three target markets include optical storage,
consumer electronics and digital imaging equipment, which correspond to the
Company's Optical Storage Group, Consumer Group and Imaging Group, respectively.
The Company's business strategy and product offerings (current and planned for
fiscal 2000) for each of the target market segments are described below.

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OPTICAL STORAGE

BUSINESS OVERVIEW/STRATEGY

Multimedia computer applications have driven the demand for low-cost,
high-density storage mechanisms in recent years. The adoption of CD-ROM
technology as the mainstream optical storage medium on the desktop was fueled in
large measure by data-intensive, graphics/audio/video-rich applications that
required a universal, high-density storage medium. The Company's Optical Storage
Group is a leading provider of controllers to the optical storage market and has
shipped more than 125 million controllers to date. More than 50% of the drives
shipped to date contain controllers from the Company's Optical Storage Group. A
pioneer in this field with the first IDE/AT/PI CD-ROM controller, the Company
has focused its recent product development efforts on emerging segments of this
industry, namely CD-RW and DVD drives. The Company's Optical Storage Group
currently has solutions for CD-ROM, CD-RW and DVD drives, and its core
competencies include IDE and alternative interfaces, error correction code
(ECC), DSP/servo control, disc write encoding, wobble servo, write strategy,
system design, and system software and firmware. The Company's OEM customers for
its optical storage products in fiscal 1999 included Philips, Yamaha and
Mitsumi.

The Company's optical storage business faced major challenges during
fiscal 1999 including rapidly declining average selling prices (ASPs) and gross
margins, increased competition from both Taiwan and Japan based competitors, and
delays in its integrated CD-ROM controller product and next generation CD-RW
product. Currently, the optical storage market is experiencing a myriad of
transition as numerous types of new drive mechanisms emerge. The growth of the
sub-$1000 PC and initial lack of DVD-ROM has extended the life of CD-ROM drives
on the desktop and has temporarily slowed down the penetration of the DVD-ROM
drives into the PC market. The DVD-ROM steep growth is expected to resume over
the next year as DVD-ROM drive costs are further reduced and a wider selection
of DVD-ROM titles becomes available. However, the optical storage market is
currently witnessing an accelerated adoption of CD-RW drives, driven by the
increased popularity of customized audio CD recordings and the widespread
availability of MP3 audio titles on the Internet. Another interesting
development is the recent appearance of the "Combo Drive", a CD-RW drive with
DVD read capability. This drive offers a wide functionality to the end user and
could become a mainstream product if the cost challenges are successfully
addressed by the drive manufacturers. The DVD writable market is off to a slow
start, with high prices and multiple competing standards limiting the adoption
rate by PC OEMs. The DVD writable market is not expected to experience
significant growth until the calendar year 2001 timeframe as the competing
standards consolidate and prices become more competitive.

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

The CD-RW market has picked up considerable momentum as more consumers
discover the advantages of this writable and removable medium. Rewritable CD
drives are quickly emerging as a strong contender to CD-ROM drives and though
primarily offered today in the retail after market, these optical storage
devices are beginning to emerge as the preferred device on the desktop for audio
CD generation, archival and data interchange applications. Increased consumer
demand and the widespread adoption of CD-RW drives by the PC OEM manufacturers
over the next year are expected to contribute to significant growth in the
CD-RW market.

The Company expects that functional integration will play an important
role in cost reduction of the CD-RW drives, thereby fueling its mass adoption by
PC OEMs. To this end, the Company has recently announced the OTI-9790, offering
the most highly integrated and cost effective solution for high performance
CD-RW drives. The OTI-9790 offers a three-in-one level of integration, combining
on one chip the encoder/decoder functions, DSP, a full servo sub-system, as well
as the write strategy and ATIP demodulator. The OTI-9790 also offers an
integrated USB interface, allowing the support of both the retail after-market
and the PC OEM applications. The Company provides a complete solution to its
customers through the availability of a comprehensive reference design based on
the OTI-9790, including the full firmware needed to build a CD-RW drive. The
capability to offer a complete solution places the Company in a unique
competitive position and offers a valuable time-to-market advantage to its

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customers. The OTI-9790 is currently sampling and is expected to be in volume
production in the second half of fiscal 2000.

The Company also has a number of ongoing developments for the DVD
market, with the OTI-9820 device currently sampling. This device also follows
the high integration philosophy, combining the functions of the DVD and CD-ROM
decoder, DSP and a full servo sub-system on the same chip.

The following table shows the Company's current mix of optical storage
products for fiscal 2000. The Company also has several next-generation products
currently in development.

OPTICAL STORAGE PRODUCTS
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<TABLE>
<CAPTION>
--------------------- ----------------------------------------------------------- ---------------------------
NAME DESCRIPTION STATUS
--------------------- ----------------------------------------------------------- ---------------------------
<S> <C> <C>
OTI-9230 The Company's four-in-one IDE/ATAPI CD-ROM controller. In production.
Combines four major functions of a CD-ROM drive (CD-DSP,
servo, block decoder, and 1Mb DRAM)
--------------------- ----------------------------------------------------------- ---------------------------
OTI-9790 The Company's three-in-one integrated CD-RW controller. Sampling . Production
Integrates encoder/decoder, DSP, servo, write shipments in 2HFY00
strategy and ATIP demodulator.
--------------------- ----------------------------------------------------------- ---------------------------
OTI-9820 The Company's three-in-one integrated DVD controller. Sampling .
Integrates DVD/CD-ROM decoder, DSP and servo functions
--------------------- ----------------------------------------------------------- ---------------------------
</TABLE>

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DIGITAL IMAGING EQUIPMENT

BUSINESS OVERVIEW/STRATEGY

The Company's imaging group, located in Andover, MA, with its Pixel
Magic brand of products is a leading provider of controllers to the digital
imaging market. The Company's imaging group designs high-performance,
full-featured compression codecs, imaging DSPs, resolution enhancement solutions
and embedded controller board solutions for the emerging class of digital
copiers, printers and multifunction peripherals. Core competencies include
strong expertise in color/monochrome image processing pipelines, dot modulation
and resolution enhancement technology, and high-speed compression/decompression
and systems expertise. The Company offers a broad suite of products, including
integrated semiconductors and embedded controller-board solutions, to major OEMs
in the digital imaging equipment market to power a variety of digital imaging
systems, such as digital laser copiers and printers (monochrome and color) and
copycentric, faxcentric and printcentric multifunction peripherals (MFPs). The
Company's OEM customers for these products during fiscal 1999 include Canon,
Fujitsu, Fuji-Xerox, Hewlett-Packard, Kodak, Matsushita, Olivetti and Xerox.
Pixel Magic was acquired by Oak Technology in November 1995. In August 1998, the
Company completed the acquisition of Xerographic Laser Images (XLI). XLI is a
supplier of leading dot modulation and resolution enhancement products to
digital imaging manufacturers.

The Company's solutions for the digital imaging include its PM-2x/3x
family of JBIG/JPEG compression codecs, the PM-4x family of high-speed imaging
DSPs, and XLI's family of resolution enhancement technology (RET) products. In
addition, the Company combines its silicon solutions with firmware and software
to deliver customized embedded controller board solutions to its customers.

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

Although historically targeting the high-end of the digital imaging
market, the Company is now also targeting high-volume opportunities, such as the
low- to mid-range laser and inkjet products (including color systems). One of
the Company's new product initiatives for fiscal 2000 is a high-speed, low-cost
imaging DSP (iDSP) for the growing inkjet MFP market. For fiscal 2000, the
Company is also developing a new modular architecture for MFP designs,
leveraging its iDSP and compression technology as well as dot modulation
technology to create differentiated embedded controller products. The Company's
strategy for its coming generations of products is to leverage this architecture
to build more standardized, cost-effective system-level solutions. This strategy
minimizes engineering resources typically spent on customization efforts for its
OEMs, accelerates its customers' time-to-market and increases cost
effectiveness.

DIGITAL IMAGING EQUIPMENT PRODUCTS

<TABLE>
<CAPTION>
------------------- ------------------------------------------------------------ -----------------
PRODUCT DESCRIPTION STATUS
------------------- ------------------------------------------------------------ -----------------
<S> <C> <C>
PM-1V High-speed bitonal image processor providing single-pass In production.
compression or decompression of image data.
------------------- ------------------------------------------------------------ -----------------
PM-2m 40 MHz bitonal JBIG codec with multitasking In production.
capability. Provides single pass
compression or decompression, as well as scaling
and rotation of bitonal image data.
------------------- ------------------------------------------------------------ -----------------
PM-22 75 MHz bitonal JBIG codec with a 32-bit I/O. Provides In production.
single pass compression or decompression, as well as
scaling and rotation of bi-tonal image data.
------------------- ------------------------------------------------------------ -----------------

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<CAPTION>
------------------- ------------------------------------------------------------ -----------------
PRODUCT DESCRIPTION STATUS
------------------- ------------------------------------------------------------ -----------------
<S> <C> <C>
PM-23 MFP controller with integrated compression. Sampling.
------------------- ------------------------------------------------------------ -----------------
PM-36 A fixed function JPEG compression and decompression Sampling.
processor with a sustained data rate of up to 75 MHz.
------------------- ------------------------------------------------------------ -----------------
PM-44+ A programmable 85 MHz image processor. Single In production.
instruction, four data paths.
------------------- ------------------------------------------------------------ -----------------
PM-44I A programmable 125 MHz image processor with integrated Sampling.
memory. Single instruction, four data paths.
------------------- ------------------------------------------------------------ -----------------
PM-48 A programmable 125 MHz image processor. Single Sampling.
instruction, eight data paths.
------------------- ------------------------------------------------------------ -----------------
XLI-2050, Family of image enhancement processors for laser copiers, In production.
2032, 2016 printers and MFPs.
------------------- ------------------------------------------------------------ -----------------

------------------- ------------------------------------------------------------ -----------------
</TABLE>

CONSUMER ELECTRONICS

BUSINESS OVERVIEW/STRATEGY

The emergence of digital video in recent years has created several
market opportunities to enable the delivery of digital content to the home by
means of entertainment systems such as DVD players, digital television (DTV)
systems and set-top boxes (STBs). The rapid migration away from analog to
digital technology in the entertainment system market is creating a need for
cost-effective, complete solutions, including integrated digital circuits and
system software, in the consumer electronics market. This trend is presenting
significant opportunities for companies with combined expertise in the
development of integrated digital circuits and system software.

In the second half of fiscal 1998, as part of its business redirection
efforts, the Company established its Consumer Group to target the emerging
digital entertainment system market, with focus on complete silicon based
solutions for videodisk player systems (DVD and VCD) and digital broadcast
applications. The Company's Consumer Group targets opportunities in the emerging
digital consumer entertainment market by developing value-added integrated
circuits and reference design solutions for DVD players and terrestrial set-top
boxes. Core competencies of the consumer group include MPEG decoding, graphics
processing, analog integration, and software expertise at each of the microcode,
systems and applications levels.

During the course of fiscal 1999, the consumer group executed on its
strategy to withdraw from the low margin, declining VCD market, to focus on the
growing DVD player market. The Company expects to have completed its withdrawal
from this market in the first half of fiscal 2000. Since the end of calendar
1998, DVD technology has experienced a strong growth rate, particularly in
the US, Europe and Japan. The Company expects that this trend will continue, and
develop in China where DVD has a significant opportunity to become the
replacement technology for VCD and S-VCD. During fiscal 1999, the Company
introduced a robust, cost-effective DVD player reference design based on its
OTI-226 integrated DVD decoder, to provide target OEMs in Japan, China,
Southeast Asia and the US with a ready-to-manufacture system solution, thereby
accelerating their time-to-

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market. The company's strategy, going forward, is to focus on developing
cost-effective, silicon based, system solutions for this market, which leverages
its intellectual property in MPEG, graphics, audio processing and DVD servo
technology. The Company is currently in development with its next generation
solution for the DVD player market.

The digital broadcast market presents several opportunities for the
Company to leverage its existing technology investment in MPEG video and audio,
graphics processing, digital demodulation, error correction and analog cores. In
fiscal 1998, the Company initiated several measures to begin building a position
in this market, including establishing a research and development center in
Bristol, U.K. (Oak Technology, Ltd.) a sales office in Munich, Germany (Oak
Technology GmbH) and acquiring key assets of ODEUM Microsystems, Inc., including
an MPEG -2 audio/video decoder and transport demultiplexor and a DVB-S compliant
QPSK demodulator. In its product development efforts for fiscal 1999, the
Company has primarily focused on the digital terrestrial market. The digital
terrestrial market has experienced strong growth during 1999 in the UK with both
digital terrestrial set-top-box and integrated digital TV (IDTV). The Company
expects strong adoption to continue for this technology in Europe and Asia. The
transition of the large installed base of TV sets from analog to digital will
create significant opportunity for cost-effective silicon-based, system
solutions. During fiscal 1999 the Company delivered two products aimed at this
market:

OTI7000: The world's first single-chip front-end solution for digital
terrestrial receivers.

OTI8215: A system-on-a-chip solution optimized for the digital
terrestrial market.

In both the DVD and digital broadcast markets, the company's strategy
is to focus on strategic alliances and partnerships with top tier OEMs early in
new product development efforts. That helps ensure a good adequation of new
products with market requirements in terms of time-to-market, cost-effectiveness
and performance.

CONSUMER PRODUCTS

The following table shows the Company's current mix of consumer
products for fiscal 2000. The Company also has several other products currently
in development.

<TABLE>
<CAPTION>
------------------- ------------------------------------------------------------ -----------------
NAME DESCRIPTION STATUS
------------------- ------------------------------------------------------------ -----------------
<S> <C> <C>
OTI-226 The Company's 1st generation single-chip DVD decoder for In production
DVD player applications. Supports CSS
authentication and decryption, Dolby AC-3 sound.
------------------- ------------------------------------------------------------ -----------------
Atlanta The Company's 1st generation DVD player reference Sampling
design. A cost effective, ready-to-production
system level solution including Oak OTI226 DVD
decoder chip and all the necessary system software
------------------- ------------------------------------------------------------ -----------------
OTI-257 The Company's third-generation highly integrated MPEG-1 Phased-out
decoder for VCD players. Combines MPEG-1
audio/video decoding, CD-ROM decoding, and complete
karaoke functions with full-screen, on-screen
display.
------------------- ------------------------------------------------------------ -----------------
OTI-8211 The Company's single-chip, integrated MPEG-2 audio/ video In production
decoder for digital cable/satellite set-top box
applications.
------------------- ------------------------------------------------------------ -----------------
The Company's 1st generation digital cable/satellite
Access set-top box reference design. A cost-effective, Sampling
ready-to-production, system level solution,
including the OTI8211 integrated MPEG-2 audio/
video decoder chip and all the necessary system
software.
------------------- ------------------------------------------------------------ -----------------

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<CAPTION>
------------------- ------------------------------------------------------------ -----------------
NAME DESCRIPTION STATUS
------------------- ------------------------------------------------------------ -----------------
<S> <C> <C>
OTI-8215 The Company's 2nd generation integrated decoder Sampling
chip for the digital terrestrial/cable/satellite
set-top box applications. Combine MPEG-2 audio and video
decoder with transport/demux, system CPU and video
encoder functions
------------------- ------------------------------------------------------------ -----------------
OTI-7000 The Company's 1st generation single-chip Coded Orthogonal Sampling
Frequency Demodulator (COFDM) for digital terrestrial
receivers
------------------- ------------------------------------------------------------ -----------------
OTI-8511 The Company's DVB-compliant digital QPSK demodulator for In production.
satellite set-top boxes.
------------------- ------------------------------------------------------------ -----------------
</TABLE>

MANUFACTURING AND DESIGN METHODOLOGY

MANUFACTURING

The Company contracts with independent foundries to manufacture all of
its products, enabling the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and gain access to advanced manufacturing
facilities. The Company is dependent on its foundries to allocate to the Company
a portion of their foundry capacity sufficient to meet the Company's needs to
produce products of acceptable quality and with acceptable manufacturing yields
and to deliver products to the Company in a timely manner. These foundries
fabricate products for other companies and some manufacture products of their
own design. The loss of any of these foundries as a supplier, the inability of
the Company in a period of increased demand for its products to expand the
foundry capacity of its current suppliers or qualify other wafer manufacturers
for additional foundry capacity, any inability to obtain timely and adequate
deliveries from the Company's current or future suppliers or any other
circumstances that would require the Company to seek alternative sources of
supply could delay shipments of the Company's products. Delays in shipments
could damage relationships with its current and prospective customers, provide
an advantage to the Company's competitors and have a material adverse effect on
the Company's business, financial condition and results of operations. Most of
the Company's devices are currently fabricated using complementary metal oxide
semiconductor ("CMOS") process technology with 0.5 micron and 0.35 micron
feature sizes. The Company is currently designing products for .25 micron
feature sizes. All of the Company's semiconductor products are assembled and
tested by independent subcontractors.

The Company's primary suppliers during fiscal year 1999 were TSMC and
Sony. The Company also uses wafer fabrication facilities at Chartered, and NEC.
The foundries generally are not obligated to supply products to the Company for
any specific period, in any specific quantity or at a specific price, except as
may be provided in a particular purchase order. However, in order to obtain an
adequate supply of wafers, especially wafers manufactured using advanced process
techniques, the Company has entered into and will continue to consider various
possible transactions, including various "take or pay" contracts, such as those
with TSMC and Chartered as described in Note 12 to the consolidated financial
statements, that commit the Company to purchase specified quantities of wafers
over extended periods.

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

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factors beyond the Company's control. Substantially all of the Company's
agreements with its offshore wafer fabrication and assembly facilities provide
for pricing and payment in U.S. dollars.

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

DESIGN METHODOLOGY

The Company's products compete in markets that are characterized by
rapidly developing technology and evolving industry standards. The Company
addresses these issues with a design environment based on workstations,
dedicated product simulators, system simulation with hardware and software
modeling, and use of a high level design description language in order to
define, develop and deliver new and enhanced products more rapidly. The
Company's engineering and design capabilities are significant to its future
performance, and the Company has invested regularly in new advanced equipment
and software tools in an effort to keep these tools updated with the latest
technology. The Company's library of core cells is key to its ability to reduce
the time needed to design new products. Examples of core cells include a CD-ROM
decoder core, CD-R/W encoder/decoder core, CD-DSP & CD-Servo core, a parallel,
multi-pipelined microprocessor core, MPEG2 core, DVD-DSP core, a .5 and .35
micron memory compiler and a .5 and .35 micron I/O library. Design methodology,
including equipment and software tools, is a critical factor with respect to the
Company's ability to successfully develop technology and products. There can be
no assurance that the Company will be able to obtain the equipment, software
tools and other resources needed to develop technically advanced products in a
timely manner. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors that May Affect Future Results - New Product
Introduction" below.

MARKETING AND CUSTOMERS

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

The Company believes that customer service and technical support are
important competitive factors in the optical storage, consumer electronics and
digital imaging markets. The Company provides technical support to its
customers worldwide. With a global presence, the Company is able to provide
prompt technical support to its customers. In addition, the Company's
representatives travel frequently to customer sites to assist in design-in
activity. The Company provides several other types of technical support,
including software distribution through an electronic bulletin board, evaluation
boards, product demonstration software, engineering design kits and application
notes. The Company works closely with its customers in qualification of its
products and providing needed quality and reliability data. In addition, the
Company makes the latest revision of its software available to its customers and
can customize the Company's software to a customer's specific requirements.

9
<PAGE>

Sales of the Company's products are made pursuant to purchase orders
and the Company has no long-term sales agreements with any of its customers.
Purchase orders are subject to price renegotiations and to changes in quantities
of products and delivery schedules in order to reflect changes in the customers'
requirements. In addition, in certain circumstances, orders may be canceled at
the discretion of the buyer without penalty. The Company's business, consistent
with that of others in the semiconductor industry, is generally characterized by
short lead-time orders. The Company's actual shipments depend on the
manufacturing capacity of the Company's foundries. Therefore, as foundry
capacity tightens, the Company may not be able to meet the customer's requested
delivery date or the Company may have to put its customers on allocation. Due to
its dependence on third party manufacturing capacity, the Company believes that
backlog at any particular date may not be indicative of actual net revenues for
any future period.

Sales of CD-ROM, CD-R and CD-RW controller products comprised 65%,
82% and 84% of the Company's net revenues in fiscal 1999, 1998 and 1997,
respectively. Sales of CD-ROM and CD-RW controller products are expected to
continue to account for a majority of the Company's total revenues for the
foreseeable future. Due to the maturation of the CD-ROM controller market,
pressure from the sub-$1000 PC segment for lower priced components, new
competitors, uncertain demand for personal computers and the Company's delay
in the next generation CD-ROM product releases, the Company has experienced
for the past several quarters and is currently experiencing both a decrease
in unit sales and prices of its mature CD-ROM and CD-RW controller products,
which in turn has had a material adverse effect on the Company's business,
financial condition and results of operation. Although the Company has
recently introduced several new products in its attempt to diversify its
product and market base, there can be no assurance that these products will
be successfully designed, accepted by the Company's customers, and brought to
production or that the Company's customer's products will be accepted in the
marketplace.

A substantial majority of the Company's revenues in fiscal 1999, 1998
and 1997 were derived outside of the United States, primarily in Asia. The
geographical areas accounting for the Company's net revenues in fiscal 1999,
1998, and 1997 are as follows:

<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------

<S> <C> <C> <C>
Japan....................... 52% 39% 40%
Other Asia.................. 22 44 56
Europe...................... 11 9 1
North America............... 15 8 3
</TABLE>

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

10
<PAGE>

A limited number of customers historically have accounted for a
substantial portion of the Company's net revenues. In fiscal 1999, 1998 and
1997, sales to the Company's top ten customers accounted for approximately 70%,
81% and 78%, respectively, of the Company's net revenues. In fiscal 1999, Yamaha
Corporation accounted for 17% and Mitsumi accounted for 10% of net revenues. In
fiscal 1998, Mitsumi accounted for 17% and LG Electronics accounted for 14% of
the Company's net revenues. In fiscal 1997, Mitsumi accounted for 14% and LG
Electronics accounted for 13% of the Company's net revenues. Kanematsu, a
Japanese trading company, purchases product from the Company and resells the
product to Japanese manufacturers. The Company expects that sales to a limited
number of customers will continue to account for a substantial portion of its
net revenues for the foreseeable future. The Company has experienced significant
changes from year to year in the composition of its major customer base and
believes this pattern will continue. The Company does not have long-term
purchase agreements with any of its customers. Customers generally purchase the
Company's products subject to cancelable short-term purchase orders. The loss
of, or a significant reduction in, purchases by current major customers would
have a material adverse effect on the Company's business, financial condition
and results of operations. In fiscal 1998 and 1999 the Company lost a number
of its optical storage customers due to increased competition and the
Company's failure to timely develop its next generation CD-ROM and CD-RW
controller products. There can be no assurance that the Company's current
customers will continue to place orders or that existing orders will not be
canceled. If sales to current customers cease or are reduced, there can be no
assurance that the Company will be able to continue to obtain the orders from
new customers necessary to offset any such losses or reductions. Moreover,
there can be no assurance that the Company could qualify its foundries for
potential new customers or that it could do so in a timely manner.

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

COMPETITION

The optical storage and consumer (particularly, video disk player)
markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, declining unit average selling
prices ("ASPs") and rapid product obsolescence. The Company is currently
experiencing intense competition in both the optical storage and consumer
markets and expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with solutions that may be less costly or provide higher
performance or additional features. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The Company's competitors also
include a number of emerging companies. Certain of the Company's principal
competitors in the optical storage market maintain their own semiconductor
foundries and may therefore benefit from certain capacity, cost, quality control
and technological advantages. In its effort to diversify its customer and market
base, in fiscal 1999 the Company entered the digital broadcast market, a market
in which the Company has not operated previously. In general, 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 industry standards, the development of
technical innovations, the ability to obtain adequate foundry capacity and
sources of raw materials, the efficiency of production, the rate at which the
Company's customers design the Company's products into their products, the
market acceptance of the products of the Company's customers, the assertion of
intellectual property rights and general market and economic conditions. There
can be no assurance that the Company will be able to compete successfully in the
future.

11
<PAGE>

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

Prior to the Company's entry into the optical storage market, merchant
suppliers such as Sanyo and captive suppliers such as Panasonic, Sony and
Toshiba supplied semiconductor solutions for proprietary and SCSI drivers.
Although the Company was the first company to sell a single-chip IDE/ATAPI
CD-ROM controller, many competitors including Cirrus Logic, MediaTek and Sanyo
now offer single-chip solutions. Furthermore, companies such as Toshiba,
Panasonic and Sony have developed their own IDE/ATAPI CD-ROM controllers and, in
addition to using them internally, sell these controllers to the merchant market
in competition with the Company's products. As the Company integrates more
functionality into its controllers, companies that had previously supplied
complementary products may also become competitors. The Company expects
increased competition in the optical storage market from large, international
companies that have their own manufacturing capabilities as this market
transitions to CD-RW and DVD. The Company's strength in competing against this
increased competition in the future will be the technological leadership and
customer relationships that it has developed and cultivated over the past
several years.

In the videodisk player market, comprised of the Company's VCD and DVD
products, the Company competes primarily with C-Cube Microsystems, ESS
Technology, Toshiba, Matsushita and LSI Logic. Approximately one-third of the
total available market of the videodisk player market is comprised of captive
suppliers. These captive suppliers are Japanese companies that make both chips
and players and are members of the DVD Forum. As members of the DVD Forum, these
companies, as a DVD player manufacturer generally pay a lower patent royalty fee
to the Forum, and therefore, enjoy a cost advantage over the Company's targeted
customers making it more difficult for the Company's customers and thereby the
Company to compete successfully. In the cable, satellite and terrestrial
markets, the Company competes with SGS Thompson, LSI Logic, VLSI Technology and
Broadcom. For the most part, these companies are all large, international
companies with a much larger infrastructure than the Company. The cable,
satellite and terrestrial markets are all new markets for the Company and
although this market is still emerging, as a new entrant, the Company will be
competing with companies who already have a strong relationship with the
Company's targeted customers. Furthermore, the Company expects competition to
increase in the future. For the Company to compete successfully in the satellite
and terrestrial market, it must develop alliances with tuner and mechanism
providers. The Company recently executed a joint development agreement with one
of the world's leading digital TV tuner manufacturers on its first generation
demodulator chip for the terrestrial market. However, the Company must form
additional alliances if the Company is to compete successfully in the satellite
and terrestrial market.

In the digital imaging market, the Company's primary product
offerings target the niche, high-end market and the Company's merchant
competition does not offer directly competitive products. In some cases, the
merchant competition offers a subset of the Company's product features. In
other cases, the merchant competition offers a software alternative to the
Company's hardware solution. However, the Company expects direct merchant
competition in the niche, high-end digital imaging equipment market to emerge
in the near future. Despite this lack of direct competition in the merchant
market, the Company does experience competition with its DSP, compression and
resolution enhancement products from internal design groups within the
Company's targeted customers, such as Xerox, HP, Canon, Hitachi, NEC and
Texas Instruments. As with the merchant market, the Company's strength in
competing with these internal design teams comes from the breadth of the
solution the Company is able to provide. With respect to the Company's
embedded controller board products, the Company competes with Peerless,
Xionics, Electronics for Imaging and AHT. The Company is currently able to
provide more silicon on a controller board than its competition providing it
with a cost advantage. However, the Company must continue to enhance and
strengthen its software capabilities in order to compete successfully in this
market. See

12
<PAGE>

"Management's Discussion and Analysis of Financial Condition and Results of
Operations Factors that May Affect Future Results - Competitive Market" below.
As to the new lower-end of products the Company is developing for the digital
imaging equipment market, the Company expects greater direct competition than it
currently experiences in the niche, high-end market.

RESEARCH AND DEVELOPMENT

The Company currently invests substantial resources in its product
development efforts. During fiscal 1999, 1998 and 1997, the Company spent
approximately $51.1 million, $49.7 million, and $34.7 million, respectively, on
research and development activities. The Company intends to continue to invest
in the development of products in each of its core technologies and in products
that integrate its core technologies.

The Company's performance is highly dependent upon the successful
development and timely introduction of new products at competitive price and
performance levels. There can be no assurance that products currently under
development or any other new products will be successfully developed or will
achieve market acceptance. The failure of the Company to introduce new products
successfully or the failure of new products to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations. During fiscal 1998 and most of fiscal 1999, the
Company failed to timely introduce its integrated CD-ROM controller and next
generation of CD-RW controller creating a situation where the Company was
selling only mature optical storage products which continued to decline in unit
volume sales and ASPs. This, combined with other factors including increased
competition, resulted in a significant decline in revenues. The success of new
product introductions is dependent on several factors, including recognition of
market requirements, product cost, timely completion and introduction of new
product designs, quality of new products and achievement of acceptable
manufacturing yields from the Company's contract manufacturers. Due to the
design complexity of its products, the Company has experienced delays in
completing development and introduction of new products, and there can be no
assurance that the Company will not encounter such delays in the development and
introduction of future products. There can be no assurance that the Company will
successfully identify new product opportunities and develop and bring new
products to market in a timely manner, that the Company's products will be
selected for design into the products of its targeted customers or that products
or technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive. The failure of the Company's new
product development efforts or the failure of the Company to achieve market
acceptance of its new products would have a material adverse effect on the
Company's business, financial condition and results of operations.

PROPRIETARY RIGHTS AND LICENSES

The Company's ability to compete is affected by its ability to protect
its proprietary information. The Company considers its technology to be
proprietary and relies on a combination of patents, trademarks, copyrights,
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company currently has patents
granted, patents pending, patents in preparation in the United States, and
international patents pending. 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 sold, or that any claims
allowed from pending applications or applications in preparation will be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to the Company. Additionally, competitors of the Company may be able
to design around the Company's patents. There can be no assurance that any
patents held by the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to the
Company. An action is currently pending in the Federal District Court for the
Northern District of California seeking to invalidate one of the Company's
patents relating to it's optical storage products. Moreover, while the Company
holds or has applied for patents relating to the design of its products, the
Company's products are based in part on standards, including MPEG-1, MPEG-2,
JPEG and JBIG and the Company does not hold patents or other intellectual
property rights for such standards. The laws of certain foreign countries in
which the Company's products are or may be manufactured or sold, including
various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. There can be no assurance that the steps taken by the
Company to protect its proprietary

13
<PAGE>

information will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology.

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

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

The Company has licensed technology from third parties for use in its
consumer, optical storage, and digital imaging equipment business, and pursuant
thereto is required to fulfill confidentiality obligations and in certain cases
pay royalties. Certain of the Company's products require that certain copy
protection software or other software be obtained if the products are to be
marketable and exportable. Should the Company lose its rights to or be unable to
obtain the necessary copy protection software, the Company would be unable to
sell and market certain of its MPEG and optical storage products geared for the
DVD market. The Company licenses the Sun Microsystems SPARC core for use with a
number of its consumer products for which it is obligated to pay a royalty based
on a percentage of the net selling price of such products. The Company has also
entered into a number of joint development and supply arrangements pursuant to
which the Company jointly develops a product with another company or contracts
with another company to develop a product or component for it and then purchases
the product or component from such company for resale with other Company
products. In addition, the Company has on occasion purchased off the shelf
products to resell bundled with its own product. In the future, it may be

14
<PAGE>

necessary or desirable for the Company to seek additional licenses to
intellectual property rights held by third parties or purchase products
manufactured and/or sold by third parties with respect to some or all of its
product offerings. There can be no assurance that such licenses or purchases
will be available on terms acceptable to the Company, if at all. The inability
of the Company to enter such license arrangements on acceptable terms or to
maintain its current licenses on acceptable terms could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - The Company May Be Unable to Protect Its Intellectual Property and
Proprietary Rights" and "The Company May Be Unable to Obtain Third Party
Intellectual Property Rights and/or May Be Liable for Significant Damages"
below.

EMPLOYEES

As of June 30, 1999, the Company had 442 full-time employees, including
281 in research and development, 75 in sales and marketing, and 86 in finance,
administration and operations. The Company believes that its future performance
will depend, in part, on its ability to continue to attract and retain qualified
technical and management personnel, particularly highly skilled design engineers
and software programmers involved in new product development, for whom
competition is intense. The Company's employees are not represented by any
collective bargaining unit and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good.

ITEM 2. PROPERTIES

The Company's executive offices and its principal marketing, sales and
product development operations are located in approximately 80,000 square feet
of leased space in Sunnyvale, California under a noncancelable operating lease
that expires in December 2001. The Company has approximately 33,425 square feet
of additional leased facilities in Sunnyvale at 1150 E. Arques under a
noncancelable lease that expires in February 2000. This facility is currently
being subleased to an unrelated party under a noncancelable sublease also
expiring in February 2000. The Company owns a portion of a building in Taipei,
Taiwan, and leases facilities, primarily for sales, product development, and
technical support, in Andover, Massachusetts; Tokyo, Japan; Bristol, England;
Munich, Germany; Shenzhen, China; and Boca Raton, Florida. The Company is
currently attempting to sublease its facilities in Boca Raton where it has 5,208
square feet. The Company believes its existing facilities will be adequate to
meet its requirements for at least the next fiscal year.

ITEM 3. LEGAL PROCEEDINGS

The Company and various of its current and former officers and
Directors are parties to several class action lawsuits filed on behalf of all
persons who purchased or acquired the Company's common stock (excluding the
defendants and parties related to them) for the period July 27, 1995 through May
22, 1996. 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 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 alleged 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 the plaintiffs' First Amended Consolidated
Complaint, but allowed the plaintiffs the opportunity to amend. The plaintiffs'
Second Amended Consolidated Complaint was filed on August 1, 1997. On December
3, 1997, the state court judge sustained the Oak defendants' demurrer to the
plaintiffs' Second Amended Consolidated Complaint without leave to amend to the
causes of action for breach of fiduciary duty and abuse of control, and to the
California Corporations Code Sections 25400/25500 claims with respect to the
Company, a number of the individual officers and directors, and the venture
capital investors. The judge also sustained the demurrer with leave to amend to
the California Civil code Sections 1709/1710 claims; however, the plaintiffs
elected not to amend this claim. Accordingly, the only remaining claim in state
court action, IN RE OAK TECHNOLOGY SECURITIES LITIGATION, is the California
Corporations Code Sections 25400/25500 cause of action against four officers of
the Company and the Company's investment bankers and securities analysts.
Plaintiffs have recently filed a motion to reinstate the California Corporation
Code Sections 25400/25500 claims against the company and the remaining Oak
defendants have filed a cross-motion to dismiss this remaining claim

15
<PAGE>

against them. These motions are scheduled for hearing on October 1, 1999. On
July 16, 1998, the state court provisionally certified a national class of all
persons who purchased the Company's stock during the class period. The class was
provisionally certified with the order held in abeyance pending resolution of
the question of whether a nationwide class may bring a California Corporations
Code Sections 25400/25500 claim. This issue was resolved in favor of allowing
such nationwide class actions by the California Supreme Court, Case No. 5058723,
on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION appeal by
the California Supreme Court. Discovery has commenced in this action. The
defendants and certain third parties have produced documents and a small number
of depositions have been taken.

The Company and several 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 common 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 the plaintiffs leave to amend most
claims. The plaintiffs' Second Amended Consolidated Complaint was filed on
September 4, 1997. The 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. Plaintiffs have recently filed a motion seeking the Court's
permission to voluntarily dismiss this action without prejudice. Defendants have
requested that the dismissal be with prejudice. This motion is scheduled for
hearing on September 29, 1999.

Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK
TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit, which
asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the class actions.

In all of the state and putative 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 shares of
the Company's common 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 legal and other expenses.

The Company and its current Directors were also parties to six putative
class actions filed on behalf of all of the Company's Stockholders (other than
defendants and parties related to them) in the Court of Chancery of the State of
Delaware in and for New Castle County concerning a proposal by a management led
investor group known as "Gold Acquisition Group" to acquire all of the
outstanding shares of the Company for a price of $4.50 per share. The plaintiffs
have requested consolidation of the actions under the caption IN RE OAK
TECHNOLOGY, INC. SHAREHOLDERS LITIGATION, C.A. No. 16789 ("Delaware Shareholders
Litigation"). The other civil action numbers are 16792, 16793, 16794, 16818, and
16831. The plaintiffs alleged that the offer was inadequate and that the
defendants breached their fiduciary duties of loyalty and entire fairness. On
December 14, 1998, a Special Committee of the Board of Directors that had been
formed to evaluate the proposal announced that it would not recommend the
proposal to the Company's full Board of Directors. In addition, on December 21,
1998, Gold Acquisition Group announced that its proposal had expired and to
date, it has not been renewed. On January 27, 1999, David Tsang and Ta-Lin Hsu,
members of Gold Acquisition Group, signed a Letter Agreement agreeing that they
would not, without the prior written consent of a majority of the Board of
Directors of the Company, acquire or offer to acquire any voting securities of
the Company (or take additional actions concerning the voting securities of the
Company as set forth in the Letter Agreement) for a period of one year from the
date of the Letter Agreement. On June 28, 1999, the

16
<PAGE>

plaintiffs voluntarily dismissed the actions without prejudice. The Court
entered an order dismissing the action on July 2, 1999.

