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

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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 DECEMBER 31, 1997

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

FOR THE TRANSITION PERIOD FROM TO

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COMMISSION FILE NUMBER 0-21422

OPTI INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 77-0220697
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)

888 TASMAN DRIVE, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 486-8000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, NO
PAR VALUE

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

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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 24,
1997 as reported on the Nasdaq Stock Market, was approximately $91,150,155.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 24, 1997, registrant had 12,626,424 shares of Common Stock
outstanding for non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement dated on or about May 5, 1998 to be
delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on May 28, 1998 are incorporated by reference into
Part III of this form 10-K Report.

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OPTI INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX

PAGE
NUMBER
PART I ------

Item 1. Business..................................................... 1
Item 2. Properties................................................... 14
Item 3. Legal Proceedings............................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.......... 14
Executive Officers of the Registrant.................................. 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters...................................................... 16
Item 6. Selected Consolidated Financial Data......................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 18
Item 8. Financial Statements and Supplementary Data.................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
Item 13. Certain Relationships and Related Transactions.............. 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 23
Signatures............................................................ 25

PART I

ITEM 1. BUSINESS

Information set forth in this report constitutes and includes forward
looking information. The accuracy of such information is subject to a variety
of risks and uncertainties, including product mix, the Company's ability to
obtain or maintain design wins, market conditions in the personal computer and
semiconductor industries, product development schedules and other matters.
Actual results may differ from the results discussed in such forward looking
statements.

INTRODUCTION

OPTi Inc., a California corporation ("OPTi" or the "Company"), was founded
in 1989 and is a independent supplier of core logic chipset products to the
personal computer ("PC") market. The Company's chipsets provide in one or a
few semiconductor devices the core logic functions of a PC. During 1997, the
Company shipped over five million core logic and audio devices to more than
100 PC manufacturers, motherboard manufacturers, and add-in board
manufacturers located primarily in Asia and the United States.

This past year was one of transition for the Company as it experienced
significant reductions in its revenue. The Company has changed its focus over
the last several years, reflected in its growth in mobile core logic, as well
as in its initiatives to develop technologies for future product applications.

On November 26, 1997, the Company sold a substantial portion of the assets
of, together with certain liabilities of, its Net Media business unit for
$14,000,000 in cash to Creative Technology Ltd. of Singapore ("Creative"). The
Net Media business unit of the Company designed, developed and marketed audio
chipsets for the personal computer industry. Under the terms of the Sale, OPTi
issued to Creative a warrant to purchase 200,000 shares of OPTi's common stock
at a price of $10.00 per share, Creative received a license to certain of
OPTi's core logic technologies and OPTi agreed to provide, and Creative agreed
to use, certain of OPTi's backend services over the next twelve months.

The Company currently competes principally in the mobile core logic chipset
market for PCs. From the Company's inception through 1995, the Company's
principal product had been desktop core logic. However, in the face of
increasingly aggressive competition in this market, primarily from Intel
Corporation, the Company revised its strategy and focused on market
opportunities where the Company had strategic advantages. This has led to the
Company's focus on the mobile core logic market where the Company has
experienced some success in the past few years, and to focus on opportunities
surrounding peripheral products, such as the USB controller, docking stations
and LCD panel controller chips.

The Company's sales have been primarily attributable to its timely
introduction of highly integrated chipsets which have assisted a wide variety
of both PC manufacturers and motherboard manufacturers in achieving the rapid
time to market and low product costs necessary for success in the intensely
competitive PC market. The Company also believes that it has benefited from
the growing practice of major PC manufacturers to outsource the production of
core logic circuits. The Company sells its products to PC manufacturers and
motherboard manufacturers and their suppliers directly or through a network of
independent sales representatives.

The Company's strategy is to deliver new, innovative and cost effective
products in a timely manner, develop products for emerging markets in the high
performance PC segment, increase sales in existing global markets and
strengthen its industry relationships. OPTi seeks to maintain its position as
a low-cost provider of chipsets by vigorously controlling production and other
operating costs.

Further information regarding the financial condition of the Company may be
found in Part IV, item 14 of this form 10-K.

INDUSTRY BACKGROUND

During the last decade, the PC industry has grown rapidly as increased
functionality combined with lower pricing have made PCs valuable and
affordable tools for business and personal use.

The principal functions of a PC are provided by a circuit board known as the
motherboard, consisting of a microprocessor, bus circuits, various memory
devices and core logic circuits. The bus is the pathway through which the
microprocessor communicates with peripheral devices and adapter cards. Core
logic circuits perform five principal functions in the PC: system control,
memory control, bus control, bus buffering and peripherals control. System
control refers to the computing functions which enable the microprocessor to
manage the flow of data between the microprocessor, the system bus and memory.
Memory control consists of the control functions employed by the
microprocessors to efficiently manage the operations of memory devices. Bus
control enables the PC to implement the protocols necessary to achieve
compatibility with industry standard bus interfaces and protocols, such as
Industry Standard Architecture ("ISA"), Extended Industry Standard
Architecture ("EISA"), Video Enhancement Standard Architecture ("VESA") and
Peripheral Control Interconnect ("PCI"). Peripherals control facilitates the
operations of peripheral devices such as the disk drive, keyboard and display
device.

In personal computer designs employed in the early-1980's, the core logic
functions were performed by several large scale integrated ("LSI") circuits
and numerous discrete transistor ("TTL") circuits located on the motherboard.
Although these circuits were available to PC manufacturers from third party
semiconductor suppliers, the large number of discrete devices needed to
implement core logic functions resulted in high part counts, low production
yields and relatively high total system costs. Moreover, the qualifications
and integration of numerous discrete devices caused the development effort to
be complex and time consuming. The high development costs associated with this
effort greatly favored PC manufacturers that had the development resources and
expertise necessary to introduce complex computer systems in a timely fashion.

The trend to higher performance, lower cost personal computers has been
accompanied by a variety of changes in the market for personal computers and
the technologies used to address these emerging market requirements. The
consumer and home office sectors have become the fastest growing sectors of
the PC market, driven, in part, by the emergence of low-cost multimedia
computers and peripherals.

Industry studies indicate that an increasing percentage of personal
computers are now sold with multimedia functionality which typically involves
sound and support of full screen, full-motion video technologies. As the
personal computer industry has matured and become more consumer-oriented,
large OEM PC suppliers, including major competitors from the consumer
electronics arena, have captured market share from smaller PC vendors as
strength of brand name, customer support and distribution channels have become
more important competitive factors in the industry.

These changes in the personal computer market and technology directly affect
the market for core logic chipsets. The primary customer base for chipsets has
shifted significantly to major PC manufacturers and to the suppliers to these
leading OEM customers, in contrast to prior periods in which motherboard
manufacturers and system integrators represented the largest portion of the
market for core logic chipsets. Large OEMs require increasingly higher levels
of product integration, thus enabling them to reduce parts count and control
total product costs. The Company also expects that peripheral functions
historically provided by add-in boards, such as sound functionality, may be
provided by semiconductor circuits included on the personal computer
motherboard or incorporated in the core logic chipset.

During 1995 and 1996, almost a complete shift occurred in the personal
computer market to Pentium class products and away from 486 microprocessor-
based products. With this shift, the industry standard became a Pentium-based
system with a VESA local bus or PCI local bus structure. During the second
half of 1995, the market for 486-based computers and the related market for
chipsets and motherboards and licensing motherboards used in 486 computers
declined precipitously. Due to the speed of this shift, the personal computer
industry experienced excess inventories of 486-based computers and
motherboards and rapidly deteriorating pricing for these products.

The Company believes that the personal computer marketplace may be headed
for another such shift as the industry moves from the Pentium class
microprocessor to the Pentium II microprocessor. The shift in the desktop
marketplace should occur sometime during 1998 with the mobile market following
six to twelve months later.

Concurrent with these shifts, the market for motherboards and chipsets
changed significantly as Intel captured an increasing percentage of the
motherboard market by selling completed motherboards and licensing motherboard
production in the Far East, employing the Intel Pentium microprocessor, Intel
chipsets and other circuitry. Intel's entry into the motherboard market has
had a direct adverse effect on the Taiwan motherboard market, and resulted in
a significant decline in demand for core logic chipsets from Taiwan
motherboard manufacturers.

Dramatic growth has continued in the PC market as computer and consumer
electronics industries have converged, combining increased multimedia and
communications capabilities. Today's systems increasingly offer more powerful
microprocessors, highly integrated chipsets, integrated video, stereo sound,
highspeed fax and modem communications and CD-Rom.

Like the PC market, the market for chipsets is seasonal. In general, chipset
suppliers experience higher sales in the second half of the calendar year than
they experience in the first half of the year.

STRATEGY

Continue Mobile Computer Penetration

The Company has continued to expand it focus into the mobile computing
sectors of the personal computer market, as this market becomes a growing
portion of the total market. In 1997, the vast majority of the Company core
logic sales were to the mobile marketplace, as the Company did not have any
significant desktop design wins during the year. Sales of core logic devices
to mobile customers in 1996 comprised approximately 59% of the Company's total
core logic sales. The Company believes it is the leading independent supplier
of core logic chipsets to the mobile computer market. The competitive
landscape in the mobile area is better suited for independent suppliers to
compete against competitors like Intel because of the greater differentiation
in designs from one mobile product to another. Within the desktop arena, many
motherboard designs and components are identical from one model to another,
providing larger competitors an opportunity to control the market in this
area.

Continually offer higher levels of product integration

One of the Company's principal strategies is to continually introduce core
logic chipsets with new features and higher levels of product integration. As
part of this strategy, the Company seeks to incorporate functions into the
chipset which have in the past required TTL implementations, peripheral
circuits or add-on boards, and to implement this functionality in low cost
highly integrated packages. These packages include single chip core logic
offerings in both the notebook and desktop core logic areas and increasing
levels of functionality within their audio controller products.

Introduce Products Which Address New Market Opportunities

The Company continues to explore market opportunities outside core logic,
including USB controllers, docking stations and LCD panel controller chips.
The Company believes that its relationships with major PC OEMs who use the
Company's core logic chipsets may provide a marketing opportunity in offering
additional products outside of the core logic area.

Introduce Core Logic Products That Provide Incremental Opportunities Based On
Previous R&D Expenditures

The Company will continue to look for market opportunities for its core
logic chipsets within the Pentium generations of PCs, where the Company
already has developed products through research and development expenditures
from prior periods. The Company may be able to take advantage of opportunities
that arise with minimum additional research and development expense.

Provide an alternative to Intel chipsets and motherboards

The Company believes that the Company's PC OEM mobile customers place a high
value on maintaining other sources of motherboards and chipsets to those
offered by Intel Corporation. In particular, the Company believes that its
customers will continue to seek to differentiate their products and maintain
multiple sources of supply, provided that chipsets can be acquired on
competitive terms from the Company or other third party suppliers. Although
Intel has acquired a large market share in the market for core logic chipsets,
the termination of supply of core logic chipsets by other third party
suppliers may provide the Company with ongoing design opportunities in the
non-Intel sector of the market.

Support of Multiple Microprocessors

The Company seeks to support substantially all leading industry
microprocessors from Intel Corporation, Advanced Micro Devices, Inc. and Cyrix
Corporation concurrent with or shortly after their introduction of Pentium
class products. The Company believes that this strategy will enable it to
address the largest segments of the personal computer market and to offer its
customers flexibility in their own product design, launch and procurement
operations

Address Both U.S. and Asia Markets

A significant aspect of the Company's market strategy is to address both the
U.S. market consisting of large PC OEMs and the Asian market consisting
primarily of producers of notebooks and add-in cards. Addressing these
markets, the Company offers low cost solutions designed for the specific needs
of each market.

Achieve Low Costs and Maintain Product Quality Through COT Design

An important aspect of the Company's manufacturing strategy is to vigorously
control production and operating costs through efficient product designs. The
Company does not maintain its own internal production capabilities and relies
on third-party foundries to produce its products. Over the last several years,
the Company has implemented full custom designs in substantially all areas of
its core logic chipsets and has established one

or more than one foundry for each of its principal products. Reliance on
outside foundries has enabled the Company to focus its development resources
on circuit design and to avoid the capital expenditures and overhead required
to maintain semiconductor manufacturing facilities.

