C CUBE SEMICONDUCTOR INC, 10-12G/A, 2000-02-23

C CUBE SEMICONDUCTOR INC
10-12G/A, 2000-02-23
SEMICONDUCTORS & RELATED DEVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 2000

REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

AMENDMENT NO. 3 TO THE

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934

------------------------

C-CUBE SEMICONDUCTOR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

------------------------

<TABLE>
<S> <C>
DELAWARE 77-0192108
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>

1778 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(408) 490-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

------------------------

SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
NONE N/A
</TABLE>

SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)

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C-CUBE SEMICONDUCTOR INC.

CROSS-REFERENCE SHEET
SHOWING LOCATION IN REGISTRATION STATEMENT OF INFORMATION
REQUIRED BY ITEMS ON FORM 10

<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION
----------------------- --------
<S> <C> <C>
1. Business................................... SUMMARY; RISK FACTORS; REASONS FOR THE
DISTRIBUTION; BUSINESS; UNAUDITED PRO-FORMA
FINANCIAL STATEMENTS; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR; FINANCIAL STATEMENTS
2. Financial Information...................... SUMMARY; RISK FACTORS; REASONS FOR THE
DISTRIBUTION; BUSINESS; UNAUDITED PRO-FORMA
FINANCIAL STATEMENTS; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR; FINANCIAL STATEMENTS
3. Properties................................. RISK FACTORS; BUSINESS
4. Securities Ownership of Certain Beneficial
Owners..................................... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
5. Directors and Executive Officers........... MANAGEMENT
6. Executive Compensation..................... EXECUTIVE COMPENSATION
7. Certain Relationships and Related
Transactions............................... CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS; SUMMARY; RISK FACTORS; THE
DISTRIBUTION; REASONS FOR THE DISTRIBUTION;
BUSINESS; MANAGEMENT; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR; AND DESCRIPTION OF
CAPITAL STOCK
8. Legal Proceedings.......................... LEGAL PROCEEDINGS
9. Market Price of and Dividends of the
Registrant's Common Equity and Related
Stockholder Matters........................ SUMMARY; RISK FACTORS; SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; DESCRIPTION OF CAPITAL STOCK;
DIVIDEND POLICY; ARRANGEMENTS BETWEEN
C-CUBE MICROSYSTEMS AND SEMICONDUCTOR
10. Recent Sales of Unregistered Securities.... RECENT SALES OF UNREGISTERED SECURITIES
11. Description of Registrant's Securities to
be Registered.............................. DESCRIPTION OF CAPITAL STOCK
</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION
----------------------- --------
<S> <C> <C>
12. Indemnification of Directors and
Officers................................... INDEMNIFICATION OF OFFICERS AND DIRECTORS
13. Financial Statements and Supplementary
Data....................................... SUMMARY; RISK FACTORS; UNAUDITED PRO-FORMA
FINANCIAL STATEMENTS; BUSINESS;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS; FINANCIAL STATEMENTS;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR
14. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. NOT APPLICABLE
15. Financial Statements and Exhibits.......... FINANCIAL STATEMENTS; EXHIBITS
</TABLE>

2
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INFORMATION STATEMENT
relating to the spin-off of
C-CUBE SEMICONDUCTOR INC.
from C-Cube Microsystems Inc.

We are sending you this information statement to describe the distribution
of shares of common stock of C-Cube Semiconductor Inc. or Semiconductor to the
stockholders of C-Cube Microsystems Inc. In this distribution, you will receive
one share of Semiconductor common stock for each share of C-Cube Microsystems
common stock owned by you at the close of business on [ , 2000]. Your
shares of Semiconductor common stock will be mailed to you on or about
[ , 2000]. All references in this Information Statement to
Semiconductor refer to C-Cube Microsystems' semiconductor business before the
distribution and to C-Cube Semiconductor Inc., a Delaware corporation, after the
distribution.

Although the completion of the distribution is not contingent on the
receipt of an opinion regarding the distribution from any tax advisors, we have
been advised by Ernst & Young that in their opinion, the distribution will
qualify as a tax-free distribution to our stockholders, although C-Cube
Microsystems itself will recognize substantial gain in connection with the
distribution. This opinion is based on certain representations by C-Cube
Microsystems and Semiconductor and is subject to certain limitations and
qualifications, however, and you are urged to read the information set forth
under the caption "Material Federal Income Tax Considerations". This opinion
does not preclude the Internal Revenue Service from successfully asserting that
the distribution is taxable to our stockholders. Accordingly, please consult
your tax advisor with respect to the tax consequences of the distribution to
you.

No C-Cube Microsystems stockholder action is necessary to make the
distribution. You do not need to surrender shares of C-Cube Microsystems common
stock to receive Semiconductor common stock in the distribution. The number of
shares of C-Cube Microsystems common stock you own will not change as a result
of the distribution. Semiconductor has applied to have the Semiconductor common
stock included for quotation on the Nasdaq National Market under the symbol
"CUBE."

Semiconductor was formed in conjunction with C-Cube Microsystems' merger
with Harmonic, Inc. It is a condition to the consummation of the merger between
Harmonic and C-Cube Microsystems that C-Cube Microsystems either spin-off or
sell its semiconductor business, and C-Cube Microsystems intends to distribute
shares of Semiconductor stock to you contingent on the satisfaction of all
conditions to the merger between Harmonic and C-Cube Microsystems. The purpose
of the distribution is to separate the semiconductor business from C-Cube
Microsystems' DiviCom business to (i) enable Harmonic to merge with the DiviCom
business, (ii) allow the semiconductor business to focus on its core strengths
in the design, development, manufacturing and sale of Semiconductor's
semiconductors, software and systems for digital video applications, and (iii)
permit customers, stockholders and other constituencies to better evaluate the
respective businesses. C-Cube Microsystems and Semiconductor have entered into a
series of agreements relating to the distribution and the relationship of
Semiconductor and C-Cube Microsystems thereafter. These agreements are attached
as exhibits to this information statement.

This document provides you with detailed information about Semiconductor
and the distribution. We are enthusiastic about this opportunity for
Semiconductor to better concentrate on its core semiconductor business and
dedicate its resources to the growth of its business. We encourage you to read
this document carefully to learn more about Semiconductor, the distribution and
Semiconductor's future plans.

Sincerely,

--------------------------------------
Alexandre Balkanski
President and Chief Executive Officer
C-Cube Microsystems Inc.
, 2000

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 5
Risk Factors................................................ 7
Forward-Looking Statements.................................. 14
The Distribution............................................ 15
Pro Forma Capitalization.................................... 16
Reasons for the Distribution................................ 17
Business.................................................... 19
Where You Can Find More Information......................... 33
Management's Discussion and Analysis........................ 35
Unaudited Pro Forma Financial Statements.................... 49
Pro Forma Condensed Consolidated Balance Sheet.............. 50
Management.................................................. 57
Executive Compensation and Other Matters.................... 60
Stock Ownership of Certain Beneficial Owners and
Management................................................ 63
Arrangements Between C-Cube Microsystems and
Semiconductor............................................. 65
Descriptions of Employee Benefits Plans..................... 71
Certain Relationships and Related Transactions.............. 74
Material Federal Income Tax Considerations.................. 75
Description of the Company's Capital Stock.................. 77
Recent Sales of Unregistered Securities..................... 78
Dividend Policy............................................. 78
Indemnification of Directors and Officers................... 79
Transfer Agent and Registrar................................ 79
Index to Financial Statements............................... F-1
</TABLE>

You should rely only on the information contained in this information
statement regarding the distribution. Semiconductor has not authorized any other
person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. Semiconductor
is not making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in this information statement is accurate as of the date on the front cover of
this information statement only. Semiconductor's business, financial condition,
results of operations and prospects may have changed since that date.

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SUMMARY

This summary highlights selected information contained elsewhere in this
information statement. To better understand the distribution and Semiconductor,
you should read the entire information statement carefully, including the risk
factors and financial statements.

WHY THIS INFORMATION STATEMENT WAS SENT TO YOU

This information statement is being delivered by C-Cube Microsystems Inc.
to you because you were an owner of C-Cube Microsystems common stock on
[ , 2000]. This entitles you to receive a distribution of one share of
the common stock of a new company, C-Cube Semiconductor Inc., a Delaware
corporation, for each share of C-Cube Microsystems common stock owned by you on
[ , ]. Although no action is required on your part to
cause this to happen and you do not have to pay cash or other consideration to
receive these shares, the distribution of these shares to you will have certain
tax and other consequences, so please read the information in this document
carefully.

This information statement describes the business of Semiconductor, the
relationship between C-Cube Microsystems and Semiconductor, how this transaction
benefits C-Cube Microsystems and its stockholders and provides other information
to assist you in evaluating the benefits and risks of holding or disposing of
your shares of Semiconductor common stock. Semiconductor has applied to have the
Semiconductor common stock included for quotation on the Nasdaq National Market
under the symbol "CUBE." All references in this Information Statement to
Semiconductor refer to C-Cube Microsystems' semiconductor business before and
after the distribution to C-Cube Semiconductor Inc., a Delaware corporation.

BUSINESS OF SEMICONDUCTOR

Semiconductor designs, develops, has manufactured and sells semiconductors,
software and systems for digital video applications. As a major supplier of such
solutions, Semiconductor has played a significant role in enabling the growth of
digital video. Semiconductor is focused on working with its original equipment
manufacturer customers to enable key applications in its consumer and
communications target markets. In the consumer market, it is focused on playback
and recordable video compact disc or VCD, and digital video disc or DVD as well
as digital VHS players. The communications market targets interactive set-top
boxes, broadcast encoders and other emerging appliances. Users of these products
will be able to record hours of DVD-quality video obtained from any video
source, whether TV, VCR, DV camcorder or analog camcorder. Once they have
recorded the video, they will be able to edit and play back the video on
standard personal computers and store the resulting video to DVD disc, web
pages, e-mail, recordable CD or personal computer hard-disk drives. Please
review the information set forth under the caption "Business" for further
details about Semiconductor's business.

RELATIONSHIP BETWEEN C-CUBE MICROSYSTEMS AND SEMICONDUCTOR

All Semiconductor common stock is being distributed to the C-Cube
Microsystems stockholders as described in this information statement. C-Cube
Microsystems will have no ownership interest in Semiconductor after the
distribution. Semiconductor's board of directors will consist of five to seven
directors. At the outset, all of the Semiconductor directors, with the exception
of Semiconductor's new Chief Executive Officer, will be former directors of
C-Cube Microsystems.

Upon consideration of the proposed merger of C-Cube Microsystems and
Harmonic, Harmonic will succeed to all obligations of C-Cube Microsystems.

Please review the information set forth under the captions "Arrangements
Between C-Cube Microsystems and Semiconductor", "Description of Capital Stock"
and "Recent Sales of Unregistered Securities" for further details about
Semiconductor's relationship with C-Cube Microsystems, its capital structure and
matters related to corporate governance.

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REASONS FOR THE DISTRIBUTION

The merger agreement with Harmonic contemplates the sale or distribution of
Semiconductor immediately prior to and in connection with the merger. After
thorough consideration, the board of directors of C-Cube Microsystems determined
that a distribution of shares of Semiconductor was in the best interest of the
stockholders of C-Cube Microsystems. The C-Cube Microsystems board of directors
considered a number of factors in determining to recommend approval of the
spin-off of Semiconductor including:

- The necessity of spinning off or selling Semiconductor in order to
complete C-Cube Microsystems' merger with Harmonic;

- The recent proposed valuation of Semiconductor;

- All purchase proposals relating to Semiconductor received by C-Cube
Microsystems; and

- Based on the current financial market conditions and the historical
market information concerning C-Cube Microsystems common stock, the
ability of Semiconductor to become a viable public company and create
substantial stockholder value by, among other things, allowing the
financial community to focus separately on the semiconductor business and
the DiviCom business.

Please review the information set forth under the caption "Reasons for the
Distribution" for further details about the reasons for the distribution.

THE DISTRIBUTION

Each C-Cube Microsystems stockholder will receive one share of
Semiconductor common stock for every share of C-Cube Microsystems common stock
held. As of [ , ], C-Cube Microsystems had [ ]
shares of common stock outstanding.

Distribution and Transfer Information. Boston EquiServe, L.P. will act as
the distribution and transfer agent for the distribution. The distribution agent
will mail stock certificates beginning on or about the distribution date.

Record Date, Distribution Date. The record date for the distribution will
be the close of business on [ , 2000]. On the record date, C-Cube
Microsystems will transfer to a custodian all of the shares of Semiconductor
common stock pursuant to an irrevocable custody arrangement. On or about
[ , ], the custodian will deliver the shares to
Semiconductor's transfer agent which will then mail them to the C-Cube
Microsystems stockholders of record as of the record date.

No Fractional Shares. No fractional shares of Semiconductor common stock
will be distributed. Fractional shares of Semiconductor common stock will be
aggregated and sold by Boston EquiServe to provide cash to holders in lieu of
such fractional shares.

Trading Market. Semiconductor has applied to have the Semiconductor common
stock included for quotation on the Nasdaq National Market under the symbol
"CUBE."

INVESTOR CONTACT

Semiconductor and C-Cube Microsystems stockholders with questions about the
distribution should contact Walt Walczykowski, Chief Financial Officer, at
C-Cube Microsystems' principal executive offices at 1778 McCarthy Boulevard,
Milpitas, California 95035; telephone (408) 490-8000. This contact information
will remain the same after the distribution.

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RISK FACTORS

You should carefully consider the risks described below when evaluating
your ownership of Semiconductor common stock. The risks and uncertainties
described below are not the only ones Semiconductor faces. Additional risks and
uncertainties Semiconductor is presently not aware of or that it currently
considers immaterial may also impair Semiconductor's business operations.

C-CUBE MICROSYSTEMS OPERATED SOLELY AS A SEMICONDUCTOR BUSINESS UNTIL 1996, WHEN
IT ACQUIRED THE DIVICOM BUSINESS. SEMICONDUCTOR MAY INCUR LOSSES AS A RESULT OF
OPERATING SOLELY AS A SEMICONDUCTOR BUSINESS AGAIN.

Since acquiring the DiviCom business in 1996, C-Cube Microsystems
operations have consisted of the semiconductor business and the DivCom systems
business. Semiconductor alone cannot be sure that its operating results will not
be adversely affected by the loss of one or more of the following attributes.
The acquisition has allowed C-Cube Microsystems, among other things:

- The ability to leverage the DiviCom business's expertise in areas related
to C-Cube Microsystems' core competency in digital video compression;

- Increased sales of C-Cube Microsystems products for set-top boxes and an
increased understanding of customer systems requirements;

- The opportunity to jointly develop various communications products;

- The ability to combine the expertise of the two businesses to serve the
digital video networking market;

- The ability to more effectively enable and cost reduce end-to-end video
networking solutions;

- The added benefit of a larger market capitalization due to the addition
of a systems business to a stand-alone semiconductor business; and

- The added diversification of serving the digital video, semiconductor and
communications systems markets.

It is possible that since Semiconductor will not be able to provide a
complete broadcast/set-top solution as it was able to do with the additional
DiviCom products, these customers will seek to find a complete solution
elsewhere. Any loss of the benefits provided by the combination with the DiviCom
business could seriously harm Semiconductor's operating results which would
negatively affect the value of your investment.

SEMICONDUCTOR'S OPERATING RESULTS HAVE VARIED SIGNIFICANTLY IN THE PAST AND ARE
LIKELY TO VARY SIGNIFICANTLY IN THE FUTURE. SEMICONDUCTOR'S STOCK PRICE MAY
DECLINE IF IT FAILS TO MEET THE EXPECTATIONS OF ANALYSTS AND INVESTORS.

Semiconductor's quarterly and annual operating results have been and will
likely continue to be affected by a wide variety of factors that could have a
negative effect on revenue and profitability. These factors include, but are not
limited to:

- The rescheduling or cancellation of orders from our customers at any
time;

- Availability and cost of raw materials, chip manufacturing capacity,
assembly capacity, packages and test capacity from our vendors;

- Fluctuations in chip manufacturing yields;

- Competitive pressures on average selling prices on products supplied by
Semiconductor;

- Changes in governmental policies in various regions in which
Semiconductor does a substantial amount of business;

- Ability to introduce new products and technologies on a timely basis to
meet customer needs;

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- Competitive products introduced by Semiconductor's competitors;

- Market acceptance of products of both Semiconductor and its customers;

- Loss of strategic relationships in Semiconductor's markets;

- Delay in the emergence of new markets in which Semiconductor products are
used;

- The level of expenditures for research and development, sales,
administration and marketing needed to be successful in Semiconductor's
markets;

- Changes in product or customer mix;

- External factors such as a general economic slowdown in areas of the
world in which Semiconductor does substantial business; and

- The level of orders which are received and can be shipped in any given
quarter.

Further, a significant portion of Semiconductor's expenses is fixed and the
timing of increases in expenses is based in large part on its forecast of future
revenue. As a result, if revenue does not meet Semiconductor's expectations, it
may be unable to quickly adjust expenses to levels appropriate to actual
revenue. Any of the above factors could have an adverse effect on its operating
results.

IF SYSTEMS MANUFACTURERS DO NOT ACCEPT SEMICONDUCTOR'S PRODUCTS OR IF NEW
MARKETS FOR ITS PRODUCTS DO NOT EMERGE, SEMICONDUCTOR'S PRODUCTS COULD BECOME
OBSOLETE AND UNMARKETABLE OR REQUIRE SEMICONDUCTOR TO REDESIGN ITS PRODUCTS,
WHICH COULD BE COSTLY AND TIME-CONSUMING.

To date, Semiconductor has derived substantially all of its product revenue
from:

- sales of products for video playback and karaoke;

- video cards for computers and direct broadcast satellite applications;

- sales of products for development;

- trials and early deployment of broadcast; and

- other applications that are not yet commercially available or are not yet
in volume production.