The Company and its current Directors were also parties to a putative
class action filed on behalf of all of the Company's Stockholders (other than
defendants and parties related to them) in Santa Clara County Superior Court,
designated KRIM V. OAK TECHNOLOGY, INC., ET AL., Case No. 778281. The
allegations of the plaintiffs in this action were nearly identical to the
Delaware Shareholders Litigation. This action was stayed by agreement of the
parties as a result of the Special Committee's announcement that it would not
recommend to the full Board of Directors the proposal made by Gold Acquisition
Group to acquire all of the outstanding shares of the Company for a price of
$4.50 per share as well as the subsequent announcement of the expiration of the
proposal by Gold Acquisition Group. On April 28, 1999, the plaintiffs filed a
dismissal without prejudice. The Court entered an order dismissing the action on
May 3, 1999.

In September, 1998, the Company and certain of its current Directors
became parties to a putative class action lawsuit pending in the Court of
Chancery in the State of Delaware, entitled MANNING V. OAK TECHNOLOGY, ET AL.,
Civil Action No. 16656NC. This action alleged violations of the Delaware General
Corporation Law and breaches of fiduciary duty and was brought on behalf of all
of the Company's common stockholders at any time between August 19, 1997 and
November 25, 1998. The plaintiffs' claims are based upon the Board of Directors'
adoption on or about August 19, 1997 of a Stockholder Rights Plan (the "Rights
Plan") that included a provision that limited the redemption or modification of
the Rights Plan to its Continuing Directors or their designated successors. The
plaintiffs alleged that the Rights Plan with the Continuing Directors provision
disenfranchises public stockholders by forcing them to vote for incumbent
directors who enjoy full voting rights; that it restricts the ability of future
directors to exercise their full statutory prerogatives; and that the particular
provision at issue is an unreasonable and disproportionate response to any
threatened takeover. The plaintiffs sought an injunction and a declaratory
judgment that the Rights Plan is invalid and unenforceable and monetary damages
for the alleged violations of fiduciary duty. On November 18, 1998, in light of
the change in the law due to the decision in CARMODY V. TOLL BROS., the
Company's Board of Directors voted to amend the Rights Plan to eliminate all
Continuing Directors provisions. On December 11, 1998, the plaintiffs amended
their complaint to include a cause of action which asserted that the Company's
Directors elected after the adoption of the Company's Rights Plan were not
validly elected and another cause of action for breach of fiduciary duty related
to the proposal by the Gold Acquisition Group to acquire all of the outstanding
shares of stock of the Company for $4.50 per share (also the subject of the
DELAWARE SHAREHOLDERS LITIGATION and the KRIM litigation described above).
Pursuant to a settlement reached with the plaintiffs, the action has been
dismissed with prejudice, except for the claims out of the Gold Acquisition
Group, which have been dismissed without prejudice. The Company agreed to pay
the plaintiffs' attorneys fees, which the Court awarded in the amount of
$90,000, a portion of which were paid by the Company's Directors' and Officers'
liability insurers. On July 29, 1999, the Court entered an Order approving the
settlement and dismissing the action. The settlement will not have a material
effect on the Company's Consolidated Financial Statements.

In connection with the above-described legal proceedings, the Company
has incurred and expects to continue to incur, legal and other expenses.

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

On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the
Company obtained a nonexclusive, royalty-free license to several Winbond
patents. The settlement agreement provided that the parties would jointly seek
termination and dismissal of investigation No. 337-TA-401 as to Winbond and its
four affiliated companies: Winbond Electronics North America Corporation;

17
<PAGE>

Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian
Berhad; and Wearnes Peripheal International (Pte.). On April 15, 1998,
Investigation No. 337-TA-401 was ordered terminated as to all parties.

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

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

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

18
<PAGE>

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

Trial before the ALJ as to all respondents except UMC commenced on
January 11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ
entered an Initial Determination that no unfair trade practices were committed
by Mediatek under Section 337 of the Tariff Act. On May 24, 1999, the Company
filed a petition requesting the Commission to review the Initial Determination
and on June 28, 1999 the Commission determined to review it. The Company
believes that both the May 14, 1999 and May 17, 1999 Initial Determinations are
incorrect and the Company intends to pursue its right to seek protection from
importation of UMC's and Mediatek's CD-ROM controllers under the trade laws of
the United States. The Commission's decision with respect to both Initial
Determinations is scheduled to be announced in October, 1999. In connection
with this legal proceeding, the Company has incurred and will continue to incur
substantial legal and other expenses.

On February 26, 1999, the Lemelson Medical, Education & Research
Foundation, Limited Partnership (the "Lemelson Partnership") filed a complaint
for patent infringement, naming eighty-eight defendants, including the Company.
The Lemelson Partnership alleges to be the owner of certain patents issued to
Jerome Lemelson (now deceased). The suit is entitled LEMELSON MEDICAL, EDUCATION
& RESEARCH FOUNDATION, LIMITED PARTNERSHIP V. LUCENT TECHNOLOGIES INC., ET AL.,
No. CIV 99-0377-PHX-RGS, and was filed in the United States District Court in
Phoenix, Arizona. In this lawsuit, the Lemelson Partnership claims that the
Company uses certain methods, or imports, sells, or offers to sell certain
devices made using certain methods, claimed in some of the Lemelson
patents-in-suit. Specifically, the suit alleges that Oak infringes certain
claims of U.S. Patents Nos. 4,338,626; 4,390,586; 4,511,918; 4,969,038;
4,979,029; 4,984,073; 5,023,714; 5,023,714; 5,039,836; 5,067,012; 5,119,190;
5,119,205; 5,128,753; 5,144,421; 5,249,045; 5,283,641; and 5,351,078. The
complaint seeks judgment that the Lemelson patents-in-suit are not invalid
and have been willfully and deliberately infringed; unspecified compensatory
damages, together with interest and costs; treble damages; reasonable
attorneys' fees; as well as injunctive relief against further infringement of
the Lemelson patents-in-suit. The Company filed an answer and declaratory
relief counterclaims on August 12, 1999. The Lemelson Partnership responded
to the Company's declaratory relief claims on September 7, 1999. The Company
will defend against the charges raised in the suit.

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

On September 1, 1999 David D. Tsang and certain of his relatives
entered into a consent decree with the Securities and Exchange Commission in
connection with an insider trading investigation. Pursuant to the terms of the
settlement, Mr. Tsang neither admits nor denies the allegation that he provided
nonpublic information to certain relatives. He did not profit personally from
any transaction in question. The Company cooperated fully with the SEC in the
investigation and was not the subject of the investigation.

19
<PAGE>

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

None.

PART II

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

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

The Company's Common Stock trades on the Nasdaq National Market under
the symbol OAKT. The following table indicates the range of the high and low
closing prices as reported by Nasdaq for the past twelve fiscal quarters and
June 30, 1999.

<TABLE>
<CAPTION>
High Low
--------- -------
<S> <C> <C>
FISCAL 1997
First Quarter ............ 11.000 5.500
Second Quarter ........... 13.750 8.688
Third Quarter ............ 14.563 9.500
Fourth Quarter ........... 10.500 7.563

FISCAL 1998
First Quarter ............ 12.000 9.313
Second Quarter ........... 11.500 6.031
Third Quarter ............ 7.563 5.594
Fourth Quarter ........... 6.438 4.250

FISCAL 1999
First Quarter ............ 4.625 2.000
Second Quarter ........... 4.813 1.875
Third Quarter ............ 4.188 2.969
Fourth Quarter ........... 4.563 2.906
</TABLE>

On August 31, 1999 the closing price of the Common Stock on the Nasdaq
National Market was $4.75 per share. As of August 31, 1999, there were 328
holders of record of the Common Stock of the Company.

20
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

OAK TECHNOLOGY, INC. AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Net revenues (1)................... $ 71,051 $ 157,106 $ 167,395 $ 247,984 $ 110,982
Gross profit....................... 31,432 74,548 94,181 109,485 54,616
Operating income (loss)........... (61,946) (9,104) 32,848 57,147 29,440
Net income (loss).................. $ (50,669) $ 5,947 $ 23,719 $ 37,133 $ 21,222
Diluted income (loss) per share.... $ (1.24) $ 0.14 $ 0.55 $ 0.87 $ 0.67
Shares used in diluted per share
calculations (2)............. 40,819 42,493 42,757 42,614 31,474
</TABLE>

<TABLE>
<CAPTION>
As of June 30,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Cash, cash equivalents and
short-term investments........ $ 133,203 $ 117,225 $ 145,269 $ 113,284 $ 150,943
Working capital.................... 150,936 144,314 168,168 134,686 156,258
Total assets....................... 203,841 261,411 287,595 256,308 193,953
Long-term debt, excluding
current portion............... 5 27 2,496 2,858 2,227
Total stockholders' equity......... $ 189,422 $ 241,208 $ 238,697 $ 210,827 $ 162,643
</TABLE>

(1) Net revenues include non-refundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.

21
<PAGE>

SELECTED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1999 1999 1998 1998 1998 1998 1997 1997
----------- ---------- ----------- ----------- ----------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues (1) ........ $ 13,258 15,965 $ 21,861 $ 19,967 $ 28,910 $ 35,550 $ 49,353 $ 43,293
Gross profit ............ 4,248 7,375 10,302 9,501 11,485 14,405 26,120 22,538
Operating income (loss) . (17,304) (13,791) (11,669) (19,188) (12,031) (8,578) 6,109 5,396
Net income (loss) ....... $(15,752) (11,045) $ (9,693) $ (14,179) $ (4,844) $ (3,004) $ 7,602 $ 6,193
Diluted income (loss)
per share (2) ......... $ (0.38) $ (0.27) $ (0.24) $ (0.35) $ (0.12) $ (0.07) $ 0.18 $ 0.15

Shares used in
diluted per share
calculations (2) ...... 40,902 40,768 40,679 40,928 41,532 42,000 42,643 42,569
</TABLE>

(1) Net revenues include non-refundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.

22
<PAGE>

ITEM 7. 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 ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS
AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO THESE
FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATES HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
AMONG THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS ARE: (i) THAT THE
INFORMATION IS OF A PRELIMINARY NATURE AND MAY BE SUBJECT TO FURTHER ADJUSTMENT,
(ii) VARIABILITY IN THE COMPANY'S QUARTERLY OPERATING RESULTS, (iii) GENERAL
CONDITIONS IN THE SEMICONDUCTOR INDUSTRY, (iv) RISKS RELATED TO PENDING LEGAL
PROCEEDINGS, (v) DEVELOPMENT BY COMPETITORS OF NEW OR SUPERIOR PRODUCTS OR THE
ENTRY OF NEW COMPETITORS INTO THE COMPANY'S MARKETS, (vi) THE COMPANY'S ABILITY
TO DIVERSIFY ITS PRODUCT AND MARKET BASE BY DEVELOPING AND INTRODUCING NEW
PRODUCTS WITHIN DESIGNATED MARKET WINDOWS AT COMPETITIVE PRICE AND PERFORMANCE
LEVELS, (vii) WILLINGNESS OF PROSPECTIVE CUSTOMERS TO DESIGN THE COMPANY'S
PRODUCTS INTO THEIR PRODUCTS, (viii) AVAILABILITY OF ADEQUATE FOUNDRY CAPACITY
AND ACCESS TO PROCESS TECHNOLOGIES, (ix) THE COMPANY'S ABILITY TO PROTECT ITS
PROPRIETARY INFORMATION AND OBTAIN ADEQUATE ACCESS TO THIRD PARTY TECHNOLOGY ON
ACCEPTABLE TERMS, (x) RISKS RELATED TO USE OF INDEPENDENT MANUFACTURERS AND
THIRD PARTY ASSEMBLY AND TEST VENDORS, (xi) DEPENDENCE ON KEY PERSONNEL, (xii)
RELIANCE ON A LIMITED NUMBER OF LARGE CUSTOMERS, (xiii) DEPENDENCE ON SALES OF
CD-ROM AND CD-RW CONTROLLER PRODUCTS AND THE PC MARKET, (xv) RISKS RELATED TO
INTERNATIONAL BUSINESS OPERATIONS, (xvi) ABILITY OF THE COMPANY TO MAINTAIN
ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS PRODUCTS, (xvii) RISKS
RELATED TO ACQUISITIONS, (xviii) THE ABILITY TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL AND (xix) OTHER RISKS IDENTIFIED FROM TIME TO
TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.

GENERAL

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

During the third quarter of fiscal 1998, the Company restructured its
operations along three market-focused groups: Optical Storage Group, Consumer
Group, and the Digital Imaging Group (Pixel Magic), at the same time
discontinuing its product development and marketing efforts in its PC audio and
3D graphics businesses. Since then, the Company has completed three acquisitions
(ODEUM Microsystems, Viewpoint Technology, Inc., and Xerographic Laser Images
Corporation), announced a fourth (Xionics Document Technologies, Inc.), and made
a joint venture investment (Omni Peripherals Pte, Ltd.), all aimed at expanding
the potential product offerings for these three target markets. The ViewPoint
and XLI acquisitions were completed during the first quarter of fiscal year 1999
ended September 30, 1998. The Xionics acquisition was announced in August 1999,
and is expected to be completed in November 1999.

As repositioned, the Company provides high-performance, integrated
semiconductors to original equipment manufacturers (OEMs) worldwide who serve
the optical storage, consumer electronics and digital imaging markets. The
Company's products, consisting primarily of integrated circuits and
supporting software and firmware, enable its OEM customers to deliver
cost-effective, powerful systems to the end-user for storage, home
entertainment and imaging applications. A leading merchant supplier of
controllers for CD-ROM and CD-R/W drives, the Company's product offerings for
its three target market segments have expanded to include controllers for DVD
drives; MPEG-2 audio/video decoders for DVD players; integrated circuits for
digital broadcast

23
<PAGE>

systems such as cable, satellite and terrestrial set-top boxes; and multitasking
imaging processors and compression codes for the emerging class of digital
office equipment. The Company's mission is to continue to seek opportunities
for value-added silicon in these emerging market segments where it can leverage
its core competencies to offer powerful, cost-effective and complete solutions
to its OEM partners.

In its press release regarding the results of operations for the fourth
quarter of fiscal 1999, the Company reported a net loss of $15.7 million, its
sixth consecutive quarterly loss. The decrease in fourth quarter revenue and
continued loss is primarily due to a product transition in the Company's optical
storage business (which in fiscal 1998 accounted for over 80% of the Company's
total revenue) as the Company moves to its next generation CD-RW controller,
which is not expected to reach mass production until the second half of fiscal
2000. Although the Company is continuing to ship its single function CD-ROM
controllers, integrated CD-ROM controllers and first generation CD-RW
controller, unit volumes and ASPs of these products have declined and will
continue to decline as these products mature.

On February 2, 1999, the Company announced the appointment of Young K.
Sohn to the office of President and Chief Executive Officer. Mr. Sohn has
completed a comprehensive review of all aspects of the Company and has hired
additional members of the management team whose charter will be to architect and
execute a turnaround plan for the Company.

The Company's quarterly and annual operating results have been, and
will continue to be, affected by a wide variety of factors that could have a
material adverse effect on revenues and profitability during any particular
period, including competitive pressures on selling prices, availability and cost
of foundry capacity and raw materials, fluctuations in yield, loss of any
strategic relationships, the Company's ability to introduce new products in
accordance with OEM design requirements and design cycles, new product
introductions by the Company's competitors and market acceptance of product sold
by both the Company and its customers.

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

RESULTS OF OPERATIONS

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

24
<PAGE>

<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues ..................................... 100.0% 100.0% 100.0%
Cost of revenues ................................. 55.8 52.5 43.7
-----------------------------
Gross margin ..................................... 44.2 47.5 56.3
Research and development expenses ................ 71.9 31.6 20.7
Selling, general and administrative expenses ..... 49.4 19.7 12.9
Acquisition-related charges ...................... 10.1 1.0 3.0
Restructuring charge ............................. -- 1.0 --
-----------------------------
Operating income (loss) .......................... (87.2) (5.8) 19.7
Non-operating income, net ........................ 7.8 10.3 3.2
-----------------------------
Income (loss) before income taxes ................ (79.4) 4.5 22.9
Income taxes (benefit) ........................... (8.1) 0.7 8.7
-----------------------------
Net income (loss) ................................ (71.3)% 3.8% 14.2%
-----------------------------
</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

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

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

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

The Company anticipates that net revenues for at least the first two
quarters of fiscal year 2000 will continue to be significantly less than the
comparable periods of the previous fiscal year as the Company completes its
transition to its next generation CD-RW controllers, which are not expected to
reach mass production until the second half of fiscal 2000. 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
44.2% in fiscal 1999 as compared to 47.5% in fiscal 1998. The decrease in gross
margin is primarily the result of a decrease in ASPs for the Company's CD-ROM
controller products which was only partially offset by a decrease in the
Company's unit cost for the same products. Additionally, operations costs
included in cost of goods sold, which were relatively flat on a dollar basis,
became higher as a percentage of revenues due to the significant decline in
sales volumes.

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

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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 continues to experience severe price pressure on its CD-ROM controller
products and expects such price erosion to continue. The Company does not
believe it can achieve cost reductions or sales of new products with higher
gross margins which fully offset the expected price declines of its CD-ROM
products and therefore, it expects gross margin percentages to decline. In
addition, given the extremely competitive nature of the optical storage and
consumer market, the Company believes that gross margins for new products in its
optical storage market and consumer market 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 were $51.1 million and
$49.7 million, and expressed as a percentage of net revenues were 71.9% and
31.6% in fiscal 1999 and 1998, respectively. The absolute dollar increase in
research and development spending for fiscal 1999 compared to 1998 was primarily
due to the hiring of additional technical personnel, as well as increased
purchased technology amortization expense related to the Odeum, ViewPoint and
XLI acquisitions made in the fourth quarter of fiscal year 1998 and first
quarter of fiscal year 1999. Research and development expenses increased
significantly as a percentage of net revenues for fiscal 1999. This increase was
due to the significant decrease in the Company's net revenues compared to fiscal
1998. The Company will continue to invest substantial resources in research and
development in an effort to complete the development of its new products in the
Company's target markets.

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

ACQUISITION-RELATED CHARGES. Acquisition-related charges include the
costs associated with the acquisitions of ViewPoint and XLI in fiscal 1999 and
the acquisition of certain assets of ODEUM in fiscal 1998.

During the first quarter of fiscal 1999, the Company acquired ViewPoint
and XLI See note 10 of Notes to Consolidated Financial Statements. Of the
combined purchase prices of the two companies, $7.2 million was allocated to
in-process research and development (IPR&D) and was charged to operations ($4.8
million related to ViewPoint, $2.4 million related to XLI). Substantially all of
the remainder of the purchase prices of the two companies (aside from
allocations to tangible assets totaling $0.9 million) was allocated to purchased
technology and other intangible assets (totaling $8.8 million) recorded on the
Company's balance sheet, and is being amortized to operations on a straight-line
basis over three years.

In March 1998, the Company entered into an asset purchase agreement
with ODEUM and Hyundai Electronics America pursuant to which the Company agreed
to acquire certain assets of ODEUM for $4.0 million. The transaction was
consummated in April 1998 and was accounted for under the purchase method of
accounting. Approximately $1.3 million of the purchase price was allocated to
in-process research and development and was charged to operations in fiscal
1998.

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

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues decreased 6% to $157.1
million in fiscal 1998 from $167.4 million in fiscal 1997. This decrease was
primarily the result of a decrease in revenues from the sales of CD-ROM
controller products and Video CD products partially offset by an increase in
revenues from the sale of digital imaging products. The decrease in revenues
from CD-ROM controller products was primarily due to a decrease in the
average selling prices ("ASPs") of the products partially offset by an
increase in unit sales. The decrease in revenues from Video CD products was
primarily due to a decrease in unit sales as well as a decrease in ASPs. The
increase in revenues from the sales of digital imaging equipment products was
primarily the result of an increase in unit sales partially offset by a
decrease in ASPs.

Net revenues from sales of the Company's CD-ROM controller products
were approximately $127.4 million in fiscal 1998 compared to $140.8 million in
fiscal 1997, accounting for 81% and 84% of net revenues, respectively. Although
the Company is attempting to diversify its revenue product base in the three
core markets of optical storage, consumer electronics and digital imaging, it
anticipates that CD-ROM controller sales will continue to account for a
substantial majority of its revenue in the foreseeable future.

Net revenues from sales to the Company's top ten customers in fiscal
1998 and 1997 accounted for approximately 81% and 78%, respectively, of the
Company's net revenues.

International sales, principally to Japan, Taiwan, Korea and Belgium
accounted for approximately 92% and 96% of the Company's net revenues in fiscal
1998 and 1997, respectively. This decrease in international sales, as a
percentage of total sales, is primarily attributable to a decrease in
international revenues as well as an increase in domestic revenues in the
comparison periods.

Included in net revenues for fiscal 1998 and fiscal 1997 were $1.2
million and $0.2 million, respectively, of nonrefundable technology license
fees.

Sales of products related to the graphics and audio/communications
businesses which the Company discontinued in the quarter ended March 31, 1998,
accounted for approximately 2% and 1% of the Company's net revenues in fiscal
1998 and 1997, respectively.

GROSS MARGIN. The Company's gross margin decreased to 47.5% in fiscal
1998 as compared to 56.3% in fiscal 1997. Gross margin in fiscal 1998 included
the impact of a charge to cost of revenues related to increases in inventory
reserves of $3.3 million recorded during the year as well as a $3.5 million
charge related to the discontinuation of the graphics and audio/communications
businesses. Excluding the impact of these inventory-related charges, gross
margin in fiscal 1998 would have been 51.8%. Gross margin in fiscal 1997
included the impact of a charge to cost of revenues related to increases in
inventory reserves of $2.6 million recorded during the year. Additionally, gross
margin in fiscal 1997 included the impact of favorable adjustments to cost of
revenues of

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<PAGE>

approximately $18.7 million 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 fiscal 1997 would have been 44.9%. The increase in
gross margin during the comparison periods, excluding the impact of the
adjustments recorded in fiscal 1998 and fiscal 1997, was primarily the result of
a product mix shift to higher margin CD-R/W controllers and digital imaging
products during the comparison periods. Gross margins related to the graphics
and audio/communications businesses which the Company discontinued in the
quarter ended March 31, 1998 accounted for less than 2% and 1% of the
Company's total gross margin contribution in fiscal 1998 and 1997,
respectively.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $49.7 million and $34.7 million, and expressed as a percentage of net
revenues were 31.6% and 20.7% in fiscal 1998 and 1997, respectively. This
increase in research and development expenditures in fiscal 1998, both in terms
of absolute dollars and as a percentage of net revenues was primarily the result
of the hiring of additional personnel and related expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 42% to $30.9 million in fiscal 1998 from $21.7
million in fiscal 1997. Additionally, selling, general and administrative
expenses increased as a percentage of net revenues to 19.7% in fiscal 1998 from
12.9% in fiscal 1997. This increase was principally the result of the hiring of
additional management and administrative personnel and associated expenses,
costs associated with the implementation of a new management information system
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.

ACQUISITION-RELATED CHARGES. Acquisition-related charges for fiscal
1997 included costs associated with the acquisitions of Pixel Magic.

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 first payment of $3.0 million was paid in
January 1998 and the second payment of $2.0 million is due in December 1998. As
a result of this agreement and because the contingent amount was based, in part,
on the continued employment of the former shareholder/employees of Pixel Magic,
Inc., the Company recorded a compensation charge of $5.0 million in fiscal 1997.

NON-OPERATING INCOME, NET. Non-operating income, net consisted
primarily of net interest income of $7.4 million, net foreign currency
transaction losses of $2.5 million and approximately $10.6 million related to
the settlement agreement between the Company and United Microelectronics
Corporation in connection with a complaint the Company filed with the
International Trade Commission on July 21, 1997. See "Legal Proceedings".

INCOME TAXES. The Company's effective tax rate was 15.0% and 38.0% in
fiscal 1998 and 1997, respectively. The decrease in effective rate is primarily
due to the Company's continued decrease in taxable income along with the
substantial research and development credits earned by the Company offset by a
partial valuation allowance recorded during 1998. See Note 11 of Notes to
Consolidated Financial Statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

QUARTERLY RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION; FUTURE
REVENUES ARE UNPREDICTABLE AND SUBJECT TO SEASONALITY. The Company's quarterly
revenues and operating results have varied significantly in the past and are
likely to vary substantially from quarter to quarter in the future. The
Company's operating results are affected by a wide variety of factors, including
factors that generally affect everyone in its industry and factors that are more
specific to its business and product lines. The principal risk the Company faces
in its business and one which has had, and is expected to continue to have, a
significant effect on its operating results, is its dependence on the optical
storage market. Other factors specific to its business and product lines include
the following: The Company's

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<PAGE>

ability to diversify its product offerings and the markets for its products; the
current market for its products; the loss or gain of important customers; the
timing of significant orders and order cancellations or reschedulings; pricing
policy changes by Oak and its competitors and suppliers; the potential for
significant inventory exposure; the timing of the development and introduction
of new products or enhanced versions of existing products; market acceptance of
new products; increased competition in product lines; barriers to entry into new
product lines; and the competitiveness of Oak's customers.

In addition, the Company's quarterly operating results could be
materially adversely affected by any judgment or settlement in the Company's
ongoing stockholder legal proceedings. The Company believes that quarterly
revenue and operating results are likely to continue to vary significantly in
the future and period-to-period comparisons of its operating results are not
necessarily meaningful. Readers should not rely on period-to-period comparisons
as indications of future performance.

Other factors generally affecting the semiconductor industry include
the following: rapid technological change; rapid product obsolescence;
availability of foundry capacity; fluctuations in manufacturing yields;
availability and cost of raw materials; the cyclical nature of the semiconductor
industry; seasonal customer demand; potential for erosion of product prices; and
general economic conditions.

The semiconductor industry historically has been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity, periods of 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. Any downturns in the
industry would have a material adverse effect on the Company's business and
results of operations

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

Any one or a combination of the above factors may adversely affect the
business and financial condition of the Company.

HISTORY OF OPERATING LOSSES. Although the Company experienced periods
of profitability following its reincorporation in Delaware in October 1994 in
connection with its initial public offering (the Company was first incorporated
in California in 1987), the Company sustained losses following the initial
public offering. Further, while the Company had net income of $5.9 million in
fiscal 1998, the Company experienced a net loss of $50.7 million in fiscal 1999.
Its current loss trend began in calendar year 1998, resulting in an operating
loss of $9.1 million for fiscal 1998 and an operating loss of $61.9 million for
fiscal 1999 (in each case before adjustments for non-operating income or loss,
or income tax expense or benefit). The Company's operating losses generally have
been due to the Company's dependence on its optical storage business, which
historically has accounted for approximately 80% of its business. In fiscal
1998, the Company failed to timely and/or adequately develop its integrated
CD-ROM controller product and second generation CD-RW product. Consequently, for
fiscal 1999, the Company was dependent on mature CD-ROM products and its first
generation CD-RW product for its revenue. These mature products have continued
to decline in both unit sales volume and average sales price in each successive
quarter. The Company is currently sampling its next generation CD-RW product,
but the Company cannot accurately predict the level of customer acceptance and
the product's impact on operating results. If the Company incurs additional
losses or fails to achieve profitability in the future, this will have a
material adverse effect on the Company's business and may affect the trading
price of the Company common stock.

DEPENDENCE ON CD-ROM AND CD-RW CONTROLLER PRODUCTS. Sales of the
Company's CD-ROM and CD-RW controller products comprised 65%, 81% and 84% of the
Company's net revenues in fiscal years 1999, 1998 and 1997, respectively. The
Company's future revenue generation is highly dependent on the successful

29
<PAGE>

introduction of its next generation CD-RW product, although the Company can
provide no assurance that this product will achieve customer acceptance.
Although sales of CD-ROM controller products are expected to continue to account
for a portion of the Company's total revenues for the foreseeable future, the
Company expects that sales of its CD-ROM controller products will continue to
decline. The Company is no longer developing any CD-ROM controllers, but is
instead focusing its development efforts on controllers for CD-RW and DVD
applications. If the Company experiences delays in its product development
efforts or fails to achieve market acceptance, the Company will need other
sources of revenue to offset the continued decline in sales of its CD-ROM
controllers.

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

The Company also faces increased competition in the emerging CD-RW and
DVD markets. See "-Competitive Market." Moreover, the current trend toward
integrating increased functionality on the CD-ROM, CD-RW or DVD controller
potentially adds to the development and manufacturing costs of producing the
controller. The Company's revenues and gross margins from its optical storage
controller products will be dependent on the Company's ability to introduce
these integrated products in a commercially competitive manner.

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

PRICING ISSUES. The willingness of prospective customers to design the
Company's products into their products depends, to a significant extent, upon
the ability of the Company to have product available at the appropriate market
window and to price its products at a level that is cost effective for such
customers. The markets for most of the applications for the Company's products,
especially in the consumer electronics market and the optical storage market,
are characterized by intense price competition. As the markets for the Company's
products mature and competition increases, as has been the trend for the optical
storage and digital video disk segment of the consumer electronics market, the
Company anticipates that ASPs on its products will decline. The Company
continually attempts to pursue cost reductions, including process enhancements,
in order to maintain acceptable gross profit margins. Gross profit margins also
vary reflecting the impact of changes in the general condition of the economy,
capacity utilization levels in the semiconductor industry, customer acceptance
of new technologies and products, product functionality and capabilities, shifts
in product mix, manufacturing yields and the effect of ongoing manufacturing
cost reduction activities. If the Company is unable to reduce its costs
sufficiently to offset declines in ASPs or is unable to successfully introduce
new higher performance products with higher ASPs, the Company's operating
results will be materially adversely affected. In addition, if the Company
experiences yield or other production problems or shortages of supply that
increase its manufacturing costs, fails to reduce its manufacturing costs, or
fails to utilize its prepaid deposits with the TSMC and Chartered foundries, the
result would be a material adverse effect on the Company's business, financial
condition and operating results.

NEW PRODUCT INTRODUCTIONS. The markets for the Company's products are
characterized by evolving industry standards, rapid technological change and
product obsolescence. The Company's financial performance is highly dependent
upon timely and successful execution of next generation and new products,
particularly in light of the continued decline in sales from the Company's
mature CD-ROM and CD-RW products and the Company's failure to timely develop new
products for the optical storage market in fiscal 1998 and 1999. Specifically,
the Company's performance is highly dependent upon the successful development,
timely introduction and customer acceptance of its next generation CD-RW
controller, MPEG-2 decoder for the DVD player market, and imaging processing
chip for the digital imaging equipment market.

If the Company fails to introduce new products successfully or its new
products fail to achieve market acceptance, its business, financial condition
and results of operations will be materially adversely affected. The

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<PAGE>

success of new product introductions is dependent on several factors, including:
recognition of market requirements; product cost; timely completion and
introduction of new product designs; quality of new products; differentiation of
the Company's products from those of its competitors; improvements in existing
technologies; and development and implementation of new process technologies to
reduce semiconductor die size, improve device performance in manufacturing
yield, adapt product and processes to technological changes, and adopt emerging
industry standards.

In both the optical storage and consumer electronics markets,
particularly DVD, a variety of standards and formats are being proposed, making
it difficult to develop product to market requirements, and making it even more
difficult for the market to develop.

The success of the Company's efforts is also dependent upon securing
sufficient foundry capacity for volume manufacturing of wafers and achievement
of acceptable manufacturing yields from the Company's contract manufacturers.
(See the discussion of risks related to foundry capacity under the heading
"Risks of Supply Constraints and Manufacturing Process" above). Due to the
design complexity of the Company's products, especially with the increased
levels of integration that are required, the Company has experienced delays in
completing development and introduction of new products, particularly in its
products for the optical storage and the digital imaging equipment markets.

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

ACQUISITIONS. 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 an alternative to developing
such technology internally. On July 29, 1999, the Company announced its
intention to acquire Xionics Document Technology, Inc., a leading supplier of
embedded software for the digital imaging market. 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. In addition,
investments in emerging technology present risks of loss of value of one or
more of the investments due to failure of the technology to gain the
predicted market acceptance.

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.

In the fourth quarter of fiscal year 1998, the Company acquired ODEUM
Microsystems, Inc. (ODEUM) and allocated approximately $1.3 million of the
purchase price to in-process research and development (which was expensed) and
approximately $2.2 million to purchased technology, goodwill and other
intangible assets which are recorded on the Company's balance sheet. In the
first quarter of fiscal year 1999, the Company acquired ViewPoint and allocated
approximately $4.8 million to in-process research and development and
approximately $4.4 million to purchased technology and other intangible assets.
Also in the first quarter of fiscal year 1999, the Company acquired XLI and
allocated approximately $2.4 million of the purchase price to in-process
research and development and approximately $4.4 million to purchased technology
and other intangible assets. For the ViewPoint and XLI acquisitions, the
valuation of the acquired in-process research and development used by the
Company in making its determination as to the amount of in-process research and
development expense was supported by valuation studies prepared by an
independent third-party appraiser. For the ODEUM acquisition, the acquired
in-process research and development valuation was based on Oak management's best
estimate based on their analysis of the progress of the ODEUM research and
development in process at the acquisition date and the anticipated cash flows to
be derived from the resulting products.

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In September 1998, a representative of the Securities and Exchange
Commission (the "SEC") provided the American Institute of Certified Public
Accountants with guidance as to the factors to be considered in the valuation of
in-process research and development. Although the Company believes that the
amounts of the recorded in-process research and development expense are
reasonable when applying these factors, there can be no assurance that the SEC
will not review the Company's valuations, which review could result in the
Company making adjustments to the reported amounts of in-process research and
development expense for the years ended June 30, 1998 and 1999. Any such
adjustment could result in an increase in the amount of purchased technology and
other intangibles recorded with respect to the acquisitions of ODEUM, ViewPoint,
and XLI, which would result in higher amortization expenses, and therefore,
adversely affect the Company's future operating results.

THE COMPANY'S MARKETS EXPERIENCE RAPID TECHNOLOGICAL CHANGE. The
markets in which the Company competes are intensely competitive and are
characterized by rapid technological change. The Company expects competition to
increase in the future from existing competitors and from other companies that
may enter the Company's existing or future markets with solutions that may be
less costly or provide higher performance or additional features. The Company's
existing and potential competitors include many large domestic and international
companies that have substantially greater financial, manufacturing, technical,
marketing, distribution and other resources, broader product lines and longer
standing relationships with customers than the Company. The Company's
competitors also include a number of emerging companies as well as some of the
Company's own customers and suppliers. Moreover, the Company is currently
attempting to enter several new segments of the consumer electronics market in
which the Company has not previously operated. These markets are intensely
competitive, and the Company will have to compete with large domestic and
international companies, some of whom have long standing relationships with the
Company's target customers. The Company must continue to enhance its current
product line and develop and introduce new products that keep pace with the
technological developments of its competitors. The Company must also satisfy
increasingly sophisticated customer requirements. If the Company cannot
successfully respond to the technological advances of others or if its new
products or product enhancements do not achieve market acceptance, the Company's
business, operating results and financial condition could be seriously harmed.

COMPETITIVE MARKETS. The optical storage and consumer electronics
markets in which the Company competes is intensely competitive and is
characterized by rapid technological change, declining unit average sales prices
and rapid product obsolescence. In these two markets 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. Furthermore, the Company is currently attempting to
enter the digital broadcast market in which it has not previously operated. This
market is intensely competitive and the Company will have to compete with large
domestic and international companies that have long standing relationships with
target customers.

The willingness of prospective customers to design the Company products
into their products depends, to a significant extent, upon the Company's ability
to have product available at the appropriate market window and to price these
products at a level that is cost effective for these customers. The markets for
most of the, applications for the Company's products, especially in the consumer
electronics market and the optical storage market, are characterized by intense
price competition. As the markets for these products mature and competition
increases, as has been the trend for the optical storage and DVD segment of the
consumer electronics market, the Company anticipates that average sales prices
on products will decline. If the Company is unable to reduce costs sufficiently
to offset declines in average sales prices or is unable to successfully
introduce new higher performance products with higher average sales prices,
operating results will be materially adversely affected. In addition, if the
Company experiences yield or other production problems or shortages of supply
that increase manufacturing costs, fail to reduce manufacturing costs or fail to
utilize prepaid deposits with foundries, the Company's business, financial
condition and operating results will be materially adversely affected.