DESIGN INNOVATIONS AND TECHNOLOGIES

The Company's products incorporate a variety of advanced technologies to
enable PC manufacturers to introduce high performance low cost systems. These
design innovations and technologies include:

USB Controller

The Company currently offers a USB Host Controller which brings USB support
to any PCI-based system. Its compact packaging allows it to be accommodated in
virtually any system. The USB Controller is fully supported under Windows 95,
Windows 98, and Windows CE. The Company's implementation is unique and
provides power management features not found in competitive solutions.

Docking Station

The Company currently offers a docking solution within its Mobile product
offerings. This solution supports either a 5v or 3.3v docking interface
running synchronously or asynchronously at speeds up to 33 Mhz. By offloading
the primary PCI bus, the docking solution can increase its bandwidth.

LCD Panel Controller

The Company is currently working on a flat panel LCD display controller, a
key component inside future LCD VGA monitors. Normally, in order to connect
VGA outputs to LCD monitors, VGA cards with special LCD control interface are
needed. However, when using the OPTi technology, the LCD VGA monitor should be
able to process regular analog VGA output signals as input without any
additional interface card or circuit.

"Green" Power Management

In 1994, OPTi was the first independent supplier of core logic chipsets to
incorporate power management features in a chipset for use with 486 desktop
computers. The power management features included in OPTi's 802G single chip
solution included support of the System Management Mode available on the 486
class CPUs, a technique known as "clock throttling" in which the core logic
circuitry shifts the clock frequency and other energy-saving techniques.

Innovative Memory Management

Since its formation, OPTi has been an innovator in offering core logic which
supports or implements sophisticated memory-management features. OPTi was the
first independent supplier to offer an integrated write-through cache
controller in core logic chipsets, the first to ship production quantities of
chipsets incorporating a write-back cache architecture and the first to
provide an adaptive write-back cache in its core logic circuitry. The Company
holds a patent on certain aspects of its write-back cache control
architecture.

CHIPSET MARKET AND PRODUCTS

The Company currently competes in the mobile core logic segment of the
personal computer market. In 1997, sales of core logic chipsets accounted for
approximately 73% of the Company's revenue. The vast majority of the core
logic sales during the year were to the mobile marketplace as the Company is
no longer a significant supplier to the desktop marketplace. In 1996, sales of
core logic chipsets accounted for approximately 71% of the Company's revenues,
of which, approximately 59% was for notebook applications and the remaining
41% was for desktop uses.

Pentium-based Mobile Core Logic Products

Core logic chipset sales into the mobile market represented the majority of
the Company's business in 1996, comprising approximately 59% of total core
logic sales as compared to approximately 14% of total core logic sales in
1995. The historical gaps in features and selling prices between desktop and
mobile products has continued to shrink as mobile products increasingly
include many of the features and standards found in desktop products.

In June of 1995, the Company began shipping its first Pentium-based mobile
product, the Viper N. This product incorporates desktop-like performance
features such as L1 and L2 cache support, a full 64-bit DRAM controller and an
integrated PCI controller.

In the first quarter of 1996, the Company began shipping its next generation
Pentium-based mobile product, the Viper N+. This product incorporates many of
the features found in the Company's current multimedia Pentium desktop product
plus full PCI docking capability and support of four drives with independent
timing.

In the first quarter of 1997, the Company began production shipments of its
Firestar single chip BGA product which combines high performance features with
space saving design capabilities for mobile applications based on the Intel
3.3V Pentium processor, Cyrix 6x86 processor and AMD5K86 processor. The
scaleable features of Firestar allow designs of a high performance multimedia
solution or, by implementing the Unified Memory Architecture (UMA) features, a
highly integrated low-cost solution. Firestar also allows Fast Page Mode DRAM,
EDO DRAM, or synchronous DRAM for further design options. The highly
concurrent cycles and deep buffering features of Firestar also improve system
performance.

In the second half of 1997, the Company began shipments of its Firestar Plus
product. The Firestar Plus solution is a pin-compatible upgrade to the
Firestar that adds full Microsoft ACPI universal power management support.
When combined with the integral OPTi standard power management unit, this
solution gives far better battery life than comparable chipsets. The Firestar
Plus can also team with the OPTi 82C602A companion chip to expand the number
of PIO pins and ACPI events available in the total solution.

SALES AND MARKETING

OPTi markets its products to PC suppliers, motherboard manufacturers, and
add-on board manufacturers directly and through independent sales
representatives. In North America, OPTi's sales managers operate from the
Company's headquarters in Milpitas, California. In Asia, the Company operates
from a branch office in Taipei, Taiwan, a wholly owned subsidiary in Tokyo,
Japan and through independent sales representatives located in Singapore,
Korea, and Hong Kong. The Company also uses stocking representatives in the
United Kingdom and Germany.

The Company's products are used by a variety of major personal computer and
motherboard manufacturers. In 1997, PC suppliers who used the Company's
products included Compaq, Hewlett-Packard, Olivetti, Siemens, NEC/Packard Bell
and Zenith Data Systems. The Company's sales to any single customer fluctuates
significantly from period to period based on order rates and design cycles.
Any individual customer may or may not continue purchasing products in any
particular subsequent product release or generation. It has been the Company's
experience that its major customers have changed from quarter to quarter and
year to year, and the Company expects these changes in its customer base will
continue to occur based on the individual customer requirements and
strategies. Sales to the Company's customers are typically made pursuant to
specific purchase orders, which are cancelable without significant penalties.

Sales to customers in Asia accounted for 89.2%, 80.3%, and 59.3% of net
sales in the years ended December 31, 1997, 1996 and 1995, respectively. Sales
to customers in Europe and other countries outside the United States and Asia
accounted for 0.1%, 6.1%, and 16.1% of net sales in the years ended December
31, 1997, 1996 and 1995, respectively. During these three years, billings to
almost all customers were made in US dollars. Approximately 13% and 4% of
sales were billed in Japanese yen in 1997 and 1996, respectively. Due to its

export sales, the Company is subject to the risks of conducting business
internationally, including unexpected changes in regulatory requirements,
fluctuations in the U.S. dollar (which could increase the sales price in local
currencies of the Company's products in international markets or make it
difficult for the Company to obtain price reductions from its foundries),
delays in obtaining export licenses for certain technology, tariffs and other
barriers and restrictions.

As is common in the semiconductor industry, the Company's business
relationships with its customers require it to acquire and maintain
inventories of chipset products based on forecast volumes from customers and
in amounts greater than that supported by firm backlog. The Company's
customers typically purchase products on a purchase order basis and do not
become obligated to purchase any quantity of products prior to the issuance of
the purchase order, even if the customer has previously forecast a
substantially higher volume of products. The Company typically places non-
cancelable orders to purchase its products from its foundries on an
approximate twelve week rolling basis, while its customers generally place
purchase orders approximately four weeks prior to delivery. These customer
purchase orders may be canceled without significant penalty. Consequently, if
anticipated sales and shipments in any quarter do not occur when expected,
expense and inventory levels could be disproportionately high, requiring
significant working capital. The Company has experienced cancellation and
shortfalls in purchase orders in the past, and in some instances such changes
have resulted in inventory write-downs or write-offs. The Company expects that
it will continue to experience such difficulties in the future.

The Company's payment terms to its customers typically require payment 30 to
60 days after shipments of products, which is the industry standard. The
Company sometimes obtains letters of credit in support of sales to customers
primarily located in Asia. International sales supported by letters of credit
are normally paid in a period of time which is shorter than the payment period
for sales for which no letter of credit is provided.

Financial Information about foreign and domestic operations and export sales
may be found in Part IV, item 14 of this form 10-K.

CUSTOMER SUPPORT AND SERVICE

The Company believes that customer service and technical support are
important competitive factors in the chipset market. The Company provides
technical support for customers in the United States, Europe and Asia.
Manufacturers' representatives supplement the Company's efforts by providing
additional customer service and technical support for OPTi products.

The Company works closely with its customers for product definitions so that
the right products can be developed for the right market segments.
Additionally, the Company works closely with its customers to design
motherboards and add-in cards configured using OPTi chipsets. OPTi believes
that close contact with its customers not only improves the customers' level
of satisfaction, but also provides important insights into requirements for
new chipsets.

MANUFACTURING, QUALITY CONTROL AND DESIGN METHODOLOGY

The Company subcontracts its manufacturing to independent foundries which
allows OPTi to avoid the significant fixed overhead, staffing and capital
requirements associated with semiconductor fabrication facilities. As a
result, the Company is able to focus its resources on product design and
development, testing, quality assurance, marketing and customer support.

The majority of the Company's products are currently manufactured using its
custom owned tooling process and procured wafers and die primarily from United
Microelectronics (UMC) in Taiwan, Chartered Semiconductor in Singapore,
Toshiba in Japan, and packaging houses in Taiwan. The Company, in an effort to
secure long term capacity, has entered into a joint foundry agreement with
UMC. The Company has developed strong relationships with its other suppliers.

The Company is constantly engaged in cost reduction programs that need to be
successful in order to ensure the profitability for products that face intense
price competition in the marketplace. These programs include the

continued migration to increasingly dense sub-micron wafer technologies,
adopting technologies that currently range from .6 to .45 micron technologies
down to .35 micron technologies and below in the future. This migration allows
for smaller die sizes with better yields and lower costs.

In order for the Company to reduce die sizes and costs, the manufacturing
technology related to packaging must continually be improved to reduce the
amount of area needed for the external contacts of each device.

Many of the Company's new and future products incorporate Ball Grid Array
(BGA) assembly, including its recently announced single chip solutions for
both notebook and desktop core logic applications.

Currently, the Company believes that there is a sufficient level of wafer
and package manufacturing capacity in the industry available . However, the
semiconductor industry experiences cycles of under-capacity and over-capacity
which have resulted in temporary shortages of products in high demand, as
experienced in the industry at various times through 1995.

The Company's long term agreement with UMC addresses this issue by securing
guaranteed capacity. The Company's agreement with UMC entails an equity
investment in a new semiconductor manufacturing facility. This ensures
significant .35 or .25 micron wafer technology capacity for the Company in
late 1998 or early 1999. The agreement also secured additional .6 to .45
micron capacity at an existing UMC facility. The Company's original commitment
to this joint foundry agreement was approximately $30 million. The first
payment of approximately $6.9 million was paid in January 1996, and an
additional $1.6 million in December 1997. The terms of the agreement were
changed so that the Company's commitment to invest any additional funds to the
venture have been eliminated and the Company will retain a prorated share of
wafer supplies and equity ownership, based on its reduced total investment.

The Company has attempted to reduce inventory risks by improving its
forecasting capabilities. Despite the fact that the Company has taken measures
to avoid supply shortages, periods of under-capacity may develop, creating
possible shortages for the Company's products. In the event of lower demand
for the Company's products, the Company may still be required to purchase
wafers in excess of that demand. Any such shortage or delays that are caused
by under capacity or any excess inventory created by a lowering of the
Company's actual demand for wafers could have a material adverse effect on the
Company's operating results.

The Company has an established testing capability, including sophisticated
test equipment to perform both wafer sort and the final testing of finished
devices.

The Company uses an automated design environment based on advanced
workstations, dedicated product simulators, system simulation with hardware
and software modeling and the use of a high level design description language
in order to more rapidly define, develop and deliver new and enhanced
products. The Company considers its computer-aided engineering ("CAE") and
computer-aided design ("CAD") capabilities to be important to its success in
all areas of new product development and intends to continue to enhance its
CAE/CAD systems. Although the Company extensively tests hardware products
prior to their introduction, it is possible that design errors may be
discovered after initial product sampling, resulting in delays in volume
production or recall of products sold. The occurrence of any such errors could
have a materially adverse effect on the Company's product introduction
schedule and operating results.

RESEARCH AND DEVELOPMENT

As of March 15, 1998, the Company has a staff of 55 research and development
personnel, which conducts virtually all of the Company's product development.
The Company is focusing its development efforts primarily on the development
of new advanced multimedia core logic chipset designs as well as peripheral
designs. During 1997, 1996 and 1995, respectively, the Company spent
approximately $12.6 million, $14.1 million, and $10.8 million on research and
development.