Semiconductor's ability to generate increased revenue will depend on the
development of new opportunities for digital video compression in the consumer
electronics, computer and communications markets. The markets for
Semiconductor's products change and evolve rapidly, but the potential size of
new market opportunities and the timing of their development is uncertain. Some
of the potential new markets for digital video compression would require
extensive communications infrastructures that are not yet in place and that
would likely be expensive and heavily regulated by governmental entities. These
new markets may never materialize or they might not materialize for some time.
Semiconductor's success in any new market will depend upon whether system
manufacturers select its products for incorporation into the system
manufacturers' products and upon the successful introduction of such products.

A variety of alternate approaches to digital video compression have been
introduced, including other hardware and software-only solutions. Other
companies are designing products around these alternate approaches. In addition,
manufacturers of general purpose microprocessors are positioning their products
as offering digital video compression capability. System manufacturers may use
such processors for video compression applications in place of purchasing
products from Semiconductor. If Semiconductor fails to develop the types of
products that systems manufacturers want in existing markets and in potential
new markets, our revenue may not meet analysts' expectations which may affect
the value of your investment.

IF THE WAFER SUPPLIERS AND SUBCONTRACTORS ON WHICH SEMICONDUCTOR DEPENDS DO NOT
PERFORM, SEMICONDUCTOR WILL NOT BE ABLE TO FILL ORDERS FOR ITS PRODUCTS.

All of Semiconductor's products are currently manufactured to its
specifications by independent chip manufacturers called foundries, and assembly,
test and packaging are subcontracted to third parties. Although Semiconductor
primarily uses three foundries to manufacture its products, the majority of its
products are produced by only one of the foundries and is therefore dependent on
a single foundry for

8
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many of its products. This dependence on single foundries subjects Semiconductor
to risks associated with an interruption in supply from any such foundry. These
risks include reduced control over:

- Delivery schedules;

- Quality assurance;

- Manufacturing yields and cost;

- The potential lack of adequate capacity; and

- The potential misappropriation of intellectual property.

Semiconductor obtains semiconductor chip manufacturing capacity through
forecasts that are generated in advance of expected delivery dates and are
binding. For example, certain of Semiconductor's suppliers require it to make
binding forecasts as much as eight months in advance of expected delivery dates.
Semiconductor's ability to obtain the capacity necessary to meet the future
demand for its products is based on its ability to accurately forecast such
future demand. If Semiconductor fails to accurately forecast future demand, it
may be unable to timely obtain an adequate supply of chips necessary to
manufacture the number of products required to satisfy the actual demand. This
obligation to make binding forecasts far in advance of delivery subjects it to
inventory risks, including the risk of obsolescence. Semiconductor may not
continue to accurately forecast the demand for its products and obtain
sufficient capacity. If it is unable to do so, its results of operation would
likely diminish.

In connection with the manufacture of its newer products, Semiconductor
also needs to qualify foundries that employ advanced manufacturing and process
technologies which are currently available from a limited number of foundries.
For example, certain of the new products that Semiconductor intends to introduce
require advanced semiconductor processes. Semiconductor has in the past
experienced increased costs and delays in connection with the qualification of
foundries. Such increased costs and delays may adversely affect results of
operation.

COMPETITION IN THE SEMICONDUCTOR INDUSTRY IS INTENSE. IF SEMICONDUCTOR IS UNABLE
TO COMPETE EFFECTIVELY, THE DEMAND FOR, AND/OR THE PRICES OF, OUR PRODUCTS MAY
DECLINE.

The market for Semiconductor's products is intensely competitive and
characterized by declining average selling prices and rapid technological
change. Semiconductor will continue to compete with its principal competitors
including:

- Philips,

- ST-Microelectronics,

- ESS Technology,

- Sony,

- NEC,

- Matsushita Electric Industrial Company (MEI),

- Zoran, and

- IBM Microelectronics.

Though C-Cube Microsystems has always faced competition from these
competitors, Semiconductor may be less able to react quickly to competitive
threats without the added joint research and development, complete solution and
financial stability benefits it enjoyed through its combination with DiviCom.

SEMICONDUCTOR DERIVES MUCH OF ITS PRODUCT REVENUE FROM SALES TO EMERGING GLOBAL
MARKETS. WITHOUT THE DIVICOM BUSINESS DIVERSIFICATION, ITS BUSINESS MIGHT BE
MORE SUSCEPTIBLE TO FLUCTUATIONS IN EMERGING MARKET ECONOMIES.

To date, Semiconductor has derived a substantial portion of its revenue
from sales of its VCD products in China. It expects that revenue from VCD
products will decrease as a percentage of total revenue, but continue to account
for a significant portion of its product revenue in 2000. Substantially all of
the growth in the sales of Semiconductor's VCD products over the last several
years has occurred in the

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Asia-Pacific region. To date, the DiviCom business has derived substantially all
of its revenue from sales of satellite delivery, cable and cable broadcasting
systems. Much of the growth in its sales has occurred in Europe and the United
States. Without DiviCom's growth in sales to Europe and the United States,
Semiconductor's sales growth is less geographically diversified which may limit
its ability to offset the effect of downturns in emerging global markets on its
results of operations.

THE SPIN-OFF OF SEMICONDUCTOR WILL CAUSE SUBSTANTIAL CORPORATE TAX, AND THE IRS
MAY SUCCESSFULLY LATER ASSERT THAT THIS CORPORATE TAX LIABILITY IS HIGHER THAN
ORIGINALLY CALCULATED. SEMICONDUCTOR MAY NEED TO RAISE ADDITIONAL FUNDS TO PAY
ITS TAX OBLIGATIONS IF THOSE OBLIGATIONS ARE HIGHER THAN ANTICIPATED.

Semiconductor will incur a substantial corporate-level tax in connection
with the distribution. It will recognize a taxable gain approximately equal to
the difference between the fair market value of Semiconductor on the date of
distribution, minus our aggregate basis in the assets (net of liabilities) that
we will transfer to Semiconductor before the spin-off, minus certain expenses
related to the transaction. C-Cube Microsystems has estimated, based on certain
assumptions, including an assumed fair market value of $975 million for the
stock of the spun-off semiconductor business, that this tax liability will be
approximately $203 million. The actual tax liability may differ significantly
from the estimate based on the facts and circumstances existing at the time of
the distribution. For example, the value of the stock of the spun-off
semiconductor business will likely fluctuate and if such value at the time of
the distribution exceeds the assumed value, the actual tax liability will exceed
the estimated tax liability.

Semiconductor will retain, and transfer to Harmonic, cash reserves in an
amount sufficient to pay this corporate tax liability and taxes attributable to
our pre-closing operations. In addition, Semiconductor has agreed to indemnify
and hold Harmonic harmless from and against these tax liabilities to the extent
they relate to our semiconductor business, including the spin-off, and exceed
the retained cash reserve set aside for the payment of taxes. Under
Semiconductor's tax sharing agreement with Harmonic, Semiconductor will be
liable for any increase in corporate tax liability attributable to the
Semiconductor business or the spin-off (plus certain related costs) that
results, for example, from an IRS audit. If these tax liabilities are
significantly higher than anticipated, Semiconductor may be forced to incur debt
or issue equity to pay its liabilities, and Semiconductor does not know for sure
that these sources of funding will be available. An increase in debt could
negatively impact Semiconductor's financial position and future results of
operations and an issuance of equity could dilute your interest in
Semiconductor.

IN THE EVENT THE DISTRIBUTION OF SEMICONDUCTOR STOCK TO YOU IS TREATED AS A
TAXABLE DISTRIBUTION, YOU MAY BE TREATED AS RECEIVING TAXABLE CAPITAL GAINS OR
TAXABLE ORDINARY INCOME.

Although the completion of the distribution is not contingent on the
receipt of a tax opinion regarding the distribution, Semiconductor has been
advised by Ernst & Young LLP that in their opinion the distribution of
Semiconductor stock to you will be treated as a tax-free distribution, except to
the extent of your receipt of cash instead of fractional shares. This opinion is
subject to certain limitations and qualifications and is based on
representations made by Semiconductor. This opinion represents only the best
judgment of Ernst & Young LLP and is not binding on the IRS or the courts. The
IRS is not precluded from successfully asserting a contrary interpretation. In
addition, subsequent authorities could result in the Ernst & Young opinion being
incorrect. Thus, it is possible that the distribution will be treated as taxable
capital gain or as taxable ordinary income up to the value of the stock
distributed.

SEMICONDUCTOR MAY EXPERIENCE DIFFICULTY ATTRACTING AND RETAINING QUALITY
EMPLOYEES WHICH MAY HURT ITS ABILITY TO OPERATE ITS BUSINESS EFFECTIVELY.

The ability of Semiconductor to maintain its competitive technological
position will depend, in large part, on its ability to attract and retain highly
qualified technical and managerial personnel. Competition for such personnel is
intense, especially in Silicon Valley where Semiconductor's headquarters is
located, and there is a risk that some key employees will depart as a result of
the distribution. In addition, the announcement of the proposed distribution may
impede Semiconductor's ability to attract new employees. While Semiconductor was
combined with the DiviCom business, some employees had a choice of which
10
<PAGE> 12

business to work for. In addition, the combination with the DiviCom business has
resulted in faster growth and greater scale for C-Cube Microsystems. Without
these benefits of a combined business, Semiconductor may not experience the same
success attracting quality employees. Lack of success in attracting such
employees could lead to lower than expected operating results, delays in the
introduction of new products and a negative effect on Semiconductor's ability to
support customers.

SEASONAL TRENDS MAY CAUSE SEMICONDUCTOR'S QUARTERLY OPERATING RESULTS TO
FLUCTUATE, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

A significant portion of our sales revenue comes from the consumer and
communications markets, both of which are characterized by seasonal sales. Both
markets tend to experience higher sales in the third and fourth calendar
quarters due to holiday purchases by system manufacturers and relatively less
strong sales in the first and second calendar quarters. Though seasonality
affects Semiconductor less and less due to diversified product lines, seasonal
trends may still cause its operating results to fluctuate which may have an
adverse effect on Semiconductor's stock price.

IF SEMICONDUCTOR IS UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY,
THIRD PARTIES COULD USE ITS INTELLECTUAL PROPERTY WITHOUT ITS CONSENT.

Semiconductor's ability to successfully compete is substantially dependent
upon its internally developed technology and intellectual property, which it
protects through a combination of patents, copyright and trade secret law,
confidentiality procedures and licensing arrangements. To that end,
Semiconductor has obtained certain patents and intends to continue to seek
patents on its technology when and where appropriate. Semiconductor may,
however, not be able to adequately protect its proprietary rights. Unauthorized
parties may attempt to obtain and use its proprietary information. Policing
unauthorized use of our proprietary information is difficult, and Semiconductor
does not know whether the steps it has taken will prevent misappropriation,
particularly in foreign countries where the laws may not protect its proprietary
rights as fully as in the United States. For a further discussion of its
intellectual property, please see "Business -- Intellectual Property Rights".

ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT SEMICONDUCTOR'S SALES.

International revenue has accounted for a significant portion of
Semiconductor's net revenue in the past, and Semiconductor believes that
international revenue will continue to account for a significant portion of net
revenue. Semiconductor's success will depend in part upon its ability to manage
international marketing and sales operations and manufacturing relationships.
Semiconductor's international manufacturing and sales are subject to risks
inherent in international transactions including:

- Difficulties in collecting accounts receivable and longer collection
periods;

- Changing and conflicting regulatory requirements;

- Potentially adverse tax consequences;

- Tariffs and general export restrictions;

- Difficulties in staffing and managing foreign operations;

- Political instability;

- Fluctuations in currency exchange rates;

- Natural disasters;

- Seasonal reduction in business activity during the summer months in
Europe and certain other parts of the world; and

- The impact of local economic conditions and practices.

For example, China is a substantial market for consumer electronics
products. As a result, any political or economic instability in China could
significantly reduce demand for products from certain of Semiconductor's major
customers. Another example is the earthquake in Taiwan during the third quarter
of 1999. The earthquake only caused minimal damage at the foundries utilized by
Semiconductor, but chip production capacity in the near future is anticipated to
be tight. Any of the above factors could have a

11
<PAGE> 13

material and adverse effect on Semiconductor's international sales and
operations, which, in turn, could adversely affect its overall business,
operating results and financial condition.

THERE HAS NEVER BEEN A TRADING MARKET FOR SEMICONDUCTOR COMMON STOCK WHICH MAY
CAUSE THE STOCK PRICE TO BE VOLATILE. THIS VOLATILITY MIGHT KEEP YOU FROM
RESELLING YOUR SHARES AT OR ABOVE THE PRICE ON THE DISTRIBUTION DATE.

Prior to the distribution, there has been no public market for
Semiconductor common stock. Semiconductor has applied to have its common stock
included for quotation on the Nasdaq National Market. Based on the trading
patterns of other companies which became publicly traded in similar
transactions, Semiconductor believes the initial trading volume in Semiconductor
common stock will be moderate as investors assess Semiconductor's progress as a
public, stand-alone company. An active, sustained trading market may not,
however, develop.

A number of factors may affect the price and liquidity of the Semiconductor
common stock, including:

- actual or anticipated fluctuations in Semiconductor's operating results;

- changes in expectations as to Semiconductor's future financial
performance or changes in securities analysts' financial estimates; and

- the operating and stock price performance of other comparable companies.

In addition, Semiconductor common stock may be followed by few, if any,
market analysts and there may be few institutions acting as market makers for
the common stock. Either of these factors could adversely affect the liquidity
and trading price of the Semiconductor common stock. Also, the stock market in
general has experienced extreme price and volume volatility that has especially
affected the market prices of securities of many high technology companies. At
times, this volatility has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of the common stock, regardless of Semiconductor's
actual operating performance.

SEMICONDUCTOR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF ITS
RESULTS AS A SEPARATE COMPANY.

The historical financial information of Semiconductor is shown in the
unaudited pro-forma financial statements at page and does not necessarily
reflect what Semiconductor's financial position, results of operations and cash
flows would have been had it been a separate, stand-alone entity during the
periods presented. In addition, the historical information is not necessarily
indicative of what its results of operations, financial position and cash flows
will be in the future. Semiconductor has not made adjustments to reflect many
significant changes that will occur in its cost structure, funding and
operations as a result of its separation from C-Cube Microsystems, including
changes in its employee base, changes in its legal structure, increased costs
associated with reduced economies of scale, increased marketing expenses related
to establishing a new brand identity and increased costs associated with being a
public, stand-alone company.

For additional information, see "Unaudited Pro Forma Condensed Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Semiconductor's historical consolidated financial
statements and notes thereto.

SEMICONDUCTOR CURRENTLY USES C-CUBE MICROSYSTEMS' INFORMATION SYSTEMS, SOME OF
WHICH REQUIRE C-CUBE MICROSYSTEMS TO TRANSFER LICENSES TO SEMICONDUCTOR OR TO BE
MODIFIED TO SUPPORT SEMICONDUCTOR'S BUSINESS AS A STAND-ALONE ENTITY.

Semiconductor currently uses C-Cube Microsystems' systems to support its
operations, including systems to manage inventory, order processing, human
resources, shipping, accounting, telecommunications

12
<PAGE> 14

and computer networking. While several of the systems currently used by C-Cube
Microsystems are specific to Semiconductor, it has an agreement with C-Cube
Microsystems for Semiconductor to continue to provide certain information
services to C-Cube Microsystems for up to the next two years. Many of the
systems Semiconductor currently uses are proprietary to C-Cube Microsystems and
are very complex. These systems have been modified, and are in the process of
being further modified, to enable Semiconductor to separately track items
related to its business. These modifications, however, may result in unexpected
system failures or the loss or corruption of data.

Any failure or significant downtime in C-Cube Microsystems' or
Semiconductor's own information systems could prevent it from taking customer
orders, shipping products or billing customers and could harm its business. In
addition, C-Cube Microsystems' and Semiconductor's information systems require
the services of employees with extensive knowledge of these information systems
and the business environment in which it operates. In order to successfully
implement and operate its systems, it must be able to attract and retain a
significant number of current C-Cube Microsystems employees to Semiconductor. If
Semiconductor fails to attract and retain the highly skilled personnel required
to implement, maintain, and operate its information systems, Semiconductor's
business could suffer.

SEMICONDUCTOR MUST OBTAIN ASSIGNMENT OF ALL MATERIAL CONTRACTS IT WILL ASSUME
FROM C-CUBE MICROSYSTEMS. SOME OF THE PARTIES TO THESE MAJOR CONTRACTS MAY NOT
CONSENT TO THE ASSIGNMENT AT ALL OR WITHOUT ADVERSE CHANGES TO THE EXISTING
COSTS TERMS AND CONDITIONS.

Because Semiconductor is a newly-formed entity, all of the contracts under
which it will operate must be either assigned from C-Cube Microsystems or newly
entered into. The parties to these existing contracts may not be willing to
assign them to Semiconductor at all or they may only be willing to assign them
on terms less favorable than those currently in effect with C-Cube Microsystems.
If any of the parties to these contracts are unwilling to assign them on
favorable terms, Semiconductor's results of operations could be adversely
affected.

SEMICONDUCTOR'S OPERATING RESULTS WOULD SUFFER IF IT WERE FORCED TO DEFEND
AGAINST A PROTRACTED INFRINGEMENT CLAIM OR IF A THIRD PARTY WERE AWARDED
SIGNIFICANT DAMAGES.

There is a substantial risk of litigation regarding intellectual property
rights in the semiconductor industry. A successful claim of patent or other
technology infringement against it and its failure or inability to license the
infringed or similar technology could harm Semiconductor's business. Third
parties could make claims of infringement against it relating to its technology.
Any claims, with or without merit, could:

- Be time-consuming and costly to defend;

- Divert management's attention and resources;

- Cause delays in delivering products;

- Require the payment of monetary damages which may be tripled if the
infringement is found to be willful;

- Result in an injunction which would prohibit us from offering a
particular product; and

- Require us to enter into royalty or licensing agreements which may not be
available on acceptable terms.

SEMICONDUCTOR MAY ENGAGE IN FUTURE ACQUISITIONS THAT RESULT IN INCREASED DEBT,
ASSUMPTION OF LIABILITIES AND OTHER MANAGERIAL CHALLENGES THAT MAY RESULT IN A
NEGATIVE EFFECT ON OPERATIONS.