Certain of the Company's principal competitors maintain their own
semiconductor foundries and may therefore benefit from certain capacity, cost
and technological advantages. In addition, in the digital imaging market, the
most intense competition comes from captive suppliers, and increased
competition is anticipated from captive suppliers to the optical storage
market as this market transitions to DVD. Also, the ability

32
<PAGE>

to compete successfully in the PC and consumer DVD market and digital broadcast
markets depends on the ability to develop partnerships with other companies
established in the industry and to gain recognition in such markets. There can
be no assurance that participation in these new markets will produce positive
results.

The Company believes that its ability to compete successfully depends
on a number of factors, both within and outside of its control, including the
following: 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 competitors; 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 its customers design its products
into their products; the market acceptance of the products of its customers; the
number and nature of its competitors in a given market; the ability to protect
its proprietary information and to obtain or preserve its rights to the
intellectual property of other parties necessary in its business; and general
market and economic conditions.

There can be no assurance that the Company will be able to compete
successfully against respective current or future competitors, or that
competitive pressures faced by it and its customers will not have a material
adverse effect on the business, results of operations or financial condition of
the combined company.

THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS. 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 intellectual property rights. However, these measures afford only
limited protection. Competitors of the Company may be able to effectively design
around the Company's patents. There can be no assurance that any patents held by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted under those patents will provide competitive advantages to the
Company. Moreover, while the Company holds or has applied for patents relating
to the design of its products, some of the Company's products are based in part
on standards, for which the Company does not hold patents or other intellectual
property rights. In addition, the laws of certain foreign countries in which the
Company's products are or may be manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely. There can be no assurance that the steps taken by the Company to protect
its proprietary information will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Moreover, the Company intends to seek additional international and
United States patents on its technology. There can be no assurance that
additional patents will issue from any of the Company s pending applications or
applications in preparation, or be issued in all countries where the Company's
products can be sold, or that any claims allowed from pending applications or
applications in preparation will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to the Company.

Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. In fiscal 1997 and
again in fiscal 1998, the Company filed a complaint with the International Trade
Commission ("ITC") against certain Asian manufacturers of optical storage
controller devices based on the Company's belief that those 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 infringing CD-ROM controllers. The Company has incurred
significant legal expenses in connection with each of these lawsuits. Any
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 that litigation results in a favorable determination
for the Company. In the event of an adverse result in any litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
noninfringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. There can be no assurance that the
Company would be successful in developing new technology or that those licenses
would be available on reasonable terms, or at all, and any development or
license could require expenditures by the Company of substantial time and other
resources.

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

33
<PAGE>

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.

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

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

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

RISKS ASSOCIATED WITH THE USE OF INDEPENDENT FOUNDRIES AND ASSEMBLY
AND TEST VENDORS AND MINIMUM PURCHASE SUPPLY CONTRACTS. The Company contracts
with independent foundries to manufacture all of its products, and with
independent vendors to assemble and test its products. Under its foundry
agreements, the Company is required to place non-cancelable orders and
purchase its products on an approximately three-month rolling basis. The
Company is currently committed under an agreement with two of its foundries
to purchase certain minimum amounts of capacity. In the fourth quarter of
fiscal 1999, the Company recorded a $2.8 million loss provision against its
deposit with one of its foundries.

The Company's customers, on the other hand, generally place purchase
orders with the Company less than four weeks prior to delivery that may be
rescheduled or under certain circumstances may be cancelled, without significant
penalty. Due to the Company's relatively narrow customer base for certain
devices and the short product life cycles of the Company's products, these
cancellations can leave the Company with significant inventory exposure.
Consequently, if anticipated sales and shipments in any quarter are rescheduled,
canceled or do not occur as quickly as expected, the Company's expense in
inventory levels could be disproportionately high, which would materially
adversely affect its business, financial condition and results of operations for
that quarter or for the year.

In addition, the Company is dependent on its foundries to allocate to
the Company a portion of their foundry capacity sufficient to meet its needs to
produce products of acceptable quality and with acceptable

34
<PAGE>

manufacturing yield and to deliver products to the Company in a timely manner.
These foundries fabricate products for other companies and some manufacture
products of their own design. If there is a decrease in available foundry
capacity, it is likely that the lead time required to manufacture the Company's
products will increase, which may materially adversely affect the Company's
results of operations and financial condition. In periods of manufacturing
capacity shortages, the Company may not be able to meet its customers' required
delivery time. Also, if the Company is unable to timely respond to its
customers' needs, the Company may lose customer orders. Insufficient orders will
result in under-utilization of the Company manufacturing facilities and
prepayments with two of the Company's foundries for certain minimum amounts of
capacity, which also will adversely affect the Company's business, financial
condition and operating results.

Product supply and demand fluctuations common to the semiconductor
industry are historically characterized by periods of manufacturing capacity
shortages immediately followed by periods of overcapacity, which are caused by
the addition of manufacturing capacity in large increments. The industry has
moved from a period of capacity shortages in 1995 to what has been a period of
excess capacity for approximately the last twelve months, although capacity has
recently tightened. During a period of industry overcapacity, profitability can
drop sharply as factory utilization declines and high fixed costs of operating a
wafer fabrication facility are spread over a lower net revenue base. No
assurance can be given that the Company can or will achieve timely,
cost-effective access to that capacity when needed.

Factors which could damage relationships with the Company's current and
prospective customers or provide an advantage to its competitors include: the
loss of any foundry as a supplier; inability in a period of increased demand for
the Company's products to expand foundry capacity; inability to obtain timely
and adequate deliveries from current or future suppliers; delays in shipments of
the Company's products; disruption of operations at any of the Company's
manufacturing facilities; and product defects and the difficulty of detecting
and remedying product defects.

The Company's reliance on independent manufacturers and third party
assembly and testing vendors involve 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.

Any problems with supply could adversely affect the Company's business,
financial condition and operating results. As the Company generally does not use
multiple services of supply for its products, the consequences of these factors
occurring is magnified.

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, which include the risks described under the heading "Risks Pertaining to
International Business" below.

RISKS PERTAINING TO INTERNATIONAL BUSINESS. During fiscal 1999, 1998
and 1997, 86%, 92% and 96%, respectively, of the Company's net revenues were
derived from international sales. A large portion of the Company's revenues are
derived from international sales. A substantial portion of the Company's
international revenues are derived from manufacturers of CD-ROM drives in Japan,
Taiwan, Korea and Singapore. Most of the Company's foreign sales are negotiated
in US dollars, although invoicing is often done in local currency. As a result,
the Company may be subject to the risks of currency fluctuations in these and
other countries.

The Company is subject to the additional risks of conducting business
outside of the United States. These risks include: unexpected changes in, or
impositions of, foreign 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 collecting accounts receivable; potentially adverse taxes and
adverse tax consequences; the burdens of complying with a variety of foreign
laws; political, social and economic instability; potential hostilities; changes
in diplomatic and trade relationships; and fluctuations in foreign currencies.

For example, the Company has made a significant investment in foundry
capacity in Taiwan and is subject to the risk of political instability in
Taiwan, including the potential for conflict between Taiwan and the People's
Republic of China. In addition, China is the primary market for the Company's
consumer DVD and cable and

35
<PAGE>

satellite products, and, therefore, any political or economic instability in
China could significantly reduce the demand for these products.

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

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

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

DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends,
to a significant degree, on the retention and contribution of members of the
Company's senior management as well as other key personnel. In February 1999,
the Company appointed a new President and Chief Executive Officer, Young K.
Sohn. It is important for the Company to retain the services of Mr. Sohn. In
fiscal 1999, the Company also appointed a new Vice President and General
Manager to head its Optical Storage Group, a new Chief Financial Officer, a
new Vice President of Sales, and a new Vice President of Human Resources. The
Company is in the process of recruiting additional senior management
positions as well as technical personnel. Competition for these persons is
intense and there can be no assurance that the Company will be able to
attract and retain additional senior managers and technical personnel.

36
<PAGE>

IMPACT OF YEAR 2000. The "Year 2000 Issue" is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company is dependent, to a significant extent, on
computer technology with date-sensitive functions. If the Company's computer
programs with date-sensitive functions are not Year 2000 compliant, they may
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing incorrect
reporting and disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in
similar normal business activities. The issue spans both information
technology and non-information technology systems that use date data. In
addition to the Company's own systems, the Company relies, directly and
indirectly, on external systems of its customers, suppliers, creditors,
financial organizations, utilities providers and government entities, both
domestic and international.

The Company's committee for the Year 2000 issue has a year 2000
project plan consisting of the following five phases: Inventory/Assessment,
Conversion, Vendor Readiness, Contingency Planning, Testing and
Implementation. The Inventory/Assessment, Conversion, Testing and
Implementation phases of the project were complete as of August 31, 1999, and
the Company is in the process of concluding the Vendor Readiness and
developing the Contingency Planning phases. The entire Year 2000 project is
expected to be completed in the fall of 1999.

In its Inventory/Assessment phase, the Company examined well over
two thousand items for Year 2000 compliance. For internal systems, the
Company examined all network components, PCs, Unix workstations, business
applications, CAD systems, desktop applications, operating systems, testers,
telephone system, FAX, copiers, security and environmental systems. The
Company purchased a Y2K tool and repaired all PC BIOS and converted all Excel
and Access data files. The Company has also upgraded all servers,
workstations and network components. Major business application systems
including the Oracle Enterprise Resource Planning system and FactoryWorks
Manufacturing Execution System have been fully upgraded and tested to Y2K
compliance status. The Company's Wide Area Network was successfully tested to
be Y2K ready. The security system was upgraded to be Y2K compliant. The
Company also obtained Y2K compliance statements from CAD systems, telephone,
energy and environmental system vendors. Further upgrades are to be applied
to some desktop applications before the end of year.

The Company is actively responding to all customer requests for
compliance, surveys and other general information related to its Year 2000
programs. The Company will also request assurance from its key customers that
they, and their products which incorporate the Company products, are Year
2000 compliant.

The Company will develop a Contingency Plan that will address the
non-compliance of vendors/suppliers and any "worst case" Year 2000 issues
that the Company may be confronted with. In the worst case, the Company or
the key customers and/or suppliers on which it depends may be unable to
produce reliable information or process routine transactions. Furthermore, in
the worst case, the Company or parties on which it depends may, for an
extended period of time be incapable of conducting critical business
activities, which include but are not limited to, manufacturing and shipping
products, invoicing customers and paying vendors.

All product related assessments and testing were completed as of
June 30, 1999. Updates or status on products are available on the Company's
web site (www.oaktech.com). The Company considers a product or system to be
Year 2000 compliant if the date/time data is accurately processed (including,
but not limited to, calculating, comparing, and sequencing) from, into and
between the twentieth and twenty-first centuries, and the years 1999 and 2000
along with leap year calculations. To date, the Company has not identified
any non-compliant products and therefore, no material costs have been
incurred with respect to remediation. The Company believes that it is
unlikely to experience a material adverse impact on its financial condition
or results of operations due to product related Year 2000 compliance issues.

The foregoing statements are based upon management's best estimates
at the present time, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain resources,
third party modification plans and other factors. There can be no guarantee
that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors

37
<PAGE>

that might cause such material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the nature and amount of
programming required to upgrade or replace each of the affected programs, the
rate and magnitude of related labor and consulting costs and the success of
the Company's external customers and suppliers in addressing the Year 2000
issue.

As the Year 2000 project continues, the Company may discover
additional Year 2000 problems, may not be able to develop, implement, or test
remediation or contingency plans in a timely manner, or may find that the
costs of these activities exceed current expectations and become material. In
many cases, the Company is relying on assurances from suppliers and customers
that new and upgraded information systems and other products will be Year
2000 compliant. The Company is testing certain third-party products, but
cannot be sure that its tests will be adequate or that, if problems are
identified, they will be addressed by the supplier in a timely and
satisfactory way.

Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year
2000-compliant fashion. Furthermore, the Company cannot be sure that it will
not suffer business interruptions, either because of its own Year 2000
problems or those of its customers or suppliers whose Year 2000 problems may
make it difficult or impossible for them to fulfill their commitments to the
Company. If the Company fails to satisfactorily resolve Year 2000 issues
related to its products in a timely manner, it could be exposed to liability
to third parties.

If the Company or the third parties with which it has relationships
were to cease or not successfully complete its or their Year 2000 remediation
efforts, the Company would encounter disruptions to its business that could
have a material adverse effect on its business, financial position and
results of operations. The Company could be materially and adversely impacted
by widespread economic or financial market disruption or by Year 2000
computer system failures at third parties with which it has relationships.

The Company has not yet developed a contingency plan that addresses
how it plans to handle any of the "worst-case" Year 2000 issues that may
confront it, but instead has focused its resources on identifying material,
remediable problems and reducing uncertainties generally, through the Year
2000 project described above.

The Company's evaluation is on-going and it expects that new and
different information will become available to it as that evaluation
continues. As a result, the Company has no reasonable basis to conclude that
the Year 2000 problem will not have a materially adverse effect on 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 June 30, 1999 consisted of approximately $133.2 million in cash,
cash equivalents and short-term investments. The Company also has approximately
$14.0 million in lines of credit with Taiwanese financial institutions, all of
which was available at June 30, 1999. Additionally, approximately $12 million in
lines of credit exist with a Japanese financial institution, all of which was
available at June 30, 1999.

In fiscal 1999, operating activities used net cash of approximately
$10.5 million. The Company's net loss of approximately $50.7 million was
offset by reduction in accounts receivable and inventories of $15.1 million,
as well as the non-cash effect of depreciation and amortization of $11.5
million, in-process research and development write-offs of $7.2 million, and
deferred taxes of $4.2 million. Investing activities utilized cash of
approximately $26.3 million primarily due to the ViewPoint and XLI
acquisitions ($15.2 million, net of cash acquired) and additions to property,
plant and equipment of $6.0 million. The proceeds of the sale of the
Company's investment in the UICC foundry were used to purchase additional
short-term investments. Borrowings under the Company's line of credit in
Japan were paid in full as of June 30, 1999 and resulted in a net $2.4
million use of cash during fiscal 1999. Additionally, the Company repurchased
858,000 shares of its common stock in fiscal 1999, for a total of
approximately $2.7 million.

In July 1999, the Company announced it had entered into a definitive
agreement to acquire Xionics Document Technologies, Inc. Under the terms of the
agreement, which is subject to approval by the shareholders of both companies,
the Company would issue approximately 10.6 million shares of common stock and
approximately $38.7 million in cash to acquire all of the common stock of
Xionics.

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, the Xionics acquisition, and any other investments it may make
through at least the next twelve months. If, however, during the next 12 to 18
month period the Company fails to increase its revenue or is unable to reduce
its expenses below its revenues, then the Company may be in a position where it
will need to seek additional financing. However, there can be no assurance that
the Company will not be required to seek other financing sooner or that such
financing, if required, will be available on terms satisfactory to the Company.
The Company may also utilize cash to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
From time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products or technologies. However,
the Company has no present understandings, commitments or agreements with
respect to any material acquisition of other businesses, products or
technologies, other than the Xionics acquisition noted above.

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<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Most of the Company's foreign sales are negotiated in US dollars;
however, invoicing is often done in local currency. As a result, the Company
may be subject to the risks of currency fluctuations. Assets and liabilities
which are denominated in non-functional currencies are remeasured into the
functional currency on a monthly basis and the resulting gain or loss is
recorded within non-operating income in the statement of operations. Many of
the Company's non-functional currency receivables and payables are hedged
through managing net asset positions, product pricing and other means. The
Company's strategy is to minimize its non-functional currency net assets or
net liabilities in its foreign subsidiaries. The Company's policy is not to
speculate in financial instruments for profit on the exchange rate price
fluctuations, trade in currencies for which there are not underlying
exposures, or enter into trades for any currency to intentionally increase
the underlying exposure. As of June 30, 1999 and 1998, the Company had
foreign currency exchange contracts to exchange Yen for approximately
$1,030,000 and $4,690,000, respectively. The Company uses financial
instruments, including local currency debt arrangements, to offset the gains
or losses of the financial instruments against gains or losses on the
underlying operations cash flows or investments. If foreign currency rates
fluctuate by 10% from rates at June 30, 1999 and 1998, the effect on the
company's consolidated financial statements would not be material. However,
there can be no assurance that there will not be a material impact in the
future.

The Company's cash equivalents and short-term investments
("investments") are exposed to financial market risk due to fluctuation in
interest rates, which may affect its interest income and the fair values of its
investments. The Company manages the exposure to financial market risk by
performing ongoing evaluation of its investment portfolio and investing in
short-term investment grade corporate securities and U.S. government and other
agencies' obligations which mature with the next 24 months. In addition, the
Company does not use investments for trading or other speculative purposes. Due
to the short maturities of its investments, the carrying value approximates the
fair value. If market rates were to increase immediately and uniformly by 10%
from levels as of June 30, 1999 and 1998, the decline in the fair value of the
portfolio would not be material. Further, the Company has the ability to hold
its fixed income investments until maturity and, therefore, the Company would
not expect to recognize such an adverse impact in income or cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Not applicable.

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<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

As of August 31, 1999, the Directors of the Company, and the executive
officers of the Company, who are elected by and serve at the discretion of the
Board of Directors, were as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David D. Tsang 57 Chairman of the Board of Directors

Young K. Sohn 43 Chief Executive Officer, President,
and Director

Ta-Lin Hsu, Ph.D. 56 Director

Timothy Tomlinson 49 Director

Richard B. Black 66 Director

Albert Y.C. Yu, Ph.D 58 Director

Robert O. Hersh 44 Vice President, Finance, and Chief
Financial Officer

William Housely 43 Vice President of Oak, General
Manager of Optical Storage Group

Paul H.F. Vroomen 42 Vice President of Oak, General
Manager of Consumer Group

Peter Besen 44 Vice President of Oak, General
Manager of Imaging Group

Abel S. Lo 49 Vice President of Oak, General
Manager, Oak Technology, Taiwan

Shawn M. Soderberg 38 Vice President, General Counsel and
Secretary
</TABLE>

Mr. Tsang has served as Chairman of the Board of Directors of the
Company since January 1991. He was also President and Chief Executive Officer of
the Company from July 1987, when he founded the Company, until February 1999,
and a Director of the Company since October 1987. Mr. Tsang has also held the
positions of Chief Financial Officer from July 1987 to March 1993 and Secretary
of the Company from July 1987 to December 1994. He also is a Director of ASE
Test, a semiconductor assembly and testing company. Prior to joining the
Company, Mr. Tsang was the founder and served in various positions including
President, Chief Executive Officer and Chairman of Data Technology Corp., a
manufacturer of disk controllers and high density disk drives, from 1979 to
1987, and co-founded Xebec, a manufacturer of disk controllers, where he was
employed from 1974 to 1979. Mr. Tsang holds a B.S.E.E. degree in electrical
engineering from Brigham Young University and an M.S. degree in electrical
engineering from the Santa Clara University. On September 1, 1999 David D.
Tsang and certain of his relatives entered into a consent decree with the
Securities and Exchange Commission in connection with an insider trading
investigation. Pursuant to the terms of the settlement, Mr. Tsang neither
admits nor denies the allegation that he provided nonpublic information to
certain relatives. He did not profit personally from any transaction in
question.

Mr. Sohn joined the Company as President and Chief Executive Officer in
February 1999. He has also been a Director of the Company since January 1998.
Prior to joining the Company, and since January 1993, Mr. Sohn was employed by
Quantum Corporation, most recently as President of its Hard Drive Business. From
August 1983 to January 1993, he acted as Director of Marketing at Intel
Corporation. Mr. Sohn currently serves on the Board of Directors of PLX
Corporation, Inc. He holds a B.S. in electrical engineering from the
University of Pennsylvania and an M.S. (M.B.A) from Massachusetts Institute
of Technology.

40
<PAGE>

Dr. Hsu has been a Director of the Company since January 1991. He has
been employed by H&Q Asia Pacific, the parent company of H&Q Taiwan Co., Ltd.,
since February 1985, most recently as Chairman. He is also a Director of
Headway Technologies, ASE Technology Corporation, and Macronix Corporation.
Dr. Hsu holds a B.S. degree in physics from National Taiwan University, an
M.S. degree in electrophysics from Polytechnic Institute of Brooklyn and a
Ph.D. in electrical engineering from the University of California, Berkeley.

Mr. Tomlinson has been a Director of the Company since June 1988. He
has been a partner of Tomlinson Zisko Morosoli & Maser LLP, a law firm, since
1983. Mr. Tomlinson is also a Director of Portola Packaging, Inc., a
manufacturer of tamper evident closures and related equipment, Verisign,
Inc., and SmartDisk Corporation. Mr. Tomlinson holds a B.A. degree in
economics, an M.B.A. and a J.D. from Stanford University.

Mr. Black has been a Director of the Company since November 1992 and
was also a Director from December 1989 to January 1991. He also served as
President of the Company from January 1998 to February 1999, as well as acting
President of the Company's Optical Storage Group from August 1998 to February
1999. Mr. Black is also a director of Gabelli Funds, Inc., Gabelli Asset
Management Inc., Morgan Group Inc., and GSI Lumonics. Mr. Black holds a B.S.
degree in civil engineering from Texas A&M University and an M.B.A. from
Harvard University.

Dr. Yu has been a Director of the Company since August 1999. He is
currently Senior Vice President of the Microprocessor Products Group of Intel
Corporation, where he has been employed for the last 23 years. Prior to joining
Intel, Dr. Yu was the head of Device Physics at Fairchild Semiconductor.

Robert O. Hersh joined the Company as Vice President and Chief
Financial Officer in December, 1998. Prior to joining Oak, from April of
1997, Mr. Hersh was Vice President of Operations and CFO at Network
Peripherals. Prior to that he was Vice President of Finance and CFO at SEEQ
Technology, and Executive Vice President and Chief Financial Officer at Alps
Electric, Inc. (North America). Mr. Hersh holds an M.B.A. from California
State University, Sacramento and a B.A. in accounting from California State
University, Stanislaus, in addition to a California CPA certification.

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

Mr. Vroomen joined the Company as Vice President, Strategic Marketing
in September 1997. He has been Vice President and General Manager of the
Consumer Products Group since January 1998. From May 1996 to June 1997, Mr.
Vroomen was Vice President and General Manager of the Consumer Digital
Entertainment business unit at VLSI Technology, Inc. From November 1994 to April
1996, Mr. Vroomen was Vice President, Sales & Marketing at Array Microsystems,
Inc., a developer of codec chips for digital video applications and from April
1989 to November 1994, Mr. Vroomen was at Zilog, Inc. where he was Vice
President of the Computer Peripherals business unit. He holds an M.S.E.E. from
the Philips International Institute in Eindhoven, the Netherlands, and a
Managerial Advancement Program diploma from the University of the Witwatersrand
Graduate School of Business in Johannesburg, South Africa.

Mr. Besen joined the Company as General Manager of Pixel Magic in
October of 1995. He was appointed as a Vice President and General Manager of the
Company in July of 1998. Prior to joining the Company, Mr. Besen spent eight
years at LaserData, Inc., a document image processing company, most recently as
Vice President of OEM sales. Mr. Besen holds an S.B.E.E. from Massachusetts
Institute of Technology.

Mr. Lo joined the Company as Engineering Design Manager in 1987. He has
been General Manager, the Company Technology, Taiwan since 1989 and became a
Vice President of the Company in April 1995. Prior to joining the Company, he
was Software Manager at Convergent Technologies, a computer system manufacturer,
from June 1986 to May 1987, and Software Manager at the Systems Division of ITT
Corp. from May 1985 to June 1986. Mr. Lo holds a B.S. degree in electrical
engineering from Seattle University, an M.S. degree in electrical

41
<PAGE>

engineering from the University of Washington and an M.S. degree in computer
science from Rensselaer Polytechnic Institute.

Ms. Soderberg was appointed Vice President, General Counsel and
Secretary in May of 1998. She joined the Company in February of 1996 as General
Counsel. Prior to joining the Company, she was General Counsel for Microtec
Research, Inc., a software provider for embedded systems from April 1994 to
February 1996. Ms. Soderberg holds a B.S. in accounting from the University of
Santa Clara, a J.D. from Seattle University and an L.L.M. in taxation from New
York University.

The information required by Item 11 with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the Proxy Statement under the Caption "Executive Compensation And
Other Matters."

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Stock Ownership
of Certain Beneficial Holders and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.

42
<PAGE>

PART IV

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

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

<TABLE>
<CAPTION>
1. Financial Statements. Page
----
<S> <C>
Independent Auditors Report.......................................................................... 47

Consolidated Balance Sheets -- As of June 30, 1999 and 1998.......................................... 48

Consolidated Statements of Operations -- For the Three Year Period Ended June 30, 1999............... 49

Consolidated Statements of Stockholders' Equity - For the Three Year Period Ended June 30, 1999...... 50

Consolidated Statements of Cash Flows - For the Three Year Period Ended June 30, 1999................ 51

Notes to Consolidated Financial Statements........................................................... 52

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

Schedule II - Valuation and Qualifying Accounts...................................................... 81

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

3. Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this report:
</TABLE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
3.01 The Company's Restated Certificate of Incorporation, amended
(1)

3.02 The Company's Restated Bylaws (2)

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

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

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

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

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

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

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

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

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)*

43
<PAGE>

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)

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)**

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)**

44
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

23.01 Consent of Independent Auditors

24.01 Power of Attorney (see page 82 of this Form 10-K)

27.01 Financial Data Schedule
</TABLE>
- -------------------------
(1) Incorporated herein by reference to exhibit 3.01 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
(2) Incorporated herein by reference to exhibit 3.05 filed with
the Company's Registration Statement on Form S-1 (File No.
33-87518) declared effective by the Securities and Exchange
Commission on February 13, 1995 (the "February 1995 Form
S-1").
(3) Incorporated herein by reference to the exhibit with the
same number filed with the February 1995 Form S-1.
(4) Incorporated herein by reference to Exhibit 10.1 filed with
the Company's Registration Statement on Form S-8 (File No.
333-4334) on May 2, 1996.

45
<PAGE>

(5) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Annual Report on Form
10-K for the year ended June 30, 1996.
(6) Incorporated herein by reference to Exhibit 2.1 filed with
the Company's Form 8-K dated October 2, 1995 (the "October
1995 form 8-K").
(7) Incorporated herein by reference to Exhibit 2.2 filed with
the October 1995 Form 8-K.
(8) Incorporated herein by reference to Exhibit 2.3 filed with
the October 1995 Form 8-K.
(9) Incorporated herein by reference to Exhibit 10.08 filed with
the Company's Annual Report on Form 10-K for the year ended
June 30, 1995.
(10) Incorporated herein by reference to Exhibit 10.08 filed with
the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(11) Incorporated herein by reference to Exhibit 10.04 filed with
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1995.
(12) Confidential treatment has been granted with respect to
portions of this exhibit.
(13) Incorporated herein by reference to Exhibit 10.17 filed with
the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(14) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
(15) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
(16) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Annual Report on Form
10-K for the year ended June 30, 1997.
(17) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(18) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997.
(19) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(20) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998.
(21) Incorporated herein by reference to the exhibit with the
same number filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to
portions of the exhibit.

(b) Reports on Form 8-K.

The Company filed a Report on Form 8-K on August 12, 1999, making an
item 5 disclosure that it had announced that it had entered into an Agreement
and Plan of Merger and Reorganization dated as of July 29, 1999 with Xionics
Document Technologies, Inc.

TRADEMARK ACKNOWLEDGMENTS

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

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

46
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Oak Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Oak
Technology, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1999. In connection
with our audits of the consolidated financial statements, we have also audited
the consolidated financial statement schedule, insofar as it relates to the
three-year period ended June 30, 1999. These consolidated financial statements
and consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oak
Technology, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

KPMG LLP
Mountain View, California
July 30, 1999

<PAGE>

OAK TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 19,500 $ 59,803
Short-term investments.............................................. 113,703 57,422
Accounts receivable, net of allowance for doubtful accounts of
$555 and $809, respectively...................................... 8,251 17,605
Inventories, net.................................................... 1,819 7,558
Current portion of foundry deposits................................. 9,061 2,944
Deferred tax asset.................................................. -- 5,356
Prepaid expenses and other current assets........................... 11,120 10,967
------------- -------------
Total current assets............................................ 163,455 161,655

Property and equipment, net............................................. 22,039 25,114
Foundry deposits........................................................ 7,760 18,231
Investment in ventures.................................................. -- 51,216
Other assets............................................................ 10,587 5,195
------------- -------------
Total assets................................................... $ 203,841 $ 261,411
------------- -------------
------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Notes payable and current portion of long-term debt................. $ 25 $ 2,625
Accounts payable.................................................... 3,648 6,236
Accrued expenses.................................................... 8,467 8,217
Deferred revenue.................................................... 379 263
------------- -------------
Total current liabilities...................................... 12,519 17,341

Long-term debt.......................................................... 5 27
Deferred income taxes................................................... 1,438 2,607
Other long-term liabilities............................................. 457 228
------------- -------------
Total liabilities.............................................. 14,419 20,203
------------- -------------

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; none
issued and outstanding as of June 30, 1999 and 1998 ........... -- --
Common stock, $0.001 par value; 60,000,000 shares authorized;
42,916,721 shares issued and 40,915,241 shares outstanding as of
June 30, 1999; and 42,290,549 shares issued and 41,147,969
shares and outstanding as of June 30, 1998..................... 42 42
Additional paid-in capital......................................... 164,784 163,172
Treasury stock..................................................... (9,437) (6,708)
Retained earnings.................................................. 34,033 84,702
------------- -------------
Total stockholders' equity..................................... 189,422 241,208
------------- -------------
Total liabilities and stockholders' equity..................... $ 203,841 $ 261,411
------------- -------------
------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

OAK TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ----------------
<S> <C> <C> <C>
Net revenues................................. $ 71,051 $ 157,106 $ 167,395
Cost of revenues............................. 39,619 82,558 73,214
------------------ ------------------ ----------------

Gross profit................................. 31,432 74,548 94,181

Research and development expenses............ 51,107 49,658 34,660
Selling, general, and administrative expenses 35,109 30,905 21,673
Acquisition related expenses................. 7,161 1,323 5,000
Restructuring charges........................ -- 1,766 --
------------------ ------------------ ----------------

Operating income (loss)...................... (61,946) (9,104) 32,848

on-operating income, net..................... 5,530 16,101 5,408
------------------ ------------------ ----------------

Income (loss) before income taxes............ (56,416) 6,997 38,256

Income taxes (benefit)....................... (5,747) 1,050 14,537
------------------ ------------------ ----------------

Net income (loss)............................ $ (50,669) $ 5,947 $ 23,719
------------------ ------------------ ----------------
------------------ ------------------ ----------------

Net income (loss) per share:
Basic...................................... $ (1.24) $ 0.14 $ 0.58
------------------ ------------------ ----------------
------------------ ------------------ ----------------
Diluted.................................... $ (1.24) $ 0.14 $ 0.55
------------------ ------------------ ----------------
------------------ ------------------ ----------------
Shares used in computing net income (loss)
per share:
Basic...................................... 40,819 41,739 40,751
------------------ ------------------ ----------------
------------------ ------------------ ----------------
Diluted.................................... 40,819 42,493 42,757
------------------ ------------------ ----------------
------------------ ------------------ ----------------
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

OAK TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------------------ ADDITIONAL -------------------------- STOCKHOLDERS'
NUMBER $.001 PAID-IN RETAINED NUMBER EQUITY
OF SHARES PAR VALUE CAPITAL EARNINGS OF SHARES COST (DEFICIT)
--------------- ---------- ----------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1996........... 40,196,796 $40 $155,751 $55,036 -- -- $210,827
Exercise of stock options......... 748,682 1 1,048 -- -- -- 1,049
Employee stock purchase plan 141,276 -- 1,169 -- -- -- 1,169
Tax benefit on exercise of stock
options......................... -- -- 1,933 -- -- -- 1,933
Net income........................ -- -- -- 23,719 -- -- 23,719
--------------- ---------- ----------- ----------- ------------- ------------ --------------
Balances, June 30, 1997........... 41,086,754 41 159,901 78,755 -- -- 238,697
Exercise of warrants.............. 150,339 -- -- -- -- -- --
Repurchase of common stock -- -- -- -- (1,142,580) $(6,708) (6,708)
Exercise of stock options......... 798,730 1 1,196 -- 1,197
Employee stock purchase plan...... 254,726 -- 1,555 -- -- -- 1,555
Tax benefit on exercise of stock
options......................... -- -- 520 -- -- -- 520
Net income........................ -- -- -- 5,947 -- -- 5,947
--------------- ---------- ----------- ----------- ------------- ------------ --------------
Balances, June 30, 1998........... 42,290,549 42 163,172 84,702 (1,142,580) (6,708) 241,208
Repurchase of common stock........ -- -- -- -- (858,900) (2,729) (2,729)
Exercise of stock options......... 346,504 -- 713 -- -- -- 713
Employee stock purchase plan...... 279,668 -- 899 -- -- -- 899
Net loss ......................... -- -- -- (50,669) -- -- (50,669)
--------------- ---------- ----------- ----------- ------------- ------------ --------------
Balances, June 30, 1999 42,916,721 $42 $164,784 $34,033 (2,001,480) $(9,437) $189,422
--------------- ---------- ----------- ----------- ------------- ------------ --------------
--------------- ---------- ----------- ----------- ------------- ------------ --------------
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

OAK TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ (50,669) $ 5,947 $ 23,719
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................... 11,486 7,386 5,502
Inventory reserve adjustments......................... -- 3,545 (21,754)
Foundry deposit reserve adjustments................... 2,800 -- --
Equity in (income) or loss of unconsolidated affiliates 194 -- 602
Acquisition-related charges........................... 7,161 1,323 5,000
Restructuring related charges......................... -- 1,047 --
Loss on disposal of fixed assets...................... 1,293 -- --
Deferred income taxes................................. 4,187 (4,743) 9,448
Foundry deposits utilized............................. 1,554 12,985 11,035
Changes in operating assets and liabilities:
Accounts receivable.................................. 9,354 7,267 (4,700)
Inventories.......................................... 5,739 1,219 21,195
Prepaid expenses and other current assets............ (153) (3,056) (298)
Accounts payable and accrued expenses................ (4,156) (13,566) 10,315
Other assets.................................... 925 (732) (1,993)
Income taxes payable, deferred revenue and other
liabilities....................................... (226) (7,139) 5,286
----------------- ----------------- -----------------
Net cash provided by operating activities....... (10,511) 12,215 65,350
----------------- ----------------- -----------------

Cash flows from investing activities:
Purchases of short-term investments........................ (114,021) (65,290) (66,791)
Proceeds from matured short-term investments............... 57,740 65,528 77,481
Additions to property and equipment, net................... (5,998) (12,035) (6,908)
Acquisition of ViewPoint, Inc., net of cash acquired....... (9,467) -- --
Acquisition of XLI Inc. common stock ................... (3,675) -- --
Payment of certain XLI, Inc. liabilities at acquisition
date.................................................. (2,094) -- --
Acquisition of ODEUM Microsystems....................... -- (4,010) --
Investment in Omni Peripherals Pte. Ltd................. -- (802) --
Proceeds from sale of (investment in) foundry venture...... 51,234 (11,616) (25,922)
----------------- ----------------- -----------------
Net cash used in investing activities.............. (26,281) (28,957) ( 24,133)
----------------- ----------------- -----------------

Cash flows from financing activities:
Issuance of debt........................................... 3,773 12,544 32,730
Repayment of debt.......................................... (6,167) (19,652) (33,490)
Treasury stock acquisition................................. (2,729) (6,708) --
Issuance of common stock................................... 1,612 2,752 2,218
----------------- ----------------- -----------------
Net cash provided by (used in) financing activities............. (3,511) (11,064) 1,458
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents............ (40,303) (27,806) 42,675
Cash and cash equivalents, beginning of period.................. 59,803 87,609 44,934
----------------- ----------------- -----------------
Cash and cash equivalents, end of period........................ $ 19,500 $ 59,803 $ 87,609
----------------- ----------------- -----------------
----------------- ----------------- -----------------

Supplemental information:
Cash paid during the period:
Interest.............................................. $ 52 $ 280 $ 465
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Income taxes.......................................... $ -- $ 14,548 $ --
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>

See accompanying notes to consolidated financial statements

51
<PAGE>

OAK TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) THE COMPANY

Oak Technology, Inc. (the "Company") commenced operations in August
1987, as a California corporation. The Company is engaged in the design,
development and marketing of high performance multimedia semiconductors and
related software to the PC, consumer electronics, and digital imaging equipment
markets. The Company formed subsidiaries in Taipei, Taiwan, in January 1989; in
Tokyo, Japan, in January 1991; in Bristol, United Kingdom in February 1998; and
in Munich, Germany in September 1998. In December 1994, the Board of Directors
approved the re-incorporation of the Company as a Delaware corporation.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND PREPARATION

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

USE OF ESTIMATES

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

CASH EQUIVALENTS AND INVESTMENTS

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

The Company accounts for its investments under Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. SFAS No. 115 requires entities to classify
investments in debt and equity securities with readily determined fair values as
"held-to-maturity," "available-for-sale" or "trading" and establishes accounting
and reporting requirements for each classification. In accordance with SFAS No.
115, the Company has classified all securities held as available-for-sale
securities. Such securities are reported at fair value with unrealized gains or
losses, if material, excluded from earnings and reported as a separate component
of stockholders' equity. To date, unrealized gains and losses have not been
significant.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

52
<PAGE>

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

<PAGE>

CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents,
short-term investments and accounts receivable. The Company's cash equivalents
and short-term investments are primarily in money market accounts, certificates
of deposit, corporate notes and US government obligations. The Company's
short-term investments have maturities ranging from 1999 through 2000. Also
included in cash and cash equivalents as of June 30, 1999 and 1998, are
approximately $2,600,000 and $3,500,000, respectively, in accounts with foreign
banks and financial institutions (in Taiwan, Japan and the UK). The Company
periodically discounts notes receivable with recourse due from some customers
with banks in Japan. As of June 30, 1999 and 1998, the Company had no discounted
notes receivable outstanding.