All research and development costs are expensed as incurred. The decrease in
research and development expenses from 1996 to 1997 is primarily related to
the Company's shift in market focus over the last year as the Company has
focused more heavily on mobile directed technologies and has reduced the
associated research and development headcount related expenses accordingly.
The Company has invested in technologies which, although not currently
productized, may be integrated into future products.

The Company has developed informal relationships with a number of PC
microprocessor and system software manufacturers. The Company believes that
these relationships facilitate its design efforts by providing it with early
access to specifications of future microprocessors and system software. The
Company is highly dependent upon the continued development and introduction of
new microprocessors requiring new supporting chipsets. Due to the short
product life cycles experienced in the chipset industry, the Company's time-
to-market is critical for successful commercialization of a chipset. The
Company believes that early access to microprocessor design specifications
expedites the Company's introduction of supporting chipsets. As relationships
in the PC industry are dynamic, there can be no assurance that such
relationships will continue or that design specifications will be openly
available on a timely basis. Failure to maintain these relationships may have
a material adverse effect on the Company.

COMPETITION

The market for the Company's products is intensely competitive. Important
competitive factors in the Company's markets are price, performance, time-to-
market, added features, degree of integration, technical support and cost. The
Company believes that it currently competes effectively with respect to these
factors, although there can be no assurance that the Company will be able to
compete effectively in the future.

Competition in Mobile Core Logic Market

The Company's main competitor in this segment is Intel. Although Intel has
not been as aggressive in this market as it has been in the desktop core logic
area, there can be no assurances that Intel will not develop a strategy to
attempt to control the market in this area. The Company must continue to try
to compete with Intel based on product features, time to market and product
compatibility, but there can be no assurance that it will be successful in
doing so.

The Company's other competitors in the multimedia core logic area include
major domestic and international semiconductor companies and established
chipset companies, including Acer Labs Inc., Silicon Integrated Systems,
United Microelectronics Corporation and VIA, Inc. Certain of these companies,
in addition to Intel, have substantially greater financial, technical,
marketing and other resources than the Company and several have their own
internal production capabilities. The Company must face the challenge of
competing at the high end of the marketplace, in the PC OEM area, based on
features and time to market and at the lower end of the marketplace, the
motherboard market, based on price.

LICENSES, PATENTS AND TRADEMARKS

The Company seeks to protect its proprietary technology by the filing of
patents. The Company currently has twelve patents based on certain aspects of
the Company's designs. The Company currently has twenty-one patents pending
for its technologies, and there can be no assurance that the pending patents
will be issued or, if issued, will provide protection for the Company's
competitive position. The Company also attempts to protect its trade secrets
and other proprietary information through agreements with customers and
suppliers, proprietary information agreements with employees and consultants
as well as other security measures. Although the Company intends to protect
its rights vigorously, there can be no assurance that these measures will be
successful.

The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. There can be no assurance that
third parties will not assert claims against the Company with

respect to existing or future products or that licenses will be available on
reasonable terms, or at all, with respect to any third-party technology. In
the event of litigation to determine the validity of any third-party claims,
such litigation 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 is determined in favor of the Company.

In the event of an adverse result in any such litigation, the Company could
be required to expend significant resources to develop non-infringing
technology or to obtain licenses to the technology which is the subject of the
litigation. There can be no assurance that the Company would be successful in
such development or that any such licenses would be available. Patent disputes
in the semiconductor industry have often been settled through cross licensing
arrangements. Because the Company currently does not yet have a large
portfolio of patents, the Company may not be able to settle an alleged patent
infringement claim through a cross licensing arrangement. In the event any
third party made a valid claim against the Company or its customers and a
license was not made available to the Company on commercially reasonable
terms, the Company's operating results would be adversely affected. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold, including Taiwan, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.

In January 1997, a patent infringement claim was brought against the Company
by Crystal Semiconductor, a subsidiary of Cirrus Logic. The claim alleges that
the Company and Tritech Microelectronics International infringed upon patents
held by Crystal Semiconductor. These patents relate to the "Codec" module
incorporated in various audio controller products. The Company believes that
the claim is without merit and that the ultimate resolution of this matter
will not have a material adverse effect on its financial position, results of
operations, or cash flow.

BACKLOG

Because the Company's customers typically expect quick deliveries, the
Company seeks to ship products within a few weeks of receipt of a purchase
order. A customer may reschedule delivery of products on a purchase order or
cancel the purchase order entirely without significant penalty. In addition,
the Company's actual shipments depend on the manufacturing capacity of the
Company's foundries, packaging houses, internal test facilities, and other
industry factors. In the past, the Company has experienced material order
cancellations and deferrals, and expects that it will experience these issues
in the future. As a result, the Company does not believe that backlog is a
reliable indicator of future sales. At December 31, 1997, the Company's
backlog scheduled for delivery within six months was approximately $3.7
million, all of which is expected to be filled during fiscal 1998 (subject to
rescheduling or cancellations). This amount compares to a backlog of
approximately $15.7 million as of December 31, 1996.

FACTORS AFFECTING EARNINGS AND STOCK PRICE

Risks Associated with Implementation of Strategic Alternatives

The Company recently announced that it has retained UBS Securities, an
investment banking firm, to advise the Company on evaluating and executing a
plan to maximize shareholder value in the near term. Such a plan is expected
to involve either the sale of the entire Company or the sale of the Company's
operating businesses and other assets accompanied by or followed by the
distribution of proceeds to the shareholders or implementation of a stock
repurchase program, or both. It is anticipated that the specific transactions
will be determined in the near term following a review of all available
alternatives and the appropriate method to maximize short term shareholder
value. The announcement of any such plan or any action taken to implement any
such plan is likely to affect materially the Company's business, financial
condition and results of operations. Further, the results of operations of the
Company are likely to be affected by a number of factors during the
implementation period. These could include the impact of the announcement of
strategic alternatives such as a liquidation of assets or other alternative on
the ability of the Company to retain employees, develop new products, secure
design wins, retain its key customers, or generate new sales. Further, any
delay in the implementation of strategic alternatives

could adversely affect the value of the Company's remaining business and could
adversely affect the value of the Company's common stock.

Fluctuations in Operating Results

The Company has experienced significant fluctuations in its quarterly
operating results in the past and expects that it will experience such
fluctuations in the future. In the past, these fluctuations have been caused
by a variety of factors including increased competition from Intel and other
suppliers, price competition, ongoing rapid price declines, sudden changes in
customer demand, the timing of delivery of new products, inventory
adjustments, changes in the availability of foundry capacity and changes in
the mix of products sold. In the future, the Company's operating results in
any given period may be adversely affected by one or more of these factors.

Price Competition

The market for the Company's products are subject to severe price
competition and price declines. There can be no assurance that the Company
will succeed in reducing its product costs rapidly enough to maintain or
increase its' gross margin level or that further substantial reduction in
chipset prices will not result in lower profitability or losses.

Changes in Customer Demand

The Company currently places non-cancelable orders to purchase products from
independent foundries, while its customers generally place purchase orders
with a significantly shorter lead time which may be canceled without
significant penalty. In the past, the Company has experienced order
cancellations and deferrals and expects that it will experience cancellations
in the future from time to time. Any such order cancellations, deferrals, or a
shortfall in a receipt of orders, as compared to order levels expected by the
Company, could have a significant adverse effect on the Company's operating
results in any given period.

Product Transitions and the Timing and Delivery of New Products

From 1993 through the first half of 1995 a large majority of the Company's
revenues were derived from sales of products for the 486-based desktop PC
market. In the second half of 1995, the PC market almost completely
transitioned to Pentium-class products. This rapid transition had an adverse
effect on the Company's operating results in the second half of 1995 due to a
decrease in 486-based revenue, which could not be offset by the Company's
Pentium-based products, primarily due to supply constraints on the delivery of
those products. There can be no assurance that the Company will not face
future rapid product transitions. Any failure to successfully make future
product transitions could materially affect the Company's results of
operations.

Product Development; Technological Change

The Company's ability to maintain or increase its sales levels and
profitability depends directly on its timely introduction and rapid ramp up of
new products. In the past, the Company has experienced material delays in the
introduction of new products and expects that it will experience similar
problems from time to time in the future. Material delays in the introduction,
production or sale of a new product can have a very severe effect on the
Company's operating results in any given period, possibly resulting in a
significant shortfall in sales and earnings from that expected by the Company
or securities analysts. In particular, the Company will be highly dependent on
the timely completion and production of its USB Controller, Docking Solution,
and LCD Panel Controller products during 1998. Any such delay or shortfall
could have an immediate and very significant adverse effect on the trading
price of the Company's stock. Investors in the Company's securities must be
willing to bear the risks of such fluctuations.

Each of the product segments in which the Company offers new products are
intensely competitive and the Company must compete with entrenched competitors
who have established greater product breadth and

distribution channels. The introduction of new products can result in a
greater than expected decline and demand for existing products and create an
imbalance between products ordered by customers and products which the Company
has in inventory. This imbalance can result in surplus or obsolete inventory,
leading to write-offs or other unanticipated costs or disruptions.

Customer Concentration

Historically, the Company has sold its products to a variety of PC and
motherboard manufacturers in Asia and the United States. However, beginning in
1993, the Company began to sell a greater percentage of products for use by
United States PC manufacturers. With the exception of Compaq and its
subcontractors, no other single customer represented more than 10% of sales in
1997 and 1996. The Company sold approximately $27 million and $37 million of
chipsets to Compaq and its subcontractors, representing a combined 40% and 31%
of net sales for the years 1997 and 1996, respectively. There can be no
assurance that the Company will not experience declining sales with this
customer, or any other major customer. The Company expects that sales of its
products to a relatively small group of customers will continue to account for
a high percentage of its net sales in the foreseeable future, although the
Company's customers in any one period will continue to change.

None of the Company's customers has entered into a long-term agreement
requiring it to purchase the Company's products. The loss of a significant
customer, reduction in orders from any significant customer, changes in the
personal computer market, or economic or competitive conditions in the chipset
market, could adversely affect the Company's business, financial condition and
results of operation.

Credit Risks

Many of the Company's customers, particularly the motherboard manufacturers
in Taiwan, operate at very low profit margins and undertake significant
inventory risks. To the extent the Company provides open terms of credit to
some of the larger of these customers, the Company is exposed to significant
credit risks if these customers are unable to remain profitable. Approximately
17% of the Company's receivables at December 31, 1997 were with these
customers.

Dependence on Foundries and Manufacturing Capacity

Almost all of the Company's products are manufactured by outside foundries
pursuant to designs provided by the Company. In most instances, the Company
provides foundries with a custom-tooled design ("Custom Production"), whereby
the Company receives a finished die from the foundry which it sends to a third
party for cutting and packaging. This process subjects the Company to the risk
of low production yields as the die moves through the production and packaging
process. The Company's reliance on independent foundries and packaging houses
involves several risks, including the absence of adequate capacity, the
unavailability of or interruptions in access to certain process technologies
and reduced control over delivery schedules, manufacturing yields and costs.
At times during the second half of 1995, the Company was unable to meet the
demand for certain of its products due to limited foundry capacity and the
Company expects that it will experience other production shortfalls or
difficulties in the future.

Because the Company's purchase orders with its outside foundries are non-
cancelable by OPTi, the Company is subject to risks of, and has in the past
experienced, excess or obsolete inventory due to an unexpected reduction in
demand for a particular product. The manufacture of chipsets is a complex
process and the Company may experience short-term difficulties in obtaining
timely deliveries, which could affect the Company's ability to meet customer
demand for its products. Should any of its major suppliers be unable or
unwilling to continue to manufacture the Company's key products in required
volumes, the Company would have to identify and qualify acceptable additional
foundries. This qualification process could take up to six months or longer.
No assurances can be given that any additional sources of supply could be in a
position to satisfy any of the Company's requirements on a timely basis. The
semiconductor industry experiences cycles of under-capacity and over-capacity
which have resulted in temporary shortages of products in high demand. Any
such delivery problems in the future could materially and adversely affect the
Company's operating results.