As part of its overall strategy to enhance or accelerate its product
development efforts, Semiconductor may acquire or invest in complementary
companies, products or technologies or enter into joint ventures or strategic
alliances with other companies. Risks commonly encountered in such transactions
include the difficulty of assimilating the operations and personnel of the
combined companies, the potential disruption of Semiconductor's ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize the financial and strategic position of
Semiconductor through the

13
<PAGE> 15

successful integration of the acquired business, decreases in reported earnings
as a result of charges for in-process research and development and amortization
of acquired intangible assets, dilution of existing equity holders, difficulty
in maintaining controls, procedures and policies, and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. Semiconductor may not be successful in overcoming these risks or any
other problems encountered in connection with such business combinations,
investments or joint ventures. These transactions may have an adverse effect on
Semiconductor's business, financial condition and results of operations.

SEMICONDUCTOR'S DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST
BECAUSE OF THEIR OWNERSHIP OF C-CUBE MICROSYSTEMS COMMON STOCK.

Certain of Semiconductor's directors and executive officers have a
substantial amount of their personal financial portfolios in C-Cube Microsystems
common stock and options to purchase C-Cube Microsystems common stock. Ownership
of C-Cube Microsystems common stock by Semiconductor's directors and officers
after its separation from C-Cube Microsystems could create, or appear to create,
potential conflicts of interest when directors and officers are faced with
decisions that could have different implications for C-Cube Microsystems and
Semiconductor. Specifically, these directors and officers might take action in
their own self interest that might not be the best possible action from
Semiconductor's perspective. For information regarding directors' and officers'
ownership of C-Cube Microsystems common stock, see "Management -- Stock
Ownership of Directors and Executive Officers."

SEMICONDUCTOR IS SUBJECT TO ANTI-TAKEOVER PROVISIONS

Certain provisions of Semiconductor's Certificate of Incorporation and
Bylaws could make it more difficult for a third party to gain control of
Semiconductor, even if a change in control might be beneficial to its
stockholders. This could adversely affect the market price of the common stock.
These provisions include:

- the elimination of the right of stockholders to act by written consent;

- the elimination of the right of stockholders to call special meetings of
the stockholders;

- the creation of a staggered board of directors; and

- the ability of the board of directors to designate and issue preferred
stock without stockholder consent.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about Semiconductor
and its industry. When used in this prospectus, the words "expects,"
"anticipates," "estimates," "intends" and similar expressions are intended to
identify forward looking statements. These statements include, but are not
limited to, statements under the captions "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus.

These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward looking statements wherever they appear in this
prospectus.

14
<PAGE> 16

THE DISTRIBUTION

The board of directors of C-Cube Microsystems has declared a distribution
to its stockholders, of one share of Semiconductor common stock for every share
of C-Cube Microsystems common stock held on , the record date for
the distribution. As a result of the distribution, all of the then outstanding
Semiconductor common stock will be distributed to C-Cube Microsystems'
stockholders. See "Description of Capital Stock."

Before , C-Cube Microsystems will complete preliminary
internal restructuring transactions related to the Semiconductor business. On
, C-Cube Microsystems will effect the distribution by delivering
all of the Semiconductor common stock to , which will hold such
shares as custodian for the benefit of the C-Cube Microsystems stockholders of
record as of the record date pursuant to an irrevocable custody arrangement. On
or about , the distribution agent will deliver the shares to
Boston EquiServe, C-Cube Microsystems' transfer agent, which will then mail the
shares to the C-Cube Microsystems stockholders of record as of the record date.

No fractional shares will be issued as part of the distribution. The
distribution agent will aggregate undistributed fractional shares and sell such
shares at the earliest practicable date at the then-prevailing market price.
Each person who would be otherwise entitled to receive a fractional share will
instead receive a cash payment equal to such person's proportionate share of the
net proceeds of the sale of such aggregated shares. The receipt of cash instead
of fractional shares will be taxable. Please see "Material Federal Income Tax
Considerations -- Material Federal Income Tax Considerations of the Spin-Off --
Stockholder Tax Considerations."

C-Cube Microsystems' stockholders will not be required to pay any cash or
other consideration for the Semiconductor common stock received in the
distribution. The distribution of the Semiconductor common stock to C-Cube
Microsystems stockholders will, however, have certain tax and other
consequences, as discussed in this document.

The general terms and conditions of the distribution and the arrangements
between Semiconductor and C-Cube Microsystems are set forth in the Separation
and Distribution Agreement, the Tax Sharing Agreement, the Real Estate Matters
Agreement, the Employee Matters Agreement, the Indemnification and Insurance
Matters Agreement, the Master Confidential Disclosure Agreement and the
Transitional Services Agreement. For more information regarding these
agreements, please see "Arrangements between C-Cube Microsystems and
Semiconductor". C-Cube Microsystems will pay the costs and expenses incurred in
connection with the distribution.

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<PAGE> 17

PRO FORMA CAPITALIZATION

The following table sets forth the capitalization and certain other balance
sheet data of Semiconductor as of September 30, 1999. This information should be
read in conjunction with the pro forma financial information included elsewhere
in this information statement.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------------------
C-CUBE
MICROSYSTEMS, INC. PRO FORMA SEMICONDUCTOR,
HISTORICAL ADJUSTMENTS(1) PRO FORMA AS ADJUSTED
------------------------ -------------- ---------------------
<S> <C> <C> <C>
Cash equivalents and short-term
investments............................ $277,373 $(148,000) $ 129,373
======== ========= =========
Stockholders' Equity:
Preferred Stock........................ $ -- $ -- $ --
Common Stock........................... 270,932 254,000 524,932
Accumulated Other Comprehensive Loss... (1,992) 27 (1,965)
Retained Earnings (Deficit)............ 58,620 (480,003) (421,383)
-------- --------- ---------
Total Stockholders' Equity..... 327,560 (225,976) 101,584
-------- --------- ---------
Total Capitalization.............. $327,560 $(225,976) $ 101,584
======== ========= =========
</TABLE>

- ---------------

(1) Assumes valuation of Semiconductor of $975 million. If the valuation of
Semiconductor were $1.1 billion, cash equivalents and short-term investments
would be $44,373,000 and stockholders' equity would be $16,584,000. See
Unaudited Pro Forma Financial Statements for a description of the pro forma
adjustments reflected in the adjusted balances.

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<PAGE> 18

REASONS FOR THE DISTRIBUTION

The Amended and Restated Agreement and Plan of Merger and Reorganization
with Harmonic contemplates the sale or distribution of the semiconductor
business immediately prior to and in connection with the merger. After thorough
consideration, the board of directors of C-Cube Microsystems determined that a
spin-off of the semiconductor business was in the stockholders' best interest.
The C-Cube Microsystems board of directors considered a number of factors in
determining to recommend approval of the spin-off of the semiconductor business
including:

- The necessity of spinning off Semiconductor in order to complete C-Cube
Microsystems' merger with Harmonic;

- The recent proposed valuation of Semiconductor;

- All purchase proposals relating to Semiconductor received by C-Cube
Microsystems; and

After reviewing C-Cube Microsystems' goals and objectives and considering other
possible methods of enhancing the growth of Semiconductor, C-Cube Microsystems'
management and board of directors concluded that enhancing this business through
the formation of Semiconductor and the distribution would be in the best
interest of C-Cube Microsystems stockholders. C-Cube Microsystems' board of
directors approved the formation of Semiconductor and the distribution after
consultation with C-Cube Microsystems' management and its financial advisor
Credit Suisse First Boston, or CSFB, which has in the past been an advisor to
other companies effecting similar transactions.

In its capacity as financial advisor to C-Cube Microsystems,
representatives of CSFB held discussions with C-Cube Microsystems' management in
December 1999 regarding a potential sale or spin-off of C-Cube Microsystems'
semiconductor business. During the period from October through December 1999,
C-Cube Microsystems' management and its advisors participated in various
meetings and conference calls with respect to the transaction described herein.
At the board meeting on December 14, 1999, representatives of CSFB reviewed with
C-Cube Microsystems' board of directors various potential transactions,
including the transaction described in this information statement.

CSFB, as part of its investment banking business, engages in the valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements, and valuations for estate, corporate and other purposes.
C-Cube Microsystems selected CSFB as its financial advisor because it is an
internationally recognized investment banking firm that has substantial
experience in transactions similar to the distribution.

Although CSFB participated in certain of the discussions regarding the
distribution, the terms of the distribution were determined solely by C-Cube
Microsystems' board of directors.

C-Cube Microsystems will account for the merger of the DiviCom business
into Harmonic and the spin-off of the semiconductor business as follows. C-Cube
Microsystems will account for the merger of the DiviCom business into Harmonic
as a sale of the DiviCom business to Harmonic and will record DiviCom as a
discontinued operation. The basis of all remaining assets, liabilities and
stockholder's equity will carryover into the new entity, Semiconductor. The
effect of this will be to account for Semiconductor as though it were a
continuation of C-Cube Microsystems following the sale of the DiviCom business
to Harmonic. Because the legal structure of the merger with Harmonic is a merger
of C-Cube Microsystems, which consists of only the DiviCom business after the
distribution of Semiconductor, with Harmonic, C-Cube Microsystems will cease to
be a registrant and Semiconductor will become a new registrant with the SEC. For
tax and legal purposes, C-Cube Microsystems will report the distribution of
Semiconductor Stock as a taxable event to C-Cube Microsystems (but not to its
stockholders). In connection with the distribution of the stock of
Semiconductor, C-Cube Microsystems will recognize taxable gain generally

17
<PAGE> 19

equal to the difference between the net tax basis of the semiconductor business
and the fair market of the shares of Semiconductor stock distributed. C-Cube
Microsystems will account for the fair market value of the shares distributed as
a distribution and will record as a taxable gain, the difference between the tax
basis of its Semiconductor assets, reduced by liabilities assumed, and the fair
market value of the shares of Semiconductor common stock.

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<PAGE> 20

BUSINESS

C-Cube Microsystems Inc. was established as a California corporation in
1988 and reincorporated in Delaware in 1994. In 1996, C-Cube Microsystems
acquired all of the capital stock of DiviCom Inc. After operating for three
years as a combined entity, C-Cube Microsystems Inc.'s semiconductor business is
being spun off to become C-Cube Semiconductor Inc., a Delaware corporation or
"Semiconductor". This spin-off will be contingent on the satisfaction of all
conditions precedent to C-Cube's merger with Harmonic. References herein to
Semiconductor refer to C-Cube Microsystems' semiconductor business before and
after the distribution of shares of Semiconductor.

Semiconductor designs, develops, has manufactured and sells semiconductors,
software and systems for digital video applications. As a major supplier of such
solutions, Semiconductor has played a significant role in enabling the growth of
digital video. Semiconductor is focused on working with its original equipment
manufacturer customers and service providers to enable key applications in its
consumer and communications target markets. In the consumer market, it is
focused on playback and recordable video compact disc or VideoCD and digital
video disc or DVD as well as digital VHS recorders and digital video recorders.
The communications market targets interactive set-top boxes, broadcast encoders
and other emerging appliances. Users of these products will be able to record
hours of DVD-quality video obtained from any video source, whether TV, VCR, DV
camcorder or analog camcorder. Once they have recorded the video, they will be
able to edit and play back the video on standard personal computers and store
the resulting video to DVD, web pages, e-mail, recordable compact disc or
personal computer hard-disk drives.

COMPRESSION ENABLES MASS-MARKET APPLICATIONS OF DIGITAL VIDEO

Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats. Digital video provides several fundamental
benefits over analog video. Unlike analog video, digital video can be
compressed, providing significant storage and transmission efficiencies, and can
be transmitted and reproduced without perceptible image degradation. In the
1980s, the benefits of digital formats led the U.S. consumer audio industry to
convert from analog long-playing records to digital CDs, resulting in tremendous
growth in the market for CD players and displacing the analog formats. In the
1990s, the evolution from analog to digital began transforming the way in which
video is produced, stored, transmitted and viewed.

Representing video in uncompressed digital form requires a large amount of
data, which in the past has made storage or transmission economically
impractical. To transmit a single uncompressed digital video program requires
multiple satellite transponders -- each costing as much as $2 million per year.
The sheer size of uncompressed digital video has relegated it to niche
applications of small volumes.

However, the very nature of video information lends itself to compression.
Any video sequence has inherent redundancies, for example, one frame of a movie
often differs very little from the next successive frame. Through digital
compression techniques, the redundancies in video data can be detected and
eliminated, significantly reducing the overall amount of data needed to recreate
the original image without affecting the image quality. Using video compression
techniques, a single satellite transponder can broadcast 8 to 12 programs
instead of the partial program possible with uncompressed video. Semiconductor
believes that the design and deployment of cost-effective and practical video
compression technology is critical to the development of mass-market
applications.

STANDARDS ENHANCE THE GROWTH OF DIGITAL VIDEO MARKETS

As digital video markets develop, so does the need for standards to ensure
that products from different manufacturers use the same formats for video
information. Throughout its history, Semiconductor has been an active
participant and respected technology pioneer on International Organization for
Standardization committees charged with creating standards for still image and
digital video compression.

Key standards that have driven the growth of digital video include the
joint photographic experts group standard for still-image compression and two
moving pictures experts group or MPEG standards for digital video and audio
compression. The MPEG-1 standard enabled the first digital video consumer

19
<PAGE> 21

products such as VideoCD, while the more recent MPEG-2 standard has become the
accepted compression format in diverse applications such as digital satellite,
cable and terrestrial TV as well as professional video editing, digital VHS and
DVD. The adoption and acceptance of these standards has contributed greatly to
the growth of digital video markets during the 1990s.

ENCODING ALGORITHMS DETERMINE VIDEO QUALITY

As vital as the International Organization for Standardization standards
have been to the development of digital video, they have a built-in limitation.
The standards determine interoperability, not video quality. More specifically,
the standards define the format for compressed video data. An MPEG-compliant
encoder (which is the compression device) will create data that an
MPEG-compliant decoder (which is the decompression device) can reconstruct into
a video image. But the process of encoding necessarily involves discarding some
of the image information to achieve compression. If the encoder is "smart," that
is, if it can correctly determine which information is redundant or
insignificant to the video quality, then the encoded video will be a faithful
representation of the original video and the decoder can create a high-quality
video image. But if the encoder makes poor choices and discards important video
information, then the decoder cannot compensate. The reconstructed image will be
poor in comparison to the original image. Encoder design, therefore, is a
critically important determining factor for video quality.

At the heart of encoder design is the development of encoding algorithms,
the mathematical rules that govern how the large volume of uncompressed video is
reduced to a manageable size without adversely affecting image quality. One of
Semiconductor's core strengths has been its expertise in the development,
testing and refinement of compression algorithms. These mathematical formulas
are proprietary and represent vital intellectual property of Semiconductor. By
incorporating these highly efficient and powerful algorithms into our products,
Semiconductor has consistently been recognized as the industry leader in digital
video encoding. As evidence of this leadership, Semiconductor products perform
the encoding for the majority of digital video television currently being
broadcast. Also, Semiconductor is one of a select group of technology companies
that have been recognized by The National Academy of Television Arts and
Sciences for technical achievement, as shown by their award of a special
technology Emmy(TM) to C-Cube Microsystems' semiconductor business in 1995.

Semiconductor differentiates its products from competitors by offering both
encoding and decoding solutions that are not only fully compliant with the
MPEG-1 and/or MPEG-2 international standards (and therefore interoperable with
equipment from many other suppliers), but at the same time provide superior
image quality (enhancing the viewing experience), are feature rich and are
highly integrated and therefore cost competitive. All Semiconductor products are
programmable, permitting the incorporation of sophisticated system-level
features after the chip design is completed, while lessening design time, risk
and system cost. Semiconductor also develops proprietary product extensions and
features such as RealSonic(TM) home theater sound enhancement and ClearView(TM)
error correction technology.

MARKET TRENDS

Semiconductor addresses two broad industries where digital video is used,
communications and consumer electronics. This section describes some of the
trends affecting these markets.

COMMUNICATIONS

Digital video compression is currently enabling a number of applications
and capabilities in the communications market in diverse segments such as
satellite, cable, telephone and wireless networks.

SATELLITE

The first full-scale digital video transmission systems to achieve full
deployment were a series of direct broadcast satellite networks. By combining
digital video compression technology with high-power Ku-band satellites, direct
broadcast satellite systems typically provide 100 or more channels to a large
geographical area

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<PAGE> 22

(e.g. the continental U.S.). This expanded service usually imposes a relatively
low cost per subscriber since the only incremental investment needed by
subscribers is the purchase of a small dish and a decoder box.

To compete with other high-speed media, satellite service providers are
beginning direct broadcast satellite deployments using high-speed satellite data
transmission to the home. A disadvantage of this approach is that the return
channel uses a standard modem over telephone lines, thus limiting the
interactive nature of the service.

A major trend in this market during 1998 and 1999 was consolidation through
a number of mergers and acquisitions, for example, the merger of DIRECTV and
USSB operations and the merger of AT&T and TCI operations. At the same time, the
satellite market saw the first trials of high definition television or HDTV
broadcasting.

CABLE

Cable providers are upgrading the level of their services using a variety
of network approaches. Open standards, such as those developed by various
standard-setting organizations, are expected to drive increased cable revenue
opportunities by creating a competitive marketplace for system network equipment
and end-terminal devices.

With the advantage of being able to support high speed, two-way networks
combined with advanced interactive set-top boxes, the revenue base for cable
operators is expected to expand as it grows its client base at the same time as
growing its revenue per client through a broad offering of interactive services
including web browsing and electronic commerce.

Cable is also experiencing consolidation as smaller companies are unable to
make the transition to digital and also as telephony companies seek to get a
foothold in a competitive delivery mechanism into the home for both voice and
video.