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

INVENTORIES

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

DEPRECIATION AND AMORTIZATION

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

FOUNDRY DEPOSITS PAID UNDER AGREEMENTS

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

INVESTMENT IN OMNI PERIPHERALS

The Company accounts for its investment in Omni Peripherals under the
equity method in which the Company records its pro-rata share of the
income/(loss) in the Omni as other non-operating income, net of non-operating
expenses.

LONG LIVED ASSETS

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

REVENUE RECOGNITION

<PAGE>

Product revenue is recognized upon shipment, with provisions for
estimated returns and allowances. Revenue from non-refundable technology license
fees is recognized upon transfer of the associated technology.

<PAGE>

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

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

The Company enters into forward currency exchange contracts to hedge
certain exposures related to certain foreign currency transactions. Gains and
losses on contracts are recognized in the same period as the transactions being
hedged and are charged to non-operating income. As of June 30, 1999 and 1998,
the Company had forward currency exchange contracts to exchange yen for
approximately $1,030,000 and $4,690,000 respectively.

STOCK-BASED COMPENSATION

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

INCOME TAXES

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

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

NET INCOME (LOSS) PER SHARE

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

<PAGE>

and diluted earnings per share (EPS) computations for the periods presented (in
thousands except per share amounts):

<PAGE>

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

<TABLE>
<CAPTION>
Years ended June 30,

1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (50,669) $ 5,947 $ 23,719
-------------------- ------------------- -----------------
-------------------- ------------------- -----------------
Shares:
Weighted average common
shares............................ 40,819 41,739 40,751
Dilutive stock options and
other common stock -- 754 2,006
equivalents..
-------------------- ------------------- -----------------
Dilutive potential common
shares............................ 40,819 42,493 42,757
-------------------- ------------------- -----------------
Earnings (loss) per share:
Basic............................. $ (1.24) $ 0.14 $ 0.58
-------------------- ------------------- -----------------
-------------------- ------------------- -----------------
Diluted........................... $ (1.24) $ 0.14 $ 0.55
-------------------- ------------------- -----------------
-------------------- ------------------- -----------------
</TABLE>

For fiscal year 1999, approximately 309,000 of stock options with
exercise prices below the average market price of the common shares for
the year were excluded from the loss per share computation since they
were anti-dilutive during the loss periods. For fiscal years 1998 and
1997, the number of anti-dilutive shares excluded from the diluted EPS
computations, representing options outstanding with an exercise price
greater than the average market price for the periods, was 1,694,000
and 345,000, respectively.

COMPREHENSIVE INCOME

The Company has no components of comprehensive income other
than its net income/loss for all periods presented.

SEGMENT REPORTING

In July 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and replaces the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions
and assessing performance as the source of a company's reportable
segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS
No. 131 did not affect the results of operations or financial position,
but did impact required disclosures.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", which will be effective for the Company's fiscal year
2001. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The statement also requires that changes in the derivative's
fair value be recognized in earnings unless specific hedge accounting
criteria are met. The Company is currently assessing the impact of this
new statement on its consolidated financial position, liquidity, and
results of operations.

<PAGE>

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

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

<TABLE>
<CAPTION>
Estimated
Accrued Fair
Cost Interest Value
----------------- ------------------ -----------------
<S> <C> <C> <C>
Money market funds................................. $ 19,500 $ 23 $ 19,523
Certificates of deposit............................ 714 - 714
Corporate notes.................................... 53,226 408 53,634
US government obligations.......................... 59,763 412 60,175
----------------- ------------------ -----------------
$ 133,203 $ 843 $ 134,046
----------------- ------------------ -----------------
----------------- ------------------ -----------------
</TABLE>

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

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

As of June 30, 1998, all investments were considered
available-for-sale securities and consisted of the following (in
thousands):

<TABLE>
<CAPTION>
Estimated
Accrued Fair
Cost Interest Value
----------------- ------------------ -----------------
<S> <C> <C> <C>
Money market funds................................. $ 47,945 $ 6 $ 47,951
Certificates of deposit............................ 12,047 -- 12,047
Corporate notes.................................... 28,708 462 29,170
US government obligations.......................... 28,525 226 28,751
----------------- ------------------ -----------------
$ 117,225 $ 694 $ 117,919
----------------- ------------------ -----------------
----------------- ------------------ -----------------
</TABLE>

As of June 30, 1998, approximately $60.3 million of these
investments had contractual maturities within one year and
approximately $57.2 million had contractual maturities between one and
two years. These investments were classified on the consolidated
balance sheet as follows (in thousands):

<TABLE>
<S> <C>
Cash and cash equivalents.............................................................. $ 59,803
Short-term investments................................................................. 57,422
-----------------
$ 117,225
-----------------
-----------------
</TABLE>

<PAGE>

(4) INVENTORIES

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Purchased parts and work in process.................................. $ 1,269 $ 5,612
Finished goods....................................................... 4,385 6,572
Reserve for obsolescence............................................. (3,835) (4,626)
------------------ -----------------
$ 1,819 $ 7,558
------------------ -----------------
------------------ -----------------
</TABLE>

During the quarter ended March 31, 1998 the Company recorded a
$3.5 million write-off of inventory related to the discontinuation of
the graphics and audio/communications businesses. See note 17 for a
discussion of the business restructuring.

(5) PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
June 30,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Land................................................................. $ 3,487 $ 3,487
Building and leasehold improvements.................................. 2,741 2,687
Computers, equipment and purchased software.......................... 36,891 31,636
Furniture and fixtures............................................... 1,587 2,463
----------------- -----------------
44,707 40,273
Less accumulated depreciation and amortization....................... 22,667 15,159
----------------- -----------------
$ 22,039 $ 25,114
----------------- -----------------
----------------- -----------------
</TABLE>

(6) OTHER ASSETS

Other assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Purchased technology, net of amortization............................ $ 7,569 $ 1,567
Note receivable from officer (see note 19)........................... 2,000 --
Investment in Omni Peripherals....................................... 434 820
Deposits............................................................. 425 2,207
Other................................................................ 159 601
----------------- -----------------
$ 10,587 $ 5,195
----------------- -----------------
----------------- -----------------
</TABLE>

Purchased technology represents the portions of the purchase
prices of ODEUM Microsystems, ViewPoint Technology, and XLI
Incorporated allocated to developed technology acquired as discussed in
Note 10 and is being amortized on a straight-line basis over a period
of three years from each acquisition. Accumulated amortization as of
June 30, 1999 and 1998 was $3,877,000 and $224,000, respectively.

<PAGE>

(7) ACCRUED EXPENSES

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Compensation and benefits related items.............................. $ 3,922 $ 4,345
Accrued legal and other fees......................................... 1,456 476
Taxes payable........................................................ 825 --
Royalties............................................................ 750 963
Current portion of acquisition-related accrued liability to former
Pixel Magic shareholders......................................... -- 1,986
Other................................................................ 1,515 447
----------------- -----------------
$ 8,467 $ 8,217
----------------- -----------------
----------------- -----------------
</TABLE>

(8) NON-OPERATING INCOME AND LICENSE FEES

NON-OPERATING INCOME, NET

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

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Interest income.................................. $ 5,617 $ 7,665 $ 6,614
Interest expense................................. (52) (286) (468)
Foreign currency translation/transaction loss.... 147 (2,521) (722)
Income (loss) on equity method investee......... (368) -- (602)
Settlement proceeds.............................. -- 10,589 --
Other income (expense)........................... 186 654 586
------------------ ----------------- -----------------
$ 5,530 $ 16,101 $ 5,408
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>

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

LICENSE FEES

Non-refundable technology license fees of approximately
$2,890,000, $1,191,000, and $235,000 were recorded as revenue in fiscal
1999, 1998 and 1997 respectively. Technology fees in fiscal 1999 were
primarily received pursuant to technology license agreements with
Matsushita and Dell.

<PAGE>

(9) NOTES PAYABLE AND LONG-TERM DEBT

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

<TABLE>
<CAPTION>
June 30,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Short-term bank loans................................................ $ -- $ 2,482
Short-term notes..................................................... -- 109
Capital lease obligations............................................ 30 61
----------------- -----------------
30 2,652
Less current portion................................................. 25 2,625
----------------- -----------------
$ 5 $ 27
----------------- -----------------
----------------- -----------------
</TABLE>

Short-term bank loans at June 30, 1998 consisted of borrowings
from two Japanese financial institutions, collateralized by standby
letters of credit drawn on U.S. banks, which bore interest based on the
Japanese prime rate. As of June 30, 1999, there were no borrowings
outstanding with either institution. Under the current arrangement with
one of the financial institutions, the Company may borrow up to an
aggregate of approximately $12 million subject to annual renewal.

Short-term notes at June 30, 1998 consisted primarily of
revolving borrowings from three Taiwanese financial institutions,
collateralized by land and a building in Taiwan, which bore interest at
rates determined at the time of each borrowing. Compensating balances
ranging from 20% to 30% of outstanding borrowings are required for
individual balances exceeding established minimums, however no
compensating balances were required as of June 30, 1998. Borrowings as
of June 30, 1998 bore interest at 6.55%. As of June 30, 1999, there
were no borrowings outstanding with any of the institutions. Under
arrangements with the three financial institutions, as of June 30,
1999, the Company may borrow up to an aggregate of approximately
$14,000,000 subject to annual renewal.

Future principal payments under all outstanding obligations as
of June 30, 1999 are approximately $30,000, of which $25,000 is due in
fiscal 2000.

(10) ACQUISITIONS AND INVESTMENT

ACQUISITIONS

On July 2, 1998, the Company acquired ViewPoint Technology,
Inc. ("ViewPoint"), a privately held company that was developing
solutions for the CD-RW drive market. ViewPoint had developed a
controller that supports high encoding speeds for CD-RW drives which
component is expected to complement the Company's expertise in the
block decoder area and be utilized in the Company's next generation
CD-RW drives. The Company paid approximately $10.1 million for all of
the outstanding shares of ViewPoint. The transaction was accounted for
under the purchase method of accounting, and ViewPoint's development
programs were integrated into the Company's overall development
programs from the date of acquisition. Of the $10.1 million purchase
price, $0.9 million was allocated to cash, fixed assets, and other
tangible assets; $4.4 million was allocated to purchased technology and
other intangible assets; and $4.8 million was allocated to in-process
research and development programs and, accordingly, was charged to
operations in the quarter ended September 30, 1998.

<PAGE>

(10) ACQUISITIONS AND INVESTMENT (CONTINUED)

On August 11, 1998 the Company acquired Xerographic Laser Images
Corporation ("XLI"), a provider of print quality enhancement technology for the
digital imaging equipment market. XLI is operating as a division of the
Company's wholly owned subsidiary, Pixel Magic, and will serve to leverage Pixel
Magic's position in the digital imaging equipment market by broadening its
expertise in resolution enhancement technology. The Company paid $3.7 million to
the XLI shareholders on the effective date of the merger, and at that date, the
shareholders of XLI had the right to receive additional payments of up to $11.4
million subject to the achievement of certain milestones by XLI over a
three-year period ending December 31, 2000. Pursuant to a post-closing audit and
related post-closing adjustment set forth in the acquisition agreement, it was
determined that XLI had a net deficit (for purposes of calculating a contingent
cash adjustment, as defined in the acquisition agreement) of $1.9 million at the
acquisition date which resulted in a contingent cash adjustment of $1.1 million,
thereby reducing the contingent payment amount to $10.3 million. The transaction
was also accounted for under the purchase method of accounting, and XLI's
operations have been included in the Company's consolidated financial statements
from the date of acquisition. The cash purchase price for XLI was allocated as
follows (in thousands):

<TABLE>
<S> <C>
Net liabilities assumed $ (3,090)
In-process research and development 2,376
Purchased technology and other intangible assets 4,389
----------
$ 3,675
----------
----------
</TABLE>

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

On April 2, 1998, the Company acquired certain assets from Odeum
Microsystems, a subsidiary of Hyundai Electronics America. With the acquisition,
the Company acquired an integrated MPEG-2 audio/video decoder and transport
demultiplexor and a DEV-S compliant QSPK demodulator as well as a core group of
hardware and software engineers. The assets of Odeum were acquired for
$4,100,000 in cash.

The acquisition was accounted for using the purchase method of
accounting and the product acquired was integrated into the Company's product
offerings from the date of acquisition. The cash payment of $4,100,000 was
allocated to in-process research and development and deposits and prepaids.
Approximately $1,300,000 of the purchase price was assigned to in-process
research and development with the remaining amount allocated to deposits and
prepaids.

INVESTMENT

On April 30, 1998, the Company entered into several agreements with
Omni Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other
investors pursuant to which the Company acquired a preferred equity interest in
Omni. Omni was incorporated in Singapore on January 2, 1996, and is in the
business of designing, developing, and marketing mechatronics modules for
optical storage drives. The Company is assisting Omni in the design and
marketing of its mechatronics modules thereby enabling the Company to offer a
complete solution to its customers. The Company paid $802,124 for its interest,
representing approximately 20% of the issued stock of Omni.

<PAGE>

(11) INCOME TAXES

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

<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal and state........................... $ (10,259) $ 2,448 $ 1,087
Foreign..................................... 325 2,825 2,069
Deferred:
Federal and state........................... 5,366 (1,146) 9,771
Foreign..................................... (1,179) (3,597) (323)
Charge in lieu of taxes attributable to
employee stock option plans................ -- 520 1,933
------------------ ----------------- -----------------
Total tax provision (benefit) $ (5,747) $ 1,050 $ 14,537
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>

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

<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Expense (benefit) at federal statutory tax rate.. $ (19,181) $ 2,379 $ 13,390
State income tax, net of federal benefit......... 867 300 523
Rate differential on foreign income.............. 428 (538) (327)
Pixel Magic acquisition.......................... -- -- 1,667
Research credit.................................. -- (1,650) (1,033)
Change in valuation allowance.................... 4,501 -- --
Change in estimate............................... (2,806) -- --
Net operating loss not utilized ................. 10,444 -- --
Other ........................................... -- 559 317

------------------ ----------------- -----------------
Total tax provision (benefit) $ (5,747) $ 1,050 $ 14,537
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>

<PAGE>

(11) INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>
June 30,
--------------------------------------
1999 1998
----------------- -------------------
<S> <C> <C>
Various reserves and accruals........................................ $ 2,963 $ 2,632
Acquired intangibles................................................. 4,395 556
Net operating loss carryforwards..................................... 7,474 -
Tax credits.......................................................... 6,996 3,190
Other foreign deferred asset......................................... 756 -
Other................................................................ 194 53
----------------- -------------------
Total gross deferred tax assets 22,778 6,431
Less valuation allowance (21,694) (1,075)
----------------- -------------------
1,084 5,356
----------------- -------------------
Fixed assets depreciation differences................................ (1,074) (546)
Other foreign liabilities............................................ (1,448) (2,061)
----------------- -------------------
Total gross deferred tax liabilities (2,552) (2,607)
----------------- -------------------
Net deferred tax assets (liabilities) $ (1,438) $ 2,749
----------------- -------------------
----------------- -------------------
</TABLE>

The Company has set up a valuation allowance of $21,694,000 as of June
30, 1999, which represented an increase of $20,619,000 from the valuation
allowance of $1,075,000 at June 30, 1998. Based upon the results of the current
year operations, the Company's projected operating results, and all other
available objective information, the Company's management does not believe it is
more likely that not that sufficient future taxable income will be generated to
sufficiently realize all of the net deferred tax assets.

As of June 30, 1999, the Company has federal and state net operating
loss carryforwards of approximately $19,773,000 and $8,503,000, respectively,
available to reduce future income subject to income taxes. The federal net
operating loss carryforwards expire in fiscal year 2019. State net operating
loss carryforwards expire in fiscal year 2004. The NOL carryforwards available
for use in any given year may be limited in the event of a significant change in
ownership, as defined by the Internal Revenue Code.

As of June 30, 1999 the Company has federal research and
experimentation credit carryforwards of approximately $3,162,000 which expire
from 2013 to 2019. The Company also has state tax credit carryforwards of
approximately $2,932,000; if not utilized, approximately $273,000 of these
credits will expire beginning in 2006 through 2007. As of June 30, 1999 and
1998, the cumulative amount of unremitted earnings of non-US subsidiaries on
which the Company had not provided US taxes approximated $11,658,000 and
$12,900,000, respectively. The additional taxes that could arise if those
earnings were to be remitted to the US would not be material after consideration
of existing foreign taxes. It is management's intent that these earnings will
remain indefinitely invested.

The Company is currently undergoing examination by the Internal Revenue
Service. The Company believes that additional liabilities, if any, that may
arise from this examination will not be material to the Company's consolidated
financial statements.

<PAGE>

(12) FOUNDRY AGREEMENTS AND INVESTMENT IN FOUNDRY VENTURE

FOUNDRY AGREEMENTS

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

The Company has subsequently twice amended its previous agreement with
TSMC. The most recent amendment, dated June 1999, covered the remaining $16.1
million of wafer deposits held be TSMC as of that date. Under the terms of the
existing agreement (as previously amended), the Company was to have utilized the
entire remaining amount of the prepayment by December 31, 1999. Under the new
amendment, the period of time over which the Company can utilize the deposit was
extended to December 31, 2000. A maximum of $9.1 million can be utilized in
calendar 1999, and the remaining $7.0 million can be utilized in calendar 2000.
Including excess wafer purchases applied from calendar 1998, the Company has
already made the maximum amount of wafer purchases required for calendar 1999
and has earned the maximum credit of $9.0 million which will be used to offset
future payments to TSMC. The Company currently believes the terms and conditions
of the agreement, as amended, will be met although no assurance can be given in
this regard.

As of June 30, 1999, the Company has $3.5 million of deposits with
Chartered. The fourth amendment to the Company's foundry agreement with
Chartered, which was negotiated during the third quarter of fiscal 1999 but made
effective as of November 6, 1998, resulted in the elimination of Chartered's
right to reinstate required future cash deposits of approximately $36 million
which had been suspended in the first amendment subject to certain conditions
being met. The new amendment extends the period of time over which the Company
may utilize the existing $3.5 million deposit by three years to December 31,
2002, but provides limitations on the maximum amounts of the deposit which can
be utilized by the Company in each of the four calendar years 1999-2002.

Under the newly amended agreement, should the Company fail to utilize
the maximum amount of the deposit for a given calendar year, the remainder of
the deposit available to be utilized for that calendar year may be forfeited to
Chartered. Additionally, should the Company fail to make certain minimum amounts
of wafer purchases in any given calendar year, pursuant to the terms of the
agreement, as amended, Chartered may elect to terminate the agreement and retain
any unused portion of the total deposit. During the fourth quarter of fiscal
1999, the Company completed its reassessment of wafer purchasing forecasts.
The Company determined that its wafer purchases for calendar 1999 and beyond
would be significantly below the minimum amounts required, and that Chartered
will have the right to terminate the agreement and retain the unused deposit.
As a result, the Company recorded a $2.8 million reserve in the fourth
quarter to reduce the deposit asset to its estimated realizable value.

INVESTMENT IN FOUNDRY VENTURE

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

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

<PAGE>

(13) COMMITMENTS

LEASES

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

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

<TABLE>
<CAPTION>
Year Ending June 30,
- --------------------
<S> <C>
2000......................................................... $ 2,789
2001......................................................... 2,141
2002......................................................... 1,295
2003......................................................... 711
2004......................................................... 503
Thereafter................................................... 1,042
------------------
$ 8,481
------------------
------------------
</TABLE>

Rent expense was approximately $3,467,000, $2,498,000, and $1,781,000 for the
years ended June 30, 1999, 1998 and 1997, respectively.

INVENTORY PURCHASE COMMITMENTS

The Company subcontracts all of its manufacturing to independent
foundries. As of June 30, 1999 and 1998, the Company had approximately
$1,600,000 and $3,164,000, respectively, in non-cancelable purchase commitments
with various wafer fabrication subcontractors.

CAPITAL EXPENDITURE COMMITMENTS

The Company had outstanding commitments to purchase capital equipment
of approximately $1.3 million at June 30, 1999.

<PAGE>

(14) CONTINGENCIES

<PAGE>

(14) CONTINGENCIES (CONTINUED)

In connection with these legal proceedings, the Company has incurred
and expects to continue to incur legal and other expenses.

<PAGE>

(14) CONTINGENCIES (CONTINUED)

Continuing Directors provisions. On December 11, 1998, the plaintiffs amended
their complaint to include a cause of action which asserted that the Company's
Directors elected after the adoption of the Company's Rights Plan were not
validly elected and another cause of action for breach of fiduciary duty related
to the proposal by the Gold Acquisition Group to acquire all of the outstanding
shares of stock of the Company for $4.50 per share (also the subject of the
DELAWARE SHAREHOLDERS LITIGATION and the KRIM litigation described above).
Pursuant to a settlement reached with the plaintiffs, the action has been
dismissed with prejudice, except for the claims out of the Gold Acquisition
Group, which have been dismissed without prejudice. The Company agreed to pay
the plaintiffs' attorneys fees, which the Court awarded in the amount of
$90,000, a portion of which were paid by the Company's Directors' and Officers'
liability insurers. On July 29, 1999, the Court entered an Order approving the
settlement and dismissing the action. The settlement will not have a material
effect on the Company's Consolidated Financial Statements.

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

Based on this current information, the Company believes that the
complaint brought by MediaTek and the counter claims made by UMC to be
without merit and the company will defend its position vigorously. At this
time, the Company does not believe it is probable that it will incur a loss
on conclusion of the ITC action or Federal District action described above.
No provision for any liability that may result upon adjudication has been
made in the Company's Consolidated Financial Statements. In connection with
all of the above-described legal proceedings, the Company has incurred and
expects to continue to incur, legal and other expenses.

The Company is party to various other legal proceedings, including a
number of patent-related matters. In the opinion of management, including
internal counsel, these other legal proceedings will not have a material adverse
effect on the Company's consolidated financial position or overall results of
operations. In connection with these matters, however, the Company has incurred,
and expects to continue to incur, substantial legal and other expenses.

70
<PAGE>

(15) STOCKHOLDERS' EQUITY

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

STOCK REPURCHASE PLAN

On January 22, 1998, the Company announced that its board of directors
had authorized the repurchase of up to 2.0 million shares of its common stock,
either in the open market or in private transactions. As of June 30, 1999, the
Company had purchased all 2.0 million shares for approximately $9.4 million.

PREFERRED STOCK

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

WARRANTS

Warrants to purchase an aggregate of 796,644 shares of Series D
preferred stock at $2.25 per share were outstanding as of June 30, 1994. The
warrants are exercisable at any time on or prior to December 15, 1997. Following
the conversion of Series D preferred stock to common stock upon the Company's
initial public offering in February 1995, these warrants represented the right
to purchase 1,194,948 shares of common stock at $1.50 per share. Warrants
representing the right to purchase 807,448 shares of common stock were exercised
under the warrants' cashless exercise provisions, resulting in the issuance of
749,650 shares of common stock in 1996. Warrants representing the right to
purchase 182,528 shares of common stock were outstanding as of June 30, 1997 and
in fiscal 1998 resulted in the issuance of 150,339 shares of common stock under
the warrants' cashless exercise provision. There were no warrants outstanding
during fiscal year 1999.

STOCK OPTIONS

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

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

71
<PAGE>

(15) STOCKHOLDERS' EQUITY (CONTINUED)

On August 1, 1996 the Company repriced 1,800,370 options under the 1994
Plan to $6.50, the fair market value as of that date. The repriced shares were
treated as canceled and re-granted; however, they retained their original
vesting terms and were not exercisable until after April 30, 1997. In December
1994 the Board of Directors also approved the 1994 Outside Directors' Stock
Option Plan (the "Directors Plan"), under which 500,000 shares of Common Stock
were reserved for issuance. The Directors Plan provides for the automatic grant
of options to purchase shares of Common Stock to non-employee Directors of the
Company.

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

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

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

<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Options Exercise Options Exercise
Outstanding Price Exercisable Price
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Balances, June 30, 1996 3,991,510 $ 10.08 2,257,424 $ 2.11
Granted.................... 3,118,240 7.69
Exercised.................. (748,682) 1.41
Canceled................... (2,579,072) 15.82
----------------- ----------------- ----------------- ----------------
Balances, June 30, 1997 3,781,996 5.91 1,459,573 $ 3.33
Granted.................... 2,730,900 8.29
Exercised.................. (798,330) 1.50
Canceled................... (1,352,928) 7.83
----------------- ----------------- ----------------- ----------------
Balances, June 30, 1998........ 4,361,638 $ 7.61 1,153,658 $ 6.06
Granted................... 10,973,478 3.14
Exercised................. (346,504) 2.35
Canceled.................. (4,637,448) 6.73
----------------- ----------------- ----------------- ----------------
Balances, June 30, 1999 10,351,164 $ 3.44 2,417,486 $ 3.90
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
</TABLE>

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

72
<PAGE>

(15) STOCKHOLDERS EQUITY (CONTINUED)

The following table summarizes information about the stock options
outstanding as of June 30, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted
Average
Options Remaining Weighted Shares Weighted
at Contractual Average At Average
June 30, Life Exercise June 30, Exercise
Exercise Prices 1999 (Years) Price 1999 Price
------------------------------ -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$0.83 to $2.97 715,327 8.82 $ 2.75 57,156 $ 1.86
$3.00 to $5.88 8,935,407 9.50 3.14 1,941,140 3.10
$6.50 to $9.75 664,430 7.46 7.35 394,350 7.06
$14.25 18,000 7.57 14.25 10,440 14.25
$25.00 18,000 6.59 25.00 14,400 25.00
-------------- ------------- ------------- -------------- -------------
$0.83 to $25.00 10,351,164 9.31 $ 3.44 2,417,486 $ 3.90
-------------- ------------- ------------- -------------- -------------
-------------- ------------- ------------- -------------- -------------
</TABLE>

STOCK PURCHASE PLAN

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

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

73
<PAGE>

(15) STOCKHOLDERS EQUITY (CONTINUED)

FAIR VALUE INFORMATION

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

<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income (loss):
As reported $ (50,669) $ 5,947 $ 23,719
Pro forma $ (57,765 $ (197) $ 18,890

Basic net income (loss) per share:
As reported $ (1.24) $ 0.14 $ 0.58
Pro forma $ (1.42) $ 0.00 $ 0.46

Diluted net income (loss) per share:
As reported $ (1.24) $ 0.14 $ 0.55
Pro forma $ (1.42) $ 0.00 $ 0.44
</TABLE>

Pro forma net income (loss) reflects options granted subsequent to
July 1, 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the options'
vesting period of three to four years and compensation cost for options granted
prior to July 1, 1995, is not considered.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with a dividend yield of 0% and the
following weighted average assumptions:

<TABLE>
<CAPTION>
Stock Option Plans Stock Purchase Plan
------------------ -------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 3.760 3.760 3.745 0.500 0.500 0.500
Expected volatility 75% 70% 85% 75% 70% 85%
Risk-free interest 5.18% 5.73% 6.51% 5.02% 5.51% 5.29%
rate
</TABLE>

74
<PAGE>

(16) EMPLOYEE BENEFIT PLAN

In July 1990, the Company adopted a 401(k) Profit Sharing Plan ("401(k)
Plan") which is intended to qualify under section 401(k) of the Internal Revenue
Code of 1986, as amended. The 401(k) Plan covers substantially all of the
Company's US employees. Participants may elect to contribute a percentage of
their compensation to this plan, up to the statutory maximum amount. The Company
makes contributions to the 401(k) Plan based on 25% of an employee's
contribution up to a maximum of 1.25% of total compensation; approximately
$242,000, $288,000 and $199,000 in matching contributions were recorded during
fiscal years 1999, 1998 and 1997, respectively.

(17) RESTRUCTURING

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

In connection with the reorganization, the Company recorded a charge of
$1.8 million which included non-cash expense of $1.0 million and cash expense of
$0.8 million. The non-cash charge was related to prepaid royalties which will
not be utilized. This write-off was completed by the end of the third quarter of
fiscal 1999. Cash outlays related to the headcount reduction of 56 individuals.
As of June 30, 1998 all amounts have been paid and there is no accrual remaining
relating to the restructuring.

(18) SEGMENT INFORMATION

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

For fiscal year 1999, Oak Technology has three reportable segments
which offer different product lines to each of its target markets: Optical
Storage Group, Consumer Group and Digital imaging Equipment Group. The Optical
Storage Group provides high-performance controllers for CD-ROM and CD-RW to
OEM's who serve the optical storage market. The Consumer Group is targeting its
products for the emerging digital entertainment system market, with focus on
integrated circuits for video disk player systems (DVD and VCD) and digital
broadcast applications. The Digital imaging Equipment Group provides
high-performance imaging systems for the digital imaging environment, including
products used in digital laser copiers and printers as well as multifunction
peripherals. The Company evaluates operating segment performance based on net
revenues and direct operating expenses of the segment. The accounting policies
of the operating segments are the same as those described in the summary of
accounting policies. No segments have been aggregated. The Company does not
allocate assets to its individual operating segments.

75
<PAGE>

(18) SEGMENT INFORMATION (CONTINUED)

Information about reported segment income or loss is as follows for the
years ended June 30, 1999, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Net Revenues
Optical Storage.......................... $ 46,992 $ 129,170 $ 144,760
Digital imaging Equipment................ 20,897 19,406 8,444
Consumer................................. 3,162 4,912 12,251
PC Audio and 3D Graphics................. -- 3,618 1,940
---------------- ----------------- -----------------
$ 71,051 $ 157,106 $ 167,395
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Cost of Goods Sold and Direct Operating Expenses,
less Depreciation:
Optical Storage.......................... $ 39,582 $ 73,263 $ 76,854
Digital imaging Equipment................ 19,131 11,866 5,413
Consumer................................. 20,817 13,946 13,803
PC Audio and 3D Graphics................. -- 12,946 15,265
---------------- ----------------- -----------------
$ 79,530 $ 112,021 $ 111,335
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Depreciation and Amortization
Optical Storage.......................... $ 2,043 $ 364 $ 271
Digital imaging Equipment................ 1,626 499 372
Consumer................................. 1,487 277 206
PC Audio and 3D Graphics................. -- 768 572
---------------- ----------------- -----------------
$ 5,156 $ 1,908 $ 1,421
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Contribution Margin:
Optical Storage.......................... $ 5,366 $ 55,543 $ 67,635
Digital imaging Equipment................ 140 7,041 2,659
Consumer................................. (19,142) (9,311) (1,758)
PC Audio and 3D Graphics................. -- (10,096) (13,897)
---------------- ----------------- -----------------
$ (13,636) $ 43,177 $ 54,639
---------------- ----------------- -----------------
---------------- ----------------- -----------------
</TABLE>

76
<PAGE>

(18) SEGMENT INFORMATION (CONTINUED)

For the years ended June 30, 1999, 1998 and 1997, the "Other" revenue
category consists of various corporate revenues. A reconciliation of the totals
reported for the operating segments to the applicable line items in the
consolidated financial statements for the years ended June 30, 1999, 1998 and
1997 is as follows (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Contribution margin from operating segments (13,636) 43,177 54,639
Indirect costs of goods sold and operating expenses 41,149 49,192 16,791
Acquisition-related/restructuring expenses 7,161 3,089 5,000
--------------- --------------- ---------------
Total operating income (loss) (61,946) (9,104) 32,848
Other income 5,530 16,101 5,408
--------------- --------------- ---------------
Income (loss) before taxes $ (56,416) $ 6,997 $ 38,256
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>

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

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

The following distribution of net revenues, identifiable assets by
geographic areas, and property and equipment for the years ended June 30,
1999, 1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- -----------------
<S> <S> <C> <C>
Revenue from unaffiliated customers
Originating from:
United States............................ $ 10,147 $ 13,155 $ 6,239
Japan.................................... 36,728 60,360 67,389
Korea.................................... 7,002 31,364 38,402
Taiwan................................... 2,104 21,414 26,288
Other Asia............................... 6,962 16,823 27,484
Europe................................... 8,108 13,990 1,593
---------------- ----------------- -----------------
$ 71,051 $ 157,106 $ 167,395
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Identifiable assets:
United States............................ $ 181,699 $ 232,689 $ 234,121
Japan.................................... 7,750 14,563 25,731
Taiwan................................... 8,917 12,679 27,743
Europe................................... 5,475 2,036 -
---------------- ----------------- -----------------
$ 203,841 $ 261,967 $ 287,595
---------------- ----------------- -----------------
---------------- ----------------- -----------------

Property and equipment, net:
United States............................ $ 15,472 $ 18,831 $ 14,534
Japan.................................... 551 677 433
Taiwan................................... 5,175 5,147 4,991
Europe............................. 841 459 -
----------------- ------------------ ------------------
$ 22,039 $ 25,114 $ 19,958
----------------- ------------------ ------------------
----------------- ------------------ ------------------
</TABLE>

77
<PAGE>

(18) SEGMENT INFORMATION (CONTINUED)

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

<TABLE>
<CAPTION>
Percentage of Net Revenues
---------------------------------------------------
Year Ended June 30,
---------------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Yamaha Corporation................................. 17% --% --%
Mitsumi Electronic Co., Ltd........................ 10% 17% 14%
LG Electronics..................................... --% 14% 13%
NEC Home Electronics, Ltd.......................... --% 10% --%
</TABLE>

<TABLE>
<CAPTION>
Percentage of Total Accounts Receivable
---------------------------------------------------
As of June 30,
---------------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Yamaha Corporation............................... 21% --% --%
Mitsumi Electronic Co., Ltd...................... 10% 19% 23%
LG Electronics................................... --% --% --%
NEC Home Electronics, Ltd........................ --% 13% 22%
</TABLE>

Major customers disclosed above were primarily in the Optical Storage market
segment.

(19) RELATED PARTY TRANSACTION

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

(20) SUBSEQUENT EVENTS

STOCK REPURCHASE

On July 28, 1999, the Company announced that its Board of Directors
approved a stock repurchase plan authorizing the purchase of up to four million
shares of the Company's common stock. Repurchases will be made from time to time
in open market or privately negotiated transactions over one year, unless
further extended by the Board.

XIONICS ACQUISITION

On July 29, 1999, the Company announced it had entered into a
definitive agreement to acquire Xionics Document Technologies, Inc. Under the
terms of the agreement, which is subject to approval by the shareholders of both
companies, Oak would issue approximately 10.6 million shares of its common stock
and approximately $38.7 million in cash to acquire all of the common stock of
Xionics. The transaction will be accounted for under the purchase method of
accounting, and is expected to be completed in the second quarter of fiscal
2000.

78
<PAGE>

SCHEDULE II

OAK TECHNOLOGY, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
Additions
Charged to
Beginning Costs and Deductions Ending
Allowance for Doubtful Accounts Balance Expenses Write-Offs Balance
- ------------------------------------ ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999 $ 809 $ -- $ (254) $ 555

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

Year ended June 30, 1997 916 286 (539) 663
</TABLE>

79
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: September 28, 1999 OAK TECHNOLOGY, INC.