The Company began using Custom Production in 1993. Custom Production
requires that the Company provide foundries with designs that differ from
those traditionally developed by the Company in its gate array production and
which are developed with specialized tools provided by the foundry. This type
of design process is inherently more complicated than gate array production
and there can be no assurance that the Company will not experience delays in
developing designs for Custom Production or that such designs will not contain
bugs. To the extent bugs are found, correcting such bugs is likely to be both
expensive and time consuming. In addition, the use of Custom Production
requires the Company to purchase wafers from the foundry instead of finished
products. As a result, the Company is required to increase its inventories and
maintain inventories of unfinished products at packaging houses. The Company
is also dependent on these packaging houses and its own internal test
functions for adequate capacity.

Unless the implementation of strategic alternatives affects current company
plans, the Company intends to continue to shift a substantial amount of its
capacity to increasingly dense sub-micron processes during 1998 and
thereafter. The Company has limited experience with processes below .45
micron, which are increasingly more complex. Although the Company extensively
tests hardware products prior to their introduction, it is possible that
design errors may be discovered after initial product sampling, resulting in
delays in volume production or recall of products sold. The occurrence of any
such errors could have a materially adverse effect on the Company's product
introduction schedule and operating results.

DEPENDENCE ON SALES OUTSIDE OF NORTH AMERICA

Sales to customers located outside of North America accounted for 90% of the
Company's total revenues for fiscal 1997. In fiscal 1998, the Company expects
that a large portion of its revenues will be from sales to customers outside
of North America, particularly to manufacturers located in the Asia-Pacific
region which sell their products worldwide. These sales are subject to a
variety of risks, including fluctuations in currency exchange rates, tariffs,
import restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles and potentially
adverse tax consequences and export license requirements. In addition, the
Company is subject to the risks inherent in conducting business
internationally, including political and economic instability and unexpected
changes in diplomatic and trade relationships. In particular, the economies of
certain countries in the Asia-Pacific region are experiencing considerable
economic instability and downturns. Because the Company's sales to date have
been denominated in United States dollars, increases in the value of the
United States dollar could increase the price in local currencies of the
Company's IC products in non-US markets and make the Company's products more
expensive than competitors' products that are denominated in local currencies.
There can be no assurance that one or more of the factors described above will
not have a material adverse effect on the Company's business, financial
condition and results of operations.

Competition

The chipset market is intensely competitive. The Company believes that its
ability to compete successfully depends upon a number of factors including
price, performance, the timely delivery of new products by the Company, the
introduction of new products by its competitors, product features, the
emergence of new PC standards, quality and customer support. There can be no
assurance that the Company will continue to compete successfully with respect
to any one or more of these factors. The Company has experienced market share
declines in the desktop core logic area, primarily to Intel. The Company also
competes directly with Intel in the notebook core logic area. Although Intel
has not been as aggressive in this market as it has in the desktop core logic
area, there can be no assurances that Intel will not develop a strategy to
attempt to control the market in this area.

Possible Volatility of Stock Price

There can be no assurances as to the Company's operating results in any
given period. The Company expects that the trading price of its common stock
will continue to be subject to significant volatility.

EMPLOYEES

As of December 31, 1997, the Company had 133 full-time employees, including
57 in research and development, 23 in marketing, sales, and support and 53 in
finance, administration and operations. The

Company's future success will depend, in part, on its ability to continue to
attract, retain and motivate highly qualified technical, marketing,
engineering and management personnel, who are in great demand. The Company's
employees are not represented by any collective bargaining unit, and the
Company has never experienced a work stoppage. The Company's ability to retain
key employees is a critical factor to the Company's success.

ITEM 2. PROPERTIES

The Company is headquartered in Milpitas, California, where it leases
administrative, sales and marketing, product development, test and
distribution facilities in two locations consisting of an aggregate of
approximately 97,000 square feet. The Company has additional lease obligations
in Milpitas of approximately 46,000 square feet, which the Company has sub-let
to a third party. The leases for the Company's facilities expire in the middle
of 2002. The Company believes that these facilities are adequate for its needs
in the foreseeable future.

The Company also leases office space in Tokyo, Japan, and Taipei, Taiwan to
provide sales and technical support to customers in these regions. The Company
believes that these facilities are adequate for its needs in the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

In September and October 1995, the Company was served with multiple
shareholder class action lawsuits filed in the United States District Court
for the Northern California District of California. The lawsuits, which name
the Company and several of its officers and directors as defendants, allege
violations of the federal securities laws in connection with the announcement
by OPTi Inc. of its financial results for the quarter ended September 30,
1995. In December 1997, the Company and its insurance carriers reached a
settlement with the plaintiffs in regards to this suit. The Company was
responsible for approximately $500,000 of the settlement amount. While, the
Company claims no wrongdoing in regards to this matter it believed that the
expense and time spent to continue to defend its position would have been more
costly than the actual settlement.

In January 1997, a patent infringement claim was brought against the Company
by Crystal Semiconductor, a subsidiary of Cirrus Logic. The claim alleges that
the Company and Tritech Microelectronics International infringed upon patents
held by Crystal Semiconductor. These patents relate to the "Codec" module
incorporated in various audio controller products. The Company believes that
the allegations of the complaints are without merit; and the Company intends
to vigorously defend itself. The Company believes that the ultimate resolution
of this matter will not have a material adverse effect on its financial
position, results of operations, or cash flows.

The Company is also subject from time to time to commercial litigation which
the Company believes is not material to its financial condition or results of
operations.

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

Not Applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company as of March 28, 1998 were as follows:

NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------

Jerry Chang........... 45 Chief Executive Officer, Chairman of the Board
Micahel Mazzoni....... 35 Chief Financial Officer and Secretary
Stephen A. Dukker..... 45 Director
Tor R. Braham (1)..... 40 Director
Bernard T. Marren (1). 62 Director
Kapil K. Nanda (1).... 52 Director

- --------
(1) Member of the Audit and Compensation Committees.

Jerry Chang, a co-founder of the Company, has served as Chief Executive
Officer of the Company since February 1995. Mr. Chang served as Chief
Operating Officer of the Company from February 1994 to February 1995 and as
President and Chief Operating Officer of the Company from February 1993 to
March 1994. Mr. Chang served as Vice President, Finance and Operations, Vice
President, ASIC Technology and Chief Financial Officer of the Company from
January 1989 to February 1993. Mr. Chang first served as a director of the
Company from March 1990 to January 1993 and currently has served as the
Chairman of the Board since May 1994. Prior to co-founding the Company, he was
employed by Chips and Technologies ("Chips"), a chipset design company, from
February 1987 to January 1989, serving as a design manager. From June 1984 to
October 1986, Mr. Chang was a senior Engineer at Zilog, Inc. Mr. Chang holds a
B.S. degree in Electrical Engineer from National Chiao-Tung University and an
M.S. in Electrical Engineering from Ohio State University.

Michael Mazzoni was appointed Chief Financial Officer of the Company in
January 1998. Mr. Mazzoni joined OPTi in October 1993 as Manager, Investor
Relations and has served as Corporate Controller since mid 1995. Prior to
joining the Company, he served in various accounting positions at Everex
Systems, Inc., a personal computer manufactur from April 1992 to October 1993,
with his last position being Corporate Controller. From March 1986 to March
1992, Mr. Mazzoni was employed at Santa Cruz Operation. Inc. ("SCO") in
various treasury, accounting and finance positions. At the time of his
departure from SCO, he was serving as Manager, Corporate Finance.

Stephen A. Dukker was elected as a director of the Company in January 1993.
He currently is employed at Computer City as Senior Vice President,
Merchandising, where he has been employed since October 1997. He served as
President of the Company from January of 1996 to October 1997. From May 1994
to mid 1995, Mr. Dukker served as President of VideoLogic, Inc., a supplier of
video and graphics add-on boards. From June 1991 through October 1993, he
served as a Senior Vice President of CompUSA, Inc., a chain of discount
computer superstores. During that time he was also a member of the Executive
Committee of CompUSA and President of its Compudyne Computer manufacturing and
mail order subsidiaries. Prior to joining CompUSA, Mr. Dukker was President of
PC Brand, Inc., a manufacturer and mail order distributor of PC products from
January 1988 to May 1991.

Tor R. Braham was elected as a director in January 1993. Mr. Braham is
currently employed at UBS Securities as Managing Director of Mergers and
Acquisition in the Technology department. Prior to UBS, Mr. Braham was a
partner in the law firm of Wilson Sonsini Goodrich & Rosati, a Professional
Corporation, where he was employed from 1984 to November 1997. Mr. Braham
received a B.A. from Columbia College in 1979 and a J.D. from New York
University School of Law in 1982. Mr. Braham is also a member of the Board of
Directors of Smart Modular Technologies, Inc., a manufacturer of memory
products, and 3Dlabs Inc., a manufacturer of high end 3D graphic semiconductor
devices.

Bernard T. Marren was elected as a director in May 1996. Mr. Marren has been
Chairman and Chief Executive Officer of Die Enhancements, a processor of
silicon wafers to produce fully tested die for the multi-chip module market,
since 1994. From 1977 to 1994, Mr. Marren founded and served as President of
Western Microtechnology Inc.,a distributor of electronic systems and
semiconductor devices. From 1972 to 1976, Mr. Marren was an employee of
American Microsystems.

Napil K. Nanda was elected as a director in May 1996. Mr. Nanda is currently
President of Infosoft, Inc., a software and development consulting company,
which he founded in 1990. Prior to 1990, Mr. Nanda held various positions at
Altos Computer Systems, a personal computer manufacturing company, from 1981
to 1989, the most recent position being Vice President of Engineering. From
1974 to 1981, Mr. Nanda was employed at Intel Corporation, where his most
recent position was Manager, Software Engineering. Mr. Nanda holds a B.S. in
Engineering from the University of Punjab, India, an M.S. in Engineering from
the University of Kansas, and an M.B.A. from the University of Southern
California.

PART II

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

The following required information is filed as a part of this Report:

The Company has not paid cash dividends on its common stock, and currently
intends to retain any future earnings for use in the development and
operations of its business. Accordingly, the Company does not expect to pay
any cash dividends in the foreseeable future. The Company's common stock is
traded over-the-counter and is quoted on the Nasdaq National Market System
under the symbol "OPTI". The following table sets forth the range of high and
low closing sale prices for the Common Stock:

QUARTERLY PERIOD ENDED
-----------------------------------
DEC. 31, SEPT. 30, JUNE 30 MAR. 31,
-------- --------- ------- --------

Common stock price per share:
1997 High.............................. $7.63 $7.50 $6.13 $6.50
Low............................... 5.75 4.25 4.50 5.00
1996 High.............................. $6.13 $6.88 $8.63 $9.50
Low............................... 4.50 4.44 4.88 5.63

As of March 24, 1998, there were approximately 267 holders of record of the
Company's common stock.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Consolidated Statement of
Operations Data:
Net sales..................... $ 67,842 $118,725 $163,676 $134,099 $85,256
Cost of sales................. 50,471 111,395 121,587 90,020 55,463
-------- -------- -------- -------- -------
Gross margin.................. 17,371 7,330 42,089 44,079 29,793
Operating expenses............ 27,836 31,000 27,458 22,614 15,631
-------- -------- -------- -------- -------
Operating income (loss)....... (10,465) (23,670) 14,631 21,465 14,162
Other income (expenses):
Gain on sale of Audio line.. 12,391 -- -- -- --
Interest income and other... 3,031 2,417 3,210 1,523 932
Interest expense............ (473) (441) (306) (233) (157)
-------- -------- -------- -------- -------
Income (loss) before provision
for income taxes............. 4,484 (21,694) 17,535 22,755 14,937
Provision (benefit) for income
taxes........................ 9,872 (7,636) 6,285 8,201 5,770
-------- -------- -------- -------- -------
Net income (loss)............. $ (5,388) $(14,058) $ 11,250 $ 14,554 $ 9,167
-------- -------- -------- -------- -------
Basic net income (loss) per
share........................ $ (0.42) $ (1.13) $ 1.02 $ 1.71 $ 1.58
======== ======== ======== ======== =======
Shares used in computing basic
per share amounts............ 12,838 12,443 11,033 8,501 5,801
======== ======== ======== ======== =======
Diluted net income (loss) per
share........................ $ (0.42) $ (1.13) $ 0.85 $ 1.17 $ 0.84
======== ======== ======== ======== =======
Shares used in computing
diluted per share amounts.... 12,838 12,443 13,171 12,436 10,891
======== ======== ======== ======== =======
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term investments..... $ 72,508 $ 56,372 $ 61,362 $ 50,302 $39,850
Working capital............. 75,360 76,188 95,551 71,481 45,040
Total assets................ 111,615 115,501 142,616 106,458 64,294
Long-term obligations,
excluding current portion.. 3,473 4,649 5,323 2,316 644
Shareholders' equity........ 92,723 96,371 108,756 79,149 48,806

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

OVERVIEW

OPTi has grown since its founding in 1989 to become an independent volume
supplier of notebook chipset products to the personal computer market. During
1997, the Company shipped more than five million core logic and audio chipsets
to more than 100 PC and motherboard manufacturers and add-on board
manufacturers located primarily in Asia and the United States.