CONSUMER ELECTRONICS

Through the use of MPEG compression, video can be stored, reproduced and
distributed on the same media currently in use for other types of digital data,
such as 5-inch (12 cm) CDs that are commonly used for digital audio. Emerging
applications for digital video capture, playback and distribution at the
consumer level are being advanced by the rapid adoption of new consumer-oriented
media formats such as VideoCD players, DVD players, digital VHS and recordable
DVD as well as consumer digital video cameras and camcorders.

DIGITAL VHS AND RECORDABLE DIGITAL VIDEO DISC

In 1999, several original equipment manufacturers demonstrated
consumer-oriented products positioned as VCR replacements. Semiconductor
believes that rapid growth in this market will occur only when single-chip
"codecs", which are an encoder/decoder combination, reach a price point low
enough to enable a recordable unit at prices that will support a mass market.
Once this milestone is achieved, however, the potential for wide consumer
acceptance of digital VCR replacements is expected to be high. Key advantages of
disc-based recording include higher video quality of digital versus analog
recording, the convenience of discs over tape, and the ability to integrate the
VCR recording function with other desirable consumer features such as easy
program recording, timeshifting of programs and DVD playback. Key advantages of
digital-VHS include the ability to record up to 24 hours of video on a single
tape, capability to record HDTV, and compatibility with VHS and Super-VHS, thus
preserving existing consumer video libraries stored in VHS format.

DVD PLAYER

Unlike the VideoCD standard, which is an adaptation of the audio CD, the
DVD standard was defined specifically for the very high-quality playback of
feature-length movies. The DVD format now commercially available provides up to
135 minutes of playing time (270 for double-sided) on a disc the

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same physical size as an audio CD with four times the image resolution of a
standard VideoCD. DVD uses MPEG-2 compression technology.

VIDEOCD PLAYER

A VideoCD player is essentially an audio CD player with an MPEG-1 decoder
and a video output. While adding this functionality marginally increases the
cost to manufacture a typical CD player, these machines now have the ability to
play movies, music videos and other titles from MPEG-1 encoded CDs. The physical
VideoCD disc format is identical to a standard audio CD and is limited to 72
minutes playing time with video quality that is generally perceived as
comparable to an analog VHS tape. Several thousand VideoCD titles are now
available, including movies, music videos and karaoke titles. The VideoCD format
has thus far received mass-market adoption in China. In 1998, leading Chinese
manufacturers and the Chinese government introduced an enhanced version of
VideoCD known as Chaoji VCD. This enhanced version features MPEG-2 video quality
that is comparable to DVD video and is backward compatible with VideoCD titles.

DESKTOP EDITING SYSTEMS

The capabilities of desktop editing systems continue to grow. Sophisticated
features such as the ability to allow a user to edit video and resequence it,
which was once the province of professional studios, are now coming to the
consumer and prosumer markets. An important enabling factor is the availability
of low-cost recordable CD drives, which provide a convenient and cost-effective
means to store edited digital video. This trend is expected to accelerate in
2000, as the higher capacity recordable DVD drives become more common in
personal computers.

PRODUCTS

Semiconductor supplies products for two main markets for digital video:

- Communications

- Consumer electronics

COMMUNICATIONS

In most digital video applications, the encoding and decoding functions are
separated. For example, in broadcasting, the video is encoded by one or a small
number of encoders at the transmission facility, while a decoder at the viewer's
home reconstructs the broadcast for viewing. Semiconductor has been, and
continues to be, a major supplier for both encoders and decoders for a full
spectrum of digital video applications. However, Semiconductor has long
recognized that combining the encoding and decoding functions into one
processor, called a codec, creates significant new market opportunities.
Semiconductor invested heavily in the development of a single-chip MPEG-2 codec
architecture and introduced DVxpert(TM), the first product based on the new
architecture, in August 1997. In 1999, Semiconductor extended the capabilities
of the architecture with the introduction of Semiconductor's high-definition
digital video product; the industry's first codec architecture for HDTV
broadcasting and video production applications.

Broadcast and Distribution Encoders

Encoders in the DVxpert family offer improved image quality, efficient
bandwidth utilization and reliability for broadcasting and professional
applications. The DVxpert broadcast encoders target applications such as
distribution, contribution, DVD authoring and video servers. All DVxpert
encoders use Semiconductor's patented PerfectView(TM) feature, which provides
clear image quality with advanced video capabilities.

One of the big issues broadcasters currently face is the migration to high
definition programming. The Federal Communications Commission has established a
target timeline for United States broadcasters to begin HDTV transmissions, but
many infrastructure issues remain uncertain. In 1999, Semiconductor
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introduced its high-definition digital video product to address these issues.
This product is an MPEG-2 encoder for HDTV broadcast applications, but also
retains the capabilities of the standard definition DVxpert products, enabling
equipment manufacturers to deliver flexible high definition/standard definition
solutions and ease broadcaster's transition issues.

Interactive Set-top Box Decoders

The primary communications application for MPEG-2 decoders is in the
set-top box market. To reconstruct the compressed broadcast program, several
steps are required. First, the MPEG-2 stream must be separated or demultiplexed
into its video and audio portions. Then the video and audio must be
decompressed. Finally, the video signal is combined with other on-screen
information, such as program guides, and displayed on a monitor.

Semiconductor has introduced several innovative products in this arena,
starting with the introduction of the CL9100 MPEG-2 video decoder in 1994.
C-Cube Microsystems followed in 1995 by bringing to market the CL9110 Transport
Demultiplexer which was licensed from DiviCom, then a private company. Together,
this two-chip combination performed all the functions needed for digital video
decoding and was instrumental in enabling first-generation designs for digital
set-top boxes.

1996 saw the introduction of the AViA(TM) family of set-top box chips.
Building on the technology and market success of the CL9100 and CL9110 products,
the AViA platform offered high-performance graphics, better quality audio (Dolby
Digital(TM)), interoperability across both wired and wireless networks and a
tighter integration between the individual chips. By offering both high-end and
basic versions, the AViA family allowed original equipment manufacturers to
target their designs for the needs of each deployment in terms of capabilities
and price point.

Recognizing the trends toward the convergence of digital broadcast,
internet access, interactivity and advanced graphics, Semiconductor introduced
the AViA@TV(TM) platform in November 1998. Using AViA@TV products, service
providers can develop additional revenue-generating features and services such
as continuous two-way data exchange, advanced graphical user interfaces,
interactive advertising and internet services such as e-mail on TV, home banking
and on-line shopping. The AViA@TV line includes Semiconductor's integrated
FlickerFilter(TM), which dramatically improves the visual quality of HTML or the
text language often used to create web pages displayed over video, an important
feature for interactive applications.

An important endorsement came when Pace Micro Technology, a leading
European original equipment manufacturer, selected the AViA@TV architecture for
its new set-top box design. The Pace set-tops are incorporated in an interactive
service developed by NTL, the UK's largest Cable TV operator, which plans to
offer interactive data services such as web browsing, e-mail, chat,
pay-per-view, games and home shopping. Similarly, Philips, Europe's largest
consumer electronics company, has designed the product into their 2-way cable
set-top box for MediaOne; the largest cable operator in the United States.

In January of 1999, C-Cube Microsystems acquired the relevant
communications activities of TV/ Com in order to reinforce this successful
strategic thrust into the arena of broadband communications network products.
One reason for the selection of TV/Com was that its products have been
successfully deployed in the same networks and set-top boxes as Semiconductor's
MPEG solutions. Through this purchase, Semiconductor gained access to key
people, intellectual property and designs including modulation and demodulation
technology. The combination of these capabilities with the relevant designs and
software from Semiconductor's AViA@TV product family and expertise in analog
design, gives Semiconductor all the necessary components required to develop
state-of-the-art, highly integrated solutions for interactive digital TV.

With this capability, Semiconductor is now able to service the end-to-end
requirements of a digital video network including video compression in the head
end, network interfaces and the full spectrum of data, video, audio and graphics
requirements in the consumer terminal. This enables a new generation of

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interactive services available through the TV in the living room, including
web-based e-commerce, video e-mail and voice over the Internet.

CONSUMER ELECTRONICS

Recordable Digital Video

While DVD playback has achieved increasing success in both consumer players
and personal computer applications, Semiconductor believes that the high-volume
applications of digital video in the consumer world depend on the ability to
both record and play back DVD-quality video. Thus, Semiconductor extended its
DVxpert technology to the consumer world with the DVxplore(TM) line of consumer
codecs. DVxplore codecs are the world's first single-chip consumer products to
support both MPEG and DV formats. The initial focus is on the personal computer
market, where original equipment manufacturers use DVxplore codecs to offer
personal content creation, PC/TV and time-shifting applications. Users of these
products are able to record hours of DVD-quality video obtained from any video
source, whether TV, VCR, DV camcorder or analog camcorder. Once they record the
video, they are able to edit and play back the video on standard personal
computers and store the resulting video to optical disc, web pages, e-mail or
hard-disk drives.

VCR replacement products began to appear on the market in 1999, and are
likely to continue to expand in the market over the next few years. For consumer
digital recorders, three types of media have emerged as viable platforms for
recording and playing back digital video: tape digital VHS; optical recordable
DVD; and hard disk digital video recorder. Semiconductor is developing products
for all three emerging consumer digital recordable platforms.

Encoders for Editing Applications

Professional editing had been primarily the province of motion-joint
photographic experts group products due to the need for accurate cuts and
special effects. Because MPEG encoders essentially "collapse" some frames to
achieve high levels of compression, industry analysts doubted whether MPEG could
ever achieve the accuracy needed to supplant motion-joint photographic experts
group products for professional needs. However, Semiconductor showed that MPEG
is a viable format for editing with the introduction of the DVxpress codecs.
Based on the same architecture as the DVxpert product, the DVxpress(TM) codecs
feature Semiconductor's proprietary Frame-Accurate MPEG Editing (FAME(TM))
algorithm and dual-stream decoding, two capabilities for professional editing.

Semiconductor's DVxpress-MX codec products can support both MPEG and DV,
which is a digital video format used primarily in digital camcorders, to allow
mixed-format editing where, for example, an MPEG stream and a DV stream are
edited together. This innovation is particularly important because DV is the
most popular format for consumer and professional digital camcorders, while MPEG
is the prevailing standard for transmission and storage. Panasonic, the
developer of the DV format, and Avid, a leading editing original equipment
manufacturers, both endorsed the DVxpress-MX codec as a significant step toward
unifying the MPEG and DV worlds. During 1999, many leading providers of editing
solutions introduced products based on DVxpress-MX, including Matrox Electronic
Systems, Pinnacle Systems, Accom and Fast Multimedia.

DVD Decoders

Semiconductor's ZiVA(TM) family of DVD products includes decoders and
system-level design solutions for consumer original equipment manufacturers. The
ZiVA DVD decoder family incorporates several critical DVD functions into a
single chip. Semiconductor addresses a critical concern of content owners with
SecureView(TM) copy protection and decryption technology. SecureView made ZiVA
decoders the first single-chip products to support the DVD consortium's copy
protection scheme.

Semiconductor collaborated with partner Toshiba to develop the ZiVA-PC
decoder targeted specifically at the notebook market, the first DVD hardware
chip with full PC98 compliance. The

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ZiVA-PC decoder offers one of the industry's lowest overall system cost for
hardware DVD playback, as well as one of the lowest power consumption, while
delivering true interactivity and flawless image quality. In 1999, Semiconductor
developed its third-generation DVD decoder, the ZiVA-3 line, which extended the
capabilities of the ZiVA line in a number of key areas, most particularly the
audio features. Personal computer original equipment manufacturers including
Toshiba, Dell and Gateway adopted ZiVA decoders for DVD-enabled notebook
computers.

VideoCD Decoders

VideoCD is a consumer entertainment format based on MPEG-1 technology.
VideoCD players allow consumers to enjoy movies, documentaries and karaoke
played from a disc similar to an audio compact disc. Semiconductor has been a
leading supplier of MPEG-1 decoders used in VideoCD players throughout the
mid-and late-1990s. Semiconductor pioneered the MPEG-1 market with the
introduction in 1992 of the CL450 MPEG-1 Video Decoder, the first commercially
available MPEG-1 video decoder. The CL450 found uses in commercial and
professional digital karaoke players. It followed with the CL480 family of
VideoCD decoders, products that boosted Semiconductor to market leadership in
the rapidly growing market for VideoCD players in China in the mid-1990s.

Semiconductor's current VideoCD product is the CL680 Advanced VideoCD
decoder. The CL680 decoder integrates an NTSC/PAL encoder, improved ClearView
error concealment technology and a new WideSound(TM) feature, which simulates a
surround-sound experience from two stereo channels. By fully utilizing the
microcode architecture of the CL680, Semiconductor was able to integrate the
system functions directly on the CL680, effectively eliminating the need for the
system micro-controller.

Chaoji VCD Decoders

As the VideoCD market matured in China, Chinese customers, original
equipment manufacturers and government agencies all saw a need for a higher
quality video experience. Due to its expertise in both VideoCD and DVD,
Semiconductor was well qualified to help define the new standard. The result of
this effort was the introduction of the Chaoji VCD standard, an extension to
VideoCD that was endorsed by the Chinese government and leading original
equipment manufacturers.

Soon after the adoption of the Chaoji VCD standard, Semiconductor
introduced the CL8800 family of Chaoji VCD decoders to its partner original
equipment manufacturers. The CL8830 decoder is a full-featured product that
features Semiconductor's patented RealSonic(TM) audio technology, offering
significant advances in audio quality for home theater and Karaoke applications.
The CL8820 decoder targets more price-sensitive products that do not demand the
same audio quality as the CL8830 decoder. Both decoders are compatible with
existing VideoCD and audio compact disc formats. In 1999, Semiconductor
introduced the most integrated Chaoji VCD decoder chip, the CL8830A. Leading
Chinese original equipment manufacturers have adopted the CL8800 decoders for
their Chaoji VCD product offerings. In 2000, we believe that the Chaoji VCD
market will continue to encroach on the VCD market as prices for Chaoji VCD
systems decline.

CONSUMER BRANDING PROGRAM

Semiconductor's consumer branding program, begun in 1996, saw continued
success throughout 1999. In 1999, Semiconductor's brand recognition reached an
all-time high in the Chinese market. Its Chinese customers continue to use its
brand as well as its technology as they combine for strong market recognition
and preference. The brand represents quality, reliability and high technology.
The success of Semiconductor's consumer branding program remains predicated on
offering first-to-market technology, superior feature sets and video playback
quality and a roadmap to higher quality, feature-rich digital video products.

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CHANGING PRODUCT MIX: DEPENDENCE ON DECODER PRODUCTS

Semiconductor offers a number of products for a variety of applications.
Since the second quarter of 1995, sales of Semiconductor's VCD decoder family of
products have represented a significant percentage of Semiconductor's total net
revenues. Semiconductor expects that revenues from its VCD decoder products
including the CL680 and Chaoji VCD families of products will decrease as a
percentage of total revenues, but continue to account for a significant portion
of its product revenues in 2000. Semiconductor expects that price competition
will continue to result in declining average selling prices for this family of
products. Semiconductor has implemented several programs that have reduced costs
associated with these families of products. In the event that increases in unit
sales and other manufacturing efficiencies of these families of products do not
offset decreasing sales prices in the future, Semiconductor's business and
results of operations would be materially and adversely affected. Semiconductor
anticipates that overall gross margin may decrease as a result of a number of
factors including anticipated declines in average selling prices over time. The
timing of volume shipments and the life cycles of Semiconductor's products are
difficult to predict due in large measure to the emerging nature of the markets
for Semiconductor's products, the future effect of product enhancements by
Semiconductor and its current and future competitors. Declines in demand for
Semiconductor's products, particularly the CL680 and Chaoji VCD families of
products, whether as a result of competition, technological change or otherwise,
would have a material adverse effect on Semiconductor's business and results of
operations.

CUSTOMERS

During the nine months ended September 30, 1999, no customer accounted for
10% or more of Semiconductor's net revenue. During 1998, only Malata accounted
for 11% or more of Semiconductor's net revenue. Sales to Sinorex, a distributor,
accounted for 31% and 14% of Semiconductor's net revenues during 1997 and 1996,
respectively. Sales to Samsung accounted for 10% of Semiconductor's net revenue
during 1996.

On February 11, 2000, Semiconductor entered into a Securities Purchase
Agreement with Thomson Multimedia S.A. pursuant to which Thomson agreed, subject
to completion of the distribution and the other conditions set forth in the
agreement, to purchase 474,747 shares of Semiconductor common stock and to
receive a warrant to purchase an additional 949,494 shares of Semiconductor
common stock. See "Recent Sales of Unregistered Securities" for further
information. The exercisability of the warrant will be accelerated in whole or
in part from the seven year anniversary of the distribution based upon Thomson
achieving certain revenue and design win milestones.

RESEARCH AND DEVELOPMENT

Semiconductor believes that the continued introduction of new products in
its target markets is essential to its growth. As of September 30, 1999,
Semiconductor had 286 full-time employees engaged in research and development.
Expenditures for research and development in 1998, 1997 and 1996 were
approximately $52.6 million, $46.5 million and $36.8 million, respectively and
$39.8 million for the nine months ended September 30, 1999.

The markets for Semiconductor's products are characterized by rapidly
changing technology and evolving industry standards. In addition, markets for
Semiconductor's products are characterized by intense price competition. As the
markets for Semiconductor's products develop and competition increases,
Semiconductor anticipates that product life cycles will shorten and average
selling prices will decline. In particular, the average selling price and
product gross margin for each of Semiconductor's products will decline as such
products mature and as per order unit volumes for such products increase.
Semiconductor's operating results will depend to a significant extent on its
ability to continue to successfully introduce new products on a timely basis and
to reduce costs of existing products. In particular, Semiconductor currently
intends to announce several new products over the next year, including next
generation MPEG-2 encoders and decoders. There can be no assurance that these
products will be successfully developed or will achieve market acceptance, and
these products are not expected to contribute significantly to revenues in the
first half of 2000. The failure of any of these products to be successfully
introduced and achieve market acceptance could have a material adverse effect on
Semiconductor's business and results of operations. In

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addition, Semiconductor continues to sell a number of earlier generation
products; any failure to manage the transition to new products effectively could
have a material adverse effect on Semiconductor's business and results of
operations. The success of new product introductions is dependent on several
factors, including proper new product definition, product cost, timely
completion and introduction of new product designs, quality of new products,
differentiation of new products from those of Semiconductor's competitors and
market acceptance of Semiconductor's and its customers' products. As a result,
Semiconductor believes that continued significant expenditures for research and
development will be required in the future. Because of the complexity of its
products, Semiconductor has experienced delays from time-to-time in completing
development and introduction of new products, and as a result, has from
time-to-time not achieved the market share anticipated for such products. There
can be no assurance that such delays will not be encountered in the development
and introduction of future products, including the products currently expected
to be announced over the next year. There can be no assurance that Semiconductor
will successfully identify new product opportunities and develop and bring new
products to market in a timely manner, that products or technologies developed
by others will not render Semiconductor's products or technologies obsolete or
noncompetitive, or that Semiconductor's products will be selected for design
into the products of its targeted customers.