By: /s/ Young Sohn
----------------------
Young Sohn, President
(Principal Executive Officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Young Sohn his or her true and lawful
attorneys-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any amendments to this report on Form 10-K and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or their substitute or
substitutes may do or cause to be done by virtue hereof.

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

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David D. Tsang Chairman of the Board of September 28, 1999
------------------------ Directors
David D. Tsang Officer

/s/ Young K. Sohn Chief Executive Officer, September 28, 1999
------------------------ President, and Director
Young K. Sohn

/s/ Richard B. Black Director September 28, 1999
------------------------
Richard B. Black

/s/ Ta-lin Hsu Director September 28, 1999
------------------------
Ta-Lin Hsu

/s/ Timothy Tomlinson Director September 28, 1999
------------------------
Timothy Tomlinson

/s/ Albert Yu Director September 28, 1999
------------------------
Albert Y.C. Yu
</TABLE>

80
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit

NUMBER EXHIBIT TITLE
- -------- --------------
<S> <C>
23.01 Consent of Independent Auditors

24.01 Power of Attorney (see page 80 of this Form 10-K)

27.01 Financial Data Schedule

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

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

<PAGE>

EXHIBIT 10.33
ADDENDUM TO OPTION AGREEEMENT
BETWEEN
OAK TECHNOLOGY, INC.
AND
TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD.
DATED AUGUST 8, 1996

THIS ADDENDUM shall be effective as of June 30, 1999 as an Addendum to the
Option Agreement which was effective as of August 8, 1996, (the "Option
Agreement") entered into by and between Taiwan Semiconductor Manufacturing Co.,
Ltd. ("TSMC"), a company organized under the laws of the Republic of China with
its registered address at 121, Park Avenue 3, Science Based Industrial Park,
Hsinchu, Taiwan, and OAK Technology, Inc., ("Customer"), a company organized
under the laws of the Republic of China with its registered address at Room B,
7th Floor, 370, Section 1,Fu-Hsing South Road, Taipei, Taiwan.

WHEREAS TSMC and Customer have entered into the Option Agreement which became
effective on August 8, 1996; and

WHEREAS TSMC and Customer intend to modify the Customer/TSMC committed capacity
as set forth in Exhibit B of the Option Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, TSMC and Customer agree as follows.

1. DEFINITIONS
All defined terms shall have the meanings specified in the Option
Agreement.

2. TERM AND TERMINATION
The term of the Option Agreement shall be extended for no more than one (1)
year. The date of December 31, 1999 stipulated in Paragraph (a) of Section
7 in the Option Agreement shall be deleted and replaced with December 31,
2000.

2. CUSTOMER/TSMC COMMITTED CAPACITY
The Customer/TSMC committed capacity set forth in Exhibit B for the
calendar year 1999 shall be deleted and replaced with the following:

1999 2000 Total
<S> <C> <C> <C>
Base Capacity 5K 8K 13K
Option Capacity 16K 14K 30K
TSMC Committed Capacity 21K 22K 43K
Customer Committed Capacity 21K 22K 43K
Wafer Credit Price US$560 US$560
Credit Amount US$8.96M US$16.8M
</TABLE>

Note:

a. Current balance of option fees deposit is US$16.8M.
b. The balance of option fees deposit to be credited for year 2000 shall
be no more than US$7.84M.

<PAGE>

IN WITNESS WHEREOF, the parties have executed this Addendum as of the date first
stated above.

TAIWAN SEMICONDUCTOR OAK TECHNOLOGY, INC.
MANUFACTURING CO., LTD

BY: BY: /s/ Robert Hersh
NAME: NAME: Robert Hersh
TITLE: TITLE: Vice President, Finance
Chief Financial Officer

<PAGE>

Exhibit 10.34

<PAGE>

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

among

OAK TECHNOLOGY, INC.

VERMONT ACQUISITION CORP.

and

XIONICS DOCUMENT TECHNOLOGIES, INC.

Dated as of July 29, 1999

TABLE OF CONTENTS

PAGE

ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.01 Certain Defined Terms . . . . . . . . . . . . . . . . . . .1

ARTICLE II THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SECTION 2.01 The Merger. . . . . . . . . . . . . . . . . . . . . . . . .5
SECTION 2.02 Closing . . . . . . . . . . . . . . . . . . . . . . . . . .6
SECTION 2.03 Effective Time. . . . . . . . . . . . . . . . . . . . . . .6
SECTION 2.04 Effect of the Merger. . . . . . . . . . . . . . . . . . . .6
SECTION 2.05 Certificate of Incorporation; Bylaws; Directors and
Officers of Surviving Corporation. . . . . . . . . . . . . .6

ARTICLE III CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES . . . . . . . .7
SECTION 3.01 Conversion of Shares. . . . . . . . . . . . . . . . . . . .7
SECTION 3.02 Exchange of Shares Other than Dissenting Shares and
Treasury Shares. . . . . . . . . . . . . . . . . . . . . . .7
SECTION 3.03 Stock Transfer Books. . . . . . . . . . . . . . . . . . . .9
SECTION 3.04 No Fractional Share Certificates. . . . . . . . . . . . . 10
SECTION 3.05 Options to Purchase Company Common Stock. . . . . . . . . 10
SECTION 3.06 Certain Adjustments . . . . . . . . . . . . . . . . . . . 11
SECTION 3.07 Dissenters' Rights. . . . . . . . . . . . . . . . . . . . 11
SECTION 3.08 Lost, Stolen or Destroyed Certificates. . . . . . . . . . 12
SECTION 3.09 Taking of Necessary Action; Further Action. . . . . . . . 12

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF COMPANY . . . . . . . . . . . . 12
SECTION 4.01 Organization and Qualification; Subsidiaries. . . . . . . 12
SECTION 4.02 Certificate of Incorporation and Bylaws . . . . . . . . . 13
SECTION 4.03 Capitalization. . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.04 Authority Relative to This Agreement. . . . . . . . . . . 14
SECTION 4.05 No Conflict; Required Filings and Consents. . . . . . . . 14
SECTION 4.06 Permits; Compliance with Laws . . . . . . . . . . . . . . 15
SECTION 4.07 SEC Filings; Financial Statements.. . . . . . . . . . . . 15
SECTION 4.08 Absence of Certain Changes or Events. . . . . . . . . . . 16
SECTION 4.09 Employee Benefit Plans; Labor Matters.. . . . . . . . . . 17
SECTION 4.10 Contracts . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4.11 Litigation. . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4.12 Environmental Matters . . . . . . . . . . . . . . . . . . 20
SECTION 4.13 Intellectual Property.. . . . . . . . . . . . . . . . . . 21
SECTION 4.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4.15 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.16 Properties. . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.17 Affiliates. . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.18 Opinion of Financial Advisor. . . . . . . . . . . . . . . 25
SECTION 4.19 Brokers.. . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 4.20 Certain Business Practices. . . . . . . . . . . . . . . . 26
SECTION 4.21 Business Activity Restriction . . . . . . . . . . . . . . 26
SECTION 4.22 Certain Tax Matters . . . . . . . . . . . . . . . . . . . 26

ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. . . . . . 26
SECTION 5.01 Organization and Qualification; Subsidiaries. . . . . . . 27

i
<PAGE>

SECTION 5.02 Certificate of Incorporation and Bylaws . . . . . . . . . 27
SECTION 5.03 Capitalization. . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.04 Authority Relative to This Agreement. . . . . . . . . . . 28
SECTION 5.05 No Conflict; Required Filings and Consents. . . . . . . . 28
SECTION 5.06 Permits; Compliance with Laws . . . . . . . . . . . . . . 29
SECTION 5.07 Absence of Certain Changes or Events. . . . . . . . . . . 29
SECTION 5.08 SEC Filings; Financial Statements.. . . . . . . . . . . . 30
SECTION 5.09 Contracts . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 5.10 Employee Benefit Plans; Labor Matters.. . . . . . . . . . 31
SECTION 5.11 Litigation. . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.13 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.14 Certain Business Practices. . . . . . . . . . . . . . . . 34
SECTION 5.15 No Prior Activities . . . . . . . . . . . . . . . . . . . 34
SECTION 5.16 Intellectual Property.. . . . . . . . . . . . . . . . . . 34
SECTION 5.17 Business Activity Restriction . . . . . . . . . . . . . . 35
SECTION 5.18 Certain Tax Matters . . . . . . . . . . . . . . . . . . . 35
SECTION 5.19 Parent Common Stock . . . . . . . . . . . . . . . . . . . 35
SECTION 5.20 Availability of Funds . . . . . . . . . . . . . . . . . . 35

ARTICLE VI COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 6.01 Conduct of Business by Company Pending the Closing. . . . 36
SECTION 6.02 Notices of Certain Events . . . . . . . . . . . . . . . . 38
SECTION 6.03 Access to Information; Confidentiality. . . . . . . . . . 38
SECTION 6.04 No Solicitation of Transactions . . . . . . . . . . . . . 39
SECTION 6.05 Control of Operations . . . . . . . . . . . . . . . . . . 40
SECTION 6.06 Further Action; Consents; Filings.. . . . . . . . . . . . 40
SECTION 6.07 Additional Reports. . . . . . . . . . . . . . . . . . . . 41
SECTION 6.08 Employee Retention. . . . . . . . . . . . . . . . . . . . 41
SECTION 6.09 Third Party Consents. . . . . . . . . . . . . . . . . . . 41

ARTICLE VII ADDITIONAL AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . 41
SECTION 7.01 Registration Statement; Proxy Statement.. . . . . . . . . 41
SECTION 7.02 Stockholders' Meetings. . . . . . . . . . . . . . . . . . 43
SECTION 7.03 Directors' and Officers' Indemnification and Insurance. . 44
SECTION 7.04 No Shelf Registration . . . . . . . . . . . . . . . . . . 44
SECTION 7.05 Public Announcements. . . . . . . . . . . . . . . . . . . 45
SECTION 7.06 NNM Listing . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 7.07 Blue Sky. . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 7.08 Company Stock Options/Registration Statements on
Form S-8 . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 7.09 Employee Benefit Matters. . . . . . . . . . . . . . . . . 45
SECTION 7.10 Tax Opinion . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 7.11 Board Representation. . . . . . . . . . . . . . . . . . . 46

ARTICLE VIII CONDITIONS TO THE MERGER. . . . . . . . . . . . . . . . . . . . 47
SECTION 8.01 Conditions to the Obligations of Each Party to
Consummate the Merger. . . . . . . . . . . . . . . . . . . 47
SECTION 8.02 Conditions to the Obligations of Company. . . . . . . . . 48
SECTION 8.03 Conditions to the Obligations of Parent . . . . . . . . . 48

ARTICLE IX TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . 49
SECTION 9.01 Termination . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 9.02 Effect of Termination . . . . . . . . . . . . . . . . . . 50
SECTION 9.03 Amendment . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 9.04 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . 51

ii
<PAGE>

SECTION 9.05 Termination Fee; Expenses.. . . . . . . . . . . . . . . . 51

ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 10.01 Non-Survival of Representations and Warranties . . . . . 52
SECTION 10.02 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 10.03 Severability . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 10.04 Assignment; Binding Effect; Benefit. . . . . . . . . . . 53
SECTION 10.05 Incorporation of Exhibits. . . . . . . . . . . . . . . . 53
SECTION 10.06 Governing Law. . . . . . . . . . . . . . . . . . . . . . 54
SECTION 10.07 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . 54
SECTION 10.08 Headings; Interpretation . . . . . . . . . . . . . . . . 54
SECTION 10.09 Counterparts . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 10.10 Entire Agreement . . . . . . . . . . . . . . . . . . . . 54

ANNEX A Company Stockholder Agreement

iii
<PAGE>

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of July 29,
1999 (as amended, supplemented or otherwise modified from time to time, this
"AGREEMENT"), among OAK TECHNOLOGY, INC., a Delaware corporation ("PARENT"),
XIONICS DOCUMENT TECHNOLOGIES, INC., a Delaware corporation ("COMPANY"), and
VERMONT ACQUISITION CORP., a Delaware corporation and a direct wholly owned
subsidiary of Parent ("MERGER SUB"):

W I T N E S S E T H:

WHEREAS, the boards of directors of Parent and Company have determined
that it is advisable and in the best interests of their respective companies and
stockholders to enter into a business combination by means of the merger of
Company with and into Merger Sub (the "MERGER") and have approved and adopted
this Agreement;

WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Parent to enter into this Agreement, certain stockholders of
Company have entered into a stockholder agreement (each, a "COMPANY STOCKHOLDER
AGREEMENT") in the form attached hereto as Annex A;

WHEREAS, for United States Federal income tax purposes, it is intended
that the Merger shall qualify as a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (together with the rules and
regulations promulgated thereunder (the "CODE"), and that this Agreement shall
be, and hereby is, adopted as a plan of reorganization for purposes of Section
368 of the Code.

NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto hereby agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01 CERTAIN DEFINED TERMS. Unless the context otherwise
requires, the following terms, when used in this Agreement, shall have the
respective meanings specified below (such meanings to be equally applicable to
the singular and plural forms of the terms defined):

"AFFILIATE" shall mean, with respect to any person, any other person
that controls, is controlled by or is under common control with the first
person.

"BLUE SKY LAWS" shall mean state securities or "blue sky" laws.

"BUSINESS DAY" shall mean any day on which the principal offices of
the SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized by law or executive order to close in the City of New
York.

"COMPANY COMPETING TRANSACTION" shall mean any of the following
involving Company (other than the Merger):

(i) any merger, consolidation, share exchange, business
combination or other similar transaction;

<PAGE>

(ii) any sale, lease, exchange, transfer or other disposition
of 33% or more of the assets of Company and its subsidiaries, taken as a
whole, in a single transaction or series of transactions;

(iii) any tender offer or exchange offer for 33% or more of
the outstanding voting securities of Company or the filing of a
registration statement under the Securities Act in connection therewith; or

(iv) any person having acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act) having been formed which
beneficially owns or has the right to acquire beneficial ownership of, 33%
or more of the outstanding voting securities of Company; or

(v) any public announcement of a proposal, plan or intention
to do any of the foregoing or any agreement to engage in any of the
foregoing.

"COMPANY DISCLOSURE SCHEDULE" shall mean the disclosure schedule
delivered by Company to Parent prior to the execution of this Agreement and
forming a part hereof.

"COMPANY ESPP" shall mean the Company's 1996 Employee Stock Purchase
Plan.

"COMPANY MATERIAL ADVERSE EFFECT" shall mean any change in or effect
on the business of Company and the Company Subsidiaries that, individually or in
the aggregate (taking into account all other such changes or effects), is, or is
reasonably likely to be, materially adverse to the business, assets,
liabilities, financial condition, prospects or results of operations of Company
and the Company Subsidiaries, taken as a whole, PROVIDED, HOWEVER, that Company
Material Adverse Effect shall not be deemed to include the impact of (a) changes
in generally accepted accounting principles, (b) acts or omissions of Company
taken with the prior written consent of Parent, (c) changes in general economic
conditions in the United States, (d) the effects of the Merger and compliance by
Company with the provisions of this Agreement on the business, financial
condition or results of operations of Company, (e) any change in the market
price or trading volume of Company Common Stock, and (f) any changes or effects
as a result of the announcement of the Merger.

"COMPANY STOCK PLANS" shall mean the Company 1993 Stock Option Plan,
the Company 1995 Stock Option Plan, the Company 1996 Stock Option Plan and the
Company 1996 Directors Stock Option Plan.

"CONFIDENTIALITY AGREEMENT" shall mean the confidentiality agreement,
dated as of June 9, 1999, between Parent and Company.

"DGCL" shall mean the General Corporation Law of the State of
Delaware.

"$" shall mean United States Dollars.

"ENCUMBRANCES" shall mean all claims, security interests, liens,
pledges, charges, escrows, options, proxies, rights of first refusal, preemptive
rights, mortgages, hypothecations, prior assignments, title retention
agreements, indentures, security agreements or any other encumbrance of any
kind.

"ENVIRONMENTAL LAW" shall mean any Law and any enforceable judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to pollution or protection of the
environment or natural resources, including, without limitation, those relating
to the use, handling, transportation, treatment, storage, disposal, release or
discharge of Hazardous Material.

"ENVIRONMENTAL PERMIT" shall mean any permit, approval, identification
number, license or other authorization required under or issued pursuant to any
applicable Environmental Law.

2
<PAGE>

"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.

"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.

"EXPENSES" shall mean, with respect to any party hereto, all
reasonable out-of-pocket expenses (including, without limitation, all fees and
expenses of counsel, accountants, investment bankers, experts and consultants to
a party hereto and its affiliates) incurred by such party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of its obligations pursuant to this Agreement and the
consummation of the Merger, the preparation, printing, filing and mailing of the
Registration Statement and the Joint Proxy Statement, the solicitation of
stockholder approvals, the filing of HSR Act notice, if any, and all other
matters related to the transactions contemplated hereby and the closing of the
Merger.

"FINAL AVERAGE CLOSING PRICE" shall mean the average closing price of
Parent Common Stock on the ten trading days immediately prior to the date of the
Effective Time.

"GOVERNMENTAL ENTITY" shall mean any United States Federal, state or
local or any foreign governmental, regulatory or administrative authority,
agency or commission or any court, tribunal or arbitral body.

"GOVERNMENTAL ORDER" shall mean any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Entity.

"HAZARDOUS MATERIAL" shall mean (i) any petroleum, petroleum products,
by-products or breakdown products, radioactive materials, friable
asbestos-containing materials or polychlorinated biphenyls or (ii) any chemical,
material or substance defined or regulated as toxic or hazardous or as a
pollutant or contaminant or waste under any applicable Environmental Law.

"HSR ACT" shall mean Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, together with the rules and regulations promulgated
thereunder.

"IRS" shall mean the United States Internal Revenue Service.

"LAW" shall mean any Federal, state, foreign or local statute, law,
ordinance, regulation, rule, code, order, judgment, decree, other requirement or
rule of law of the United States or any other jurisdiction, and any other
similar act or law.

"NNM" shall mean the Nasdaq National Market.

"PARENT DISCLOSURE SCHEDULE" shall mean the disclosure schedule
delivered by Parent to Company prior to the execution of this Agreement and
forming a part hereof.

"PARENT MATERIAL ADVERSE EFFECT" shall mean any change in or effect on
the business of Parent and the Parent Subsidiaries that, individually or in the
aggregate (taking into account all other such changes or effects), is, or is
reasonably likely to be, materially adverse to the business, assets,
liabilities, financial condition, prospects or results of operations of Parent
and the Parent Subsidiaries, taken as a whole, provided, however, that Parent
Material Adverse Effect shall not be deemed to include the impact of (a) change
in generally accepted accounting principles, (b) acts or omissions of Parent
taken with the prior written consent of Company, (c) changes in general economic
conditions in the United States, (d) the effects of the Merger and compliance by
Parent with the provisions of this Agreement on the business, financial
condition or results of operations of Parent, (e) any change in the market price
or trading volume of Parent Common Stock, and (f) any changes or effects as a
result of the announcement of the Merger.

"PARENT STOCK PLANS" shall mean Parent's 1988 Employee Stock Option
Plan, 1994 Employee Stock Option Plan, 1999 Employee Stock Purchase Plan and
1999 Executive Stock Option Plan.

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"PERMITTED ENCUMBRANCES" shall mean (i) liens for Taxes, assessments
and other governmental charges not yet due and payable, (ii) immaterial unfiled
mechanics', workmen's, repairmen's, warehousemen's, carriers' or other like
liens arising or incurred in the ordinary course of business which are not yet
due and payable and (iii) equipment leases with third parties entered into in
the ordinary course of business.

"PERSON" shall mean an individual, corporation, partnership, limited
partnership, limited liability company, syndicate, person (including, without
limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act),
trust, association, entity or government or political subdivision, agency or
instrumentality of a government.

"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.

"SUBSIDIARY" shall mean, with respect to any person, any corporation,
limited liability company, partnership, joint venture or other legal entity of
which such person (either alone or through or together with any other subsidiary
of such person) owns, directly or indirectly, a majority of the stock or other
equity interests, the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.

"TAX" shall mean (i) any and all taxes, fees, levies, duties, tariffs,
imposts and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect thereto)
imposed by any Governmental Entity or taxing authority ("TAXING AUTHORITY"),
including, without limitation, taxes or other charges on or with respect to
income, franchises, windfall or other profits, gross receipts, property, sales,
use, capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation or net worth; taxes or other charges in the nature of
excise, withholding, ad valorem, stamp, transfer, value-added or gains taxes;
license, registration and documentation fees; and customers' duties, tariffs and
similar charges; (ii) any liability for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated, combined,
consolidated or unitary group for any taxable period; and (iii) any liability
for the payment of amounts of the type described in (i) or (ii) as a result of
being a transferee of, or a successor in interest to, any person or as a result
of an express or implied obligation to indemnify any person.

"TAX RETURN" shall mean any return, statement or form (including,
without limitation, any estimated tax reports or return, withholding tax reports
or return and information report or return) required to be filed with respect to
any Taxes.

ARTICLE II

THE MERGER

SECTION 2.01 THE MERGER. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the DGCL, at the
Effective Time (as defined in Section 2.03), Company shall be merged with and
into Merger Sub. As a result of the Merger, the separate corporate existence of
Company shall cease and Merger Sub shall continue as the surviving corporation
of the Merger as a wholly owned subsidiary of Parent (the "SURVIVING
CORPORATION").

SECTION 2.02 CLOSING. Unless this Agreement shall have been
terminated and the Merger herein contemplated shall have been abandoned pursuant
to Section 9.01 and subject to the satisfaction or waiver of the conditions set
forth in Article VIII, the consummation of the Merger shall take place as
promptly as practicable (and in any event within three business days) after
satisfaction or waiver of the conditions set forth in Article VIII, at a closing
(the "CLOSING") to be held at the offices of Brobeck, Phleger & Harrison LLP,
1633 Broadway, 47th Floor, New York, New York 10019, unless another date, time
or place is agreed to by Parent and Company.

SECTION 2.03 EFFECTIVE TIME. At the Closing, the parties shall cause
the Merger to be consummated by filing a certificate of merger (the "CERTIFICATE
OF MERGER") with the Secretary of State of the State

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of Delaware in such form as required by, and executed in accordance with the
relevant provisions of, the DGCL (the date and time of such filing, or such
later date and time as may be set forth therein, being the "EFFECTIVE TIME").

SECTION 2.04 EFFECT OF THE MERGER. At the Effective Time, the effect
of the Merger shall be as provided in the applicable provisions of the DGCL.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, except as otherwise provided herein, all the property, rights,
privileges, powers and franchises of Company and Merger Sub shall vest in Merger
Sub as the Surviving Corporation, and all debts, liabilities and duties of
Company and Merger Sub shall become the debts, liabilities and duties of Merger
Sub as the Surviving Corporation.

SECTION 2.05 CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS AND
OFFICERS OF SURVIVING CORPORATION. Unless otherwise agreed by Parent and
Company before the Effective Time, at the Effective Time:

(a) the Certificate of Incorporation and the Bylaws of Merger
Sub as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation and the Bylaws of the Surviving Corporation, until
thereafter amended as provided by Law and such Certificate of Incorporation or
Bylaws; provided, however, that Article I of the Certificate of Incorporation of
the Surviving Corporation shall be amended to read as follows: "The name of the
corporation is XIONICS DOCUMENT TECHNOLOGIES, INC.";

(b) the officers of Merger Sub immediately prior to the
Effective Time shall serve in their respective offices of the Surviving
Corporation from and after the Effective Time, in each case until their
successors are elected or appointed and qualified or until their resignation or
removal; and

(c) the directors of Merger Sub immediately prior to the
Effective Time shall serve as the directors of the Surviving Corporation from
and after the Effective Time, in each case until their successors are elected or
appointed and qualified or until their resignation or removal.

ARTICLE III

CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES

SECTION 3.01 CONVERSION OF SHARES. At the Effective time, by virtue
of the Merger, and without any action on the part of Parent, Merger Sub, Company
or the holders of any of the following securities:

(a) Each share of Common Stock, $.01 par value per share, of
Company ("COMPANY COMMON STOCK") issued and outstanding immediately before the
Effective Time (excluding (i) shares of Company Common Stock, if any, held by
persons who have not voted such shares for approval of the Merger and with
respect to which such persons shall have perfected dissenters' rights in
accordance with the DGCL ("DISSENTING SHARES"), (ii) those held in the treasury
of Company, and (iii) those owned by any wholly owned subsidiary of Company) and
all rights in respect thereof, shall, forthwith cease to exist and be converted
into and become exchangeable for $ 2.94 in cash and .8031 shares of common
stock, $.01 par value, of Parent ("PARENT COMMON STOCK") (such per share amount
of consideration, the "EXCHANGE RATIO").

(b) Each share of Company Common Stock held in the treasury of
Company or owned by any wholly owned subsidiary of Company immediately prior to
the Effective Time shall be canceled and retired and no shares of stock or other
securities of Parent, the Surviving Corporation or any other corporation shall
be issuable, and no payment of other consideration shall be made, with respect
thereto.

(c) Each issued and outstanding share of capital stock of
Merger Sub shall be converted into and become one fully paid and nonassessable
share of common stock of the Surviving Corporation. From and after the
Effective Time, each outstanding certificate theretofore representing shares of
Merger Sub common stock shall be deemed for all purposes to evidence ownership
of and to represent the number of shares of Surviving Corporation common stock
into which such shares of Merger Sub common stock shall have been converted.
Promptly after the Effective Time, the Surviving Corporation shall issue to
Parent a stock certificate

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representing 100 shares of Surviving Corporation common stock in exchange for
the certificate that formerly represented shares of Merger Sub common stock,
which shall be surrendered by Parent and cancelled.

SECTION 3.02 EXCHANGE OF SHARES OTHER THAN DISSENTING SHARES AND
TREASURY SHARES.

(a) EXCHANGE AGENT. At or prior to the Effective Time, Parent
shall enter into an agreement with a bank or trust company reasonably acceptable
to Company to act as exchange agent for the Merger (the "EXCHANGE AGENT") as may
be designated by Parent.

(b) PARENT TO PROVIDE COMMON STOCK AND CASH. Parent shall
make available to the Exchange Agent for the benefit of the holders of Company
Common Stock: (i) promptly after the Effective Time, Certificates of Parent
Common Stock ("PARENT CERTIFICATES") representing the number of whole shares of
Parent Common Stock issuable pursuant to Section 3.01(a) in exchange for shares
of Company Common Stock outstanding immediately prior to the Effective Time; and
(ii) no later than the Closing, sufficient funds to permit payment of the cash
portion of the consideration to be paid pursuant to Section 3.01(a) plus cash in
lieu of fractional shares pursuant to Section 3.04. All funds deposited with
the Exchange Agent shall be invested as directed by the Surviving Corporation,
provided that such investments shall be in obligations of or guaranteed by the
United States of America or of any agency thereof and backed by the full faith
and credit of the United States of America, or in deposit accounts, certificates
of deposit or banker's acceptances of, repurchase or reverse repurchase
agreements with, or Eurodollar time deposits purchased from, commercial banks
with capital, surplus and undivided profits aggregating in excess of $100
million (based on the most recent financial statements of such bank which are
then publicly available).

(c) EXCHANGE PROCEDURES. The Exchange Agent shall mail to
each holder of record of certificates of Company Common Stock ("COMPANY
CERTIFICATES"), whose shares were converted into the right to receive cash and
shares of Parent Common Stock (and cash in lieu of fractional shares pursuant to
Section 3.04) promptly after the Effective Time (and in any event no later than
three business days after the later to occur of the Effective Time and receipt
by Parent of a complete list from Company of the names and addresses of its
holders of record): (i) a form letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Company
Certificates shall pass, only upon receipt of the Company Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as
Parent may reasonably specify, and which shall be reasonably satisfactory to
Company); and (ii) instructions for use in effecting the surrender of the
Company Certificates in exchange for cash and Parent Certificates (and cash in
lieu of fractional shares). Upon surrender of a Company Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly completed
and validly executed, and such other documents as may be reasonably required by
the Exchange Agent, the holder of such Company Certificate shall be entitled to
receive in exchange therefor $2.94 per share in cash, a Parent Certificate
representing the number of whole shares of Parent Common Stock that such holder
has the right to receive pursuant to this Article III and payment of cash in
lieu of fractional shares which such holder has the right to receive pursuant to
Section 3.04, and the Company Certificate so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Company Certificate that,
prior to the Effective Time, represented shares of Company Common Stock will be
deemed from and after the Effective Time, for all purposes other than the
payment of dividends and distributions, to evidence the ownership of the number
of full shares of Parent Common Stock into wich such shares of Company Common
Stock shall have been so converted and the right to receive an amount in cash
equal to $2.94 per share plus cash in lieu of the issuance of any fractional
shares in accordance with Section 3.04. Notwithstanding any other provision of
this Agreement, no interest will be paid or will accrue on any cash payable to
holders of Company Certificates pursuant to the provisions of this Article III.

(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No
dividends or other distributions with respect to Parent Common Stock with a
record date after the Effective Time will be paid to the holder of any
unsurrendered Company Certificate with respect to the shares of Parent Common
Stock represented thereby until the holder of record of such Company Certificate
shall surrender such Company Certificate. Subject to the effect of applicable
escheat or similar laws, following surrender of any such Company Certificate,
there shall be paid to the record holder of the Parent Certificates issued in
exchange therefor, without interest, at the time of such

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surrender, the amount of any such dividends or other distributions with a record
date after the Effective Time theretofore payable (but for the provisions of
this Section 3.02(d)) with respect to such shares of Parent Common Stock.

(e) TRANSFER OF OWNERSHIP. If any Parent Certificate is to be
issued in a name, or cash paid to a person, other than that in which the Company
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance and/or payment thereof that the Company Certificate so
surrendered will be properly endorsed and otherwise in proper form for transfer
and that the person requesting such exchange will have paid to Parent or any
agent designated by it any transfer or other taxes required by reason of the
issuance of a Parent Certificate for shares of Parent Common Stock in any name
other than that of the registered holder of the Company Certificate surrendered,
or established to the satisfaction of Parent or any agent designated by it that
such tax has been paid or is not payable.

(f) TERMINATION OF EXCHANGE AGENT FUNDING. Any portion of
funds (including any interest earned thereon) or Parent Certificates held by the
Exchange Agent which have not been delivered to holders of Company Certificates
pursuant to this Article III within six months after the Effective Time shall
promptly be paid or delivered, as appropriate, to Parent, and thereafter holders
of Company Certificates who have not theretofore complied with the exchange
procedures set forth in and contemplated by this Section 3.02 shall thereafter
look only to Parent (subject to abandoned property, escheat and similar laws)
only as general creditors thereof for their claim for cash, shares of Parent
Stock, any cash in lieu of fractional shares of Parent Common Stock and any
dividends or distributions (with a record date after the Effective Time) with
respect to Parent Common Stock to which they are entitled.

(g) NO LIABILITY. Notwithstanding anything to the contrary in
this Section 3.02, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to any person in respect of any shares of Parent
Common Stock or cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.

SECTION 3.03 STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of Company shall each be closed, and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of any such stock transfer books. In the event of a transfer of
ownership of shares of Company Common Stock that is not registered in the stock
transfer records of Company at the Effective Time, a certificate or certificates
representing the number of full shares of Parent Common Stock into which such
shares of Company Common Stock shall have been converted shall be issued to the
transferee together with a cash payment equal to $2.94 per share plus cash in
lieu of fractional shares, if any, in accordance with Section 3.04 hereof, and a
cash payment in the amount of dividends, if any, in accordance with Section
3.02(d) hereof, if the certificate or certificates representing such shares of
Company Common Stock is or are surrendered as provided in Section 3.02(c)
hereof, accompanied by all documents required to evidence and effect such
transfer and by evidence of payment of any applicable stock transfer tax.

SECTION 3.04 NO FRACTIONAL SHARE CERTIFICATES. No scrip or
fractional share Parent Certificate shall be issued upon the surrender for
exchange of Company Certificates, and an outstanding fractional share interest
shall not entitle the owner thereof to vote, to receive dividends or to any
rights of a stockholder of Parent or of Surviving Corporation with respect to
such fractional share interest. As promptly as practicable following the
Effective Time, Parent shall deposit with the Exchange Agent an amount in cash
sufficient for the Exchange Agent to pay each holder of Company Common Stock an
amount in cash, rounded to the nearest whole cent, equal to the product obtained
by multiplying (i) the fractional share interest to which such holder would
otherwise be entitled (after taking into account all shares of Company Common
Stock held at the Effective Time by such holder) by (ii) the Final Average
Closing Price. As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Company Common Stock with respect to any
fractional share interests, the Exchange Agent shall make available such
amounts, net of any required withholding taxes, to such holders of Company
Common Stock, subject to and in accordance with the terms of Section 3.02
hereof.

SECTION 3.05 OPTIONS TO PURCHASE COMPANY COMMON STOCK.

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(a) At the Effective Time, the Company Stock Plans and each
option granted by Company to purchase shares of Company Common Stock pursuant to
the Company Stock Plans or otherwise listed on Schedule 3.05 of the Company
Disclosure Schedule ("COMPANY STOCK OPTIONS"), which is outstanding and
unexercised immediately prior to the Effective Time, shall be assumed by Parent
and converted into an option or warrant, as the case may be, to purchase shares
of Parent Common Stock in such number and amount and at such exercise price as
provided below and otherwise having the same terms and conditions as in effect
immediately prior to the Effective Time (except to the extent that such terms,
conditions and restrictions may be altered in accordance with their terms as a
result of the Merger contemplated hereby and except that all references in each
such Company Stock Option to Company shall be deemed to refer to Parent):

(i) the number of shares of Parent Common Stock to be subject
to the new option or warrant, as the case may be, shall be equal to the
product of (x) the number of shares of Company Common Stock subject to the
original Company Stock Option immediately prior to the Effective Time and
(y) 1.5748 (the "SHARE EQUIVALENT EXCHANGE RATIO").

(ii) the exercise price per share of Parent Common Stock
under the new option or warrant shall be equal to (x) the exercise price
per share of Company Common Stock in effect under the original Company
Stock Option immediately prior to the Effective Time divided by (y) the
Share Equivalent Exchange Ratio; and

(iii) in effecting such assumption and conversion, the
aggregate number of shares of Parent Common Stock to be subject to each
assumed Company Stock Option will be rounded down, if necessary, to the
next whole share and the aggregate exercise price shall be rounded up, if
necessary, to the next whole cent.

The adjustments provided herein with respect to any options that are
"incentive stock options" (as defined in Section 422 of the Code) shall be
effected in a manner consistent with the requirements of Section 424(a) of the
Code.

(b) Notwithstanding the arrangements set forth in Section
3.05(a), Company shall consider, in conjunction with Parent, providing, if
practicable, the following opportunity. If requested by the holder of a Company
Stock Option which is to be assumed by Parent pursuant to Section 3.05(a) and
which at the Effective Time is exercisable to any extent (the Company Common
Stock as to which such Option is then exercisable, the "VESTED SHARES"), Parent
would, if Company directed in its discretion, pay the holder of such Company
Stock Option an amount of cash equal to the cash which the holder would have
received on an exchange of the Vested Shares pursuant to Section 3.01 of this
Agreement in consideration of a reduction in the number of shares covered by the
holder's Company Stock Option as assumed by Parent to the number of shares of
Parent Common Stock the holder would have received on an exchange of the Vested
Shares pursuant to Section 3.01 of this Agreement without any change in the
aggregate exercise price from that under the Company Stock Option prior to
assumption. Appropriate adjustments will be made in the cash to be paid and the
aggregate exercise price so that the exercise price per share of Parent Common
Stock under the Company Stock Option as assumed by Parent and as adjusted
pursuant to this Section does not exceed the fair market value of a share of
Parent Common Stock as of the Effective Time. Any payment pursuant to this
Section shall be net of applicable tax withholdings. Company shall not make any
such payment and adjustment, and instead Section 3.05(a) shall apply
exclusively, if the payment would result in the failure to satisfy the condition
to Closing set forth in Section 8.01(g).