This past year was one of transition for the Company as it experienced a
significant reduction in revenue. The Company recently announced that it has
retained UBS Securities, an investment banking firm, to advise the Company on
evaluating and executing a plan to maximize shareholder value in the near
term. Such a plan is expected to involve either the sale of the entire Company
or the sale of the Company's operating businesses and other assets accompanied
by or followed by the distribution of proceeds to the shareholders or
implementation of a stock repurchase program, or both. It is anticipated that
the specific transactions will be determined in the near term following a
review of all available alternatives and the appropriate method to maximize
short term shareholder value. The announcement of any such plan or any action
taken to implement any such plan is likely to affect materially the Company's
business, financial condition and results of operations.

1997 COMPARED TO 1996. Net sales for the year ended December 31, 1997
("1997") decreased 43% to $67.8 million, compared to net sales of $118.7
million for the year ended December 31, 1996 ("1996"). This decrease in sales
was attributable to decreased sales of chipsets supporting the Company's
desktop core logic business segment and decreased sales from the Company's
audio line. In 1997 the Company shipped approximately 5.7 million chipsets as
compared to approximately 9.0 million chipsets in 1996.

Revenue from core logic products was approximately 73% of net sales for 1997
as compared to approximately 71% in 1996. The remaining 27% of revenue in 1997
was from peripheral products (audio and graphics). The mix of revenues within
the core logic area shifted to notebook core logic products in 1996 and
continued in 1997 as the Company had no major product wins in 1997 for desktop
products. It is likely that the Company will experience ongoing shifts in its
revenue mix. No assurances can be given that future revenues will reflect this
product mix trend.

Gross margin for 1997 increased to approximately 26% of net sales as
compared to approximately 6% in 1996. This increase in gross margin for 1997
as compared to 1996 was primarily attributable to inventory write-downs taken
on some of the Company's Pentium class desktop core logic products and
reductions in selling prices for the Company's Pentium class desktop core
logic products during fiscal 1996. The Company is likely to face continued
potential inventory risks and adjustments if anticipated sales and shipments
do not occur when expected, as in the case of some of its notebook core logic
and audio products. The markets for the Company's products are also subject to
severe price competition and price declines. There can be no assurance that
the Company will succeed in reducing its product costs rapidly enough to
increase its gross margin level or that further substantial reductions in
notebook core logic prices will not result in future losses.

Research and development expenses for 1997 decreased approximately 11% to
$12.6 million, compared with $14.1 million for 1996. The decrease in research
and development expenses from 1996 to 1997 is primarily related to the
Company's shift in market focus over the last year as the Company has focused
more heavily on notebook directed technologies and has reduced research and
development headcount expenses accordingly.

Selling, general and administrative ("SG&A") expenses for 1997 decreased
approximately 17% to $14.1 million, compared with $16.9 million in 1996. This
decrease in SG&A expenses from 1996 to 1997 was primarily attributable to a
reduction in sales headcount expenses and decreased sales commission relating
to decreased net sales.

Restructuring and other expenses for 1997 were $1.2 million. During the
second quarter of 1997 the Company initiated a restructuring program as a
result of decisions by its Chief Executive Officer and Board of Directors to
adjust the Company's organizational structure in order to align resources with
a revised business model and to lower the Company's cost structure. The
restructuring actions resulted in reducing headcount, vacating leased
facilities, and reducing the value of certain assets.

In November 1997, the Company sold some of the assets associated with its
Audio line, substantially under the terms of the Asset Purchase Agreement
dated November 22, 1997, to Creative Technology Ltd., ("Creative"), an
unaffiliated Singapore corporation. Creative paid the Company cash of $14.0
million and received a warrant to purchase 200,000 shares of OPTi's Common
Stock exercisable at a price of $10.00 per share and expiring in 2002.

Net interest and other income for 1997 was $2.5 million as compared to $2.0
million for 1996. Interest and other income consists primarily of interest
income and has increased primarily due to higher average balances of cash,
cash equivalents and short term investments in 1997 versus 1996.

The Company's effective tax rate was a 220% provision for 1997, a 35.2%
benefit for 1996, and a 35.8% provision for 1995. The Company's effective tax
rate differed from the federal statutory rate in 1997 due to a $9.8 million
increase in the Company's reserve against deferred tax assets at December 31,
1997. The effective tax rate differed from the federal statutory rate in 1996
due, primarily state income taxes and an increase in the Company's reserve
against deferred tax assets at December 31, 1996. The Company anticipates its
effective tax rate for 1998 will be less than the federal statutory tax rate
due to available net operating losses and credit carryforwards to reduce
potential current taxable income and the limitations controlling the timing
for recognition of deferred tax assets established by the Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes" which will prevent a tax benefit for potential operating losses.

1996 COMPARED TO 1995. Net sales for the year ended December 31, 1996
("1996") decreased 27% to $118.7 million, compared to net sales of $163.7
million for the year ended December 31, 1995 ("1995"). This decrease in sales
was attributable to decreased sales of chipsets supporting the Company's
desktop core logic business segment. This reduction was partially offset by
increases in the Company's notebook core logic and audio business segments. In
1996 the Company shipped approximately 9.0 million chipsets as compared to
approximately 11.5 million chipsets in 1995.

Revenue from core logic products were approximately 71% of net sales for
1996 as compared to approximately 80% in 1995. The remaining 29% of revenue in
1996 was from peripheral products (audio and graphics). The mix of revenues
within the core logic area has shifted to notebook core logic products which
represented approximately 59% of total core logic sales in 1996 as compared
with approximately 14% in 1995.

The Company's declines in its desktop core logic business have been largely
due to Intel's aggressive push to dominate the desktop core logic market and
the Company's inability to compete successfully over this period. This push
from Intel which began in 1995 corresponds to their aggressive marketing of
the Pentium platform and their successful attempts to control a significant
share of the Pentium motherboard market, utilizing their own processors and
core logic.

Gross margin for 1996 decreased to approximately 6% of net sales as compared
to approximately 26% in 1995. This decrease in gross margin for the year was
primarily attributable to inventory write-downs taken on some of the Company's
Pentium class desktop core logic products, reductions in selling prices for
the Company's

Pentium class desktop core logic products, increased overhead expenses as a
percentage of revenue, and reductions in selling prices for the Company's
audio products.

Research and development expenses for 1996 increased approximately 30% to
$14.1 million, compared with $10.8 million for 1995. The increase in research
and development expenses from 1995 to 1996 is primarily related to the
Company's shift in market focus over the last year as the Company has focused
more heavily on notebook directed technologies and in the multimedia areas.
The Company has invested in technologies which, although not currently
productized, may be integrated into future products.

Selling, general and administrative ("SG&A") expenses for 1996 increased
approximately 2% to $16.9 million, compared with $16.6 million in 1995. This
increase in SG&A expenses from 1995 to 1996 was primarily attributable to
increased legal expenses related to the class action lawsuit brought against
the Company, partially offset by a reduction in sales expenses relating to
decreased net sales.

Net interest and other income for 1996 was $2.0 million as compared to $2.9
million for 1995. Interest and other income consists primarily of interest
income and has decreased primarily due to lower average balances of cash and
cash equivalents and lower average interest rates in 1996 versus 1995.

The Company's effective tax benefit was 35% for 1996 and the Company's
effective tax rate for 1995 was 36%. The Company has relied on future taxable
income to benefit its deferred tax assets. The Company has recorded net
deferred tax assets of $9.8 million, reflecting the benefit of $2.7 million in
unrealized net operating loss carryforwards and $1.3 million in credit
carryforwards, which will expire in varying amounts between 2001 and 2011.
Management believed it was more likely than not that the deferred tax asset
was realizable at December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES. The Company has financed its operations
through cash generated from operations and an initial public offering of
equity in 1993. In 1997, the Company generated cash from operating activities
of $3.6 million primarily due to reductions in accounts receivable due to
lower sales and an increase in accounts payable partially offset by the
Company's net loss for the year. In 1996, the Company generated cash from
operations of $4.5 million primarily due to reductions in inventories and
accounts receivable, offset, in part, by a decrease in accounts payable and a
net loss for the year.

The Company's investing activities generated cash of $3.3 million and used
cash of $11.6 million in 1997 and 1996, respectively. The cash generated in
1997 was primarily due to proceeds of $13.9 million from the sale of the
Company's audio line, partially offset by an investment into short term
investments of approximately $8.7 million and a payment of approximately $1.6
million to United Microelectronics Corporation ("UMC") as partial payment
under the terms of the 1995 agreement that the Company signed with UMC. As of
December 31, 1997 the Company has no further obligations under this agreement.
During 1996, the Company made capital expenditures, including obligations
under a capital lease, of approximately $8.5 million. These expenditures
related primarily to the acquisition of computer equipment and high speed
circuit testers for use in the development and testing of chipset products.

Financing activities provided cash of approximately $0.5 million and $2.1
million in 1997 and 1996, respectively. The cash generated in 1997 was
primarily due to proceeds from the sale of stock partially offset by principal
payments on capital lease obligations. In 1996, the cash generated was
primarily due to proceeds from the sale of stock and proceeds from the sale
and leaseback of fixed assets, partially offset by principal payments on
capital lease obligations.

Company's small percentage ownership and minor influence on the operations of
the foundry venture, the Company will continue to account for this investment
on the cost basis.

The Company's manufacturing plans and expenditure levels are based primarily
upon sales forecasts. Typically, the Company orders products from foundries
pursuant to non-cancelable purchase orders on a rolling twelve week basis
while its customers generally place product orders approximately four weeks
prior to delivery. These customer orders may be canceled without significant
penalty. The Company anticipates that the rate of new orders will vary
significantly from month to month. As a result, backlog can fluctuate
significantly. Consequently, if anticipated sales and shipments do not occur
when expected, expense and inventory levels could be disproportionately high
and the Company's operating results could be materially and adversely
affected.

As of December 31, 1997, the Company's principal sources of liquidity
included cash, cash equivalents and short term investments of approximately
$72.5 million and working capital of $75.4 million. The Company believes that
the existing sources of liquidity as well as its $10 million line of credit
will satisfy the Company's projected working capital and other cash
requirements through at least the end of 1998.

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer will be affected in some
way by the rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. Management is in the
process of working with its software vendors to assure that the Company is
prepared for the year 2000. Management does not anticipate that the Company
will incur significant operating expenses or be required to invest heavily in
computer systems improvements to be year 2000 compliant. However, significant
uncertainty exists concerning the potential costs and effects associated with
any year 2000 compliance. Any year 2000 compliance problem of either the
Company or its suppliers or customers could materially adversely affect the
Company's business; results of operations, financial condition and prospects.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's financial statements and the report of the independent
auditors appear on pages F-1 through F-16 of this Report.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item concerning the Company's directors is
incorporated by reference from the sections captioned "Election of Directors"
and "Other Information" contained in the Company's Proxy Statement related to
the Annual Meeting of Shareholders to be held on May 28, 1998, and to be filed
by the Company with the Securities and Exchange Commission within 120 days of
the end of the Company's fiscal year end pursuant to General Instruction G(3)
of Form 10-K (the "Proxy Statement"). Certain information required by this
item concerning executive officers is set forth in Part I of this Report and
certain other information is incorporated by reference from the section
captioned "Other Information" contained in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
section captioned "Other Information" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

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

(a)(1) Financial Statements

The following financial statements are filed as part of this Report:

PAGE
----

Report of Ernst & Young LLP, Independent Auditors...................... F-1
Consolidated Balance Sheets, December 31, 1997 and 1996................ F-2
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995................................................... F-3
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995................................................... F-5
Notes to Consolidated Financial Statements............................. F-6

(a)(2) Financial Statement Schedules

SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
-------- ----------- ------

II Valuation and Qualifying Accounts S-1

All other schedules not applicable.