SALES AND MARKETING

Semiconductor's sales and marketing strategy targets markets for which
digital video compression is an enabling technology in order to achieve key
design wins with industry leaders, as well as early adopters of digital video
technology. To implement its strategy, Semiconductor has established a direct
sales and marketing force and a worldwide network of independent sales
representatives and distributors. In addition, Semiconductor has a team of
application engineers who assist customers with designing in Semiconductor's
products.

In the United States, Semiconductor sells its products through direct sales
channels, independent representatives and distributors. Semiconductor records
revenues from products sales to customers at the time of shipment. Certain of
Semiconductor's agreements with its distributors permit limited stock rotation
and provide for price protection. Allowances for returns and adjustments,
including price protection, are provided at the time revenues from product sales
are recorded. Generally, Semiconductor pays its independent sales
representatives on a commission basis. As of September 30, 1999, Semiconductor
had North American regional sales offices in California and Quebec, and
international sales offices in Hong Kong, the United Kingdom, Korea, China,
Taiwan and Japan. In Japan, Semiconductor sells products through the direct
sales force of C-Cube Microsystems Japan, Inc. and two distributors. C-Cube
Microsystems Japan, Inc. was formed by Semiconductor and Kubota Corporation in
1988 and is currently owned 65% by Semiconductor and 35% by Kubota. The primary
business of C-Cube Microsystems Japan, Inc. is the marketing, sales and support
of Semiconductor's products in Japan. Internationally, Semiconductor has
commissioned sales representatives or distributors in Canada, Denmark, Finland,
France, Germany, Great Britain, Hong Kong, Ireland, India, Israel, Italy, Korea,
Sweden and Taiwan.

INTERNATIONAL BUSINESS ACTIVITIES

During 1998, 1997 and 1996, international revenues accounted for
approximately 82%, 88% and 77% of Semiconductor's net revenues, respectively,
and 80% of net revenues in the first nine months of 1999. Semiconductor believes
that international revenues will continue to account for a significant portion
of net revenues. Semiconductor's success will depend in part upon its ability to
manage international marketing and sales operations. In addition, Semiconductor
purchases a substantial portion of its manufacturing services from foreign
suppliers. Semiconductor's international manufacturing and sales are subject to
changes in foreign political and economic conditions, and to other risks,
including currency or export/import controls, changes in tax laws, tariffs and
freight rates and changes in the ownership and/or leadership of international
customers that may result in delayed or canceled orders. For example, China is
the primary market for VideoCD and Chaoji VCD players utilizing Semiconductor's
decoder products. As a consequence, any political or economic instability in
China could significantly reduce demand for Semiconductor's products.
Semiconductor has made and will continue to make significant investments in
additional foundry capacity in Taiwan and is subject to the risk of political
instability in Taiwan, including

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but not limited to the potential for conflict between Taiwan and the People's
Republic of China. Semiconductor sells products to customers in Korea and is
subject to the risk of economic and political instability in Korea, including
the potential for conflict between North and South Korea. In addition,
Semiconductor sells certain of its products in international markets and buys
certain products from its foundries in currencies other than the U.S. dollar. As
a result, currency fluctuations could, in the long term, have a material adverse
effect on Semiconductor's business and results of operations. With respect to
international sales that are denominated in U.S. dollars, increases in the value
of the U.S. dollar relative to foreign currencies can increase the effective
price of, and reduce demand for, Semiconductor's products relative to
competitive products priced in the local currency. The United States has
considered trade sanctions against Japan and has had disputes with China
relating to trade and human rights issues. If trade sanctions were imposed,
Japan or China could enact trade sanctions in response. Because a number of
Semiconductor's current and prospective customers and suppliers are located in
Japan and China, trade sanctions, if imposed, could have a material adverse
effect on Semiconductor's business and results of operations. Similarly,
protectionist trade legislation in either the United States or foreign countries
could have a material adverse effect on Semiconductor's ability to manufacture
or sell its products in foreign markets.

The Asian consumer electronics markets accounted for approximately 74%, 80%
and 72% of total sales in 1998, 1997 and 1996, respectively, and 67% in the
first nine months of 1999 Asia sales are expected to continue to account for a
substantial, though declining, percentage of sales in the future. Most of
Semiconductor's sales in Asia were of decoder chips, which are used in VideoCD
and Chaoji VCD players. Semiconductor believes purchases of VideoCD and Chaoji
VCD players are not as likely to be deferred as are purchases of higher priced
consumer durables and production equipment, which have impacted U.S. export
sales. However, there can be no assurance that Semiconductor will not experience
reduced sales of its products into Asia because of declining consumer spending
or because of its customers' increasing difficulty in obtaining letters of
credit, which Semiconductor generally requires prior to shipment.

MANUFACTURING

Semiconductor has chosen to use independent chip manufacturing facilities
called foundries to fabricate its integrated circuits. Assembly, test and
packaging are also subcontracted to third parties. This approach enables
Semiconductor to concentrate its resources on product design and development,
where Semiconductor believes it has greater competitive advantages.
Semiconductor continually evaluates alternative sources for chip manufacturing,
assembly and test capacity.

During 1998, Semiconductor's devices were fabricated using advanced process
technology with 0.65 micron, 0.5 micron, 0.35 micron, 0.30 micron and 0.25
micron process feature sizes, using either three or four layers of metal
interconnect. In 1999, Semiconductor began using 0.22 micron technology with
five layers of metal interconnect. Fabricated chips are either tested by the
fabrication facility to Semiconductor specifications or Semiconductor takes
receipt of untested chips and works with subcontractor testing facilities. Once
the chips are fully tested and accepted, the dice are assembled into packages by
subcontractors, primarily located in Asia. Semiconductor utilizes multiple
assembly subcontractors for its products.

In the second quarter of 1996, Semiconductor expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. to provide chip
production capacity in the years 1996 to 2001. The agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. provided that Taiwan Semiconductor
Manufacturing Co., Ltd. would produce and ship chips to Semiconductor at
specified prices and required Semiconductor to make two advance payments
totaling $49.0 million. An advance payment of $24.5 million was made in June
1996. In May 1997, Semiconductor amended its agreement with Taiwan Semiconductor
Manufacturing Co., Ltd. which resulted in a reduction of Semiconductor's future
chip purchase commitments and the forgiveness of the second advance payment of
$24.5 million. Taiwan Semiconductor Manufacturing Co., Ltd. will apply the June
1996 prepayment against a portion of the chip cost as product is delivered to
Semiconductor. Accordingly, the prepaid amount, which has been allocated between
current and long-term assets, will be amortized to inventory as chips are
received. At

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September 30, 1999, remaining production capacity rights were $6.4 million
dollars of which $1.2 million was included in other current assets and $5.2
million was classified as a non-current asset.

During the fourth quarter of 1999, Semiconductor signed a production
capacity agreement with United Microelectronics Corporation to provide
Semiconductor with chip manufacturing capacity through at least 2002, for which
it made a $20.0 million refundable payment in the first quarter of 2000. This
refundable payment allows for certain discounts on purchased capacity based upon
the quantities purchased. The agreement does not commit Semiconductor to
purchase chips, but does guarantee the availability of a set capacity of chips
at "not to exceed" prices.

Semiconductor believes that an increase in the demand for semiconductor
chips over currently expected levels, or a failure of manufacturing capacity in
the industry to grow at anticipated rates, could result in greater difficulty in
obtaining adequate manufacturing capacity, increased prices and increased lead
times. Semiconductor's future operating results depend in substantial part on
its ability to increase the capacity available to it from its existing or new
foundries. In order to secure such capacity, Semiconductor has considered and
will continue to consider various possible transactions, which could include,
without limitation, equity investments in, prepayments to, non-refundable
deposits with or loans to foundries in exchange for guaranteed capacity, "take
or pay" contracts that commit Semiconductor to purchase specified quantities of
chips over extended periods, joint ventures or other partnership relationships
with foundries. There can be no assurance that Semiconductor will be able to
make any such arrangement in a timely fashion, or at all, that Semiconductor
will not require additional issuances of equity or debt in order to raise
capital for any such arrangements or that any such financing would be available
to Semiconductor on acceptable terms, or at all. If Semiconductor were not able
on a timely basis to obtain additional manufacturing capacity, its business and
results of operations would be materially and adversely affected.

Semiconductor sources its integrated circuit products from Matsushita
Electronics Corporation, United Microelectronics Corporation, Taiwan
Semiconductor Manufacturing Co., Ltd. and Yamaha. This dependence on a small
number of foundries subjects Semiconductor to risks associated with an
interruption in supply from these foundries. In connection with the manufacture
of its newer products, Semiconductor needs to continue to evaluate and qualify
additional foundries that employ advanced manufacturing and process
technologies, which are currently available from a limited number of foundries.
For example, certain of the new products that Semiconductor intends to introduce
require advanced process technology. Semiconductor has in the past experienced
increased costs and delays in connection with the qualification of new
foundries. There can be no assurance that any delays, cost increases or quality
problems resulting from the qualification of new foundries will not have a
material adverse effect on Semiconductor's business and results of operations.

Semiconductor's reliance on subcontractors to manufacture and assemble its
products involves significant risks, including reduced control over delivery
schedules, quality assurance, manufacturing yields and cost; the potential lack
of adequate capacity and potential misappropriation of Semiconductor
intellectual property. Semiconductor obtains manufacturing capacity through
forecasts that are generated in advance of expected delivery dates.
Semiconductor's ability to obtain the manufacturing capacity necessary to meet
the future demand for its products is based on its ability to accurately
forecast such future demand. If Semiconductor fails to accurately forecast such
future demand, Semiconductor may be unable to timely obtain an adequate supply
of chips necessary to manufacture the number of products required to satisfy the
actual demand. There can be no assurance that Semiconductor will continue to
accurately forecast the future demand for its products and obtain sufficient
manufacturing capacity in the future.

Semiconductor has from time-to-time experienced disruptions in supply,
although none of those disruptions have to date materially adversely affected
results. There can be no assurance that chip fabrication or assembly problems
will not occur in the future or that any such disruptions will not have a
material adverse effect upon Semiconductor's results of operations. Further,
there can be no assurance that suppliers who have committed to provide product
will do so, or that Semiconductor will meet all conditions imposed by such
suppliers. Failure to obtain an adequate supply of products on a timely basis
would delay product delivery to Semiconductor's customers, which would have a
material adverse effect on

29
<PAGE> 31

Semiconductor's business and results of operations. In addition, Semiconductor's
business could also be materially and adversely affected if the operations of
any supplier are interrupted for a substantial period of time, or if
Semiconductor is required, as a result of capacity constraints in the
semiconductor industry or otherwise, to increase the proportion of chips or
finished goods purchased from higher cost suppliers in order to obtain adequate
product volumes.

The markets into which Semiconductor sells its products are subject to
extreme price competition. Thus, Semiconductor expects to continue to experience
declines in the selling prices of its products over the life cycle of each
product. In order to offset or partially offset declines in the selling prices
of its products, Semiconductor must continue to reduce the costs of products
through product design changes, manufacturing process changes, volume discounts,
yield improvements and other savings negotiated with its manufacturing
subcontractors. Since Semiconductor does not operate its own manufacturing
facilities and must make volume commitments to subcontractors at prices that
remain fixed over certain periods of time, it may not be able to reduce its
costs as rapidly as its competitors who perform their own manufacturing. The
failure of Semiconductor to design and introduce, in a timely manner, lower cost
versions of existing products or new products with higher gross margins, or to
successfully manage its manufacturing subcontractor relationships would have a
material adverse effect on Semiconductor's gross margins.

COMPETITION

The markets in which Semiconductor competes are intensely competitive and
are characterized by declining average selling prices and rapid technology
change. Semiconductor believes that it competes favorably in the areas of
product definition, system cost, functionality, time-to-market, reliability and
reputation. Semiconductor competes with major domestic and international
companies, most of which have substantially greater financial and other
resources than Semiconductor with which to pursue engineering, manufacturing,
marketing and distribution of their products. Some of these companies own
proprietary video compression technology competitive with Semiconductor's
standards-based systems.

In the market for consumer electronics semiconductors, principal
competitors include ESS Technology, ST-Microelectronics and Zoran, as well as
several large, integrated Japanese and Korean consumer electronics companies,
such as Sony and MEC, which have their own semiconductor design and
manufacturing capacity. In the computer segment of the consumer electronics
market, principal Semiconductor competitors include the increasingly powerful
general-purpose microprocessors that are now available from, among others,
Intel, AMD and Motorola, as well as hardware solutions from Zoran and IBM.
Graphics chip manufacturers such as ATI, S3 and Trident are also potential
competitors. In the market for communications decoders, Semiconductor's
principal competitors include ST-Microelectronics and Philips.

IBM is the principal competitor in the broadcast encoder market, while Sony
is the principal competitor in the consumer encoder market. Semiconductor
expects that other companies will introduce competing encoder products in the
future. Although the timing of the production availability of such encoders is
uncertain, their availability could have an adverse impact on Semiconductor's
encoder product revenues and margins. Semiconductor may also face increased
competition in the future from new entrants into its markets. As the markets for
Semiconductor's products develop, competition from large semiconductor
companies, such as ST-Microelectronics and Philips, and from vertically
integrated companies such as Sony, MEC, Toshiba and NEC, may increase
significantly. If Semiconductor can offer low-cost hardware solutions, then it
may continue to compete with manufacturers of general-purpose microprocessors
such as Intel, AMD and Motorola in conjunction with software solutions. The
ability of Semiconductor to compete successfully in the rapidly evolving markets
for high-performance video compression technology depends on factors both within
and outside of its control, including success in designing and subcontracting
the manufacture of new products that implement new technologies, adequate
sources of raw materials, protection of Semiconductor products by effective
utilization of intellectual property laws, product quality, reliability, price
and the efficiency of production, the pace at which customers incorporate
Semiconductor's integrated circuits into their products or technologies, success
of

30
<PAGE> 32

competitors' products and general economic conditions. There can be no assurance
that Semiconductor will be able to compete successfully in the future.

A variety of other hardware and software solutions to digital video
compression have been introduced. Competitor companies are designing products
around these and other alternative approaches. In addition, manufacturers of
general-purpose microprocessors, such as Intel, AMD and Motorola and graphics
chip manufacturers are positioning their products as offering digital video
compression capability. There can be no assurance that system manufacturers will
not use such processors for video compression applications. While MPEG has
become the accepted standard, any of the alternative approaches, individually or
collectively, could be adopted on a widespread basis in the emerging video
compression market. If this were to happen, Semiconductor's business and results
of operations would be materially and adversely affected.

INTELLECTUAL PROPERTY AND LICENSES

Semiconductor attempts to protect its technology through a combination of
patents, copyrights, trade secret laws, confidentiality procedures and licensing
arrangements. As of September 30, 1999, Semiconductor had 59 issued United
States patents and 43 U.S. patent applications pending and has filed certain
corresponding applications in certain foreign jurisdictions. These patents
expire at various times from 2010 to 2016. Semiconductor intends to continue to
seek patents on its technology where appropriate. Notwithstanding its patent
position, Semiconductor believes that, in view of the rapid pace of
technological change in the semiconductor industry, the technical experience and
creative skills of its engineers and other personnel are the most important
factors in determining Semiconductor's future technological success.

There can be no assurance that patents will issue from any pending
applications or that any claims allowed from existing or pending patents will be
sufficiently broad to protect Semiconductor's technology. While Semiconductor
intends to protect its intellectual property rights vigorously, there can be no
assurance that any patents held by Semiconductor will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to Semiconductor. Moreover, while Semiconductor holds or
has applied for patents relating to the design of its products, Semiconductor's
products are based in part on standards, including MPEG-1, MPEG-2 and joint
photographic experts group, and Semiconductor does not hold patents or other
intellectual property rights for such standards. The semiconductor industry is
characterized by frequent litigation regarding patent and other intellectual
property rights.

From time-to-time Semiconductor receives notices of potential infringement
of third-party rights and there can be no assurance that third parties will not
assert claims against Semiconductor 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 including third-party technology which is or may
be embodied in standards. In the event of litigation to determine the validity
of any third-party claims, such litigation could result in significant expense
to Semiconductor and divert the efforts of Semiconductor's technical and
management personnel, whether or not such litigation is determined in favor of
Semiconductor. In the event of an adverse result in any such litigation,
Semiconductor could be required to pay substantial amounts in damages and to
cease selling the infringing product unless and until Semiconductor is able to
develop non-infringing technology or to obtain licenses to the technology which
was the subject of the litigation. There can be no assurance that Semiconductor
would be successful in such development or that such licenses would be
available, and any such development or license could require expenditure of
substantial time and other resources.

In order to defray the cost of developing its products and to develop
products with specifications meeting customer requirements, Semiconductor has
established development relationships with certain companies. Under these
arrangements, these companies provided Semiconductor with development funding
and/or technical assistance, and participated with Semiconductor in determining
the specifications for the performance requirements of various products. As a
result of these relationships, Semiconductor believes it has been able to more
rapidly introduce products meeting the demands of these as well as other
customers for similar

31
<PAGE> 33

applications. In certain cases, as consideration for such development
assistance, Semiconductor has agreed to pay royalties to such customers and
generally Semiconductor retains ownership of such products.