SECTION 3.06 CERTAIN ADJUSTMENTS. If between the date of this
Agreement and the Effective Time, (a) the outstanding shares of Parent Common
Stock or Company Common Stock shall be changed into a different number of shares
by reason of any reclassification, recapitalization, split-up, combination or
exchange of shares, or any dividend payable in stock or other securities shall
be declared thereon with a record date within such period, or (b) the number of
shares of Company Common Stock on a fully diluted basis is in excess of that
specified in Section 4.03 and disclosed in Schedule 4.03 of the Company
Disclosure Schedule (regardless of whether such excess is a result of an
additional issuance of capital stock except as otherwise permitted pursuant to
this Agreement or a correction to such Sections), then, in either case, the
Exchange Ratio established pursuant to the

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provisions of Section 3.01 and the Share Equivalent Exchange Ratio established
pursuant to the provisions of 3.05(a) shall be adjusted accordingly (by the
proportionate adjustment of each of the number of shares of Parent Common Stock
and cash payable or issuable per share of Company Common Stock) to provide
Parent and the stockholders and option holders of Company the same economic
effect as contemplated by this Agreement prior to such reclassification,
recapitalization, split-up, combination, exchange, dividend or increase.

SECTION 3.07 DISSENTERS' RIGHTS. Any Dissenting Shares shall not be
converted into, or be exchangeable for, the right to receive cash and Parent
Common Stock but shall instead be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares pursuant to the DGCL unless and until such holder shall have failed to
perfect or shall have effectively withdrawn or lost his right of appraisal and
payment, as the case may be. Company shall give Parent prompt notice of any
Dissenting Shares (and shall also give Parent prompt notice of any withdrawals
of such demands for appraisal rights) and Parent shall have the right to direct
all negotiations and proceedings with respect to such demands. Neither Company
nor the Surviving Corporation shall, except with the prior written consent of
Parent, voluntarily make any payments with respect to, or settle or offer to
settle, any such demand for appraisal rights. If, after the Effective Time, any
Dissenting Shares shall lose their status as Dissenting Shares, Parent shall
issue and deliver, upon surrender by such shareholder of certificate or
certificates representing shares of Company Capital Stock, the amount of cash
and the number of shares of Parent Common Stock to which such shareholder would
otherwise be entitled pursuant to this Article III.

SECTION 3.08 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event
any Company Certificates shall have been lost, stolen or destroyed, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed Company
Certificates, upon the making of an affidavit of that fact by the holder
thereof, such cash and shares of Parent Common Stock (and cash in lieu of
fractional shares) as may be required pursuant to Section 3.01, provided,
however, that Parent may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed Company
Certificates to indemnify Parent against any claim that may be made against
Parent, the Surviving Corporation or the Exchange Agent with respect to the
Company Certificates alleged to have been lost, stolen or destroyed.

SECTION 3.09 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any
time after the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of Company, the officers and directors of
Company are fully authorized in the name of their corporation or otherwise to
take, and will use good faith efforts to take, all such lawful and necessary
action, so long as such action is not inconsistent with this Agreement.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF COMPANY

Company hereby represents and warrants to Parent and Merger Sub,
subject to the exceptions specifically disclosed in writing in the Company
Disclosure Schedule, all such exceptions to be referenced to a specific
representation set forth in this Article IV, that:

SECTION 4.01 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.

(a) Each of Company and each directly and indirectly owned
Subsidiary of Company (the "COMPANY SUBSIDIARIES") has been duly organized and
is validly existing and in good standing (to the extent applicable) under the
laws of the jurisdiction of its incorporation or organization, as the case may
be, and has the requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as it is now being
conducted. Company and each Company Subsidiary is duly qualified or licensed to
do business, and is in good standing (to the extent applicable), in each
jurisdiction where the character of the properties owned, leased or operated by
it or the nature of its business makes such qualification or licensing
necessary, except for such

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failures to be so qualified or licensed and in good standing that could not
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect.

(b) Schedule 4.01 of the Company Disclosure Schedule sets
forth, as of the date of this Agreement, a true and complete list of each
Company Subsidiary, together with (i) the jurisdiction of incorporation or
organization of each Company Subsidiary and the percentage of each Company
Subsidiary's outstanding capital stock or other equity interests owned by
Company or another Company Subsidiary and (ii) an indication of whether each
Company Subsidiary is a "SIGNIFICANT SUBSIDIARY" as defined in Regulation S-X
under the Exchange Act. Except as set forth in Schedule 4.01 of the Company
Disclosure Schedule, neither Company nor any Company Subsidiary owns an equity
interest in any partnership or joint venture arrangement or other business
entity.

SECTION 4.02 CERTIFICATE OF INCORPORATION AND BYLAWS. The copies of
Company's certificate of incorporation and bylaws previously presented to Parent
by Company are true, complete and correct copies thereof. Such certificate of
incorporation and bylaws are in full force and effect. Company is not in
violation of any of the provisions of its certificate of incorporation or
bylaws.

SECTION 4.03 CAPITALIZATION. The authorized capital stock of Company
consists of 40,000,000 shares of Company Common Stock and 10,000,000 shares of
preferred stock, par value $0.01 per share ("COMPANY PREFERRED STOCK") of which
35,000 shares of Company Preferred Stock are designated as Series A Junior
Participating Preferred Stock pursuant to the Rights Agreement (as defined in
Section 4.04 below). As of the date hereof, (i) 11,578,076 shares of Company
Common Stock are issued and outstanding, all of which outstanding shares are
validly issued, fully paid and nonassessable, (ii) 1,244,944 shares of Company
Common Stock are held in the treasury of Company, (iii) no shares of Company
Common Stock are held by Company Subsidiaries, (iv) 643,378 shares of Company
Common Stock are reserved for future issuance pursuant to Company Stock Plans,
(v) no shares of Company Preferred Stock are outstanding, and (vi) 200,000
shares of Company Common Stock are reserved for issuance pursuant to The Company
ESPP, of which 174,545 shares have been issued. The name of each holder of a
Company Stock Option, the grant date of each Company Stock Option, the number of
shares of Company Common Stock for which each Company Stock Option is
exercisable, the vesting or exercise schedule and the exercise price of each
Company Stock Option are set forth in Schedule 4.03 of the Company Disclosure
Schedule. Except for shares of Company Common Stock issuable pursuant to
Company Stock Plans and stock option agreements entered into in connection
therewith, and the Company ESPP and as otherwise set forth in Schedule 4.03 of
the Company Disclosure Schedule, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character to which Company or any
Company Subsidiary is a party or by which Company or any Company Subsidiary is
bound relating to the issued or unissued capital stock of Company or any Company
Subsidiary or obligating Company or any Company Subsidiary to issue or sell any
shares of capital stock of, or other equity interests in, Company or any Company
Subsidiary. All shares of Company Common Stock subject to issuance as
aforesaid, upon issuance prior to the Effective Time on the terms and conditions
specified in the instruments pursuant to which they are issuable, will be duly
authorized, validly issued, fully paid and nonassessable. There are no
outstanding contractual obligations of Company or any Company Subsidiary to
repurchase, redeem or otherwise acquire any shares of Company Common Stock or
any capital stock of any Company Subsidiary. Each outstanding share of capital
stock of each Company Subsidiary is duly authorized, validly issued, fully paid
and nonassessable and each such share owned by Company or another Company
Subsidiary is free and clear of all Encumbrances. There are no material
outstanding contractual obligations of Company or any Company Subsidiary to
provide funds to, or make any material investment (in the form of a loan,
capital contribution or otherwise) in, any Company Subsidiary or any other
entity or person.

SECTION 4.04 AUTHORITY RELATIVE TO THIS AGREEMENT. Company has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder, and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Company
and the consummation by Company of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action, and no other
corporate proceedings on the part of Company are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby (other than,
with respect to the Merger, the approval of this Agreement by the holders of a
majority of the outstanding shares of Company Common Stock

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entitled to vote with respect thereto at the Company Stockholders' Meeting (as
defined in Section 7.01), and the filing and recordation of the Certificate of
Merger as required by the DGCL). This Agreement has been duly executed and
delivered by Company and, assuming the due authorization, execution and delivery
by the other parties hereto, constitutes the legal, valid and binding obligation
of Company, enforceable against Company in accordance with its terms except to
the extent that enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting the enforcement of
creditors' rights generally and by principles of equity regarding the
availability of remedies. The Company has taken all action necessary to cause
the Parent and Merger Sub not to be deemed an "Acquiring Person" under the
Rights Agreement, dated as of April 15, 1998, between the Company and
BankBoston, NA as Rights Agent (the "RIGHTS AGREEMENT"), and to ensure that none
of the execution of this Agreement, nor the consummation of the transactions
contemplated herein, shall result in any rights under the Rights Agreement being
exercisable.

SECTION 4.05 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.

(a) The execution and delivery of this Agreement by Company do
not, and the performance by Company of its obligations hereunder, and the
consummation of the Merger will not, (i) conflict with or violate any provision
of the certificate of incorporation or bylaws of Company or any equivalent
organizational documents of any Company Subsidiary, (ii) assuming that all
filings and notifications described in Section 4.05(b) have been made, conflict
with or violate in any material respect any Law applicable to Company or any
Company Subsidiary or by which any property or asset of Company or any Company
Subsidiary is bound or affected or (iii) except as otherwise set forth on
Schedule 4.05(a) of the Company Disclosure Schedule, result in any breach of or
constitute a default (or an event which with the giving of notice or lapse of
time or both could reasonably be expected to become a default) under, or give to
others any right of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or other encumbrance on any property or asset
of Company or any Company Subsidiary pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation.

(b) The execution and delivery of this Agreement by Company do
not, and the performance by Company of its obligations hereunder and the
consummation of the Merger will not, require any consent, approval,
authorization or permit of, or filing by Company with or notification by Company
to, any Governmental Entity, except pursuant to applicable requirements of the
Exchange Act, the Securities Act, Blue Sky Laws, the rules and regulations of
the NNM, the premerger notification requirements of the HSR Act, and the filing
and recordation of the Certificate of Merger as required by the DGCL.

SECTION 4.06 PERMITS; COMPLIANCE WITH LAWS. Company and the Company
Subsidiaries are in possession of all material franchises, grants,
authorizations, licenses, establishment registrations, product listings,
permits, approvals and orders of any Governmental Entity necessary for Company
or any Company Subsidiary to own, lease and operate its properties and assets or
otherwise to carry on its business as it is now being conducted (collectively,
the "COMPANY PERMITS"), and, as of the date of this Agreement, none of the
Company Permits has been suspended or cancelled nor is any such suspension or
cancellation pending or, to the knowledge of Company, threatened. Neither
Company nor any Company Subsidiary is in conflict with, or in default or
violation of, (i) any Law applicable to Company or any Company Subsidiary or by
which any property or asset of Company or any Company Subsidiary is bound or
affected or (ii) any Company Permits, except, in each case, for such conflicts,
defaults or violations that could not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. Schedule
4.06 of the Company Disclosure Schedule sets forth, as of the date of this
Agreement, all actions, proceedings, investigations or surveys pending or, to
the knowledge of Company, threatened against Company or any Company Subsidiary
that could reasonably be expected to result in the suspension or cancellation of
any other Company Permit. Except as set forth in Section 4.06 of the Company
Disclosure Schedule, since June 30, 1996, neither Company nor any Company
Subsidiary has received from any Governmental Entity any written notification
with respect to possible conflicts, defaults or violations of Laws.

SECTION 4.07 SEC FILINGS; FINANCIAL STATEMENTS.

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(a) Company has timely filed all forms, reports, statements
and documents required to be filed by it (A) with the SEC and the NNM since June
30, 1996 (collectively, together with any such forms, reports, statements and
documents Company may file subsequent to the date hereof until the Closing, the
("COMPANY REPORTS") and (B) since June 30, 1996, in all material respects, with
any other Governmental Entities. Each Company Report (i) was prepared in
accordance with the requirements of the Securities Act, the Exchange Act or the
rules and regulations of the NNM, as the case may be, and (ii) did not at the
time it was filed contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading. Each form, report, statement and document
referred to in clause (B) of this paragraph was prepared in all material
respects in accordance with the requirements of applicable Law. No Company
Subsidiary is subject to the periodic reporting requirements of the Exchange Act
or required to file any form, report or other document with the SEC, the NNM,
any other stock exchange or any other comparable Governmental Entity.

(b) Each of the consolidated financial statements (including,
in each case, any notes thereto) contained in the Company Reports was prepared
in accordance with U.S. GAAP applied on a consistent basis throughout the
periods indicated (except as may be indicated in the notes thereto) and each
presented fairly the consolidated financial position of Company and the Company
Subsidiaries as at the respective dates thereof, and their consolidated results
of operations, stockholders' equity and cash flows for the respective periods
indicated therein, except as otherwise noted therein (subject, in the case of
unaudited statements, to normal and recurring immaterial year-end adjustments).

(c) Except as and to the extent set forth or reserved against
on the consolidated balance sheet of Company and the Company Subsidiaries as of
June 30, 1998 as reported in the Company Reports, none of Company or any
Company Subsidiary has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on a balance sheet or in notes thereto prepared in accordance with
U.S. GAAP, except for liabilities or obligations incurred in the ordinary course
of business consistent with past practice since June 30, 1998.

SECTION 4.08 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
otherwise set forth on Schedule 4.08 of the Company Disclosure Schedule, since
June 30, 1998, Company and the Company Subsidiaries have conducted their
businesses only in the ordinary course consistent with past practice and, since
such date, there has not been (i) any Company Material Adverse Effect, (ii) any
event that could reasonably be expected to prevent or materially delay the
performance of Company's obligations pursuant to this Agreement and the
consummation of the Merger by Company, (iii) any material change by Company in
its accounting methods, principles or practices, (iv) any declaration, setting
aside or payment of any dividend or distribution in respect of the shares of
Company Common Stock or any redemption, purchase or other acquisition of any of
Company's securities, (v) except in the ordinary course of business consistent
with past practice, any increase in the compensation or benefits or
establishment of any bonus, insurance, severance, deferred compensation,
pension, retirement, profit sharing, stock option (including, without
limitation, the granting of stock options, stock appreciation rights,
performance awards or restricted stock awards), stock purchase or other employee
benefit plan, or any other increase in the compensation payable or to become
payable to any executive officers of Company or any Company Subsidiary, (vi) any
issuance or sale of any stock, notes, bonds or other securities other than
pursuant to the exercise of outstanding securities, or entering into any
agreement with respect thereto, (vii) any amendment to the Company's certificate
of incorporation or bylaws, (viii) other than in the ordinary course of
business, any (x) purchase, sale, assignment or transfer of any material assets,
(y) mortgage, pledge or the institution of any lien, encumbrance or charge on
any material assets or properties, tangible or intangible, except for liens for
taxes not yet delinquent and such other liens, encumbrances or charges which do
not, individually or in the aggregate, have a Company Material Adverse Effect,
or (z) waiver of any rights of material value or cancellation or any material
debts or claims, (ix) any incurrence of any material liability (absolute or
contingent), except for current liabilities and obligations incurred in the
ordinary course of business consistent with past practice, (x) any incurrence of
any damage, destruction or similar loss, whether or not covered by insurance,
materially affecting the business or properties of Company or any Company
Subsidiary, or (xi) any entering into any transaction of a material nature other
than in the ordinary course of business, consistent with past practices.

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SECTION 4.09 EMPLOYEE BENEFIT PLANS; LABOR MATTERS.

(a) The Company Disclosure Schedule lists each employee
benefit fund, plan, program, arrangement and contract (including, without
limitation, any "pension" plan, fund or program, as defined in Section 3(2) of
ERISA, and any "employee benefit plan", as defined in Section 3(3) of ERISA and
any plan, program, arrangement or contract providing for severance, medical,
dental or vision benefits; life insurance or death benefits; disability
benefits, sick pay or other wage replacement; vacation, holiday or sabbatical;
pension or profit-sharing benefits; stock options or other equity compensation;
bonus or incentive pay or other material fringe benefits), whether written or
not ("BENEFIT PLANS"), maintained, sponsored or contributed to or required to be
contributed to by Company or any Company Subsidiary (the "COMPANY BENEFIT
PLANS"). With respect to each Company Benefit Plan, Company has delivered or
made available to Parent a true, complete and correct copy of (i) such Company
Benefit Plan (or, if not written, a written summary of its material terms) and
the most recent summary plan description, if any, related to such Company
Benefit Plan, (ii) each trust agreement or other funding arrangement relating to
such Company Benefit Plan, (iii) the most recent annual report (Form 5500) filed
with the IRS with respect to such Company Benefit Plan (and, if the most recent
annual report is a Form 5500-R, the most recent Form 5500-C filed with respect
to such Company Benefit Plan), (iv) the most recent actuarial report or
financial statement relating to such Company Benefit Plan and (v) the most
recent determination letter, if any, issued by the IRS with respect to such
Company Benefit Plan, or any pending request for such a determination letter.
Neither Company nor any Company Subsidiary nor, to the knowledge of the Company,
any other person or entity, has any express or implied commitment, to modify,
change or terminate any Company Benefit Plan, other than with respect to a
modification, change or termination required by ERISA or the Code.

(b) Each Company Benefit Plan has been administered in
all material respects in accordance with its terms and all applicable laws,
including, without limitation, ERISA and the Code, and all contributions
required to be made under the terms of any of the Company Benefit Plans as of
the date of this Agreement have been timely made or, if not yet due, have been
reflected on the most recent consolidated balance sheet filed or incorporated by
reference in the Company Reports prior to the date of this Agreement. With
respect to the Company Benefit Plans, no event has occurred and, to the
knowledge of Company, there exists no condition or set of circumstances in
connection with which Company or any Company Subsidiary could be subject to any
material liability (other than for routine benefit liabilities) under the terms
of, or with respect to, such Company Benefit Plans, ERISA, the Code or any other
applicable Law.

(c) Company, on behalf of itself and all of the Company
Subsidiaries, hereby represents that: (i) each Company Benefit Plan which is
intended to be qualified under Section 401(a), 401(k), 401(m) or 4975(e)(6) of
the Code has received or is currently awaiting receipt of a favorable
determination letter from the IRS as to its qualified status under the Code, and
each trust established in connection with any Company Benefit Plan which is
intended to be exempt from federal income taxation under Section 501(a) of the
Code has received a determination letter from the IRS that it is so exempt, and
to Company's knowledge no fact or event has occurred that could adversely affect
the qualified status of any such Company Benefit Plan or the exempt status of
any such trust; (ii) to Company's knowledge there has been no prohibited
transaction (within the meaning of Section 406 of ERISA or Section 4975 of the
Code and other than a transaction that is under a statutory or administrative
exemption) with respect to any Company Benefit Plan that could result in
liability to the Company or any Company Subsidiaries; and (iii) except as set
forth in Section 4.09(c) of the Company Disclosure Schedule, each Company
Benefit Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, without material liability (other
than (A) liability for ordinary administrative expenses typically incurred in a
termination event or (B) if the Company Benefit Plan is a pension benefit plan
subject to Part 2 of Title I of ERISA, liability for the accrued benefits as of
the date of such termination (if and to the extent required by ERISA) to the
extent that either there are sufficient assets set aside in a trust or insurance
contract to satisfy such liability or such liability is reflected on the most
recent consolidated balance sheet filed or incorporated by reference in the
Company Reports prior to the date of this Agreement). No suit, administrative
proceeding, action or other litigation has been brought, or to the knowledge of
Company is threatened, against or with respect to any such Company Benefit Plan,
including any audit or inquiry by the IRS or United States Department of Labor
(other than routine benefits claims).

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(d) No Company Benefit Plan is a multiemployer pension plan
(as defined in Section 3(37) of ERISA) or other pension plan subject to Title IV
of ERISA and neither the Company, any Company Subsidiary nor any other trade or
business (whether or not incorporated) that is under "common control" with
Company or a Company Subsidiary (within the meaning of Section 4001(b) of ERISA)
or with respect to which Company or any Company Subsidiary could otherwise incur
liability under Title IV of ERISA (a "COMPANY ERISA AFFILIATE") has sponsored or
contributed to or been required to contribute to a multiemployer pension plan or
other pension plan subject to Title IV of ERISA. No material liability under
Title IV of ERISA has been incurred by Company, any Company Subsidiary or any
Company ERISA Affiliate that has not been satisfied in full, and no condition
exists that presents a material risk to Company or any Company Subsidiary of
incurring or being subject (whether primarily, jointly or secondarily) to a
material liability thereunder. None of the assets of Company or any Company
Subsidiary is, or may reasonably be expected to become, the subject of any lien
arising under ERISA or Section 412(n) of the Code.

(e) With respect to each Benefit Plan required to be set forth
in the Company Disclosure Schedule that is subject to Title IV or Part 3 of
Title I of ERISA or Section 412 of the Code, (i) no reportable event (within the
meaning of Section 4043 of ERISA, other than an event that is not required to be
reported before or within 30 days of such event) has occurred or is expected to
occur, (ii) there was not an accumulated funding deficiency (within the meaning
of Section 302 of ERISA or Section 412 of the Code), whether or not waived, as
of the most recently ended plan year of such Benefit Plan; and (iii) there is no
"unfunded benefit liability" (within the meaning of Section 4001(a)(18) of
ERISA).

(f) Company has scheduled on Schedule 4.09(f) of the Company
Disclosure Schedule and has delivered to Parent true, complete and correct
copies of (i) all current employment agreements with officers and employees and
all current consulting agreements of Company and each Company Subsidiary
providing for annual compensation in excess of $100,000, (ii) all severance
plans, agreements, programs and policies of Company and each Company Subsidiary
with or relating to their respective employees, directors or consultants, and
(iii) all plans, programs, agreements and other arrangements of Company and each
Company Subsidiary with or relating to their respective employees, directors or
consultants which contain "change of control" provisions. Except as set forth
in Schedule 4.09(f) of the Company Disclosure Schedule, no payment or benefit
which may be required to be made by Company or any Company Subsidiary which
otherwise may be required to be made under the terms of any Company Benefit
Plan or other arrangement will constitute an excess parachute payment under
Section 280G(b) of the Code, and the consummation of the transactions
contemplated by this Agreement will not, individually or in conjunction with any
other possible event (including termination of employment), (i) entitle any
current or former employee or other service provider of Company or any Company
Subsidiary to severance benefits or any other payment, compensation or benefit
(including forgiveness of indebtedness), except as expressly provided by this
Agreement, or (ii) accelerate the time of payment or vesting, or increase the
amount of compensation or benefit due any such employee or service provider.

(g) Neither Company nor any Company Subsidiary is a party to
any collective bargaining or other labor union contract applicable to persons
employed by Company or any Company Subsidiary and no collective bargaining
agreement is being negotiated by Company or any Company Subsidiary. As of the
date of this Agreement, there is no labor dispute, strike or work stoppage
against Company or any Company Subsidiary pending or, to the knowledge of
Company, threatened which may interfere with the respective business activities
of Company or any Company Subsidiary. As of the date of this Agreement, to the
knowledge of Company, none of Company, any Company Subsidiary, or any of their
respective representatives or employees has committed any unfair labor practice
in connection with the operation of the respective businesses of Company or any
Company Subsidiary, and there is no charge or complaint against Company or any
Company Subsidiary by the National Labor Relations Board or any comparable
Governmental Entity pending or threatened in writing.

(h) Except as required by Law or as set forth in Section
4.09(h) of the Company Disclosure Schedule, no Company Benefit Plan provides any
of the following retiree or post-employment benefits to any person: medical,
disability or life insurance benefits. Company and the Company ERISA Affiliates
are in compliance with (i) the requirements of the applicable health care
continuation and notice provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") and the regulations (including

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proposed regulations) thereunder and (ii) the applicable requirements of the
Health Insurance Portability and Accountability Act of 1996, as amended and the
regulations (including the proposed regulations) thereunder.

(i) The Company has the power and authority under the terms of
the Company Stock Plans to effect the assumption of Company Stock Options in the
manner provided in Section 3.05 without the consent of the holder of any such
option. The Company has the power and authority under the terms of the Company
ESPP to terminate that plan prior to the Effective Time (as provided in Section
7.08) without the consent of any employee.

SECTION 4.10 CONTRACTS. Schedule 4.10 of the Company Disclosure
Schedule sets forth a list of each contract or agreement that is material to the
business, assets, liabilities, financial condition or results of operations of
Company and Company Subsidiaries taken as a whole (each, a "COMPANY MATERIAL
CONTRACT"). Except as set forth in Schedule 4.10 of the Company Disclosure
Schedule, neither Company nor any Company Subsidiary is in material violation of
or default under (nor does there exist any condition which with the passage of
time or the giving of notice could reasonably be expected to cause such a
material violation of or default under) any Company Material Contract. Each
Company Material Contract is in full force and effect and is a legal, valid and
binding obligation of Company or a Company Subsidiary and, to the knowledge of
Company, each of the other parties thereto, enforceable in accordance with its
terms, except to the extent that enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and by principles of
equity regarding the availability of remedies.

SECTION 4.11 LITIGATION. There is no suit, claim, action, proceeding
or investigation pending or, to the knowledge of Company, threatened against
Company or any Company Subsidiary that could reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect or
materially impair Company's ability to consummate the transactions contemplated
herein. Company is not aware of any facts or circumstances which could
reasonably be expected to result in the denial of insurance coverage under
policies issued to Company and Company Subsidiaries in respect of such suits,
claims, actions, proceedings and investigations, except in any case as could not
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. Neither Company nor any Company Subsidiary is subject
to any outstanding order, writ, injunction or decree which could reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect or materially impair Company's ability to consummate the transactions
contemplated herein.

SECTION 4.12 ENVIRONMENTAL MATTERS. Except as could not reasonably
be expected to have, individually or in the aggregate, a Company Material
Adverse Effect, (i) Company and the Company Subsidiaries are in compliance with
all applicable Environmental Laws and all Company Permits required by
Environmental Laws; (ii) all past noncompliance of Company or any Company
Subsidiary with Environmental Laws or Environmental Permits has been resolved
without any pending, ongoing or future obligation, cost or liability; and (iii)
neither Company nor any Company Subsidiary has released a Hazardous Material at,
or transported a Hazardous Material to or from, any real property currently or
formerly owned, leased or occupied by Company or any Company Subsidiary, in
violation of any Environmental Law.

SECTION 4.13 INTELLECTUAL PROPERTY.

(a) All trademarks, trade names, service marks, trade dress
(whether or not registered), and all goodwill associated with any of the
foregoing, patents (including, without limitation, all U.S. and foreign
patents, patent applications, patent disclosures and any and all divisions,
continuations, continuations-in-part, re-issues, re-examinations and extensions
thereof), Internet domain names, copyrights (whether or not registered), mask
works and any renewal rights therefor, inventions (whether or not patented)
technology, supplier lists, trade secrets, know-how, computer software programs
or applications in both source and object code form, technical documentation of
such software programs, databases, data, registrations and applications for any
of the foregoing and all other tangible or intangible proprietary information or
materials that are or have been used (including without limitation in the
development of) in the Company's business and/or in any product, technology or
process (i) currently being or formerly manufactured, published or marketed by
Company or (ii) previously or

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currently under development for possible future manufacturing, publication,
marketing or other use by Company are hereinafter referred to as the "COMPANY
INTELLECTUAL PROPERTY."

(b) The Company Disclosure Schedule contains a true and
complete list of Company's patents, patent applications, trademarks, trademark
applications, trade names, service marks, service mark applications, Internet
domain names, Internet domain name applications, copyrights and copyright
registrations and applications, all of the foregoing existing anywhere in the
world, owned by Company. Prior to Closing, the Company shall provide a schedule
to Parent detailing all due dates for further filings, maintenance, payments or
other actions relating to the foregoing falling due within twelve (12) months of
the Closing. All of Company's patents, registrations, trademark registrations
and copyright registrations are enforceable and subsisting in all material
respects, and remain in good standing with all fees and filings that are due as
of the Closing having been made as of the Closing.

(c) The Company Intellectual Property consists solely of items
and rights which are: (i) owned by Company; or (ii) in the public domain; or
(iii) jointly owned between Company and a customer or vendor pursuant to the
terms of an agreement between Company and such customer or vendor; or
(iv) rightfully used by Company pursuant to a valid and enforceable license (the
"COMPANY LICENSED INTELLECTUAL PROPERTY"), the parties, date and subject matter
of each such material license agreement and each material agreement in which
Company is the licensee or owner of the subject rights in the agreement being
set forth on Schedule 4.13(c) of the Company Disclosure Schedule. Except as
described in Section 4.13(c) of Company Disclosure Schedule, Company has all
rights in Company Intellectual Property and Company Licensed Intellectual
Property necessary to carry out Company's current activities and Company's
future activities to the extent such future activities are already planned,
including without limitation, to the extent required to carry out such
activities, rights to make, have made, use, import, export, reproduce, modify,
adapt, create derivative works based on, translate, distribute (directly and
indirectly), transmit, display and perform publicly, license, sublicense, rent
and lease and, other than with respect to the Company Licensed Intellectual
Property, assign and sell, the Company Intellectual Property.

(d) The reproduction, manufacturing, distribution, licensing,
sublicensing or sale of any Company Intellectual Property, product, service,
work, technology or process as now used or offered or proposed for use,
licensing or sale by Company and which are material to Company's business does
not infringe on any patent, copyright, trademark, service mark, trade name,
trade dress, firm name, Internet domain name, logo, trade dress, mask work or
other proprietary right of any person and does not constitute a misappropriation
of any trade secret. Except as set forth in Section 4.13(d) of the Company
Disclosure Schedule, no claims (i) challenging the validity, effectiveness or
ownership by Company of any of the Company Intellectual Property, or (ii) to the
effect that the use, distribution, licensing, sublicensing or sale of the
Company Intellectual Property, product, service, work, technology or process as
now used or offered by Company, its agents or the intended use by its customers
infringes or will infringe on any intellectual property or other proprietary
right of any person have been asserted or, to the knowledge of Company, are
threatened by any person or have been made or threatened by any person against
the Company or the Company's distributors, nor are there, to Company's
knowledge, any valid grounds for any bona fide claim of any such kind in all
cases, except for those claims that would not have a Company Material Adverse
Effect. Except as set forth in Section 4.13(d) of the Company Disclosure
Schedule, to the knowledge of Company, there is no unauthorized use,
infringement or misappropriation from the Company of any of the Company
Intellectual Property or the Company Licensed Intellectual Property by any third
party, employee or former employee.

(e) Except as set forth in Section 4.13(e) of the Company
Disclosure Schedule, all personnel, including employees, agents, consultants and
contractors, who have contributed to or participated in the conception and
development of Company Intellectual Property, other than the Company Licensed
Intellectual Property, on behalf of Company, have executed nondisclosure
agreements containing substantially the same confidentiality provisions as set
forth in the form set forth on the Company Disclosure Schedule and either (i)
have been a party to an enforceable "work-for-hire" arrangement or agreements
with Company in accordance with applicable national and state law that has
accorded Company full, effective, exclusive and original ownership of, or other
rights in all tangible and intangible property thereby arising sufficient for
the conduct of the Company's business as currently conducted, or (ii) have
executed appropriate instruments of assignment in favor of Company as

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assignee that have conveyed to Company effective and exclusive ownership of, or
other rights in all tangible and intangible property thereby arising.

(f) Except as set forth in Section 4.13(f) of the Company
Disclosure Schedule, Company is not, nor as a result of the execution or
delivery of this Agreement, or performance of Company's obligations hereunder,
will Company be, in violation of any material license, sublicense, agreement or
instrument to which Company is a party or otherwise bound, nor will execution or
delivery of this Agreement, or performance of Company's obligations hereunder,
cause the diminution, termination or forfeiture of any material Company
Intellectual Property, except in all cases for violations, diminutions,
terminations or forfeitures that would not reasonably be expected to have a
Company Material Adverse Effect.

(g) Schedule 4.13(g) of the Company Disclosure Schedule
contains a true and complete list of all of Company's material
internally-developed software programs (the "COMPANY SOFTWARE PROGRAMS").
Except as set forth in the Company Disclosure Schedule, Company owns full and
unencumbered right and good, valid and marketable title to such Company Software
Programs and all material Company Intellectual Property free and clear of all
mortgages, pledges, liens, security interests, conditional sales agreements or
encumbrances.

(h) The source code and system documentation relating to the
Company Software Programs (i) have at all times been maintained in strict
confidence, (ii) have been disclosed by Company only to employees on a need to
know basis in connection with the performance of their duties to Company, and
(iii) to the Company's knowledge, have not been disclosed to any third party
except pursuant to an agreement between Company and such third party.

(i) As of the Closing, all Date Data and Date-Sensitive
Systems developed by the Company are Year 2000 Compliant. "Date Data" means any
data of any type that includes date information or which is otherwise derived
from, dependent on or related to date information. "Date-Sensitive System"
means any software, microcode or hardware system or component, including any
electronic or electronically controlled system or component, that processes any
Date Data and that is installed, in development or on order by the Company or
its Subsidiaries for their internal use, which the Company or any of its
Subsidiaries sells, leases, licenses, assigns or otherwise provides, or the
provision or operation of which the Company or any of its Subsidiaries provides
the benefit, to its customers, vendors, suppliers, affiliates or any other third
party. "Year 2000 Compliant" means (i) with respect to Date Data, that such
data is in proper format and accurate for all dates in the twentieth and
twenty-first centuries, and (ii) with respect to Date-Sensitive Systems, that
each such system accurately processes all Date Data, including for the twentieth
and twenty-first centuries, without loss of any functionality or performance,
including but not limited to calculating, comparing, sequencing, storing and
displaying such Date Data (including all leap year considerations), when used as
a stand-alone system or in combination with other software or hardware. The
Company has obtained, or is in the process of using reasonable efforts to
obtain, written representations or assurances from each entity that (x) provides
Date Data to it, (y) processes in any way Date Data for it or otherwise provides
any material product or service to it that is dependent on Year 2000 Compliant
Date Data or Year 2000 Compliant Date-Sensitive System, that all of such
entity's Date Data and Date-Sensitive Systems that are used for, or on behalf of
it are Year 2000 Compliant.

(j) Except as set forth in the Company Disclosure Schedule,
Company does not owe any outstanding or past due royalties or other payments
to third parties in respect of Company Licensed Intellectual Property. All
royalties or other payments set forth in the Company Disclosure Schedule that
have accrued prior to the Closing have been paid.

(k) To the Company's knowledge, the Company Software Programs
contain no "viruses". For the purposes of this Agreement, "virus" means any
computer code intentionally designed to disrupt, disable or harm in any manner
the operation of any software or hardware.

SECTION 4.14 TAXES. Except in those instances that would not result
in a Company Material Adverse Effect:

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(a) Company and each of Company Subsidiaries, and any
consolidated, combined, unitary or aggregate group for Tax purposes of which
Company or any Company Subsidiary is or has been a member, have properly
completed in all material respects and timely filed all Tax Returns required to
be filed by them and have paid all Taxes shown thereon to be due. Company has
provided adequate accruals in accordance with generally accepted accounting
principles in its June 30, 1998 balance sheet contained in the Company Reports
(the "1998 BALANCE SHEET") for any Taxes that have not been paid, whether or not
shown as being due on any Tax Returns, and Company and the Company Subsidiaries
have no material liability for unpaid Taxes accruing after June 30, 1998;

(b) there is (i) no material claim for Taxes that is a lien
against the property of Company or any Company Subsidiary or is being asserted
against Company or any Company Subsidiary other than liens for Taxes not yet due
and payable, (ii) no audit of any Tax Return of Company or any Company
Subsidiary being conducted by a Tax Authority; (iii) no extension of the statute
of limitations on the assessment of any Taxes granted by Company or any Company
Subsidiary and currently in effect, and (iv) no agreement, contract or
arrangement to which Company or any Company Subsidiary is a party that may
result in the payment of any amount that would not be deductible by reason of
Section 162(m), Section 280G or Section 404 of the Code;

(c) without giving effect to the transactions contemplated by
this Agreement, there has been no change in ownership of Company or any Company
Subsidiaries that has caused the utilization of any losses of such entities to
be limited pursuant to Section 382 of the Code, and any loss carryovers
reflected on the 1998 Balance Sheet are properly computed and reflected;

(d) Company and the Company Subsidiaries are not and will not
be required to include any material adjustment in taxable income for Tax period
(or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger;

(e) neither Company nor any Company Subsidiary has filed or
will file any consent to have the provisions of Section 341(f)(2) of the Code
(or comparable provisions of any state Tax laws) apply to Company or any Company
Subsidiary;

(f) neither Company nor any Company Subsidiary is a party to
any Tax sharing or Tax allocation agreement nor does Company or any Company
Subsidiary have any liability or potential liability to another party under any
such agreement;

(g) neither Company nor any Company Subsidiary has filed any
disclosures under Section 6662 or comparable provisions of state, local or
foreign law to prevent the imposition of penalties with respect to any Tax
reporting position taken on any Tax Return;

(h) neither Company nor any Company Subsidiary has ever been a
member of a consolidated, combined or unitary group of which Company was not the
ultimate parent corporation; and

(i) Company and each Company Subsidiary has in its possession
receipts for any Taxes paid to foreign Tax authorities. Neither Company nor any
Company Subsidiary has ever been a "personal holding company" within the meaning
of Section 542 of the Code or a "United States real property holding
corporation" within the meaning of Section 897 of the Code.