(a)(3) Exhibit Listing

EXHIBIT
NUMBER DESCRIPTION
------- -----------

2.1 Asset Purchase Agreement dated as of November 22, 1997 by and between
Creative Technology LTD, and OPTi, Inc. (7)
3.1 Registrant's Articles of Incorporation, as amended (2).
3.2 Registrant's Bylaws (2).
10.1 1993 Stock Option Plan, as amended (2).
10.2 1993 Director Stock Option Plan (2).
10.3 1993 Employee Stock Purchase Plan (2).
10.4 Form of Indemnification Agreement between Registrant and its officers
and directors (2).
10.5 Lease between the Registrant and Century 73 & Meier Associates dated
August 22, 1990 and First Addendum to Lease dated January 24, 1992
(2).
10.6 OPTi Inc. 1993 Bonus Plan (2).
10.7 Lease between the Registrant and Michael P. Groom, Trustee, dated
April 5, 1993 and First Addendum to Lease dated April 5, 1993(1).
10.8 Sublease between Registrant and Chem Group, Inc., dated June 15, 1993
(1).
10.9 Manufacturing Agreement between Registrant and IBM Microelectronics,
dated as of November 12, 1993(1).
10.10 Promissory Note between OPTi Inc. and Sumitomo Bank of California,
dated November 14, 1994. (3)
10.11 Credit Agreement dated as of November 14, 1994 by and among OPTi Inc.,
certain banks therein named and Sumitomo Bank of California, as Agent.
(3)
10.12 Employee/Consultant Agreement between OPTi Inc. and Kenny Lui dated as
of August 18, 1994. (3)
10.13 Terms of Severance between OPTi Inc. and Raymond J. Farnham dated as
of January 31, 1995. (3)
10.14 Foundry Venture Investment Agreement between the Registrant and United
Microelectronics Corporation dated September 13, 1995. (4)

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.15 Foundry Capacity Agreement by and between the Registrant, FabVen and
United Microelectronics Corporation dated September 13, 1995. (4)
10.16 Lease between the Registrant and John Arrillaga and Richard T. Peery
as separate property trusts, dated April 26, 1995. (4)
10.17 OPTi Inc. 1995 Nonstatutory Stock Option Plan. (4)
10.18 1996 Employee Stock Purchase Plan. (5)
10.19 1995 Employee Stock Option Plan, as amended. (6)
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (see page 25, signature page).
27 Financial Data Schedule.

- --------
(1) Incorporated by reference to the Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1993, of OPTi Inc.
(2) Incorporated by reference to Registration Statement on Form S-1 (File No.
33-59978) as declared effective by the Securities and Exchange Commission
on May 11, 1993.
(3) Incorporated by reference to the Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1994, of OPTi Inc.
(4) Incorporated by reference to the Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1995, of OPTi Inc.
(5) Incorporated by reference to Registration Statement on Form S-8 (File No.
333-15181) as filed with the Securities and Exchange Commission on October
31, 1996.
(6) Incorporated by reference to Registration Statement on Form S-8 (File No.
333-17299) as filed with the Securities and Exchange Commission on
December 5, 1996.
(7) Incorporated by reference to the Current Report on Form 8-K/A of OPTi Inc.
filed on December 29, 1997.

(b) Reports on Form 8-K

ITEM 14(B) REPORTS ON FORM 8-K

On December 11, 1997, the Company filed a Current Report on form 8-K dated
November 26, 1997, disclosing, under Item 2, the disposition of the assets of
the Company's Net Media business unit in an asset sale to Creative Technology
Ltd., a corporation organized under the laws of Singapore, for $14,000,000 in
cash. On December 29, 1997, the Company filed an amendment to that Current
Report. The purpose of the Amendment was to file Exhibit 2.

(d) Financial Statements Schedules. See Item 14(a)(2) above.

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS FORM 10-K TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY
OF MILPITAS, STATE OF CALIFORNIA ON THE 31ST DAY OF MARCH 1998.

OPTi Inc.

/s/ Jerry Chang
By___________________________________
JERRY CHANG CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE BOARD

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry Chang and Michael Mazzoni and each of
them, jointly and severally, his true and lawful attorney-in-fact, each with
full power of substitution and resubstitution, for him in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that each said attorneys-in-fact and agents, or their
substitute or substitutes, or any of them, shall do or cause to be done by
virtue Hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
FORM 10-K HAS BEEN SIGNED BELOW BY THE PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITITES AND ON THE DATES INDICATED:

SIGNATURES TITLE DATE

/s/ Jerry Chang Chief Executive March 31, 1998
- ------------------------------------- Officer and
JERRY CHANG Chairman of the
Board (Principal
Executive Officer)

/s/ Michael Mazzoni Chief Financial March 31, 1998
- ------------------------------------- Officer (Principal
MICHAEL MAZZONI Financial and
Accounting Officer)

/s/ Stephen A. Dukker Director March 31, 1998
- -------------------------------------
STEPHEN A. DUKKER

/s/ Tor R. Braham Director March 31, 1998
- -------------------------------------
TOR R. BRAHAM

Director
- -------------------------------------
BERNARD T. MARREN

- ------------------------------------- Director
KAPIL K. NANDA

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
OPTi Inc.

We have audited the accompanying consolidated balance sheets of OPTi Inc. as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
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 consolidated financial position
of OPTi Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

/s/ Ernst & Young LLP

San Jose, California
January 28, 1998

F-1

OPTI INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS

DECEMBER 31,
------------------
1997 1996
-------- --------

Current assets:
Cash and cash equivalents................................ $ 63,832 $ 56,372
Short term investments................................... 8,676 --
Accounts receivable, net of allowance for doubtful
accounts of $1,600 in 1997 and $1,275 in 1996........... 11,782 17,950
Inventories.............................................. 5,017 4,946
Prepaid expenses and other current assets................ 1,472 1,513
Deferred taxes........................................... -- 9,888
-------- --------
Total current assets................................... 90,779 90,669
Property and equipment:
Machinery and equipment.................................. 25,183 25,733
Furniture and fixtures................................... 1,407 1,710
-------- --------
26,590 27,443
Accumulated depreciation................................... (15,543) (11,203)
-------- --------
11,047 16,240
Other assets............................................... 9,789 8,592
-------- --------
Total assets......................................... $111,615 $115,501
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 11,171 $ 9,718
Accrued expenses......................................... 1,639 2,037
Accrued employee compensation............................ 1,367 1,449
Income taxes payable..................................... 106 111
Current obligations under capital leases................. 1,136 1,166
-------- --------
Total current liabilities.............................. 15,419 14,481
Long-term obligations under capital leases................. 3,473 4,649
Commitments and contingences
Shareholders' equity:
Preferred stock, no par value:
Authorized shares--5,000,000
No shares issued or outstanding........................ -- --
Common stock, no par value:
Authorized shares--50,000,000
Issued and outstanding shares--13,126,508 in 1997, and
12,661,213 in 1996.................................... 58,623 56,883
Retained earnings........................................ 34,100 39,488
-------- --------
Total shareholders' equity........................... 92,723 96,371
-------- --------
Total liabilities and shareholders' equity........... $111,615 $115,501
======== ========

See accompanying notes

F-2

OPTI INC.

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

YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------

Net sales........................................ $ 67,842 $118,725 $163,676
Costs and expenses:
Cost of sales.................................. 50,471 111,395 121,587
Research and development....................... 12,565 14,084 10,812
Selling, general and administrative............ 14,058 16,916 16,646
Restructuring.................................. 1,213 -- --
-------- -------- --------
Total costs and expenses..................... 78,307 142,395 149,045
-------- -------- --------
Operating income (loss).......................... (10,465) (23,670) 14,631
Gain on sale of audio line....................... 12,391 -- --
Interest income and other........................ 3,031 2,417 3,210
Interest expense................................. (473) (441) (306)
-------- -------- --------
14,949 1,976 2,904
-------- -------- --------
Income (loss) before provision (benefit) for
income tax...................................... 4,484 (21,694) 17,535
Provision (benefit) for income taxes............. 9,872 (7,636) 6,285
-------- -------- --------
Net income (loss)................................ $ (5,388) $(14,058) $ 11,250
======== ======== ========
Basic net income (loss) per share................ $ (0.42) $ (1.13) $ 1.02
======== ======== ========
Shares used in computing basic per share amounts. 12,838 12,443 11,033
======== ======== ========
Diluted net income (loss) per share.............. $ (0.42) $ (1.13) $ 0.85
======== ======== ========
Shares used in computing diluted per share
amounts......................................... 12,838 12,443 13,171
======== ======== ========

See accompanying notes

F-3

OPTI INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

COMMON STOCK TOTAL
------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ------- -------- -------------

Balance at December 31, 1994........ 9,882,238 $36,853 $ 42,296 $ 79,149
Sale of common stock.............. 1,994,725 6,528 -- 6,528
Tax benefits from sale of common
stock............................ -- 11,829 -- 11,829
Net income........................ -- -- 11,250 11,250
---------- ------- -------- --------
Balance at December 31, 1995........ 11,876,963 55,210 53,546 108,756
Sale of common stock.............. 784,250 1,673 -- 1,673
Net loss.......................... -- -- (14,058) (14,058)
---------- ------- -------- --------
Balance at December 31, 1996........ 12,661,213 56,883 39,488 96,371
Sale of common stock.............. 465,295 1,740 -- 1,740
Net loss.......................... -- -- (5,388) (5,388)
---------- ------- -------- --------
Balance at December 31, 1997........ 13,126,508 $58,623 $ 34,100 $ 92,723
========== ======= ======== ========

See accompanying notes

F-4

OPTI INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------

OPERATING ACTIVITIES
Net income (loss)............................... $ (5,388) $(14,058) $ 11,250
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 5,213 5,266 2,801
Deferred taxes................................ 9,888 (4,335) (2,393)
Gain on sale of audio line.................... (12,391) -- --
Changes in operating assets and liabilities:
Accounts receivable......................... 6,168 8,529 (10,451)
Inventories................................. (896) 20,313 (3,297)
Prepaid expenses and other current assets... 41 2,744 765
Accounts payable............................ 1,453 (11,735) 3,143
Accrued expenses............................ (398) 257 585
Accrued employee compensation............... (82) 339 (1,279)
Income taxes payable........................ (5) (2,800) 12,589
-------- -------- --------
Net cash provided by operating activities....... 3,603 4,520 13,713
INVESTING ACTIVITIES
Purchases of property and equipment............. (227) (6,380) (8,718)
Purchase of short term investments.............. (8,676) -- --
Net proceeds from sale of Audio line............ 13,873 -- --
Increase in other assets........................ (1,647) (5,190) (2,627)
-------- -------- --------
Net cash provided (used in) in investing
activities..................................... 3,323 (11,570) (11,345)
FINANCING ACTIVITIES
Net proceeds from sale of common stock.......... 1,740 1,673 6,528
Net proceeds from sale (purchase) of subsidiary
stock.......................................... -- (151) 151
Proceeds from sale and leaseback of fixed
assets......................................... -- 2,099 3,112
Principal payments on capital lease obligations. (1,206) (1,561) (1,099)
-------- -------- --------
Net cash provided by financing activities....... 534 2,060 8,692
Net increase (decrease) in cash and cash
equivalents.................................... 7,460 (4,990) 11,060
Cash and cash equivalents at beginning of year.. 56,372 61,362 50,302
-------- -------- --------
Cash and cash equivalents at end of year........ $ 63,832 $ 56,372 $ 61,362
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.......................... $ 473 $ 441 $ 306
Equipment leased under capital lease obligation. $ -- $ 2,099 $ 3,112
Income tax benefit from stock option exercises.. $ -- $ -- $ 11,829

See accompanying notes

F-5

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company OPTi Inc., a California corporation, is engaged in designing and
marketing core logic chipsets for use principally by personal computer and
motherboard manufacturers.

Principles of Consolidation The consolidated financial statements include
the Company and its majority and wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.