EMPLOYEES

As of September 30, 1999, Semiconductor had approximately 603 employees,
286 of whom are engaged in, or directly support, Semiconductor's research and
development, 189 of whom are in sales and marketing, 36 of whom are in
operations and 92 of whom are in administration. Semiconductor's employees are
not represented by any collective bargaining agreement, and Semiconductor has
never experienced a work stoppage. Semiconductor believes its employee relations
are good.

Semiconductor's future success is heavily dependent upon its ability to
hire and retain qualified technical, marketing and management personnel. The
loss of the services of key personnel could have a material adverse effect on
Semiconductor's business. Semiconductor is currently seeking certain additional
engineering, marketing and management personnel. Semiconductor's success in the
future will depend in part on the successful assimilation of such new personnel.
Semiconductor also obtains assistance from customers whose engineers participate
in development programs at Semiconductor. The continuing availability of such
support is dependent upon a number of factors, including relationships with
customers and the ability of such engineers, many of whom are foreign residents,
to obtain immigration visas. The competition for such personnel, particularly
for engineering personnel, is intense and the loss of such personnel could have
a material adverse effect on Semiconductor.

MERGERS AND ACQUISITIONS

On August 28, 1996, C-Cube Microsystems acquired the DiviCom business.
C-Cube Microsystems paid $65.7 million in cash, issued 2.3 million shares of its
common stock, assumed options exercisable for 264,000 shares of its common stock
and incurred $1.35 million in other costs in exchange for the outstanding shares
of DiviCom stock that C-Cube Microsystems did not already own.

C-Cube Microsystems has entered into an agreement to merge with Harmonic
Inc. after the distribution. The effect of the proposed merger is the
acquisition of C-Cube Microsystems' DiviCom systems business by Harmonic.

PROPERTIES

Semiconductor's principal facilities consist of approximately 182,300
square feet of space in three buildings located in Milpitas, California. This
space is leased pursuant to three agreements that expire on various dates
through April 14, 2005. Semiconductor believes its existing facilities and other
available facilities will be adequate to meet its requirements for at least the
next 12 months.

LEGAL PROCEEDINGS

From time-to-time Semiconductor is party to certain litigation or legal
claims. Management has reviewed all pending legal matters and believes that the
resolution of such matters will not have a significant adverse effect on
Semiconductor's financial position or results of operations.

32
<PAGE> 34

WHERE YOU CAN FIND MORE INFORMATION

As a result of the distribution, the Securities Exchange Act of 1934,
requires Semiconductor to file annual, quarterly and other reports with the
Securities and Exchange Commission. Semiconductor intends to provide annual
reports containing audited financial statements to its stockholders in
connection with its annual meetings of stockholders.

Semiconductor filed with the Securities and Exchange Commission a
registration statement, which includes certain exhibits, under the Exchange Act,
for the securities issued pursuant to this information statement. This
information statement contains general information about the contents of
contracts and other documents filed as exhibits to the registration statement.
However, this information statement does not contain all of the information set
forth in the registration statement and the exhibits filed with the registration
statement. You should read the registration statement and the exhibits for
further information about Semiconductor and the distribution.

The SEC allows Semiconductor to "incorporate by reference" information into
this joint proxy statement/prospectus/information statement, which means that
important information may be disclosed to you by referring you to another
document filed separately with the SEC. The information of Semiconductor
incorporated by reference is deemed to be part of this joint proxy
statement/prospectus/information statement, except for information superseded by
information in, or incorporated by reference in, this joint proxy
statement/prospectus/information statement. This joint proxy
statement/prospectus/information statement incorporates by reference the
documents set forth below that have been previously filed with the SEC. The
following documents contain important information about Semiconductor and its
financial condition and operating results and are hereby incorporated by
reference:

- C-Cube Microsystems' Annual Report on Form 10-K for the year ended
December 31, 1998;

- C-Cube Microsystems' Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1999;

- C-Cube Microsystems' Annual Report Pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, filed on Form 11-K with the
SEC on July 14, 1999;

- C-Cube Microsystems' Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 1999;

- C-Cube Microsystems' Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1999; and

- C-Cube Microsystems's Current Report on Form 8-K dated October 29, 1999.

Semiconductor has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus/information statement
relating to Semiconductor.

If you would like to request documents from either company, please do so by
March 21, 2000, to receive them before the special meeting.

You should rely only on the information in this document or to which we
have referred you. We have not authorized anyone to provide you with information
that is different. If you are in a jurisdiction where offers to exchange or
sell, or solicitations of offers to exchange or purchase, the securities offered
by this document or the solicitation of proxies is unlawful, or if you are a
person to whom it is unlawful to direct these types of activities, then the
offer presented in this document does not extend to you. The information
contained in this document speaks only as of the date of this document unless
the information specifically indicates that another date applies.

You may read and copy the registration statement and other materials that
Semiconductor files with the Securities and Exchange Commission at the Public
Reference Room of the Securities and Exchange Commission, 450 Fifth Street,
Washington, D.C. 20549 and at the Securities and Exchange Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies
of these documents, upon payment of a duplication fee, by writing to the
Securities and Exchange Commission's Public Reference Section. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the Public Reference Rooms. The Securities and Exchange
Commission filings of Semiconductor are also available to the public on the
Securities and Exchange Commission Internet site (http://www.sec.gov).

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<PAGE> 35

SELECTED FINANCIAL DATA

The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 have been derived from the audited
consolidated financial statements of the Company included herein. The
consolidated statements of income for the nine month periods ended September 30,
1999 and 1998 and consolidated balance sheet at September 30, 1999 are derived
from the unaudited consolidated financial statements included herein. The
selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this report.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
1998 1997 1996 1995 1994 1999 1998
-------- -------- -------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product.............................................. $351,797 $337,012 $319,758 $123,190 $42,026 $291,922 $255,997
Development contracts................................ -- -- -- 1,412 2,993 -- --
-------- -------- -------- -------- ------- -------- --------
Total.............................................. 351,797 337,012 319,758 124,602 45,019 291,922 255,997
-------- -------- -------- -------- ------- -------- --------
Costs and expenses:
Cost of product revenues............................. 160,839 151,333 144,985 59,253 19,574 130,947 116,768
Research and development............................. 74,031 64,204 44,177 14,342 9,774 61,659 55,134
Selling, general and administrative.................. 60,512 52,732 39,002 19,227 11,283 50,677 43,756
Purchased in-process technology...................... -- -- 131,349 3,800 -- -- --
-------- -------- -------- -------- ------- -------- --------
Total.............................................. 295,382 268,269 359,513 96,622 40,631 243,283 215,658
-------- -------- -------- -------- ------- -------- --------
Income (loss) from operations......................... 56,415 68,743 (39,755) 27,980 4,388 48,639 40,339
Interest income (expense), net........................ 4,239 (1,757) (28) 2,059 689 7,084 2,547
-------- -------- -------- -------- ------- -------- --------
Income (loss) before income taxes, minority Interest
and extraordinary item............................... 60,654 66,986 (39,783) 30,039 5,077 55,723 42,886
Income tax expense.................................... 18,196 22,895 32,944 4,933 69 16,717 12,869
-------- -------- -------- -------- ------- -------- --------
Income (loss)before minority interest and
Extraordinary item................................... 42,458 44,091 (72,727) 25,106 5,008 39,006 30,017
Minority interest in net income (loss) of
subsidiary........................................... (337) (248) 318 211 -- 381 (354)
-------- -------- -------- -------- ------- -------- --------
Income (loss) before extraordinary item............... 42,795 44,339 (73,045) 24,895 5,008 38,625 30,371
Extraordinary gain on repurchase of convertible notes
(net of tax)......................................... 3,494 -- -- -- -- 33 3,494
-------- -------- -------- -------- ------- -------- --------
Net income (loss)..................................... $ 46,289 $ 44,339 $(73,045) $ 24,895 $ 5,008 $ 38,658 $ 33,865
======== ======== ======== ======== ======= ======== ========
Basic earnings (loss)per share:(1)
Income (loss) before extraordinary item.............. $ 1.14 $ 1.21 $ (2.15) $ 0.78 $ 0.18 $ 0.98 $ 0.82
Extraordinary item (net of tax)...................... 0.09 -- -- -- -- -- 0.09
-------- -------- -------- -------- ------- -------- --------
Net income (loss).................................... $ 1.24 $ 1.21 $ (2.15) $ 0.78 $ 0.18 $ 0.98 $ 0.91
======== ======== ======== ======== ======= ======== ========
Diluted earnings (loss) per share:(1)
Income (loss) before extraordinary item.............. $ 1.11 $ 1.15 $ (2.15) $ 0.74 $ 0.16 $ 0.91 $ 0.79
Extraordinary item (net of tax)...................... 0.09 -- -- -- -- -- 0.09
-------- -------- -------- -------- ------- -------- --------
Net income (loss).................................... $ 1.19 $ 1.15 $ (2.15) $ 0.74 $ 0.16 $ 0.91 $ 0.88
======== ======== ======== ======== ======= ======== ========
Shares:(1)
Basic................................................ 37,382 36,497 33,928 31,819 28,248 39,368 37,215
======== ======== ======== ======== ======= ======== ========
Diluted.............................................. 40,754 41,683 33,928 35,000 31,433 43,224 40,769
======== ======== ======== ======== ======= ======== ========
PRODUCT GROSS MARGIN DATA:
Net product revenues................................. $351,797 $337,012 $319,758 $123,190 $42,026 $291,922 $255,997
Cost of product revenues............................. 160,839 151,333 144,985 59,253 19,574 130,947 116,768
-------- -------- -------- -------- ------- -------- --------
Product gross margin................................. $190,958 $185,679 $174,573 $ 63,937 $22,452 $160,975 $139,229
======== ======== ======== ======== ======= ======== ========
Product gross margin percentage...................... 54.3% 55.1% 54.6% 51.9% 53.4% 55.1% 54.4%
======== ======== ======== ======== ======= ======== ========
BALANCE SHEET DATA:
Cash and short-term investments...................... $207,827 $166,350 $ 82,246 $144,089 $43,833 $277,373
Working capital...................................... 220,466 208,391 124,487 158,577 48,751 303,811
Total assets......................................... 343,171 304,108 279,515 203,526 67,862 424,967
Short-term debt and current portion of long-term
obligations........................................ 355 608 25,337 3,093 6,908 368
Long-term obligations, net of current portion........ 23,557 87,462 87,700 88,010 2,081 20,150
Stockholders' equity................................. 243,375 175,415 118,572 87,535 53,488 327,560
</TABLE>

- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income (loss) per share.

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<PAGE> 36

MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW AND BASIS OF PRESENTATION

While the legal structure of the transaction pursuant to which this
information statement is being filed is an internal restructuring and spin-off
of the semiconductor business and a merger of C-Cube Microsystems, which as
restructured, will consist of the DiviCom business, into Harmonic, for
accounting purposes the merger is being treated as a distribution of DiviCom's
net investment and Semiconductor is being treated as the continuing accounting
entity. This is primarily due to the fact that (i) the historical assets,
revenue, profits and employees of C-Cube Semiconductor, Inc. have been greater
than those of DiviCom, (ii) the corporate management of C-Cube Microsystems will
remain employees of Semiconductor, and (iii) the C-Cube Microsystems
stockholders will receive common stock representing approximately 44% ownership
interest in Harmonic in the merger. Accordingly, the historical financial
information required by the Form 10 is substantially identical to the historical
financial information presented in C-Cube Microsystems' Forms 10-K and 10-Q and
the Management's Discussion and Analysis as presented below is substantially
identical to that in C-Cube Microsystems' Form 10-Q filed for the quarter ended
September 30, 1999 and 10-K filed for the fiscal year ended December 31, 1998
which reflect the historical consolidated operations of Semiconductor and the
DiviCom business.

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E if the Securities
Exchange of Act of 1934. The forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements as a result of certain factors, including those
set forth below, those described elsewhere in this report and those described in
other reports filed pursuant to the Securities Exchange Act of 1934. Such
forward-looking statements include, but are not limited to those statements
marked with an (*) in this report.

QUARTER ENDED SEPTEMBER 30, 1999

The following table sets forth certain operating data as a percentage of
net revenues for the quarters ended September 30, 1999 and 1998:

<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Net revenues................................................ 100.0% 100.0%
Costs and expenses:
Cost of revenues.......................................... 44.6 45.0
Research and development.................................. 20.8 21.9
Selling, general and administrative....................... 17.2 17.6
----- -----
Total............................................. 82.6 84.5
----- -----
Income from operations...................................... 17.4 15.5
Other income, net........................................... 2.6 1.9
----- -----
Income before income taxes, minority interest and
extraordinary item........................................ 20.0 17.4
Income tax expense.......................................... 6.0 5.2
----- -----
Income before minority interest and extraordinary item...... 14.0 12.2
Minority interest in net income of subsidiary............... 0.1 (0.2)
----- -----
Income before extraordinary item............................ 13.8 12.4
Extraordinary gain (net of tax)............................. -- 2.7
----- -----
Net income.................................................. 13.8% 15.1%
===== =====
</TABLE>

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<PAGE> 37

Merger

On October 27, 1999, C-Cube Microsystems entered into an Agreement and Plan
of Merger and Reorganization with Harmonic Inc., a Delaware corporation
("Harmonic"), pursuant to which, subsequent to the sale or spin-off of C-Cube
Microsystems' semiconductor business, C-Cube Microsystems has agreed to merge
with and into Harmonic (the "Merger"). The Merger will be effected through the
issuance of 0.5427 shares of Harmonic stock for each share of common stock of
C-Cube Microsystems outstanding immediately prior to the consummation of the
Merger. The merger is subject to the approval of the stockholders of each
company, customary closing conditions, including applicable regulatory
clearances, and the spin-off or sale of the semiconductor business. The closing
is anticipated to take place during Q1 2000.* C-Cube Microsystems expects to
incur additional costs during the fourth quarter of 1999 and the first quarter
of 2000 for legal, accounting and other costs related to the Merger.* Readers
are referred to C-Cube Microsystems' Form 8-K filed with the SEC on October 29,
1999 for more information.

Net Revenues

Net revenues in the third quarter of 1999 were $101.4 million, an increase
of 17.6% over the $86.2 million reported in the corresponding quarter a year
ago. This increase was led by growth in sales of DiviCom's encoder products,
primarily attributable to existing customer upgrades to next generation
products, contract wins in the cable and satellite markets, and higher selling
prices on next generation products due to design improvements and feature and
quality enhancements. The growth in revenues was also attributable to increased
Semiconductor revenues, primarily from increased volumes of DVD decoder chips
used in consumer applications and from increased volumes of codecs for nonlinear
editing and video server applications. These increases were partially offset by
decreases in revenues of VideoCD and Chaoji VCD decoder chips primarily due to
declines in average selling prices.

DiviCom revenues accounted for 48% of consolidated net revenues for the
third quarter of 1999, compared to 44% for the third quarter of 1998. DiviCom
integrates solutions for customers which involve its own and third party
products, with the integrations usually occurring over a number of months.
Difficulty in completing the stages of these integrations on the expected
schedule can adversely affect the timing of revenue recognition.

International revenues accounted for 58% of net revenues for the third
quarter of 1999, compared to 56% for the third quarter of 1998. C-Cube
Microsystems expects that international revenues will continue to represent a
significant portion of net revenues.* C-Cube Microsystems' success will depend
in part upon its ability to manage international marketing and sales operations.
In addition, C-Cube Microsystems purchases a substantial portion of its
manufacturing services from foreign suppliers. The earthquake in Taiwan during
the third quarter of 1999 caused minimal chip damage at C-Cube Microsystems'
manufacturing facilities, but resulted in temporary production delays at such
facilities. As a result, chip production capacity during the fourth quarter of
1999 is anticipated to be constrained; however, C-Cube Microsystems is working
with its existing partner, Taiwan Semiconductor Manufacturing Co., Ltd., with
whom C-Cube Microsystems has a capacity agreement, to assure supply of product
for the next several years.* In addition, C-Cube Microsystems has expanded its
source of supplies by signing a production capacity agreement for a term of up
to three years, with another foundry, United Microelectronics Corporation,
during the fourth quarter of 1999.

C-Cube Microsystems' international manufacturing and sales are subject to
changes in foreign political and economic conditions and to other risks
including currency or export/import controls, changes in tax laws, tariffs and
freight rates and changes in the ownership and/or leadership of international
customers that may result in delayed or canceled orders. For example, China
continues to be a large market for VideoCD and Chaoji VCD players utilizing
C-Cube Microsystems' decoder products. As a consequence, any political or
economic instability in China could significantly reduce demand for those
products. C-Cube Microsystems has made investments in chip manufacturing
capacity in Taiwan and is subject to the risk of political instability in
Taiwan, including but not limited to the potential for conflict between Taiwan
and the People's Republic of China. C-Cube Microsystems sells products to
customers in Korea and is subject to the risk of economic and political
instability in Korea, including the potential for

36
<PAGE> 38

conflict between North and South Korea. In addition, C-Cube Microsystems sells
certain of its products in international markets and buys certain products from
its chip manufacturing facilities in currencies other than the U.S. dollar and,
as a result, currency fluctuations could have a material adverse effect on
C-Cube Microsystems' business and results of operations. C-Cube Microsystems
mitigates this risk through the use of foreign currency hedges for transactions
denominated in foreign currencies. However, with respect to international sales
that are denominated in U.S. dollars, increases in the value of the U.S. dollar
relative to foreign currencies can increase the effective price of and reduce
demand for C-Cube Microsystems' products relative to competitive products priced
in the local currency. The United States has considered trade sanctions against
Japan and has had disputes with China relating to trade and human rights issues.
If trade sanctions were imposed, Japan or China could enact trade sanctions in
response. Because a number of the Company's current and prospective customers
and suppliers are located in Japan and China, trade sanctions, if imposed, could
have a material adverse effect on C-Cube Microsystems' business and results of
operations. Similarly, protectionist trade legislation in either the United
States or foreign countries could have a material adverse effect on C-Cube
Microsystems' ability to manufacture or sell its products in foreign markets.