SECTION 4.15 INSURANCE. Company has heretofore furnished to Parent a
complete and correct list as of the date hereof of all insurance policies
maintained by Company or the Company Subsidiaries, and has made available to
Parent complete and correct copies of all such policies, together with all
riders and amendments thereto. All such policies are in full force and effect
and all premiums due thereon have been paid to the date hereof. Company and the
Company Subsidiaries have complied in all material respects with the terms of
such policies.

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SECTION 4.16 PROPERTIES. Company and the Company Subsidiaries have
good and valid title, free and clear of all Encumbrances, except for Permitted
Encumbrances, to all their material properties and assets, whether tangible or
intangible, real, personal or mixed, reflected in the Company's consolidated
financial statements contained in the Company's Annual Report on Form 10-K for
the period ended June 30, 1998 as being owned by Company and the Company
Subsidiaries as of the date thereof, other than (i) any properties or assets
that have been sold or otherwise disposed of in the ordinary course of business
since the date of such financial statements, (ii) liens disclosed in the notes
to such financial statements and (iii) liens arising in the ordinary course of
business after the date of such financial statements. All buildings, and all
fixtures, equipment and other property and assets that are material to its
business on a consolidated basis, held under leases or sub-leases by Company or
any Company Subsidiary are held under valid instruments enforceable in
accordance with their respective terms, subject to applicable laws of
bankruptcy, insolvency or similar laws relating to creditors' rights generally
and to general principles of equity (whether applied in a proceeding in law or
equity). Except where the failure to so maintain would not have a Company
Material Adverse Effect, substantially all of Company's and the Company
Subsidiaries' equipment in regular use has been reasonably maintained and is in
serviceable condition, reasonable wear and tear excepted.

SECTION 4.17 AFFILIATES. Schedule 4.17 of the Company Disclosure
Schedule sets forth the names and addresses of each person who is, in Company's
reasonable judgment, an affiliate (as such term is used in Rule 145 under the
Securities Act or under applicable SEC accounting releases with respect to
pooling of interests accounting treatment) of Company.

SECTION 4.18 OPINION OF FINANCIAL ADVISOR. Adams, Harkness & Hill,
Inc. ("COMPANY FINANCIAL ADVISOR") has delivered to the board of directors of
Company its opinion to the effect that the Exchange Ratio to be received by the
holders of shares of Company Common Stock is fair to such holders from a
financial point of view.

SECTION 4.19 BROKERS.

(a) No broker, finder or investment banker (other than Company
Financial Advisor) is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of Company. Company has heretofore made available to Parent true,
complete and correct copies of all agreements between Company and Company
Financial Advisor pursuant to which such firm would be entitled to any payment
relating to the Merger.

(b) Other than as attached hereto as Schedule 4.19(b) of the
Company Disclosure Schedule, there are no other agreements between Company and
the Company Financial Advisor.

SECTION 4.20 CERTAIN BUSINESS PRACTICES. Neither Company nor any
Company Subsidiary nor any directors, officers, agents or employees of Company
or any Company Subsidiary (in their capacities as such) has (i) used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity or (ii) made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns or violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended.

SECTION 4.21 BUSINESS ACTIVITY RESTRICTION. Except as set forth in
Schedule 4.21 of the Company Disclosure Schedule, there is no non-competition or
other similar agreement, commitment, judgment, injunction, order or decree to
which Company or any Company Subsidiary is a party or subject to that has or
could reasonably be expected to have the effect of prohibiting or impairing the
conduct of business by Company. Except as set forth in Schedule 4.21 of the
Company Disclosure Schedule, Company has not entered into any material agreement
under which Company is restricted from selling, licensing or otherwise
distributing any of its technology or products intended for distribution to, or
providing services to, customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market or line of business.

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SECTION 4.22 CERTAIN TAX MATTERS. Neither Company nor, to the best
knowledge of Company, any of its affiliates has taken or agreed to take any
action (other than actions contemplated by this Agreement) that could reasonably
be expected to prevent this Merger from constituting a "reorganization" under
Section 368 of the Code.

ARTICLE V

REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB

Each of Parent and Merger Sub hereby represents and warrants to
Company, subject to the exceptions specifically disclosed in the Parent
Disclosure Schedule, all such exceptions to be referenced to a specific
representation set forth in this Article V, that:

SECTION 5.01 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.

(a) Parent and each directly and indirectly owned subsidiary
of Parent, including Merger Sub, (the "PARENT SUBSIDIARIES") has been duly
organized and is validly existing and in good standing (to the extent
applicable) under the laws of the jurisdiction of its incorporation or
organization, as the case may be, and has the requisite corporate power and
authority and all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as it is now being conducted. Parent
and each Parent Subsidiary, including Merger Sub, is duly qualified or licensed
to do business, and is in good standing (to the extent applicable), in each
jurisdiction where the character of the properties owned, leased or operated by
it or the nature of its business makes such qualification or licensing
necessary, except for such failures to be so qualified or licensed and in good
standing that could not reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect.

(b) Schedule 5.01(b) of the Parent Disclosure Schedule sets
forth, as of the date of this Agreement, a true and complete list of each Parent
Subsidiary, together with (i) the jurisdiction of incorporation or organization
of each Parent Subsidiary and the percentage of each Parent Subsidiary's
outstanding capital stock or other equity interests owned by Parent or another
Parent Subsidiary and (ii) an indication of whether each Parent Subsidiary is a
"Significant Subsidiary" as defined in Regulation S-X under the Exchange Act.
Neither Parent nor any Parent Subsidiary owns an equity interest in any
partnership or joint venture arrangement or other business entity that is
material to the business, assets, liabilities, financial condition or results of
operations of Parent and the Parent Subsidiaries, taken as a whole.

SECTION 5.02 CERTIFICATE OF INCORPORATION AND BYLAWS. The copies of
each of Parent's and Merger Sub's certificate of incorporation and bylaws
previously provided to Company by Parent are true, complete and correct copies
thereof. Such certificates of incorporation and bylaws are in full force and
effect. Parent is not in violation of any of the provisions of its certificate
of incorporation or bylaws.

SECTION 5.03 CAPITALIZATION. The authorized capital stock of Parent
consists of 60,000,000 shares of Parent Common Stock and 2,000,000 shares of
preferred stock, $0.01 par value per share ("PARENT PREFERRED STOCK"), of which
400,000 shares of Parent Preferred Stock are designated as Series A Junior
Participating Preferred Stock pursuant to a rights plan. As of the date hereof
(i) 42,924,121 shares of Parent Common Stock are issued and outstanding, all of
which are validly issued, fully paid and nonassessable, (ii) 2,001,480 shares of
Parent Common Stock are held in the treasury of Parent, (iii) no shares of
Parent Common Stock are held by the Parent Subsidiaries, (iv) 14,220,140 shares
of Parent Common Stock are reserved for future issuance pursuant to outstanding
options and warrants to purchase Parent Common Stock ("PARENT STOCK OPTIONS"),
(v) no shares of Parent preferred stock are issued and outstanding and (vi)
850,190 shares of Parent Common Stock are reserved for issuance pursuant to the
Parent ESPP, of which no shares have been issued. Except for the shares of
Parent Common Stock issuable pursuant to the Parent Stock Plans and the Parent
ESPP, there are no options, warrants or other rights, agreements, arrangements
or commitments of any character to which Parent is a party or by which Parent is
bound relating to the issued or unissued capital stock of Parent or any Parent
Subsidiary or obligating Parent or any Parent Subsidiary to issue or sell any
shares of capital stock of, or other equity interests in,

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Parent or any Parent Subsidiary. All shares of Parent Common Stock subject to
issuance as aforesaid, upon issuance prior to the Effective Time on the terms
and conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. There
are no outstanding contractual obligations of Parent or any Parent Subsidiary to
repurchase, redeem or otherwise acquire any shares of Parent Common Stock or any
capital stock of any Parent Subsidiary. Each outstanding share of capital stock
of each Parent Subsidiary is duly authorized, validly issued, fully paid and
nonassessable and each such share owned by Parent or another Parent Subsidiary
is free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on Parent's or such other
Parent Subsidiary's voting rights, charges and other encumbrances of any nature
whatsoever. There are no material outstanding contractual obligations of Parent
or any Parent Subsidiary to provide funds to, or make any material investment
(in the form of a loan, capital contribution or otherwise) in, any Parent
Subsidiary or any other person.

SECTION 5.04 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent
and Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by each of Parent and Merger Sub and the consummation by Parent and
Merger Sub of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action, and no other corporate proceedings
on the part of Parent or Merger Sub are necessary to authorize this Agreement or
to consummate the transactions contemplated herein (other than the approval of
this Agreement and the issuance of shares of Parent Common Stock hereunder (the
"SHARE ISSUANCE") by the holders of a majority of the outstanding shares of
Parent Common Stock present at the Parent Stockholders' Meeting (as defined in
Section 7.01(a)) and the consent of Parent as sole shareholder of Merger Sub).
This Agreement has been duly executed and delivered by each of Parent and Merger
Sub and, assuming the due authorization, execution and delivery by Company,
constitutes a legal, valid and binding obligation of each of Parent and Merger
Sub enforceable against Parent and Merger Sub in accordance with its terms
except to the extent that enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization and other similar laws affecting the
enforcement of creditors' rights generally and by principles or equity regarding
the availability of remedies.

SECTION 5.05 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.

(a) The execution and delivery of this Agreement by Parent and
Merger Sub do not, and the performance by Parent and Merger Sub of their
obligations hereunder and the consummation of the Merger will not, (i) conflict
with or violate any provision of the articles of incorporation or bylaws of
Parent or any equivalent organizational documents of any Parent Subsidiary, (ii)
assuming that all consents, approvals, authorizations and permits described in
Section 5.05(b) have been obtained and all filings and notifications described
in Section 5.05(b) have been made, conflict with or violate in any material
respect any Law applicable to Parent or any other Parent Subsidiary or by which
any property or asset of Parent or any Parent Subsidiary is bound or affected or
(iii) result in any breach of or constitute a default (or an event which with
the giving of notice or lapse of time or both could reasonably be expected to
become a default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of Parent or any Parent Subsidiary pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation.

(b) The execution and delivery of this Agreement by Parent and
Merger Sub do not, and the performance by Parent and Merger Sub of their
obligations hereunder and the consummation of the Merger will not, require any
consent, approval, authorization or permit of, or filing by Parent with or
notification by Parent to, any Governmental Entity, except pursuant to
applicable requirements of the Exchange Act, the Securities Act, Blue Sky Laws,
the rules and regulations of the NNM, the premerger notification requirements of
the HSR Act, if any, and the filing and recordation of the Certificate of Merger
as required by the DGCL.

SECTION 5.06 PERMITS; COMPLIANCE WITH LAWS. Parent and the Parent
Subsidiaries are in possession of all franchises, grants, authorizations,
licenses, establishment registrations, product listings, permits, approvals and
orders of any Governmental Entity necessary for Parent or any Parent Subsidiary
to own, lease and operate its properties and assets or otherwise to carry on its
business as it is now being conducted (collectively, the

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"PARENT PERMITS"), and, as of the date of this Agreement, none of the Parent
Permits has been suspended or cancelled nor is any such suspension or
cancellation pending or, to the knowledge of Parent, threatened. Neither Parent
nor any Parent Subsidiary is in conflict with, or in default or violation of,
(i) any Law applicable to Parent or any Parent Subsidiary or by which any
property or asset of Parent or any Parent Subsidiary is bound or affected or
(ii) any Parent Permits, except for such conflicts, defaults or violations that
could not reasonably be expected to have, individually or in the aggregate, a
Parent Material Adverse Effect. Schedule 5.06 of the Parent Disclosure Schedule
sets forth, as of the date of this Agreement, all actions, proceedings,
investigations or surveys pending or, to the knowledge of Parent, threatened
against Parent or any Parent Subsidiary that could reasonably be expected to
result in the suspension or cancellation of any material Parent Permit. Since
June 30, 1996, neither Parent nor any Parent Subsidiary has received from any
Governmental Entity any written notification with respect to possible conflicts,
defaults or violations of Laws.

SECTION 5.07 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
otherwise set forth on Schedule 5.07 of the Parent Disclosure Schedule, since
June 30, 1998, Parent and the Parent Subsidiaries have conducted their
businesses only in the ordinary course consistent with past practice and, since
such date, there has not been (i) any Parent Material Adverse Effect, (ii) any
event that could reasonably be expected to prevent or materially delay the
performance of Parent's obligations pursuant to this Agreement and the
consummation of the Merger by Parent, (iii) any material change by Parent in its
accounting methods, principles or practices, (iv) any declaration, setting aside
or payment of any dividend or distribution in respect of the shares of Parent
Common Stock or any redemption, purchase or other acquisition of any of Parent's
securities, (v) except in the ordinary course of business consistent with past
practice, any increase in the compensation or benefits or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase in
the compensation payable or to become payable to any executive officers of
Parent or any Parent Subsidiary, (vi) any issuance or sale of any stock, notes,
bonds or other securities other than pursuant to the exercise of outstanding
securities, or entering into any agreement with respect thereto, (vii) any
amendment to the Parent's certificate of incorporation or bylaws, (viii) other
than in the ordinary course of business, any (x) purchase, sale, assignment or
transfer of any material assets, (y) mortgage, pledge or the institution of any
lien, encumbrance or charge on any material assets or properties, tangible or
intangible, except for liens for taxes not yet delinquent and such other liens,
encumbrances or charges which do not, individually or in the aggregate, have a
Parent Material Adverse Effect, or (z) waiver of any rights of material value or
cancellation or any material debts or claims, (ix) any incurrence of any
material liability (absolute or contingent), except for current liabilities and
obligations incurred in the ordinary course of business consistent with past
practice, (x) any incurrence of any damage, destruction or similar loss, whether
or not covered by insurance, materially affecting the business or properties of
Parent or any Parent Subsidiary, or (xi) any entering into any transaction of a
material nature other than in the ordinary course of business, consistent with
past practices.

SECTION 5.08 SEC FILINGS; FINANCIAL STATEMENTS.

(a) Parent has timely filed all forms, reports, statements and
documents required to be filed by it (A) with the SEC and the NNM since June 30,
1996 (collectively, together with any such forms, reports, statements and
documents Parent may file subsequent to the date hereof until the Closing, the
"PARENT REPORTS") and (B) since June 30, 1996, in all material respects, with
any other Governmental Entities. Each Parent Report (i) was prepared in
accordance with the requirements of the Securities Act, the Exchange Act or the
NNM, as the case may be, and (ii) did not at the time it was filed contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading. Each
form, report, statement and document referred to in clause (B) of this paragraph
was prepared in all material respects in accordance with the requirements of
applicable Law. No Parent Subsidiary is subject to the periodic reporting
requirements of the Exchange Act or required to file any form, report or other
document with the SEC, the NNM, any other stock exchange or any other comparable
Governmental Entity.

(b) Each of the consolidated financial statements (including,
in each case, any notes thereto) contained in the Parent Reports was prepared in
accordance with U.S. GAAP applied on a consistent basis

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throughout the periods indicated (except as may be indicated in the notes
thereto) and each presented fairly the consolidated financial position of Parent
and the Parent Subsidiaries as at the respective dates thereof, and their
consolidated results of operations, stockholders' equity and cash flows for the
respective periods indicated therein, except as otherwise noted therein
(subject, in the case of unaudited statements, to normal and recurring
immaterial year-end adjustments).

(c) Except as and to the extent set forth or reserved against
on the consolidated balance sheet of Parent and the Parent Subsidiaries as of
June 30, 1998 as reported in the Parent Reports, none of Parent or any Parent
Subsidiary has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected on a
balance sheet or in notes thereto prepared in accordance with U.S. GAAP, except
for liabilities or obligations incurred in the ordinary course of business
consistent with past practice since June 30, 1998.

SECTION 5.09 CONTRACTS. Except as set forth in Schedule 5.09 of the
Parent Disclosure Schedule, neither Parent nor any Parent Subsidiary is in
material violation of or default under (nor does there exist any condition which
with the passage of time or the giving of notice could reasonably be expected to
cause such a material violation of or default under) any contract or agreement
that is material to the business, assets, liabilities, financial condition or
results of operations of Parent and Parent Subsidiaries taken as a whole (each,
a "PARENT MATERIAL CONTRACT"). Each Parent Material Contract is in full force
and effect and is a legal, valid and binding obligation of Parent or a Parent
Subsidiary and, to the knowledge of Company, each of the other parties thereto,
enforceable in accordance with its terms, except to the extent that
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and by principles of equity regarding the availability of
remedies.

SECTION 5.10 EMPLOYEE BENEFIT PLANS; LABOR MATTERS.

(a) The Parent Disclosure Schedule lists each employee benefit
fund, plan, program, and arrangement (including, without limitation, any
"pension" plan, fund or program, as defined in Section 3(2) of ERISA, and any
"employee benefit plan", as defined in Section 3(3) of ERISA and any plan,
program or arrangement providing for severance; medical, dental or vision
benefits; life insurance or death benefits; disability benefits, sick pay or
other wage replacement; vacation, holiday or sabbatical; pension or
profit-sharing benefits; stock options or other equity compensation; bonus or
incentive pay or other material fringe benefits) maintained, sponsored or
contributed to or required to be contributed to by Parent or any Parent
Subsidiary (the "PARENT BENEFIT PLANS"). With respect to each Parent Benefit
Plan, Parent has delivered or made available to Company a true, complete and
correct copy of a summary of such Parent Benefit Plan.

(b) Each Parent Benefit Plan has been administered in all
material respects in accordance with its terms and all applicable laws,
including, without limitation, ERISA and the Code, and all contributions
required to be made under the terms of any of the Parent Benefit Plans as of the
date of this Agreement have been timely made or, if not yet due, have been
reflected on the most recent consolidated balance sheet filed or incorporated by
reference in the Parent Reports prior to the date of this Agreement. With
respect to the Parent Benefit Plans, no event has occurred and, to the knowledge
of Parent, there exists no condition or set of circumstances in connection with
which Parent or any Parent Subsidiary could be subject to any material liability
(other than for routine benefit liabilities) under the terms of, or with respect
to, such Parent Benefit Plans, ERISA, the Code or any other applicable Law.

(c) Parent, on behalf of itself and all of the Parent
Subsidiaries, hereby represents that: (i) each Parent Benefit Plan which is
intended to be qualified under Section 401(a), 401(k), 401(m) or 4975(e)(6) of
the Code has received or is currently awaiting receipt of a favorable
determination letter from the IRS as to its qualified status under the Code, and
each trust established in connection with any Parent Benefit Plan which is
intended to be exempt from federal income taxation under Section 501(a) of the
Code has received a determination letter from the IRS that it is so exempt, and
to Parent's knowledge no fact or event has occurred that could adversely affect
the qualified status of any such Parent Benefit Plan or the exempt status of any
such trust; and (ii) to Parent's knowledge there has been no prohibited
transaction (within the meaning of Section 406 of ERISA or

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Section 4975 of the Code and other than a transaction that is under a statutory
or administrative exemption) with respect to any Parent Benefit Plan that could
result in material liability to the Parent or any Parent Subsidiaries. No suit,
administrative proceeding, action or other litigation has been brought, or to
the knowledge of Parent is threatened, against or with respect to any such
Parent Benefit Plan, including any audit or inquiry by the Internal Revenue
Service or United States Department of Labor (other than routine benefits
claims).

(d) No Parent Benefit Plan is a multiemployer pension plan (as
defined in Section 3(37) of ERISA) or other pension plan subject to Title IV of
ERISA and neither the Parent, Parent Subsidiary nor any other trade or business
(whether or not incorporated) that is under "common control" with Parent or a
Parent Subsidiary (within the meaning of Section 4001(b) of ERISA) or with
respect to which Parent or any Parent Subsidiary could otherwise incur liability
under Title IV of ERISA (a "PARENT ERISA AFFILIATE") has sponsored or
contributed to or been required to contribute to a multiemployer pension plan or
other pension plan subject to Title IV of ERISA. No material liability under
Title IV of ERISA has been incurred by Parent, any Parent Subsidiary or any
Parent ERISA Affiliate that has not been satisfied in full, and no condition
exists that presents a material risk to Parent or any Parent Subsidiary of
incurring or being subject (whether primarily, jointly or secondarily) to a
material liability thereunder. None of the assets of Parent or any Parent
Subsidiary is, or may reasonably be expected to become, the subject of any lien
arising under ERISA or Section 412(n) of the Code.

(e) With respect to each Parent Benefit Plan required to be
set forth in the Parent Disclosure Schedule that is subject to Title IV or Part
3 of Title I of ERISA or Section 412 of the Code, (i) no reportable event
(within the meaning of Section 4043 of ERISA, other than an event that is not
required to be reported before or within 30 days of such event) has occurred or
is expected to occur, (ii) there was not an accumulated funding deficiency
(within the meaning of Section 302 of ERISA or Section 412 of the Code), whether
or not waived, as of the most recently ended plan year of such Parent Benefit
Plan; and (iii) there is no "unfunded benefit liability" (within the meaning of
Section 4001(a)(18) of ERISA).

(f) Neither Parent nor any Parent Subsidiary is a party to any
collective bargaining or other labor union contract applicable to persons
employed by Parent or any Parent Subsidiary and no collective bargaining
agreement is being negotiated by Parent or any Parent Subsidiary. As of the
date of this Agreement, there is no labor dispute, strike or work stoppage
against Parent or any Parent Subsidiary pending or, to the knowledge of Parent,
threatened which may interfere with the respective business activities of Parent
or any Parent Subsidiary. As of the date of this Agreement, to the knowledge of
Parent, none of Parent, any Parent Subsidiary, or any of their respective
representatives or employees has committed any unfair labor practice in
connection with the operation of the respective businesses of Parent or any
Parent Subsidiary, and there is no charge or complaint against Parent or any
Parent Subsidiary by the National Labor Relations Board or any comparable
Governmental Entity pending or threatened in writing.

(g) Except as required by Law or as set forth in Schedule
5.10(g) of the Parent Disclosure Schedule, no Parent Benefit Plan provides any
of the following retiree benefits to any person: medical, disability or life
insurance benefits. To Parent's knowledge, Parent and the Parent ERISA
Affiliates are in material compliance with (i) the requirements of the
applicable health care continuation and notice provisions of COBRA and the
regulations (including proposed regulations) thereunder and (ii) the applicable
requirements of the Health Insurance Portability and Accountability Act of 1996
and the regulations (including the proposed regulations) thereunder.

SECTION 5.11 LITIGATION. Except as set forth in the Parent
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of Parent, threatened against Parent
or any Parent Subsidiary that could reasonably be expected to have, individually
or in the aggregate, a Parent Material Adverse Effect or materially impair
Parent's ability to consummate the transactions contemplated herein, and, to the
knowledge of Parent, there are no existing facts or circumstances that could
reasonably be expected to result in such a suit, claim, action, proceeding or
investigation. Parent is not aware of any facts or circumstances which could
reasonably be expected to result in the denial of insurance coverage under
policies issued to Parent and Parent Subsidiaries in respect of such suits,
claims, actions, proceedings and investigations, except in any case as could not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect. Neither Parent

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nor any Parent Subsidiary is subject to any outstanding order, writ, injunction
or decree which could reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect or materially impair Parent's
ability to consummate the transactions contemplated herein.

SECTION 5.12 TAXES. Except in those instances that would not result
in a Parent Material Adverse Effect:

(a) Parent and each of Parent Subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which Parent or any
Parent Subsidiary is or has been a member, have properly completed and timely
filed all Tax Returns required to be filed by them and have paid all Taxes shown
thereon to be due;

(b) Parent has provided adequate accruals in accordance with
generally accepted accounting principles in its June 30, 1998 balance sheet
contained in the Parent Reports for any Taxes that have not been paid, whether
or not shown as being due on any Tax Returns; and

SECTION 5.13 BROKERS. No broker, finder or investment banker (other
than I C Advisors (the "PARENT FINANCIAL ADVISOR")) is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger
based upon arrangements made by or on behalf of Parent. Parent has heretofore
made available to Company true, complete and correct copies of all agreements
between Parent and Parent Financial Advisor pursuant to which such firm would be
entitled to any payment relating to the Merger.

SECTION 5.14 CERTAIN BUSINESS PRACTICES. Neither Parent nor any
Parent Subsidiary nor any directors, officers, agents or employees of Parent or
any Parent Subsidiary (in their capacities as such) has (a) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity or (b) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended.

SECTION 5.15 NO PRIOR ACTIVITIES. Except for liabilities incurred in
connection with its incorporation or organization, and consummation of this
Agreement and the transactions contemplated hereby, Merger Sub has not incurred
any liabilities, and has not engaged in any business or activities of any type
or kind whatsoever or entered into any agreements or arrangements with any
person or entity. Merger Sub is a wholly owned subsidiary of Parent.

SECTION 5.16 INTELLECTUAL PROPERTY.

(a) All trademarks, trade names, service marks, trade dress,
and all goodwill associated with any of the foregoing, patents, Internet domain
names, copyrights and any renewal rights therefor, technology, supplier lists,
trade secrets, know-how, computer software programs or applications in both
source and object code form, technical documentation of such software programs,
registrations and applications for any of the foregoing and all other tangible
or intangible proprietary information or materials that are or have been used
(including without limitation in the development of) Parent's business and/or in
any product, technology or process (i) currently being or formerly manufactured,
published or marketed by Parent or (ii) previously or currently under
development for possible future manufacturing, publication, marketing or other
use by Parent are hereinafter referred to as the "PARENT INTELLECTUAL PROPERTY."

(b) Parent has all rights in Parent Intellectual Property
necessary to carry out Parent's current activities. Except as set forth in
Schedule 5.16(b), no claims have been asserted or threatened against Parent that
challenge the validity or ownership of any Parent Intellectual Property or
allege that the use, reproduction, manufacturing, distribution, licensing,
sublicensing or sale of Parent Intellectual Property infringes on

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any intellectual property or proprietary right of any person or constitutes a
misappropriation of any trade secret. All of Parent's patents, patent
applications, registered trademarks and trademark applications and registered
copyrights are in good standing with all fees and filings due as of the Closing
duly made. Parent owns full and unencumbered rights and good, valid and
marketable title to all of Parent's internally developed software.

(c) The software programs developed by Parent (i) have been
designed to ensure year 2000 compatibility, which includes, but is not limited
to, being able to provide specific dates and calculate spans of dates within and
between twentieth century and twenty-first century, prior to, including and
following January 1, 2000; (ii) operate and will operate in accordance with
their specifications and correctly process day and date calculations for dates
prior and up to December 31, 1999, and on and after January 1, 2000, prior to,
during and after the calendar year 2000; and (iii) shall not end abnormally or
provide invalid or incorrect results as a result of date data, specifically
including date data which represents or references different centuries or more
than one century.

(d) The integrated circuits developed by Parent (i) operate
and will operate in accordance with their specifications and correctly process
day and date calculations for dates prior and up to December 31, 1999, and on
and after January 1, 2000, prior to, during and after the calendar year 2000;
and (ii) shall not end abnormally or provide invalid or incorrect results as a
result of date data, specifically including date data which represents or
references different centuries or more than one century.

SECTION 5.17 BUSINESS ACTIVITY RESTRICTION. Except as set forth in
Schedule 5.17 of the Parent Disclosure Schedule, there is no non-competition or
other similar agreement, commitment, judgment, injunction, order or decree to
which Parent or any Parent Subsidiary is a party or subject to that has or could
reasonably be expected to have the effect of prohibiting or impairing the
conduct of business by Parent. Parent has not entered into any material
agreement under which Parent is restricted from selling, licensing or otherwise
distributing any of its technology or products to, or providing services to,
customers or potential customers or any class of customers, in any geographic
area, during any period of time or in any segment of the market or line of
business.

SECTION 5.18 CERTAIN TAX MATTERS. Neither Parent nor, to the best
knowledge of Parent, any of its affiliates has taken or agreed to take any
action (other than actions contemplated by this Agreement) that could reasonably
be expected to prevent the Merger from constituting a "reorganization" under
Section 368 of the Code.

SECTION 5.19 PARENT COMMON STOCK. The shares of Parent Common Stock
to be issued pursuant to the Merger, when issued, will be duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights created by statute, Parent's certificate of incorporation or bylaws or
any agreement which Parent is a party or by which Parent is bound, and will,
when issued, be registered under the Securities Act and the Exchange Act and
registered or exempt from registration under applicable blue sky laws.

SECTION 5.20 AVAILABILITY OF FUNDS. Parent will have available to
it, at the Effective Time, sources of capital and financing or cash on hand
sufficient to pay the cash portion of the consideration to be paid pursuant to
Section 3.01(a) and to pay any other amounts payable pursuant to this Agreement
and to effect the transactions contemplated hereby.

ARTICLE VI

COVENANTS

SECTION 6.01 CONDUCT OF BUSINESS BY COMPANY PENDING THE CLOSING.
Company agrees that, between the date of this Agreement and the Effective Time,
unless Parent shall otherwise agree in writing, or except as set forth in
Section 6.01 of the Company Disclosure Schedule or as otherwise provided for in
this Agreement (x) the respective businesses of Company and the Company
Subsidiaries shall be conducted only in, and Company and the Company
Subsidiaries shall not take any action except in, the ordinary course of
business

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consistent with past practice and (y) Company shall use all reasonable efforts
to keep available the services of such of the current officers, significant
employees and consultants of Company and the Company Subsidiaries and to
preserve the current relationships of Company and the Company Subsidiaries with
such of the corporate partners, customers, suppliers and other persons with
which Company or any Company Subsidiary has significant business relations in
order to preserve substantially intact its business organization. Without
limitation, neither Company nor any Company Subsidiary shall, between the date
of this Agreement and the Effective Time, except as set forth in Schedule 6.01
of the Company Disclosure Schedule or as otherwise provided for in this
Agreement, directly or indirectly, do, or agree to do, any of the following
without the prior written consent of Parent:

(a) amend or otherwise change its certificate of incorporation
or bylaws or equivalent organizational documents;

(b) issue, sell, pledge, dispose of, grant, transfer, lease,
license, guarantee or encumber, or authorize the issuance, sale, pledge,
disposition, grant, transfer, lease, license or encumbrance of, (i) any shares
of capital stock of Company or any Company Subsidiary of any class, or
securities convertible into or exchangeable or exercisable for any shares of
such capital stock, or any options, warrants or other rights of any kind to
acquire any shares of such capital stock, or any other ownership interest
(including, without limitation, any phantom interest), of Company or any Company
Subsidiary, other than the issuance of shares of Company Common Stock pursuant
to the exercise of stock options therefor outstanding as of the date of this
Agreement or the grant after the date hereof of Company Stock Options, whether
or not granted pursuant to any Company Stock Plans, in the ordinary course of
business consistent with past practice (provided, that such additional amount of
Company Common Stock subject to such Company Stock Options shall not exceed
300,000 shares in the aggregate), and the issuance of shares of Company Common
Stock pursuant to such options, or except pursuant to the Rights Agreement or
(ii) any material property or assets of Company or any Company Subsidiary except
(A) transactions pursuant to existing contracts, (B) transactions in the
ordinary course of business consistent with past practice and (C) shares of
Company Common Stock issued pursuant to the Company ESPP in the ordinary course
of business consistent with past practice;

(c) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any interest in any
corporation, partnership, other business organization or person or any division
thereof, other than the purchase of assets in the ordinary course of business
consistent with past practice; (ii) incur any indebtedness for borrowed money
(other than indebtedness with respect to working capital in amounts consistent
with past practice) or issue any debt securities or assume, guarantee or
endorse, or otherwise as an accommodation become responsible for, the
obligations of any person (other than a Company Subsidiary) for borrowed money
or make any loans or advances material to the business, assets, liabilities,
financial condition or results of operations of Company and the Company
Subsidiaries, taken as a whole; (iii) terminate, cancel or request any material
change in, or agree to any material change in, any Company Material Contract or
other material License Agreement (it being understood that no consent of Parent
shall be required for Company to enter into any enhancement of such agreements
or additional agreements in the ordinary course of business); (iv) make or
authorize any capital expenditure, other than capital expenditures in the
ordinary course of business consistent with past practice that are not, in the
aggregate, in excess of $300,000 for Company and the Company Subsidiaries taken
as a whole; or (v) enter into or amend any contract, agreement, commitment or
arrangement that, if fully performed, would not be permitted under this Section
6.01(c);

(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock, except that any Company Subsidiary may pay dividends or
make other distributions to Company or any other Company Subsidiary;

(e) reclassify, combine, split, subdivide or redeem, purchase
or otherwise acquire, directly or indirectly, any of its capital stock except
repurchases of unvested shares at cost in connection with the termination of the
employment relationship with any employee pursuant to stock option or purchase
agreements in effect on the date hereof;

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(f) amend or change the period (or permit any acceleration,
amendment or change) of exercisability of options granted under the Company
Stock Plans or authorize cash payments in exchange for any Company Stock Options
granted under any of such plans;

(g) amend the terms of, repurchase, redeem or otherwise
acquire, or permit any Company Subsidiary to repurchase, redeem or otherwise
acquire, any of its securities or any securities of any Company Subsidiary;

(h) except as set forth in Section 6.08, increase the
compensation payable or to become payable to its directors, officers,
consultants or employees, grant any rights to severance or termination pay to,
or enter into any employment or severance agreement which provides benefits upon
a change in control of Company that would be triggered by the Merger with, any
director, officer, consultant or other employee of Company or any Company
Subsidiary who is not currently entitled to such benefits from the Merger,
establish, adopt, enter into or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
director, officer, consultant or employee of Company or any Company Subsidiary,
except to the extent required by applicable Law or the terms of a collective
bargaining agreement, or enter into or amend any contract, agreement, commitment
or arrangement between Company or any Company Subsidiary and any of Company's
directors, officers, consultants or employees, except for increases in
compensation paid and bonuses payable to persons who are not directors of
Company in the ordinary course of business consistent with past practice;

(i) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of claims,
liabilities or obligations (A) in the ordinary course of business and consistent
with past practice or (B) claims, liabilities or obligations reflected on the
1998 Balance Sheet or (C) as otherwise set forth on Schedule 6.01 of the Company
Disclosure Schedule;

(j) except as required by any Governmental Entity, make any
material change with respect to Company's accounting policies, principles,
methods or procedures, including, without limitation, revenue recognition
policies, other than as required by U.S. GAAP;

(k) make any material Tax election or settle or compromise any
material Tax liability; or

(l) authorize or enter into any formal or informal agreement
or otherwise make any commitment to do any of the foregoing or to take any
action which would make any of the representations or warranties of Company
contained in this Agreement untrue or incorrect or prevent Company from
performing or cause Company not to perform its covenants hereunder or result in
any of the conditions to the Merger set forth herein not being satisfied.

SECTION 6.02 NOTICES OF CERTAIN EVENTS. Each of Parent and Company
shall give prompt notice to the other of (i) any notice or other communication
from any person alleging that the consent of such person is or may be required
in connection with the Merger; (ii) any notice or other communication from any
Governmental Entity in connection with the Merger; (iii) any actions, suits,
claims, investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting Parent or the Parent
Subsidiaries or Company or the Company Subsidiaries, respectively, which, if
pending on the date hereof, would have been required to have been disclosed in
this Agreement, or that relate to the consummation of the Merger; (iv) the
occurrence of a default or event that, with the giving of notice or lapse of
time or both, will become a default under any Parent Material Contract or
Company Material Contract, respectively; and (v) any change that could
reasonably be expected to have a Parent Material Adverse Effect or a Company
Material Adverse Effect, respectively, or to delay or impede the ability of
either Parent or Company, respectively, to perform their respective obligations
pursuant to this Agreement and to effect the consummation of the Merger.

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SECTION 6.03 ACCESS TO INFORMATION; CONFIDENTIALITY.

(a) Except as required pursuant to any confidentiality
agreement or similar agreement or arrangement to which Parent or Company or any
of the Parent Subsidiaries or the Company Subsidiaries is a party or pursuant to
applicable Law or the regulations or requirements of any stock exchange or other
regulatory organization with whose rules a party hereto is required to comply,
from the date of this Agreement to the Effective Time, Parent and Company shall
(and shall cause the Parent Subsidiaries and Company Subsidiaries, respectively,
to) (i) provide to the other (and its officers, directors, employees,
accountants, consultants, legal counsel, agents and other representatives
(collectively, "REPRESENTATIVES")) access at reasonable times upon prior notice
to its and its subsidiaries' officers, employees, agents, properties, offices
and other facilities and to the books and records thereof, and (ii) furnish
promptly such information concerning its and its subsidiaries' business,
properties, contracts, assets, liabilities and personnel as the other party or
its Representatives may reasonably request. No investigation conducted pursuant
to this Section 6.03 shall affect or be deemed to modify any representation or
warranty made in this Agreement.