Cash and Cash Equivalents The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Cash equivalents are carried at cost, which approximates
fair value. The Company is exposed to credit risk in the event of default by
the financial institutions or issuers of the investments to the extent of
amounts recorded on the balance sheet.

Short-Term Investments The Company invests its excess cash in high
quality,auction rate preferred securities with reset dates within sixty days.
At December 31, 1997, all short-term investments are designated as available
for sale. Interest and dividends on the investments are included in interest
income. There were no realized gains or losses on the Company's investments
during 1997 as all investments were held to maturity during the year. At
December 31, 1997, the fair value of short-term investments approximates cost.

Inventories Inventories, comprised of finished goods and work in process,
are stated at the lower of cost (using the first-in, first-out method ) or
market. The market value is based upon estimated net realizable value.

Property and Equipment Property and equipment, including machinery and
equipment under capital lease, are stated at cost, less accumulated
depreciation and amortization. Depreciation for non-leased property and
equipment is computed by the straight-line method over the estimated useful
lives of the assets, ranging from three to five years. Assets under capital
lease are amortized using the straight-line method over the shorter of the
remaining term of the lease or the estimated economic life of the asset.

Revenue Recognition The Company records sales upon shipment and provides an
allowance for the estimated return of product.

Net Income (loss) Per Share In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share" ("FAS 128"). FAS 128
replaced the calculation of primary and diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported primary earnings per share. Earnings per share amounts for
all periods presented have been restated to conform to FAS 128 requirements.

The following table sets forth the computation of basic and diluted net
income (loss) per share:

FISCAL YEAR ENDED
-----------------------------------------
1997 1996 1995
------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Numerator:
Net income (loss)............. $ (5,388) $ (14,058) $ 11,250
============ ============= ============
Denominator for basic net income
(loss) per share weighted
average shares................. 12,838 12,443 11,033
Effect of dilutive securities:
Employee stock options........ -- -- 2,138
------------ ------------- ------------
Denominator for diluted net
income (loss) per share........ 12,838 12,443 13,171
============ ============= ============
Basic net income (loss) per
share.......................... $ (0.42) $ (1.13) $ 1.02
============ ============= ============
Diluted net income (loss) per
share.......................... $ (0.42) $ (1.13) $ 0.85
============ ============= ============

F-6

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Accounting for Employee Stock Options In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123). The Company has elected
to continue to account for employee stock options in accordance with APB
Opinion No. 25 and has adopted the "disclosure only" alternative described in
FAS 123.

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 amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.

Recent Pronouncements In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, Reporting Comprehensive Income. This statement
requires that all items that are to be required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997, and will be adopted by the Company for the year ended
December 31, 1998.

In addition, during June 1997, the Financial Accounting Standards Board
issued Statement No. 131, Disclosures About Segments of the Enterprise and
Related Information. This statement replaces Statement 14 and changes the way
public companies report segment information. This statement is effective for
fiscal years beginning after December 15, 1997, and will be adopted by the
Company for the year ended December 31, 1998.

NOTE 2--INVENTORIES

A summary of inventories follows (in thousands):

1997 1996
------ ------

Finished Goods.............................................. $2,508 $2,422
Work in Process............................................. 2,509 2,524
------ ------
Total Inventory........................................... $5,017 $4,946
====== ======

NOTE 3--OBLIGATIONS UNDER CAPITAL LEASE

The Company leases certain machinery and equipment under capital leases. The
related obligations under capital leases represent the present value of future
minimum lease payments. Assets capitalized under leases totaled $6,876,000 and
$9,699,000 at December 31, 1997 and 1996, respectively. Accumulated
amortization of these leased assets was $3,982,000 and $3,828,000 at December
31, 1997 and 1996, respectively.

The aggregate minimum annual payments under capital lease obligations as of
December 31, 1997, were as follows (in thousands):

1998.............................................................. $1,504
1999.............................................................. 2,018
2000.............................................................. 939
2001.............................................................. 793
------
Future minimum lease payments..................................... 5,254
Less amount representing interest................................. 645
------
Present value of future minimum lease payments.................... 4,609
Less current obligations under capital lease...................... 1,136
------
Long-term obligations under capital lease......................... $3,473
======

F-7

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4--SHAREHOLDERS' EQUITY

PREFERRED STOCK

The Board of Directors has authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges, qualifications, limitations and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the shareholders.

STOCK OPTION PLANS

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123, "Accounting for Stock-Based Compensation," requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.

Pro forma information regarding net income/(loss) and net income/(loss) per
share is required by FAS 123 which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of the
grant using a Black-Scholes option pricing model.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

The fair value of the Company's stock based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:

1997 1996 1995
--------- --------- ---------

Expected Life............................. 4.5 years 4.5 years 4.5 years
Expected volatility....................... 0.62 0.60 0.65
Risk Free Interest Rate................... 6.23% 6.50% 6.50%

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information follows (in thousands except for earnings per share information):

1997 1996 1995
------- -------- ------

Pro forma net income/(loss)...................... $(8,670) $(16,800) $9,700
Pro forma basic net income/(loss) per share...... $ (0.68) $ (1.35) $ 0.88
Pro forma diluted net income/(loss) per share.... $ (0.68) $ (1.35) $ 0.76

Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1999.

F-8

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During October 1996, the Company offered a repricing of stock options to all
non-officers and directors. The repriced exercise price was for $5.32 per
share. Approximately 1,100,000 options were repriced at that time.

The weighted average fair value of options granted under all stock option
plans was $3.49, $2.86 and $5.94 for the years ending 1997, 1996 and 1995,
respectively. The average remaining contractual life of options outstanding at
December 31, 1997 under all option plans was 7.42 years.

1993 Stock Option Plan

The Company's 1993 Stock Option Plan (the "1993 Plan"), which was adopted in
February 1993, provides for the granting of incentive stock options to
employees and for the granting of nonstatutory stock options to employees and
consultants of the Company. The Board of Directors determines the term of each
option, the option price and the condition under which the option becomes
exercisable. The options generally vest over four years from the date of grant
and expire ten years from the date of grant.

The activity under the 1993 Plan (including the Evergreen Plan) is as
follows:

OUTSTANDING
---------------------------------------
WEIGHTED AVE EXERCISE
SHARES EXERCISE PRICE PRICE
---------- -------------- ------------

Outstanding at December 31, 1994. 4,607,927 $.0075-16.75
Granted........................ 89,500 $10.31
Exercised...................... (1,927,080) $ 3.02
Canceled....................... (468,600) $11.35
----------
Outstanding at December 31, 1995. 2,301,747 $ 5.39
Granted........................ 497,000 $ 5.42
Exercised...................... (667,621) $ 1.74
Canceled....................... (439,818) $10.45
----------
Outstanding at December 31, 1996. 1,691,308 $ 4.49
Granted........................ 130,000 $ 5.50
Exercised...................... (214,161) $ 2.77
Canceled....................... (191,714) $ 7.30
----------
Outstanding at December 31, 1997. 1,415,433 $ 4.30
==========

Approximately 1,021,787, 1,128,716 and 1,576,620 options outstanding were
exercisable as of December 31, 1997, 1996 and 1995, respectively. At December
31, 1997, the range of exercise prices under the plan for options exercisable
was $0.60--$14.00.

1995 Stock Option Plan

The Company's 1995 Stock Option Plan (the "1995 Plan"), which was adopted in
August 1995, provides for the granting of up to 2,500,000 nonstatutory stock
options, of which 1,500,000 were authorized in 1996, to employees and
consultants of the Company. The Board of Directors determines the term of each
option, the option price and the condition under which the option becomes
exercisable. The options generally vest over four years from the date of grant
and expire ten years from the date of grant.

F-9

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The activity under the 1995 Plan is as follows:

OUTSTANDING
-------------------------
WEIGHTED AVE.
SHARES EXERCISE PRICE
--------- --------------

Outstanding at December 31, 1994...................... -- --
Granted............................................. 734,750 $12.31
Exercised........................................... (8,372) $15.14
Canceled............................................ (99,456) $14.34
---------
Outstanding at December 31, 1995...................... 626,922 $11.31
Granted............................................. 2,073,000 $ 5.72
Canceled............................................ (489,348) $10.05
---------
Outstanding at December 31, 1996...................... 2,210,574 $ 5.17
Granted............................................. 395,500 $ 5.24
Exercised........................................... (119,899) $ 5.11
Canceled............................................ (899,920) $ 5.25
---------
Outstanding at December 31, 1997...................... 1,586,255 $ 5.06
=========

Approximately 666,432, 328,772, and 85,881 options outstanding were
exercisable as of December 31, 1997, 1996 and 1995, respectively. At December
31, 1997, the range of exercise prices under the plan for options exercisable
was $4.63--$9.50.

1993 Director Stock Option Plan

In February 1993, the Company adopted the 1993 Director Stock Option Plan
(the "Director Plan") and reserved 50,000 shares of common stock for issuance
thereunder. Under this plan, non-employee directors are granted options to
purchase common stock at 100% of fair market value on dates specified in the
plan. The options generally vest over four years from the date of grant and
expire ten years from the date of grant. In May 1996, the Company's
shareholders authorized an additional 50,000 shares for grant under the plan.
For the years ended December 31, 1997 and 1996 12,000 and 43,999 shares at a
weighted average price of $7.50 and $5.31 per share were granted. At December
31, 1997, 98,665 options with exercise prices of between $5.25 and $16.75 had
been granted, of which 4,722 had been exercised, 18,000 were returned to the
plan and an additional 33,277 were vested.

1993 Employee Stock Purchase Plan

In February 1993, the Company adopted the 1993 Employee Stock Purchase Plan
(the "Purchase Plan") under Section 423 of the Internal Revenue Code and
reserved 150,000 shares of common stock for issuance thereunder. Under the
Purchase Plan, qualified employees are entitled to purchase shares at 85% of
fair market value. As of December 31, 1997, 149,399 shares were issued under
the Purchase Plan.

1996 Employee Stock Purchase Plan

In October 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") under Section 423 of the Internal Revenue Code and
reserved 150,000 shares of common stock for issuance thereunder. In October
1997, the Company added an additional 100,000 shares to this plan, for a total
of 250,000 shares available. Under the Purchase Plan, qualified employees are
entitled to purchase shares at 85% of fair market value. For the years ended
December 31, 1997 and 1996 131,235 and 66,019 shares, respectively were sold
under the Purchase Plan.

F-10

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Common Stock Reserved

At December 31, 1997, the Company has reserved shares of common stock for
future issuance as follows:

1993 Employee Stock Purchase Plan................................ 601
1996 Employee Stock Purchase Plan................................ 52,746
1993 Directors Stock Option Plan................................. 95,278
1993 Stock Option Plan (including the Evergreen Plan)............ 1,845,960
1995 Stock Option Plan........................................... 2,371,729
---------
Totals......................................................... 4,366,314
=========

NOTE 5--COMMITMENTS

The Company leases its facilities under noncancelable operating leases. At
December 31, 1997, future minimum commitments related to these leases are as
follows (in thousands):

1998................................................................ $1,993
1999................................................................ 1,987
2000................................................................ 2,072
2001................................................................ 2,157
2002................................................................ 1,492
------
Total............................................................. $9,701
======

The Company has entered into an agreement to sub-lease a facility that will
reduce its commitment above by approximately $595,000, $621,000, $648,000,
$674,000, and $347,000 for the years 1998 through 2002, respectively. This
sub-lease is for a facility that the Company has never occupied and will not
have a material effect on the Company's financials.

Rental expense for operating leases amounted to $1,529,000, $1,584,000, and
$945,000 for the years ended December 31, 1997, 1996, and 1995, respectively.

The Company has a $10.0 million unsecured line of credit. The Company is not
utilizing the available credit as of December 31, 1997. The credit is
available through October 1998 and is subject to certain financial covenants.
At December 31, 1997, the Company was in violation of its profitability
covenant. The Company has obtained a waiver for this violations through
December 31, 1997.

At December 31, 1997, the Company had noncancelable commitments
approximating $1,282,000 with suppliers to provide finished goods and work in
process in the normal course of business.