The Asian markets accounted for approximately 43% of total sales in the
third quarter of 1999 and are expected to continue to account for a substantial,
though declining, percentage of sales in the future.* In the third quarter of
1999, most of C-Cube Microsystems' sales in Asia were of DVD, VideoCD and Chaoji
decoder chips. There can be no assurance that C-Cube Microsystems will not
experience reduced sales of its semiconductor products into Asia because of
declining consumer spending or because of its customers' increasing difficulty
in obtaining letters of credit, which C-Cube Microsystems generally requires
prior to shipment into that region.

Gross Margin

C-Cube Microsystems' gross margin for the third quarter of 1999 was 55.4%
compared to a gross margin of 55.0% for the same period in the prior year. This
moderate improvement was primarily due to a reduction in product transition
costs and a moderate improvement in DiviCom product margins over the third
quarter of 1998. While the selling prices for semiconductor products have
generally declined from the prior year quarter, C-Cube Microsystems was able to
offset the related impact on gross margin by realizing operating efficiencies,
including reduced material costs, refinement of its semiconductor fabrication
process and the reduction of outside manufacturing costs.

DiviCom's business involves transactions which can vary substantially in
the portions of DiviCom manufactured products, third party products and services
included. These variations can cause substantial differences in gross margin
from one contract to another. DiviCom has a number of competitors which are
divisions of larger corporations. Such corporations may decide from time-to-time
to aggressively lower prices of products that compete with DiviCom in order to
sell related products or achieve strategic goals. Such "strategic pricing" by
competitors can place strong pricing pressure on DiviCom products in certain
transactions, resulting in lower selling prices and gross margins for those
transactions.

The markets into which C-Cube Microsystems sells its semiconductor products
are subject to extreme price competition. Thus, C-Cube Microsystems expects to
continue to experience declines in the selling prices of its semiconductor
products over the life cycle of each product.* In particular, C-Cube
Microsystems expects to continue to experience significant price competition in
the markets for decoder chips.* In order to offset or partially offset declines
in the selling prices of its products, C-Cube Microsystems must continue to
reduce the costs of products through product design changes, manufacturing
process changes, volume discounts, yield improvements and other savings
negotiated with its manufacturing subcontractors. Since C-Cube Microsystems does
not believe that it can continually achieve cost reductions which fully offset
the price declines of its products, it expects gross margin percentages to
decline for existing products over their life cycles.*

C-Cube Microsystems does not operate its own manufacturing facilities and
must make volume commitments to subcontractors at prices that remain fixed over
certain periods of time. Therefore, it may

37
<PAGE> 39

not be able to reduce its costs as rapidly as its competitors who perform their
own manufacturing. Failure of C-Cube Microsystems to design and introduce in a
timely manner lower cost versions of existing products or higher gross margin
new products, or to successfully manage its manufacturing subcontractor
relationships, would have a material adverse effect on C-Cube Microsystems'
gross margins. C-Cube Microsystems anticipates production capacity at its chip
manufacturing facilities to be constrained during the fourth quarter of 1999 and
the first quarter of 2000 due to production delays caused by the earthquake in
Taiwan, which occurred during the third quarter of 1999, and due to higher
projected industry demand for semiconductor products causing a reduction of
available capacity.* As a result, product costs may increase at a rate faster
than C-Cube Microsystems can offset those increases with other cost-saving
measures, which could adversely affect gross margins for semiconductor products
during those periods.*

Research and Development Expenses

In the third quarter of 1999, research and development expenses were $21.1
million, or 20.8% of net revenues, compared with $18.9 million, or 21.9% of net
revenues in the third quarter of 1998. The increase in research and development
expenses primarily represents additional employee-related costs associated with
increases in product engineering staff, reflecting C-Cube Microsystems'
continuing efforts to provide industry leading digital video solutions at the
chip and systems levels.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $17.5 million, or
17.2% of net revenues, in the third quarter of 1999, compared to $15.2 million,
or 17.6% of net revenues, for the same quarter last year. The increase was
primarily due to increased headcount and related expenses, as C-Cube
Microsystems continues to increase its international coverage in sales and
marketing. The increase was also due to higher sales commission expense
resulting from the growth in revenues over the third quarter of 1998.

Other Income (Expense)

Other income, net of other expense, increased to $2.7 million for the third
quarter of 1999, compared to $1.6 million for the third quarter of 1998. The
increase over the prior year quarter is primarily due to higher interest income
earned on higher average cash and investment balances and lower interest expense
on lower average outstanding debt balances.

Income Tax Expense

C-Cube Microsystems' effective tax rate for the third quarters of 1999 and
1998 was 30%. C-Cube Microsystems' effective tax rate is less than the combined
federal and state statutory rate primarily due to tax credits and lower foreign
tax rates.

Extraordinary Item

During the third quarter of 1999, C-Cube Microsystems did not repurchase
any of the outstanding balance of its 5 7/8% Convertible Subordinated Notes (the
"Notes") due 2005. During the third quarter of 1998, C-Cube Microsystems
repurchased $42.8 million of the face value of the Notes at 88.4% of principal
amount, with related accrued interest to the date of repurchase, and recognized
an extraordinary gain of $2.4 million, or $0.06 per diluted share, net of
related income taxes of $1.6 million.

38
<PAGE> 40

NINE MONTHS ENDED SEPTEMBER 30, 1999

The following table sets forth certain operating data as a percentage of
net revenues for the nine months ended September 30, 1999 and 1998:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Net revenues................................................ 100.0% 100.0%
----- -----
Costs and expenses:
Cost of revenues.......................................... 44.9 45.6
Research and development.................................. 21.1 21.5
Selling, general and administrative....................... 17.4 17.1
----- -----
Total............................................. 83.3 84.2
----- -----
Income from operations...................................... 16.7 15.8
Other income, net........................................... 2.4 1.0
----- -----
Income before income taxes, minority interest and
extraordinary item........................................ 19.1 16.8
Income tax expense.......................................... 5.7 5.0
----- -----
Income before minority interest and extraordinary item...... 13.4 11.7
Minority interest in net income (loss) of Subsidiary........ 0.1 (0.1)
----- -----
Income before extraordinary item............................ 13.2 11.9
Extraordinary gain (net of tax)............................. -- 1.4
----- -----
Net income.................................................. 13.2% 13.2%
===== =====
</TABLE>

Production Capacity Rights

In the second quarter of 1996, C-Cube Microsystems expanded and formalized
its relationship with Taiwan Semiconductor Manufacturing Co., Ltd. to provide
additional chip production capacity in the years 1996 to 2001. The agreement
with Taiwan Semiconductor Manufacturing Co., Ltd. provided that Taiwan
Semiconductor Manufacturing Co., Ltd. would produce and ship chips to C-Cube
Microsystems at specified prices and required C-Cube Microsystems to make two
advance payments totaling $49 million. An advance payment of $24.5 million was
made in June 1996. In May 1997, C-Cube Microsystems amended its agreement with
Taiwan Semiconductor Manufacturing Co., Ltd. which resulted in a reduction of
C-Cube Microsystems' future chip purchase commitments and the forgiveness of the
second advance payment of $24.5 million. In January 1999, Taiwan Semiconductor
Manufacturing Co., Ltd. refunded $11.8 million of the advance payment to C-Cube
Microsystems. Taiwan Semiconductor Manufacturing Co., Ltd. will apply the
remaining prepayment against a portion of the chip cost as product is delivered
to C-Cube Microsystems. Accordingly, the prepaid amount, which has been
allocated between current and long-term assets, will be amortized to inventory
as chips are received.

Net Revenues

Net revenues for the nine months ended September 30, 1999 were $291.9
million, a 14.0% increase from $256.0 million in revenues during the nine month
period ending September 30, 1998. This increase was led by growth in sales of
DiviCom's encoder products, primarily attributable to existing customer upgrades
to next generation products, contract wins in the cable and satellite markets,
and higher selling prices on next generation products, due to design
improvements and feature and quality enhancements. Semiconductor revenues were
slightly higher than in the first nine months of 1998; however, the revenue
product mix changed significantly. Revenues from DVD decoder chips used in
consumer applications increased due to higher volume shipments, despite price
reductions resulting from increasing competition. Revenues from encoder and
codec chipsets for broadcast, non-linear editing and video server applications
increased due to higher volume shipments. These increases were largely offset by
a reduction in revenues from VideoCD decoder chips due to reduced shipments and
increased price competition.

39
<PAGE> 41

Gross Margin

C-Cube Microsystems' gross margin percentage increased to 55.1% in the nine
months ended September 30, 1999 from 54.4% in the nine month period in the prior
year. This increase was primarily the result of changes in product mix, as sales
of products with higher gross margins, including DiviCom encoders, DVD decoders
and digital set-top boxes, contributed more to revenues in the first nine months
of 1999 than the first nine months of 1998. While the selling prices for
semiconductor products have generally declined from the prior year, C-Cube
Microsystems was able to offset the related impact on gross margin by realizing
operating efficiencies, including reduced material costs, refinement of its
semiconductor fabrication process and the reduction of outside manufacturing
costs.

Research and Development Expenses

In the first nine months of 1999, research and development expenses were
$61.7 million or 21.1% of net revenues, as compared to $55.1 million, or 21.5%
of net revenues, for the same period in the prior year. The increase in research
and development expenses primarily represents additional employee-related costs
associated with increases in product engineering staff, reflecting C-Cube
Microsystems' continuing efforts to provide digital video solutions at the chip
and systems levels.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $50.7 million, or
17.4% of net revenues in the first nine months of 1999, as compared to $43.8
million, or 17.1% of net revenues for the same period in the prior year. The
increase was primarily due to increased headcount and related expenses, and also
due to higher sales commission expense resulting from the growth in revenues
over the first nine months of 1998.

Other Income (Expense)

Other income, net of other expense, was $7.1 million for the first nine
months of 1999, an increase from $2.5 million reported for the nine months ended
September 30, 1998. The increase is primarily due to higher interest income
earned on higher average cash and investment balances and lower interest expense
on lower average outstanding debt balances during the first nine months of 1999
compared to the same period last year.

Income Tax Expense

C-Cube Microsystems' effective tax rate for the nine months ended September
30, 1999 and 1998 was 30%. C-Cube Microsystems' effective tax rate is less than
the combined federal and state statutory rate primarily due to tax credits and
lower foreign tax rates.

Extraordinary Item

During the nine months ended September 30, 1999, C-Cube Microsystems
repurchased $3.4 million of the face value of C-Cube Microsystems' 5 7/8%
Convertible Subordinated Notes due 2005 at 95.5% of the principal amount, with
related accrued interest to the date of repurchase, and recognized an
extraordinary gain of approximately $33,000 (zero effect per diluted share), net
of related income taxes of approximately $23,000. During the nine months ended
September 30, 1998, C-Cube Microsystems repurchased $63.5 million of the face
value of the notes at 88.4% of the principal amount, with related accrued
interest to the date of repurchase, and recognized an extraordinary gain of $3.5
million, or $0.09 per diluted share, net of related taxes of $2.4 million.

FACTORS THAT MAY AFFECT FUTURE RESULTS

On October 27, 1999, C-Cube Microsystems entered into an Agreement and Plan
of Merger and Reorganization with Harmonic Inc., a Delaware corporation
("Harmonic"), pursuant to which, subsequent

40
<PAGE> 42

to the sale or spin-off of C-Cube Microsystems' semiconductor business, C-Cube
Microsystems has agreed to merge with and into Harmonic (the "Merger"). The
consummation of the Merger and the sale or spin-off of the semiconductor
business may have a material effect on C-Cube Microsystems' financial statements
taken as a whole, as the execution of these transactions may contribute to
C-Cube Microsystems' results differing from the investment community's
expectation in a given quarter. These activities may result in the cancellation
of orders and additional charges to earnings. The success of the merger between
C-Cube Microsystems and Harmonic may require, among other things, integration or
coordination with a different company culture, management team organization and
business infrastructure. It may also require the development, manufacture and
marketing of C-Cube Microsystems' product offerings with Harmonic's products in
a way that enhances the performance of the combined business or product line.
Successful integration of the companies depends on a variety of factors,
including the hiring and retention of key employees, management of
geographically separate facilities, and the integration or coordination of
different research and development and product manufacturing facilities. The
success of the semiconductor business may depend on a variety of factors,
including the hiring and retention of key employees and management team and
business infrastructure reorganization. All of these efforts require varying
levels of management resources, which may temporarily adversely impact business
operations.

C-Cube Microsystems' quarterly and annual operating results have been, and
will continue to be, affected by a wide variety of factors that could have a
material adverse effect on revenues and profitability during any particular
period, including the timing of revenue recognized under its systems contracts
and the level of orders which are received and can be shipped in a quarter, the
rescheduling or cancellation of orders by its customers, competitive pressures
on selling prices, changes in product or customer mix, availability and cost of
chip manufacturing capacity and raw materials, fluctuations in yield, loss of
any strategic relationships, C-Cube Microsystems' ability to introduce new
products and technologies on a timely basis, unanticipated problems in the
performance of C-Cube Microsystems' next generation or cost-reduced products,
the ability to successfully introduce products in accordance with original
equipment manufacturer design requirements and design cycles, new product
introductions by C-Cube Microsystems' competitors, market acceptance of products
of both C-Cube Microsystems and its customers, compatibility of new products
with emerging digital video standards, purchase commitments for customized
components procured in advance of anticipated systems contracts, supply
constraints for other components incorporated into its customers' products,
credit risk for international customers not using letters of credit,
fluctuations in foreign currency exchange rates to the U.S. dollar, the level of
expenditures in manufacturing, research and development, and sales, general and
administrative functions, and a recent trend of mergers and acquisitions
creating larger competitors which may have established market share or greater
financial or technical resources than C-Cube Microsystems.*

In the second half of 2000, Semiconductor expects to derive significant
revenue from its next generation DVD decoder products.* There can be no
assurance that these products will be successfully developed or will achieve
market acceptance. The failure of any of these products to be successfully
introduced and achieve market acceptance could have a material adverse effect on
Semiconductor's business and results of operations.

In addition, C-Cube Microsystems' operating results are subject to
fluctuations in the markets for its customers' products, particularly the
consumer electronics and personal computer markets, which have been extremely
volatile in the past, and the digital satellite broadcast, cable and wireless
cable markets, which are in an early stage, creating uncertainty with respect to
product volume and timing. To the extent C-Cube Microsystems is unable to
fulfill its customers' purchase orders on a timely basis, these orders may be
canceled due to changes in demand in the markets for its customers' products.
Historically, C-Cube Microsystems has shipped a substantial portion of its
product in the last month of a given quarter. A significant portion of C-Cube
Microsystems' expenses are fixed in the short term, and the timing of increases
in expenses is based in large part on C-Cube Microsystems' forecast of future
revenues. As a result, if revenues do not meet C-Cube Microsystems'
expectations, it may be unable to quickly adjust expenses to levels appropriate
to actual revenues, which could have a material adverse effect on C-Cube
Microsystems' business and results of operations.

41
<PAGE> 43

C-Cube Microsystems' dependence on the Asian consumer electronics market
has started to decline, and C-Cube Microsystems believes it will either remain
stable or continue to decline in the future, as growth in the encoder, digital
satellite broadcast, non-linear editing, digital cable and wireless cable
markets generate larger contributions to revenues.* Nevertheless, the
substantial seasonality of sales in the consumer electronics market could impact
C-Cube Microsystems' revenues and net income. In particular, C-Cube Microsystems
believes that there may be seasonality in the Asia-Pacific region related to the
Chinese New Year, which falls within the first calendar quarter, which could
result in relatively lower product demand during the second and third quarters
of each year.* If in the future the geographic mix of C-Cube Microsystems' sales
shifts towards the U.S. and Europe, C-Cube Microsystems would anticipate higher
revenues and net income in the third and fourth calendar quarters as system
manufacturers in these regions make purchases in preparation for the holiday
season, and comparatively less revenues and net income in the first and second
calendar quarters.*

As a result of the foregoing, C-Cube Microsystems' operating results and
stock price may be subject to significant volatility, particularly on a
quarterly basis. Any shortfall in net revenues or net income from levels
expected by securities analysts could have an immediate and significant adverse
effect on the trading price of C-Cube Microsystems' common stock.

The market price of C-Cube Microsystems' common stock has fluctuated
significantly since its initial public offering in April 1994. The market price
of the common stock could be subject to significant fluctuations in the future
based on factors such as announcements of new products by C-Cube Microsystems or
its competitors, quarterly fluctuations in C-Cube Microsystems' financial
results, quarterly fluctuations in other semiconductor or digital video
networking companies' financial results, changes in analysts' estimates of
C-Cube Microsystems' financial performance, general conditions in the
semiconductor and digital video networking industries, conditions in the
financial markets and general conditions in the global economy which might
adversely affect consumer purchasing. In addition, the stock market in general
has experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many high technology companies and which have
often been unrelated to the operating performance of the specific companies. The
market price of C-Cube Microsystems' common stock has declined substantially
from its historic highs, and may continue to experience significant fluctuations
in the future.

Year 2000

The Company completed its Year 2000 project as scheduled, including
addressing leap year calendar date calculation concerns. As a result of these
efforts, to date the Company has experienced no significant problems with either
its own technology or that of its infrastructure providers. The Company
continues to monitor its products, business systems, infrastructure, and
manufacturing systems to ensure that latent defects do not manifest themselves
over the next few months. In addition, the Company continues to monitor the
impact of the Year 2000 on those suppliers and other third parties on whom the
Company is dependent for key raw materials, components, products, or services.
Contingency plans to manage all identified areas of perceived risk will remain
in place throughout 2000. Based upon information currently available, the
Company believes that its most reasonably likely worst case Year 2000 scenario
would relate to a temporary disruption in the supply of key raw materials,
components, products, or services resulting from problems with the systems and
services of third parties, rather than with its internal systems or products.
The costs incurred to date by the Company in connection with its Year 2000
project have not and are not expected to exceed $500,000.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $277.4 million at
September 30, 1999 compared to $207.8 million at the end of 1998. Working
capital increased to $303.8 million at September 30, 1999 from $220.5 million at
December 31, 1998.