(b) The parties hereto shall comply with, and shall cause
their respective Representatives to comply with, all of their respective
obligations under the Confidentiality Agreement with respect to the information
disclosed pursuant to this Section 6.03.

SECTION 6.04 NO SOLICITATION OF TRANSACTIONS. Company shall not,
directly or indirectly, and shall cause its Representatives not to, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing
nonpublic information), any inquiries or the making of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders) that
constitutes, or may reasonably be expected to lead to, any Company Competing
Transaction, or enter into or maintain or continue discussions or negotiate with
any person in furtherance of such inquiries or to obtain a Company Competing
Transaction, or agree to or endorse any Company Competing Transaction, or
authorize or permit any of Company's Representatives or subsidiaries, or any
Representative retained by Company's subsidiaries, to take any such action;
provided, however, that nothing contained in this Section 6.04 shall prohibit
the board of directors of Company (i) from complying with Rule 14d-9 or 14e-2(a)
promulgated under the Exchange Act with regard to a tender or exchange offer not
made in violation of this Section 6.04 or (ii) prior to receipt of the approval
by the stockholders of Company of this Agreement and the Merger from providing
information (subject to a confidentiality agreement at least as restrictive, in
all material respects, as the Confidentiality Agreement) in connection with, and
negotiating, another unsolicited, bona fide written proposal regarding a Company
Competing Transaction that (A) Company's board of directors shall have
determined in good faith, after considering applicable state law, based upon the
advice of independent outside counsel of nationally recognized reputation, that
such action is required in order for the board of directors of Company to comply
with its fiduciary duties to Company's stockholders under applicable law, (B) if
any cash consideration is involved, shall not be subject to any financing
contingency, and with respect to which Company's board of directors shall have
determined in the proper exercise of its fiduciary duties to Company's
stockholders that the acquiring party is reasonably capable of consummating such
Company Competing Transaction on the terms proposed, and (C) Company's board of
directors shall have determined in its good faith judgment (based upon the
advice of Company's independent financial advisors of nationally recognized
reputation) that such Company Competing Transaction provides greater value, in
the aggregate, to the stockholders of Company than the Merger (any such Company
Competing Transaction being referred to herein as a "COMPANY SUPERIOR
PROPOSAL"). Company shall notify Parent promptly if any proposal or offer, or
any inquiry or contact with any person with respect thereto, regarding a Company
Competing Transaction is made, such notice to include the identity of the person
making such proposal, offer, inquiry or contact, and the terms of such Company
Competing Transaction. Company immediately shall cease and cause to be
terminated all existing discussions or negotiations with any parties conducted
heretofore with respect to a Company Competing Transaction. Company shall not
release any third party from, or waive any provision of, any confidentiality or
standstill agreement to which it is a party.

SECTION 6.05 CONTROL OF OPERATIONS. Nothing contained in this
Agreement shall give Parent, directly or indirectly, the right to control or
direct the operations of Company and the Company Subsidiaries prior to the
Effective Time. Prior to the Effective Time, Company shall exercise, consistent
with the terms and conditions of this Agreement, complete control and
supervision over its operations.

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SECTION 6.06 FURTHER ACTION; CONSENTS; FILINGS.

(a) Upon the terms and subject to the conditions hereof, each
of the parties hereto shall use all reasonable efforts to (i) take, or cause to
be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the Merger, (ii) obtain from Governmental Entities any
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by Parent or Company or any of their respective
subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the consummation of the Merger and (iii) make all necessary
filings, and thereafter make any other required or appropriate submissions, with
respect to this Agreement and the Merger required under (A) the rules and
regulations of the NNM, (B) the Securities Act, the Exchange Act and any other
applicable Federal or state securities Laws, (C) the HSR Act, if any, and (D)
any other applicable Law. The parties hereto shall cooperate and consult with
each other in connection with the making of all such filings, including by
providing copies of all such documents to the nonfiling parties and their
advisors prior to filing, and none of the parties shall file any such document
if any of the other parties shall have reasonably objected to the filing of such
document. No party shall consent to any voluntary extension of any statutory
deadline or waiting period or to any voluntary delay of the consummation of the
Merger at the behest of any Governmental Entity without the consent and
agreement of the other parties hereto, which consent shall not be unreasonably
withheld or delayed.

(b) Each of Company and Parent will give (or will cause their
respective subsidiaries to give) any notices to third persons, and use, and
cause their respective subsidiaries to use, reasonable efforts to obtain any
consents from third persons necessary, proper or advisable to consummate the
transactions contemplated by this Agreement.

(c) From the date of this agreement until the Effective Time,
each of Company and Parent covenants and agrees that it will not (i) knowingly
take any action that could reasonably be expected to prevent the Merger from
constituting a transaction qualifying under Section 368(a) of the Code; and (ii)
take any action which would make any of the representations or warranties made
by it contained in this Agreement untrue and incorrect or prevent it from
performing or cause it not to perform its covenants hereunder or result in any
of the conditions to the Merger set forth herein not being satisfied.

SECTION 6.07 ADDITIONAL REPORTS. Company and Parent shall each
furnish to the other copies of any reports of the type referred to in Sections
4.07 and 5.06, which it files with the SEC on or after the date hereof, and
Company and Parent, as the case may be, covenant and warrant that as of the
respective dates thereof, such reports will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Any unaudited consolidated interim
financial statements included in such reports (including any related notes and
schedules) will fairly present the financial position of Company and its
consolidated subsidiaries or Parent and its consolidated subsidiaries, as the
case may be, as of the dates thereof and the results of operations and changes
in financial position or other information including therein for the periods or
as of the date then ended (subject, where appropriate, to normal year-end
adjustments), in each case in accordance with past practice and U.S. GAAP
consistently applied during the periods involved (except as otherwise disclosed
in the notes thereto).

SECTION 6.08 EMPLOYEE RETENTION.

(a) As promptly as practicable after the date hereof, Company
shall offer to up to 15 employees of Company designated by Parent retention
bonuses in an aggregate amount of not more than $300,000 payable to such
employees if they remain employed by Company at the Effective Time.

(b) Company shall use its best efforts to cause the employees
of Company set forth on Schedule 6.08(b) to agree upon arrangements satisfactory
to Parent and such employees for such employees to remain employed or engaged by
the Surviving Corporation during a post-closing transition period to assist
Parent in integrating the Surviving Corporation with the Parent.

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SECTION 6.09 THIRD PARTY CONSENTS. Company shall use its
commercially reasonable efforts to obtain the consent or approval or
confirmation or other reasonable comfort of those persons listed on Schedule
6.09 with respect to the continuing relationship of Company and such parties
under existing contracts and arrangements following the Effective Time.

ARTICLE VII

ADDITIONAL AGREEMENTS

SECTION 7.01 REGISTRATION STATEMENT; PROXY STATEMENT.

(a) As promptly as practicable after the execution of this
Agreement, Parent and Company shall jointly prepare and shall file with the SEC
a document or documents that will constitute (i) the prospectus forming part of
the registration statement on Form S-4 of Parent (together with all amendments
thereto, the "REGISTRATION STATEMENT"), in connection with the registration
under the Securities Act of Parent Common Stock to be issued to Company's
stockholders pursuant to the Merger and (ii) the joint proxy statement with
respect to the Merger relating to the special meeting of Company's stockholders
to be held to consider approval of this Agreement and the Merger (the "COMPANY
STOCKHOLDERS' MEETING") and of Parent's stockholders (the "PARENT STOCKHOLDERS'
MEETING") to be held to consider approval of the Share Issuance (together with
any amendments thereto, the "JOINT PROXY STATEMENT"). Copies of the Joint Proxy
Statement shall be provided to the NNM in accordance with its rules. With the
cooperation of Company, Parent shall use its best efforts to cause the
Registration Statement to become effective as promptly as practicable after the
date hereof, and, prior to the effective date of the Registration Statement,
Parent shall, with the cooperation of the Company, take all action required
under any applicable Laws in connection with the issuance of shares of Parent
Common Stock pursuant to the Merger. Parent or Company, as the case may be,
shall furnish all information concerning Parent or Company as the other party
may reasonably request in connection with such actions and the preparation of
the Registration Statement and the Joint Proxy Statement. Each of Parent and
Company shall notify the other of the receipt of any comments from the SEC on
the Registration Statement and the Joint Proxy Statement and of any requests by
the SEC for any amendments or supplements thereto or for additional information
and shall provide to each other promptly copies of all correspondence between
Parent, Company or any of their representatives and advisors and the SEC. As
promptly as practicable after the effective date of the Registration Statement,
the Joint Proxy Statement shall be mailed to the stockholders of Company and of
Parent. Each of Parent and Company shall cause the Proxy Statement to comply as
to form and substance as to such party in all material respects with the
applicable requirements of (i) the Exchange Act, (ii) the Securities Act, (iii)
the rules and regulations of the NNM.

(b) The Joint Proxy Statement shall include (i) the approval
of the Merger and the recommendation of the board of directors of Company to
Company's stockholders that they vote in favor of approval of this Agreement and
the Merger, and (ii) the opinion of Company Financial Advisor referred to in
Section 4.19 or any updated version thereof. The Joint Proxy Statement shall
include the approval of the Share Issuance and the recommendation of the board
of directors of Parent or Parent's stockholders that they vote in favor of the
Share Issuance.

(c) No amendment or supplement to the Joint Proxy Statement or
the Registration Statement shall be made without the approval of Parent and
Company, which approval shall not be unreasonably withheld or delayed. Each of
the parties hereto shall advise the other parties hereto, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order, of the suspension of the qualification of the Parent Common Stock
issuable in connection with the Merger for offering or sale in any jurisdiction,
or of any request by the SEC for amendment of the Proxy Statement or the
Registration Statement or comments thereon and responses thereto or requests by
the SEC for additional information.

(d) None of the information supplied by Company for inclusion
or incorporation by reference in the Registration Statement or the Joint Proxy
Statement shall, at the respective times filed with the SEC or other regulatory
agency and, in addition, (A) in the case of the Joint Proxy Statement, at the
date it or any

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amendments or supplements thereto are mailed to stockholders of Parent and
Company, at the time of the Company Stockholders' Meeting, at the time of the
Parent Stockholder's Meeting, and at the Effective Time and (B) in the case of
the Registration Statement, when it becomes effective under the Securities Act
and at the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. If at any time prior to the Effective Time any
event or circumstance relating to Company or any Company Subsidiary, or their
respective officers or directors, should be discovered by Company that should be
set forth in an amendment or a supplement to the Registration Statement or the
Joint Proxy Statement, Company shall promptly inform Parent. All documents that
Company is responsible for filing with the SEC in connection with the Merger
will comply as to form in all material respects with the applicable requirements
of the rules and regulations of the Securities Act and the Exchange Act.

(e) None of the information supplied by Parent for inclusion
or incorporation by reference in the Registration Statement or the Joint Proxy
Statement shall, at the respective times filed with the SEC or other regulatory
agency and, in addition, (A) in the case of the Joint Proxy Statement, at the
date it or any amendments or supplements thereto are mailed to stockholders of
Parent and Company, at the time of Company Stockholders' meeting, at the time of
the Parent Stockholders' Meeting and at the Effective Time and (B) in the case
of the Registration Statement, when it becomes effective under the Securities
Act and at the Effective Time, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. If, at any time prior to the Effective Time, any
event or circumstance relating to Parent or any Parent Subsidiary, or their
respective officers or directors, should be discovered by Parent that should be
set forth in an amendment or a supplement to the Registration Statement or the
Joint Proxy Statement, Parent shall promptly inform Company. All documents that
Parent is responsible for filing with the SEC in connection with the Merger will
comply as to form in all material respects with the applicable requirements of
the rules and regulations of the Securities Act and the Exchange Act.

SECTION 7.02 STOCKHOLDERS' MEETINGS. Company shall call and hold the
Company Stockholders' Meeting and Parent shall call and hold the Parent
Stockholders' Meeting as promptly as practicable after the date hereof for the
purpose of voting upon the approval of this Agreement and the Merger or the
Share Issuance, as the case may be, pursuant to the Joint Proxy Statement, and
Company and Parent shall use all reasonable efforts to hold the Parent
Stockholders' Meeting and the Company Stockholders' Meeting as soon as
practicable after the date on which the Registration Statement becomes effective
and, to the extent practicable, such stockholders' meetings shall be held on the
same day. Except as otherwise contemplated by this Agreement, Company shall use
all reasonable efforts to solicit from its stockholders proxies in favor of the
approval of this Agreement and the Merger pursuant to the Joint Proxy Statement
and shall take all other action necessary or advisable to secure the vote or
consent of stockholders required by the DGCL or applicable other stock exchange
requirements to obtain such approval. Except as otherwise contemplated by this
Agreement, Parent shall use all reasonable efforts to solicit from its
stockholders proxies in favor of the Share Issuance pursuant to the Joint Proxy
Statement and shall take all other action necessary or advisable to secure the
consent of stockholders required by NNM or the DGCL to obtain such approval.

SECTION 7.03 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.

(a) The provisions with respect to indemnification that are
set forth in the certificate of incorporation and bylaws of the Surviving
Corporation shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner that would affect adversely the
rights thereunder of individuals who at or at any time prior to the Effective
Time were directors, officers, employees or agents of Company.

(b) From and after the Effective Time, Parent shall indemnify
and hold harmless each present and former director and officer of Company (the
"INDEMNIFIED PARTIES"), against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "COSTS") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal,

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administrative or investigative, arising out of or pertaining to matters
relating to their service as such an officer or director existing or occurring
at or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent that Company would have been
permitted under Delaware law and its charter documents (each as in effect on the
date hereof) to indemnify such Indemnified Parties.

(c) For a period of six years after the Effective Time, Parent
shall maintain in effect the directors' and officers' liability insurance
policies maintained by Company; provided, however, that in no event shall Parent
be required to expend in any one year in excess of 150% of the annual premium
currently paid by Company for such coverage, and provided further, that if the
premium for such coverage exceeds such amount, Parent shall purchase a policy
with the greatest coverage available for such 150% of the annual premium.

(d) If the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then and in each such case, proper provision shall be made so
that the successors and assigns of the Surviving Corporation assume the
obligations set forth in this Section 7.03.

(e) The provisions of this Section 7.03 are intended to be for
the benefit of, and enforceable by, each Indemnified Party and his or her heirs
and representatives, and nothing herein shall affect any indemnification rights
that any Indemnified Party and his or her heirs and representatives may have
under the certificate of incorporation or bylaws of Company or any Company
subsidiary, any contract or applicable law.

SECTION 7.04 NO SHELF REGISTRATION. Parent shall not be required to
amend or maintain the effectiveness of the Registration Statement for the
purpose of permitting resale of the shares of Parent Common Stock received
pursuant hereto by the persons who may be deemed to be "affiliates" of Company
within the meaning of Rule 145 promulgated under the Securities Act.

SECTION 7.05 PUBLIC ANNOUNCEMENTS. The initial press release
concerning the Merger shall be a joint press release and, thereafter, Parent and
Company shall consult with each other before issuing any press release or
otherwise making any public statements with respect to this Agreement or the
Merger and shall not issue any such press release or make any such public
statement without the prior written approval of the other, except to the extent
required by applicable Law or the requirements of the rules and regulations of
the NNM, in which case the issuing party shall use all reasonable efforts to
consult with the other party before issuing any such release or making any such
public statement.

SECTION 7.06 NNM LISTING. Prior to the Effective Time, Parent shall
file with the NNM a Notification Form for Listing of Additional Shares with
respect to the Parent Common Stock issued or issuable in connection with the
Merger and shall use its best efforts to have such Parent Common Stock approved
for quotation on the NNM.

SECTION 7.07 BLUE SKY. Parent shall use its best efforts to obtain
prior to the Effective Time all necessary permits and approvals required under
Blue Sky Laws to permit the distribution of the shares of Parent Common Stock to
be issued in accordance with the provisions of this Agreement.

SECTION 7.08 COMPANY STOCK OPTIONS/REGISTRATION STATEMENTS ON FORM
S-8. Parent shall reserve for issuance the number of shares of Parent Common
Stock that will be issuable upon exercise of Company Stock Options assumed
pursuant to Section 3.05 hereof. Within 10 business days after the Effective
Time, Parent shall file with the SEC one or more registration statements on Form
S-8 for the shares of Parent Common Stock issuable with respect to Company Stock
Options and will maintain the effectiveness of such registration statements for
so long as any of such options or other rights remain outstanding. The Company
ESPP shall be terminated prior to the Effective Date. The board of directors of
Parent shall adopt a resolution approving the acquisition by officers and
directors of Company who shall become officers and directors of Parent at the
Effective Time of Parent Common Stock in exchange for shares of Company Common
Stock, and of options of Parent Common Stock upon conversion of Company Stock
Options pursuant to Section 3.05 hereof, in each case pursuant to the
transactions

33
<PAGE>

contemplated by this Agreement so that such acquisitions shall be exempt from
the application of Section 16(b) of the Exchange Act, to the extent permitted
thereunder.

SECTION 7.09 EMPLOYEE BENEFIT MATTERS.

(a) From and after the Effective Time until the earlier of
(i) the first anniversary of the Effective Time or (ii) the date of the first
annual renewal of each of such benefits after the Effective Time, Parent agrees
to provide the employees of Company (the "COMPANY EMPLOYEES") who remain
employed after the Effective Time (collectively, the "TRANSFERRED COMPANY
EMPLOYEES") with substantially similar benefits as maintained by Company
immediately prior to the Closing; PROVIDED, that this obligation shall not
include the Company 401(k) Plan, the Company ESPP or Company Stock Plans. After
such time, Parent shall provide the Transferred Company Employees with the types
and levels of employee benefits maintained by Parent for similarly situated
employees of Parent. Parent will treat, and cause its applicable benefit plans
to treat, the service of Company Employees with Company or any Company
Subsidiary as service rendered to Parent or any Affiliate of Parent for purposes
of eligibility to participate, vesting and for other appropriate benefits
including, but not limited to, applicability of minimum waiting periods for
participation, but not for benefit accrual (including minimum pension amount)
attributable to any period before the Effective Time. Without limiting the
foregoing, Parent shall not treat any Company Employee as a "new" employee for
purposes of any exclusions under any health or similar plan of Parent for a
pre-existing medical condition, and will make appropriate arrangements with its
insurance carrier(s) to ensure such result.

(b) Following the Effective Time, Parent shall honor in
accordance with their terms all individual employment, termination, severance,
change in control, post-employment and other compensation agreements,
arrangements and plans, which are between Company or any Company Subsidiary and
any director, officer or employee thereof, and Parent will not challenge the
validity of any obligation of Company or any Company Subsidiary under, any
employment, severance, change in control, post-employment, consulting,
supplemental retirement or such other compensation, contract or arrangement with
any current or former director, officer or employee of Company.

(c) Unless Parent consents otherwise in writing, Company shall
take all action necessary to terminate, or cause to terminate, immediately
before the Effective Time, any Company Benefit Plan that is a 401(k) plan.
Notwithstanding anything to the contrary contained herein, Parent shall have
sole discretion with respect to the determination as to whether or when to
terminate, merge or continue any Company Benefit Plan; provided; however, that
Parent shall continue to maintain the Company Benefit Plans (other than stock
based or incentive plans or 401(k) plans) until Company Employees are permitted
to participate in the Parent's plans.

(d) The provisions of Section 7.09 respecting the Parent's
agreement to honor the contracts, arrangements, commitments and understandings
referred to in Section 7.09(b) are intended to be for the benefit of and
enforceable by the persons referred to therein or the parties to these
agreements, respectively, and their heirs and representatives.

SECTION 7.10 TAX OPINION. Parent and Company shall use their
respective best efforts to obtain the tax opinion that satisfies the condition
set forth in Section 8.01(g) and shall use their respective best efforts to
provide such certificates regarding tax matters as shall be requested and which
are customary in transactions of this type.

SECTION 7.11 BOARD REPRESENTATION. Company shall be entitled to
designate one individual to Parent's Board of Directors, who shall be appointed
by Parent to serve from the Effective Time and until his successor shall be duly
elected and qualified.

34
<PAGE>

ARTICLE VIII

CONDITIONS TO THE MERGER

SECTION 8.01 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY TO
CONSUMMATE THE MERGER. The obligations of the parties hereto to consummate the
Merger are subject to the satisfaction or, if permitted by applicable Law,
waiver of the following conditions:

(a) the Registration Statement shall have been declared
effective by the SEC under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the SEC
and no proceeding for that purpose shall have been initiated by the SEC and not
concluded or withdrawn;

(b) this Agreement and the Merger shall have been duly
approved by the requisite vote of stockholders of Company in accordance with the
DGCL and the Share Issuance shall have been approved by the required vote of the
stockholders of Parent in accordance with the rules of the NNM;

(c) no order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction shall have been enacted, entered,
promulgated or enforced by any court or Governmental Entity which prohibits or
prevents the consummation of the Merger which has not been vacated, dismissed or
withdrawn prior to the Effective Time. Company and Parent shall use their
reasonable best efforts to have any of the foregoing vacated, dismissed or
withdrawn by the Effective Time;

(d) any waiting period (and any extension thereof) applicable
to the consummation of the Merger under the HSR Act or any other applicable
competition, merger control or similar Law shall have expired or been
terminated;

(e) all consents, approvals and authorizations legally
required to be obtained to consummate the Merger shall have been obtained from
all Governmental Entities, except where the failure to obtain any such consent,
approval or authorization could not reasonably be expected to result in a Parent
Material Adverse Effect or a Company Material Adverse Effect;

(f) The shares of Parent Common Stock to be issued in the
Merger shall have been authorized for listing on the NNM, subject to notice of
issuance; and

(g) Parent shall have obtained an opinion from Parent's legal
counsel in form and substance reasonably satisfactory to it, and Company shall
have obtained an opinion from Company's legal counsel in form and substance
reasonably satisfactory to it, substantially to the effect that, if the Merger
is consummated in accordance with the provisions of this Agreement, under
current law, for federal income tax purposes, the Merger will qualify as a
reorganization within the meaning of Section 368(a).

SECTION 8.02 CONDITIONS TO THE OBLIGATIONS OF COMPANY. The
obligations of Company to consummate the Merger, or to permit the consummation
of the Merger are subject to the satisfaction or, if permitted by applicable
Law, waiver of the following further conditions:

(a) each of the representations and warranties of Parent
contained in this Agreement shall be true, complete and correct in all material
respects both when made and on and as of the Effective Time as if made at and as
of the Effective Time (other than representations and warranties which address
matters only as of a certain date which shall be true, complete and correct as
of such certain date) and Company shall have received a certificate of the Chief
Executive Officer and Chief Financial Officer of Parent to the foregoing effect;

(b) Parent shall have performed or complied in all material
respects with all covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time and

35
<PAGE>

Company shall have received a certificate of the Chief Executive Officer and
Chief Financial Officer of Parent to that effect;

(c) the board of directors of Parent shall not have resolved,
amended or modified, in any adverse respect, its approval of the Share Issuance
or its recommendation to Parents' stockholders described in Section 7.01(b)
hereof; and

(d) there shall have been no Parent Material Adverse Effect
since the date of this Agreement.

SECTION 8.03 CONDITIONS TO THE OBLIGATIONS OF PARENT. The
obligations of Parent to consummate the Merger are subject to the satisfaction
or waiver of the following further conditions:

(a) each of the representations and warranties of Company
contained in this Agreement shall be true, complete and correct in all material
respects both when made and on and as of the Effective Time as if made at and as
of the Effective Time (other than representations and warranties which address
matters only as of a certain date which shall be true, complete and correct as
of such certain date) and Parent shall have received a certificate of the Chief
Executive Officer and Chief Financial Officer of Company to the foregoing
effect;

(b) Company shall have performed or complied in all material
respects with all covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time and Parent shall have
received a certificate of the Chief Executive Officer and Chief Financial
Officer of Company to that effect;

(d) the Rights Agreement shall have been terminated and all
rights issued thereunder (whether or not exercisable) shall have terminated
or been redeemed;

(e) The board of directors of Company shall not have revoked,
amended or modified, in any adverse respect, its approval of the Merger or its
recommendation to Company's stockholders described in Section 7.01(b)(i); and

(f) Parent shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons listed on
Schedule 8.03(f) whose consent or approval may be required in connection with
the Merger.

ARTICLE IX

TERMINATION, AMENDMENT AND WAIVER

SECTION 9.01 TERMINATION. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, notwithstanding
any requisite adoption and approval of this Agreement, as follows:

(a) by mutual written consent duly authorized by the boards of
directors of each of Parent and Company;

(b) by either Parent or Company, if the Effective Time shall
not have occurred on or before February 15, 2000; provided, however, that the
right to terminate this Agreement under this Section 9.01(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement shall have caused, or resulted in, the failure of the Effective Time
to occur on or before such date;

36
<PAGE>

(c) by either Parent or Company, if any Governmental Order,
writ, injunction or decree preventing the consummation of the Merger shall have
been entered by any court of competent jurisdiction and shall have become final
and nonappealable;

(d) by Parent, if (i) the board of directors of Company
withdraws, modifies or changes its recommendation of this Agreement or the
Merger in a manner adverse to Parent or its stockholders or shall have resolved
to do so, (ii) the board of directors of Company shall have recommended to the
stockholders of Company a Company Competing Transaction or shall have resolved
to do so, (iii) a Company Competing Transaction shall have been announced or
otherwise publicly known and the board of directors of Company shall have within
fifteen (15) days of announcement (A) failed to recommend against acceptance of
such by its stockholders (including by taking no position, or indicating its
inability to take a position, with respect to the acceptance of a Company
Competing Transaction involving a tender offer or exchange offer by its
stockholders), (B) failed to reconfirm its approval and recommendation of this
Agreement and the transactions contemplated hereby within 15 business days of
the first announcement or other public knowledge of such Competing Offer or (C)
determined that such Company Competing Transaction was a Company Superior
Proposal and to take any of the actions allowed by clause (ii) of Section
6.04(a), or (iv) the board of directors of Company resolves to take any of the
actions described above;

(e) by Parent or Company, if (i) this Agreement and the Merger
shall fail to receive the requisite votes for approval at the Company
Stockholders' Meeting or any adjournment or postponement thereof or (ii) the
Share Issuance shall fail to receive the requisite votes for approval at the
Parent Stockholders' Meeting or any adjournment or postponement thereof;

(f) by Parent, 10 days after receipt by Company of a written
notice from Parent of a breach in any material respect of any representation,
warranty, covenant or agreement on the part of Company set forth in this
Agreement, or if any representation or warranty of Company shall have become
untrue, incomplete or incorrect, in either case such that the conditions set
forth in Section 8.03 would not be satisfied (a "TERMINATING COMPANY BREACH");
provided, however, that if such Terminating Company Breach is curable by Company
through the exercise of its reasonable efforts within 10 days and for so long as
Company continues to exercise such reasonable efforts, Parent may not terminate
this Agreement under this Section 9.01(g); and provided, further that the
preceding proviso shall not in any event be deemed to extend any date set forth
in paragraph (b) of this Section 9.01;

(g) by Company, 10 days after receipt by Parent of a written
notice from Company of a breach in any material respect of any representation,
warranty, covenant or agreement on the part of Parent set forth in this
Agreement, or if any representation or warranty of Parent shall have become
untrue, incomplete or incorrect, in either case such that the conditions set
forth in Section 8.02 would not be satisfied (a "TERMINATING PARENT BREACH");
provided, however, that if such Terminating Parent Breach is curable by Parent
through the exercise of its reasonable efforts within 10 days and for so long as
Parent continues to exercise such reasonable efforts, Company may not terminate
this Agreement under this Section 9.01(h); and provided, further that the
preceding proviso shall not in any event be deemed to extend any date set forth
in paragraph (b) of this Section 9.01; and

(h) by Company, if the board of directors of Company shall
have recommended to stockholders of Company a Company Competing Transaction or
shall have resolved to do so.

The right of any party hereto to terminate this Agreement pursuant to
this Section 9.01 will remain operative and in full force and effect regardless
of any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.

SECTION 9.02 EFFECT OF TERMINATION. Except as provided in Section
9.05, in the event of termination of this Agreement pursuant to Section 9.01,
this Agreement shall forthwith become void, there shall be no liability under
this Agreement on the part of any party hereto or any of its affiliates or any
of its or their officers

37
<PAGE>

or directors, and all rights and obligations of each party hereto shall cease;
provided, however, that nothing herein shall relieve any party hereto from
liability for the willful or intentional breach of any of its representations
and warranties or the willful or intentional breach of any of its covenants or
agreements set forth in this Agreement.

SECTION 9.03 AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective boards of directors
at any time prior to the Effective Time; provided, however, that, after the
approval of this Agreement by the stockholders of Company, no amendment may be
made that changes the amount or type of consideration into which Company common
stock will be converted pursuant to this Agreement. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto.

SECTION 9.04 WAIVER. At any time prior to the Effective Time, any
party hereto may (a) extend the time for or waive compliance with the
performance of any obligation or other act of any other party hereto, (b) waive
any inaccuracy in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein. Any such extension
or waiver shall be valid if set forth in an instrument in writing signed by the
party or parties to be bound thereby.

SECTION 9.05 TERMINATION FEE; EXPENSES.

(a) Except as set forth in this Section 9.05, all Expenses
incurred in connection with this Agreement and the Merger shall be paid by the
party incurring such Expenses, whether or not the Merger is consummated, except
that Parent and Company each shall pay one-half of all Expenses incurred solely
for printing, filing and mailing the Registration Statement and the Proxy
Statement and all SEC and other regulatory filing fees incurred in connection
with the Registration Statement and the Proxy Statement and any fees required to
be paid under the HSR Act.

(b) In the event that (i) Parent shall terminate this
Agreement pursuant to Section 9.01(d), (ii) Parent shall terminate this
Agreement due to a Terminating Company Breach pursuant to Section 9.01(f) and
such breach by Company is intentional, (iii) Parent shall terminate this
Agreement pursuant to Section 9.01(e)(i) but only if a Company Competing
Transaction shall have been announced or otherwise publicly known prior to the
event giving rise to the termination pursuant to Section 9.01(e)(i), and within
twelve (12) months of such termination, Company shall have consummated a
Competing Company Transaction or (iv) Company shall have terminated this
Agreement pursuant to Section 9.01(h), then, without limiting any other remedies
available to Parent and Merger Sub, Company shall pay to Parent (the "COMPANY
TERMINATION FEE") a sum equal to all of Parent's Expenses up to $500,000 plus
$3.1 million. Notwithstanding the foregoing, no fee shall be paid pursuant to
this Section 9.05(b) if Parent shall be in material breach of its obligations
hereunder. Any Company Termination Fee shall be paid in same day funds within
three Business Days of the date of termination.

(c) In the event that Company shall terminate this Agreement
due to a Terminating Parent Breach pursuant to Section 9.01(g) and such breach
by Parent is intentional, then, without limiting any other remedies available to
Company, Parent shall pay to Company (the "PARENT TERMINATION FEE") a sum equal
to all of Company's Expenses up to $500,000 plus $3.1 million. Notwithstanding
the foregoing, no fee shall be paid pursuant to this Section 9.05(c) if Company
shall be in material breach of its obligations hereunder. Any Parent
Termination Fee shall be paid in same day funds within three Business Days of
the date of termination.

(d) Parent and Company agree that the agreements contained in
Sections 9.05(b) and 9.05(c) above are an integral part of the transaction
contemplated by this Agreement. If Company fails to pay to Parent any fee due
under Section 9.05(b), Company shall pay the cash and expenses (including legal
fees and expenses) in connection with any action, including the filing of any
lawsuit of other legal action, taken to collect payment. Similarly, if Parent
fails to pay to Company any fee due under Section 9.05(c), Parent shall pay the
cash and expenses (including legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other action taken to collect
payment.

38
<PAGE>

ARTICLE X

GENERAL PROVISIONS

SECTION 10.01 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties in this Agreement shall terminate at the
Effective Time or upon the termination of this Agreement pursuant to Section
9.01, as the case may be. This Section 10.01 shall not limit any covenant or
agreement of the parties which by its terms contemplates performance after the
Effective Time.

SECTION 10.02 NOTICES. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by
telecopy or facsimile, by registered or certified mail (postage prepaid, return
receipt requested) or by a nationally recognized courier service to the
respective parties at the following addresses (or at such other address for a
party as shall be specified in a notice given in accordance with this Section
10.02):

(a) if to Company:

Xionics Document Technologies, Inc.
70 Blanchard Road
Burlington, MA 01803
Attention: Chief Executive Officer
Telecopier: (781) 229-7121

with a copy to:

Bingham Dana LLP
150 Federal Street
Boston, MA 02109
Attention: Neil Townsend, Esq.
Telecopier: (617) 951-8736

(b) if to Parent or Merger Sub:

Oak Technology, Inc.
139 Kifer Court
Sunnyvale, CA 94086
Attention: General Counsel
Telecopier: (408) 737-0888

with a copy to:

Brobeck, Phleger & Harrison LLP
1633 Broadway, 47th Floor
New York, NY 10019
Attention: Eric Simonson, Esq.
Telecopier: (212) 586-7878

SECTION 10.03 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Merger is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable

39
<PAGE>

manner to the fullest extent permitted by applicable Law in order that the
Merger may be consummated as originally contemplated to the fullest extent
possible.

SECTION 10.04 ASSIGNMENT; BINDING EFFECT; BENEFIT. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of Law or otherwise)
without the prior written consent of the other parties hereto. Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Notwithstanding anything contained in this Agreement to the contrary,
other than Section 7.03 and 7.09, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective successors and permitted assigns any rights or remedies under
or by reason of this Agreement.

SECTION 10.05 INCORPORATION OF EXHIBITS. The Parent Disclosure
Schedule, the Company Disclosure Schedule and all Exhibits attached hereto and
referred to herein are hereby incorporated herein and made a part of this
Agreement for all purposes as if fully set forth herein. Parent and Company
acknowledge that the Parent Disclosure Schedule and the Company Disclosure
Schedule (i) are qualified in their entirety by reference to specific provisions
of this Agreement and (ii) are not intended to constitute and shall not be
construed as indicating that such matter is required to be disclosed, nor shall
such disclosure be construed as an admission that such information is material
with respect to Parent or Company, as the case may be, except to the extent
required by this Agreement and by applicable law.

SECTION 10.06 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE
OTHER THAN CONFLICT OF LAWS PRINCIPLES THEREOF DIRECTING THE APPLICATION OF ANY
LAW OTHER THAN THAT OF DELAWARE.

SECTION 10.07 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING (WHETHER BASED
ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR
ANY TRANSACTION OR AGREEMENT CONTEMPLATED HEREBY OR THE ACTIONS OF ANY PARTY
HERETO IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.

SECTION 10.08 HEADINGS; INTERPRETATION. The descriptive headings
contained in this Agreement are included for convenience of reference only and
shall not affect in any way the meaning or interpretation of this Agreement.
The parties have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the parties,
and no presumption or burden of proof shall arise favoring or disfavoring any
party by virtue of the authorship of any provisions of this Agreement.

SECTION 10.09 COUNTERPARTS. This Agreement may be executed and
delivered (including by facsimile transmission) in one or more counterparts, and
by the different parties hereto in separate counterparts, each of which when
executed and delivered shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.

SECTION 10.10 ENTIRE AGREEMENT. This Agreement (including the
Exhibits, the Parent Disclosure Schedule and the Company Disclosure Schedule)
and the Confidentiality Agreement constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.

[SIGNATURE PAGE FOLLOWS]

40
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.

OAK TECHNOLOGY, INC.

By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------

XIONICS DOCUMENT TECHNOLOGIES, INC.

By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------

VERMONT ACQUISITION CORP.

By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------

[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION]

<PAGE>

EXHIBIT 23.01

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Oak Technology, Inc.:

We consent to incorporation by reference in the registration statements (No.
033-89446, 333-04334, 333-70175 and 333-85381) on Form S-8 of Oak Technology,
Inc. of our report dated July 30, 1999, relating to the consolidated balance
sheets of Oak Technology, Inc. and subsidiaries as of June 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
1999, and related schedule, which report appears in the June 30, 1999 annual
report on Form 10-K of Oak Technology, Inc.

KPMG LLP
Mountain View, California
September 28, 1999

<PAGE>
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