In 1995, the Company entered into a manufacturing agreement and foundry
venture agreement with United Microelectronics Corporation ("UMC"). Under the
original terms of the agreements, the Company received an immediate supply of
wafers from UMC and the Company committed to invests the equivalent of $30
million in cash for a 5% equity interest in the foundry venture. The Company
made a payment of approximately $6.9 million in January 1996 per the original
agreement. The terms of the agreement were subsequently changed so that the
Company's commitment to invest any additional funds to the venture could have
been eliminated and the Company would retain a prorated share of wafer
supplies and equity ownership, based on its reduced total investment. The
Company based on the economic value of the foundry made an additional
investment in December 1997 for approximately $1.6 million, bringing its total
investment to approximately $8.5 million. The Company does not have Board of
Director or management representation in the foundry venture. Due to the
Company's percentage ownership and limited influence on the operations of the
foundry venture, the Company has accounted for this investment on a cost
basis.

F-11

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1997, the Company had invested approximately $2 million in a
design company focused on power amplification. This investment represents an
approximate 11% equity interest in the design company. The investment was
accounted for under the cost method of accounting. The design company's losses
through December 31, 1997 were not significant.

NOTE 6--CONCENTRATIONS

Credit Risks and Major Customers

The Company primarily sells to PC, motherboard, and add-in card
manufacturers. The Company performs ongoing credit evaluations of its
customers but does not require collateral. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations. With the exception of sales to Compaq and its subcontractors, no
other single customer represented more than 10% of sales in fiscal 1997. The
Company sold approximately $27 million of mobile core logic to Compaq and its
subcontractors, representing a combined 40% of net sales for that period. In
1996, the Company sold approximately $37 million of chipsets to Compaq and its
subcontractors, representing a combined 31% of net sales in that period. In
1995, the Company sold approximately $41 million of chipsets to IBM and its
subcontractors, representing approximately 25% of net sales for fiscal 1995.
The Company also sold approximately $17 million worth of chipsets to Compaq
and its subcontractors, representing approximately 11% of net sales for fiscal
1995. The Company expects that sales of its products to a relatively small
group of customers will continue to account for a high percentage of its net
sales in the foreseeable future, although the Company's customers in any one
period will continue to change.

Many of the Company's customers, particularly the motherboard manufacturers
in Taiwan, operate at very low profit margins and undertake significant
inventory risks. To the extent the Company provides open terms of credit to
some of the larger of these customers, the Company is exposed to significant
credit risks if these customers are unable to remain profitable. Approximately
21% of the Company's receivables at December 31, 1997 were with these
customers.

Suppliers

The Company's reliance on independent foundries and packaging houses
involves several risks, including the absence of adequate capacity, the
unavailability of or interruptions in access to certain process technologies
and reduced control over delivery schedules, manufacturing yields and costs.
At times during the second half of 1995, the Company was unable to meet the
demand for certain of its products due to limited foundry capacity and the
Company expects that it will experience other production shortfalls or
difficulties in the future. Because the Company's purchase orders with its
outside foundries are non-cancelable by OPTi, the Company is subject to
inventory and has in the past experienced write-downs of inventories due to an
unexpected reduction in demand for a particular product.

Products

The Company's product life cycles are typically very short and ramp into
volume production very quickly. At any point in time, the Company may rely on
a limited number of products for a significant share of the Company's
revenues. In the first half of 1998, the Company will be highly dependent on
continued revenue contributions from its principal notebook product, the
Firestar product line. In the second half of 1998, the Company will rely
heavily upon the successful product transitions into the next generation of
the Firestar product for the notebook and several follow on peripheral
products. Any significant shortfall in sales for the Company's current volume
products or problems with the successful transition to next generation
products will have a material adverse effect upon the Company's financials.

F-12

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7--EXPORT SALES

Export sales account for a significant portion of the Company's revenues and
are summarized by geographic areas as follows (in thousands):

YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- -------- --------

Far East......................................... $60,548 $ 95,317 $ 96,996
Europe/Other..................................... 220 7,241 26,415
------- -------- --------
Total Export Sales............................. $60,768 $102,558 $123,411
======= ======== ========

NOTE 8--BONUSES

In 1993, the Company adopted the OPTi Inc. Bonus Plan (the "Bonus Plan").
Under the Bonus Plan the maximum aggregate quarterly amount of bonuses,
including officers, may not exceed 10% of pre-tax, pre-bonus income for the
quarter. The bonus is generally based on the success of the employee in
achieving goals and the Company's performance as a whole. The Company recorded
bonuses of $1,449,000, $1,156,000, and $460,000 for the years ended December
31, 1997, 1996 and 1995, respectively, which were allocated as shown below (in
thousands). Bonuses paid to research and development personnel in 1997 include
bonuses to attract and retain high quality engineering talent.

1997 1996 1995
------ ------ ----

Research and development............................... $ 625 $ 834 $200
Selling, general and administrative.................... 824 322 260
------ ------ ----
$1,449 $1,156 $460
====== ====== ====

NOTE 9--TAXES

The provision (benefit) for income taxes consists of the following (in
thousands):

1997 1996 1995
------ ------- -------

Federal:
Current........................................ $ (137) $(3,116) $ 7,141
Deferred....................................... 9,888 (3,372) (1,065)
------ ------- -------
9,751 (6,488) 6,076
------ ------- -------
State:
Current........................................ -- (185) 1,232
Deferred....................................... -- (963) (1,328)
------ ------- -------
-- (1,148) (96)
------ ------- -------
Foreign:
Current........................................ 121 -- 305
Deferred....................................... -- -- --
------ ------- -------
121 -- 305
------ ------- -------
Total........................................ $9,872 $(7,636) $ 6,285
====== ======= =======

F-13

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

1997 1996 1995
------ ------- ------

Income taxes computed at the federal statutory
rate........................................... $1,502 $(7,611) $6,137
State taxes (net of federal benefit)............ -- (746) (62)
Alternative minimum taxes....................... 93 -- --
Valuation reserve movement...................... 8,386 699 --
Foreign Taxes................................... 121 -- --
Other individually immaterial items............. (230) 22 210
------ ------- ------
$9,872 $(7,636) $6,285
====== ======= ======

The components of deferred taxes consist of the following (in thousands):

1997 1996
-------- -------

Deferred tax assets:
Inventory............................................. $ 5,355 $ 5,294
Credit carryforwards.................................. 2,066 1,302
Capitalized research & development costs.............. 1,103 1,330
Accounts receivable reserve........................... 620 496
Reserve for sales return.............................. 159 520
Net operating loss carryforwards...................... 4,889 4,820
Other individually immaterial items................... 527 68
-------- -------
Total deferred tax assets........................... 14,719 13,830
Valuation Allowance................................. (12,837) (2,169)
-------- -------
1,882 11,661
-------- -------
Deferred tax liabilities:
Non-recurring engineering............................. -- --
Depreciation.......................................... (1,882) (1,773)
-------- -------
Net deferred tax assets............................. $ -- $ 9,888
======== =======

At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $13.5 million and $4.3 million, respectively,
expiring in the years 2001 through 2017. At December 31, 1997, the Company had
tax credit carryovers of approximately $700,000 and $800,000 for federal and
state purposes, expiring in the years 2007 through 2012. In addition, the
Company had federal alternative minimum tax credit carryforwards of
approximately $841,000 that will not expire.

The tax benefit associated with exercise of nonqualified stock options,
disqualifying dispositions of stock options and shares acquired under the
employee stock purchase plan created net operating losses of $1,798,000 in
1997 and $1,470,000 in 1996. These benefits were fully reserved by a valuation
allowance, and will be credited to paid in capital when realized.

NOTE 10--EMPLOYEE BENEFIT PLAN

Savings Plan The Company has a savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pre-tax salary, but not more than the
statutory limits. The Company currently does not match employee contributions
made to the savings plan.

F-14

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11--CONTINGENCIES

In September and October 1995, the Company was served with multiple
shareholder class action lawsuits filed in the United States District Court
for the Northern California District of California. The lawsuits, which named
the Company and several of its officers and directors as defendants, alleged
violations of the federal securities laws in connection with the announcement
by OPTi Inc. of its financial results for the quarter ended September 30,
1995. In December 1997, the Company and its insurance carriers reached a
settlement with the plaintiffs in regards to this suit. The Company was
responsible for approximately $500,000 of the settlement amount. While, the
Company claims no wrongdoing in regards to this matter it believed that the
expense and time spend to continue to defend its position would have been more
costly than the actual settlement.

In January 1997, a patent infringement claim was brought against the Company
by Crystal Semiconductor (a subsidiary of Cirrus Logic). The claim alleges
that the Company and Tritech Microelectronics International infringed upon
patents held by Crystal Semiconductor. These patents relate to the "Codec"
module incorporated in various audio controller devices. The Company believes
that the allegations of the complaints are without merit, and the Company
intends to vigorously defend itself. The Company believes that the ultimate
resolution of this matter will not have a material adverse effect on its
financial position, results of operations, or cash flows.

NOTE 12--RESTRUCTURING

During the second quarter of 1997 the Company initiated a restructuring
program as a result of decisions by its Chief Executive Officer and Board of
Directors to adjust the Company's organizational structure in order to align
resources with a revised business model and to lower the Company's cost
structure. The restructuring actions resulted in a charge of $1,213,000 which
included approximately $140,000 associated with the termination of
approximately 30 employees primarily at the Company's headquarters in
Milpitas, CA, approximately $335,000 for costs associated with vacating leased
facilities, approximately $600,000 for the write-down of capital assets, and
approximately $138,000 in other charges. At December 31, 1997 no accrual
related to the restructuring activities remained in current liabilities.

NOTE 13--SALE OF AUDIO LINE

On November 26, 1997 the Company sold some of the assets associated with its
audio line, substantially under the terms of the Asset Purchase Agreement
dated November 22, 1997, to Creative Technology Ltd., ("Creative"), an
unaffiliated, Singapore corporation.

Under the terms of the Asset Purchase Agreement, the Company transferred to
Creative all of the audio line assets except for the accounts receivable and
inventory of the line. All liabilities of the audio line were retained by the
Company except for certain obligations relating to licensing agreements and a
supply contract. At the closing, Creative paid the Company $14,000,000 in cash
and received a warrant to purchase 200,000 shares of OPTi's Common Stock at a
price of $10.00 per share expiring in 2002. The Company deemed the fair value
of the warrant at the time of issuance to be immaterial.

The Company recognized a net gain of $12.4 million as a result of the sale
of the audio line. This gain is derived from the cash proceeds of $14.0
million offset, in part, by expenses of $0.2 million for fixed assets,
$0.8 million for inventory write-down, $0.5 million for write-down of prepaid
assets, and $0.1 million for legal costs related to the transaction.

The Company's revenues from the sale of its audio products represents
approximately 28% and 27% of the Company's revenues in 1996 and the first nine
months of 1997, respectively. Fourteen million dollars of the purchase price,
paid in cash, is being used by the Company to fund its daily activities;
however, by seeking the Audio line, the Company loses a significant source of
continued revenue.

F-15

OPTI INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14--SUBSEQUENT EVENTS (UNAUDITED)

On February 3, 1998 the Company announced that due to the difficulties that
it had been experiencing over the past couple of years that the Board of
directors of the Company has determined that it would retain the services of
an investment banker to advise the Company on the best course of action. Such
plans are expected to involve finding a purchaser for the Company or selling
off the operating businesses and assets followed by the distribution of funds
to shareholders. On February 23, 1998, the Company announced to it had
retained the services of UBS Securities as its investment banker to execute
the plan of action.

In an effort to retain the employees as it attempts to sale the Company or
its operating businesses, the Company on February 27, 1998, offered
accelerated vesting to its employees. Non-officer and director level employees
that are part of a business line that is involved in a transaction will
receive full vesting of their respective OPTi stock options if one of the two
conditions are met: They are not offered a job by the acquiring company and
are terminated by OPTi or they accept an offer from the acquiring company and
do not voluntarily terminate employment with the acquirer for sixty days.
Directors will receive an additional twelve months vesting of stock options
based on the same conditions.

F-16

OPTI INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------

Year ended December 31, 1995
Allowance for doubtful accounts..... $ 500 $350 -- $ 850
Year ended December 31, 1996
Allowance for doubtful accounts..... $ 850 $425 -- $1,275
Year ended December 31, 1997
Allowance for doubtful accounts..... $1,275 $325 -- $1,600

S-1