42
<PAGE> 44

C-Cube Microsystems' operating activities generated cash of $50.5 million
in the nine months ended September 30, 1999, primarily from net income and a
refund of $11.8 million prepaid production capacity rights, partially offset by
a $23.8 million increase in accounts receivable. Receivable days outstanding
increased from 35 days at December 31, 1998 to 54 days at September 30, 1999
primarily due to DiviCom's growing contribution to consolidated revenues, as a
substantial portion of DiviCom's revenues are generated under long-term
contracts which generally have longer payment terms than the semiconductor
business. During the fourth quarter of 1999, the Company signed a production
capacity agreement with United Microelectronics Corporation for which C-Cube
Microsystems paid a $20 million refundable deposit to United Microelectronics
Corporation during the first quarter of 2000.

C-Cube Microsystems' investing activities, exclusive of sales and
maturities of $188.6 million and purchases of $248.0 million of short-term
investments, used cash of $19.8 million, primarily for $17.1 million capital
expenditures.

Cash provided by financing activities was $37.3 million, primarily from
proceeds of $40.6 million from sales of stock pursuant to employee stock plans,
partially offset by $3.3 million used to repurchase a portion of C-Cube
Microsystems' Convertible Subordinated Notes.

At September 30, 1999, C-Cube Microsystems had an available bank line of
credit of $30.0 million which expires in May 2001. Borrowings bear interest at
LIBOR plus 1.25% or the bank's prime rate (8.25% at September 30, 1999). The
line of credit agreement requires that C-Cube Microsystems, among other things,
maintain a minimum tangible net worth, a minimum annual net income (no quarterly
loss exceeding $3 million) and certain financial ratios. In addition, this
agreement prohibits the payment of cash dividends. At September 30, 1999, C-Cube
Microsystems was in compliance with these covenants, and there were no
outstanding balances under this line.

Based on current plans and business conditions, C-Cube Microsystems expects
that its cash, cash equivalents and short-term investments together with any
amounts generated from operations and available borrowings, will be sufficient
to meet C-Cube Microsystems' cash requirements for at least the next 12 months.*
However, there can be no assurance that C-Cube Microsystems will not be required
to seek other financing sooner or that such financing, if required, will be
available on terms satisfactory to C-Cube Microsystems, or at all. In addition,
C-Cube Microsystems has considered and will continue to consider various
possible transactions with foundries to secure additional foundry capacity,
which could include, without limitation, equity investments, prepayments,
non-refundable deposits or loans in exchange for guaranteed capacity, "take or
pay" contracts that commit C-Cube Microsystems to purchase specified quantities
of chips over extended periods, joint ventures or other partnership
relationships.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Readers are referenced to "Part II, Item 7A. Quantitative and Qualitative
Disclosures about Market Risk", in the Company's most recent Annual Report on
Form 10-K, filed with the SEC on March 23, 1999, as there have been no material
changes since that filing.

43
<PAGE> 45

YEAR ENDED DECEMBER 31, 1998

The following table sets forth certain operating data for C-Cube
Microsystems as a percentage of net revenues for the years ended December 31,
1998, 1997 and 1996:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of product revenues.................................. 45.7 44.9 45.3
Research and development.................................. 21.0 19.1 13.8
Selling, general and administrative....................... 17.2 15.6 12.2
Purchased in-process technology........................... -- -- 41.1
----- ----- -----
Total............................................. 84.0 79.6 112.4
----- ----- -----
Income (loss) from operations............................... 16.0 20.4 (12.4)
Interest income (expense), net.............................. 1.2 (0.5) --
----- ----- -----
Income (loss) before income taxes, minority interest and
extraordinary item........................................ 17.2 19.9 (12.4)
Income tax expense.......................................... 5.2 6.8 10.3
----- ----- -----
Income (loss) before minority interest and extraordinary
item...................................................... 12.1 13.1 (22.7)
Minority interest in net income (loss) of subsidiary........ (0.1) (0.1) 0.1
----- ----- -----
Income (loss) before extraordinary item..................... 12.2 13.2 (22.8)
Extraordinary gain on repurchase of convertible notes (net
of tax)................................................... 1.0 -- --
----- ----- -----
Net income (loss)........................................... 13.2% 13.2% (22.8)%
===== ===== =====
</TABLE>

Acquisitions

On August 28, 1996, C-Cube Microsystems acquired DiviCom Inc., a digital
video networking company. C-Cube Microsystems paid $65.7 million in cash, issued
2.3 million shares of its common stock, assumed options exercisable for 264,000
shares of its common stock and incurred $1.35 million in other costs in exchange
for the outstanding shares of DiviCom stock that C-Cube Microsystems did not
already own. C-Cube Microsystems assumed net liabilities of $1.9 million,
purchased technology of $14.2 million, which will be amortized over five years,
and wrote off $131.3 million of in-process technology.

C-Cube Microsystems incurred acquisition-related charges of $133 million in
the third quarter of 1996, which included the in-process technology write-off
and bonuses paid to DiviCom employees.

The acquisition of DiviCom was accounted for as a purchase and therefore
DiviCom's financial results from the date of acquisition, August 28, 1996, are
included in C-Cube Microsystems' consolidated financial results.

Net Revenues

Net revenues increased 4.0% to $351.8 million in 1998 compared to $337.0
million in 1997. Revenue from C-Cube Microsystems' family of encoder products
increased due to growth in sales of communications products, which was led by
DiviCom and increased sales of C-Cube Microsystems' DVxpress and DVxpert
families of codecs. Revenue from MPEG-2 decoder chips used primarily in digital
set-top boxes and in DVD-ROMs on PCs increased from 1997 due to customers'
adoption of C-Cube Microsystems' AViA and ZiVA families of decoder chips and the
wider acceptance of the DVD format. C-Cube Microsystems also had sales from the
introduction of its Chaoji VCD decoder. These increases were partially offset by
a decrease in revenues from MPEG-1 decoder chips used in VideoCD players sold
primarily in China, due to price reductions made in response to competitive
pricing pressures, partially offset by an increase in unit volumes.

44
<PAGE> 46

In 1997, net revenues increased 5% to $337.0 million compared to $319.8
million in 1996. Revenue from C-Cube Microsystems' family of encoder products
increased primarily due to sales of encoder systems developed by DiviCom, which
was acquired in the third quarter of 1996. See "Acquisitions." C-Cube
Microsystems also began volume shipments of its MPEG-2 DVD decoder chips used
primarily in DVD-ROMs on PCs. Revenue from MPEG-1 decoder chips used in VideoCD
players which are sold primarily in China, decreased from the prior year due to
price reductions made in response to competition. The decreased prices for these
products were partially offset by an increase in unit volumes.

The sales returns allowance at December 31, 1998 was $13.1 million, up from
$6.7 million at December 31, 1997. During 1998, additions to the sales returns
allowance were $12.6 million and deductions were $6.2 million. The deductions to
the allowance were primarily due to price protection credits given to
distributors and other pricing adjustments. The allowance at December 31, 1998
is to cover price protection, pricing adjustments and stock rotation credits to
distributors.

The sales returns allowance at December 31, 1997 was $6.7 million, down
from $11.5 million at December 31, 1996. During 1997, additions to the sales
returns allowance were $3.3 million and deductions were $8.1 million. The
deductions to the allowance were primarily due to price protection credits given
to distributors in the first quarter of 1997 as C-Cube Microsystems
significantly reduced the selling prices of its MPEG-1 decoder chips in response
to competitive pressures.

During 1998, no individual customer accounted for 10% or more of net
revenues. Sales to Sinorex, a distributor, accounted for 20% and 12% of C-Cube
Microsystems' net revenues during 1997 and 1996, respectively.

International revenues accounted for 62%, 65% and 67% of net revenues in
1998, 1997 and 1996, respectively. International revenues were a significant
portion of total revenues primarily due to volume shipments of the CL480, CL680
and CL8800 families of products in Asia for VideoCD and Chaoji VCD players in
the consumer market. C-Cube Microsystems sells products and supports customers
internationally through subsidiaries in Hong Kong and Japan. C-Cube Microsystems
expects that international revenues will continue to represent a significant
portion of net revenues. C-Cube Microsystems' international sales and
manufacturing are subject to changes in foreign political and economic
conditions and to other risks, including fluctuations in foreign exchange rates,
export/import controls and changes in tax laws, tariffs and freight rates. See
"Item 1. Business -- International Business Activities."

Gross Margin

C-Cube Microsystems' gross margin percentage decreased to 54.3% in 1998
from 55.1% in 1997. This decrease is due primarily to higher product transition
costs and lower average selling prices partially offset by reduced product
material costs and a shift in product mix to higher margin encoder products.
C-Cube Microsystems has been able to reduce product material costs through the
negotiation of lower foundry chip prices, the adoption of finer geometry
fabrication processes and the redesign of products to reduce die size. C-Cube
Microsystems' gross margin percentage increased to 55.1% in 1997 from 54.6% in
1996. This improvement is due primarily to lower product transition costs,
reduced product costs and a shift in product mix to higher margin encoder
products.

The markets into which C-Cube Microsystems sells its products are subject
to extreme price competition. Thus, C-Cube Microsystems expects to continue to
experience declines in the selling prices of its products over the life cycle of
each product. In particular, C-Cube Microsystems expects to continue to
experience significant price competition in the markets for decoder chips. In
order to offset or partially offset declines in the selling prices of its
products, C-Cube Microsystems must continue to reduce the costs of products
through product design changes, manufacturing process changes, volume discounts,
yield improvements and other savings negotiated with its manufacturing
subcontractors. Since C-Cube Microsystems does not believe that it can
continually achieve cost reductions which fully offset the price declines of its
products, it expects gross margin percentages to decline for existing products
over their life cycles.

45
<PAGE> 47

C-Cube Microsystems does not operate its own manufacturing facilities and
must make volume commitments to subcontractors at prices that remain fixed over
certain periods of time. Therefore, C-Cube Microsystems may not be able to
reduce its costs as rapidly as its competitors who perform their own
manufacturing. Failure of C-Cube Microsystems to design and introduce, in a
timely manner, lower cost versions of existing products or new products with
higher gross margins, or to successfully manage its manufacturing subcontractor
relationships, would have a material adverse effect on C-Cube Microsystems'
gross margins.

Research and Development Expenses

In 1998, research and development expenses were $74.0 million or 21.0% of
net revenues, compared to $64.2 million or 19.1% of net revenues in 1997. The
increase in research and development expenses from the prior year is primarily
related to an increase in employee-related costs associated with increases in
product engineering staff, partially offset by decreases in start-up and
non-recurring engineering costs. In 1997, research and development expenses were
$64.2 million or 19.1% of net revenues, compared to $44.2 million or 13.8% of
net revenues in 1996. The increase in absolute research and development expenses
from the prior year primarily represents the inclusion of DiviCom's operations
for a full year in 1997, compared to the 1996 period subsequent to the August
28, 1996 date of acquisition. The increase over 1996 was also due to additional
employee-related costs associated with increased staffing, reflecting C-Cube
Microsystems' continuing efforts to provide industry leading digital video
solutions at the chip and systems levels. C-Cube Microsystems anticipates that
absolute levels of research and development expenses will continue to increase
in future periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $60.5 million or
17.2% of net revenues in 1998 compared to $52.7 million or 15.6% of net revenues
for 1997. The increase in absolute dollars was primarily due to increased
travel, staffing and related expenses partially offset by decreased commissions
to distributors. Selling, general and administrative expenses increased to $52.7
million or 15.6% of net revenues in 1997 compared to $39.0 million or 12.2% of
net revenues for 1996. The increase in spending was primarily due to the
inclusion of DiviCom's operations for a full year in 1997, compared to the 1996
period subsequent to the August 28, 1996 date of acquisition. The increase over
1996 was also due to increased headcount and related expenses, increased travel
costs and higher advertising costs. C-Cube Microsystems expects that absolute
levels of selling, general and administrative expenses will continue to increase
in future periods.

Other Income (Expense)

Interest income and other increased to $8.5 million in 1998 compared to
$4.3 million in 1997 primarily due to higher average balances of cash and
investments in 1998 compared to 1997. Interest income and other decreased to
$4.3 million in 1997 compared to $5.9 million in 1996 primarily due to lower
average balances in cash and investments in 1997 compared to 1996. Interest
expense and other decreased to $4.3 million in 1998 compared to $6.0 million in
1997 primarily due to lower average outstanding debt balances due to the
repurchase of a significant portion of C-Cube Microsystems' convertible
subordinated notes. Interest expense and other remained consistent at $6.0
million in 1997 and 1996 and consisted primarily of interest paid on the $86.3
million principal of convertible subordinated notes issued in the fourth quarter
of 1995.

Income Tax Expense

C-Cube Microsystems provided $18.2 million for income taxes in 1998 on
income before taxes, minority interest and extraordinary items of $60.7 million,
for an effective tax rate of 30%. In 1997, C-Cube Microsystems provided $22.9
million on income before taxes and minority interest of $67.0 million, for an
effective tax rate of 34%. In 1996, C-Cube Microsystems provided $32.9 million
on a loss before income taxes and minority interest of $39.8 million, as the
write-off of purchased in-process

46
<PAGE> 48

technology in 1996 was not tax deductible. The effective tax rate in 1996 was
36% excluding the 1996 purchased in-process technology charge. The effective tax
rates for 1998, 1997 and 1996 are less than the combined federal and state
statutory rate primarily due to tax credits and lower foreign taxes.

Extraordinary Item

During 1998, C-Cube Microsystems repurchased $63.5 million of the face
value of C-Cube Microsystems' 5.875% subordinated convertible notes due in 2005
at 88.4% of the principal amount, with accrued interest to the date of
repurchase. Upon repurchase of the notes, C-Cube Microsystems recognized
extraordinary gains of $3.5 million, or $0.09 per diluted share, net of related
income taxes of $2.4 million.

FACTORS THAT MAY AFFECT FUTURE RESULTS

C-Cube Microsystems' quarterly and annual operating results have been, and
will continue to be, affected by a wide variety of factors that could have a
material adverse effect on revenues and profitability during any particular
period, including the level of orders which are received and can be shipped in a
quarter, the rescheduling or cancellation of orders by its customers,
competitive pressures on selling prices, changes in product or customer mix,
availability and cost of foundry capacity and raw materials, fluctuations in
yield, loss of any strategic relationships, C-Cube Microsystems' ability to
introduce new products and technologies on a timely basis, unanticipated
problems in the performance of C-Cube Microsystems' next generation or
cost-reduced products, the ability to successfully introduce products in
accordance with original equipment manufacturer design requirements and design
cycles, new product introductions by C-Cube Microsystems' competitors, market
acceptance of products of both C-Cube Microsystems and its customers, supply
constraints for other components incorporated into its customers' products,
fluctuations in the Japanese yen and Great Britain pound to U.S. dollar exchange
rates, and the level of expenditures in manufacturing, research and development
and sales, general and administrative functions.

In addition, C-Cube Microsystems' operating results are subject to
fluctuations in the markets for its customers' products, particularly the
consumer electronics market, which has been extremely volatile in the past, and
the satellite broadcast and wireless cable markets, which are in an early stage,
creating uncertainty with respect to product volume and timing. C-Cube
Microsystems has devoted a substantial portion of its research and development
efforts in recent quarters to develop chips used in DVD systems. C-Cube
Microsystems' DVD products are subject to the new product risks described in the
preceding paragraph, including in particular C-Cube Microsystems' ability to
timely introduce these products and the market's acceptance of them, which could
have a materially adverse affect on its operating results. Furthermore, to the
extent C-Cube Microsystems is unable to fulfill its customers' purchase orders
on a timely basis, these orders may be canceled due to changes in demand in the
markets for its customers' products. Historically, C-Cube Microsystems has
generally shipped a substantial portion of its product in the last month of a
given quarter. A significant portion of C-Cube Microsystems' expenses are fixed
in the short term, and the timing of increases in expenses is based in large
part on C-Cube Microsystems' forecast of future revenues. As a result, if
revenues do not meet C-Cube Microsystems' expectations, it may be unable to
quickly adjust expenses to levels appropriate to actual revenues, which could
have a material adverse effect on C-Cube Microsystems' business and results of
operations.

Due to C-Cube Microsystems' dependence on the consumer electronics market,
the substantial seasonality of sales in that market could impact C-Cube
Microsystems' revenues and net income. In particular, C-Cube Microsystems
believes that there may be seasonality in the Asia-Pacific region related to the
Chinese New Year, which falls within the first calendar quarter, which could
result in relatively lower product demand from mid-first quarter until mid-third
quarter. If the future geographic mix of C-Cube Microsystems' sales shifts
towards the U.S. and Europe, C-Cube Microsystems would anticipate higher
revenues and net income in the third and fourth calendar quarters as system
manufacturers in these areas make purchases in preparation for the holiday
season, and comparatively less revenues and net income in the first and second
calendar quarters.

47
<PAGE> 49

The economic crisis in Asia has been characterized by increases in idle
production capacity, real estate vacancies, unemployment and bank failures, and
has resulted in currency devaluation, falling consumer spending and domestic
price deflation. Any of these factors could significantly reduce the demand for
the end user goods in which C-Cube Microsystems' products are used.

The market price of C-Cube Microsystems' common stock has fluctuated
significantly since the initial public offering in April 1994. The market price
of the common stock could be subject to significant fluctuations in the future
based on factors such as announcements of new products by C-Cube Microsystems or
its competitors, quarterly fluctuations in C-Cube Microsystems' financial
results or other semiconductor companies' financial results, changes in
analysts' estimates of C-Cube Microsystems' financial performance, general
conditions in the semiconductor and digital video networking industries,
conditions in the financial markets and general conditions in the global economy
which might adversely affect consumer purchasing. In addition, the stock market
in general has experienced extreme price and volume fluctuations, which have
particularly affected the market prices for many high technology companies and
which have often been unrelated to the operating performance of the specific
companies. The market price of C-Cube Microsystems' common stock has declined
substantially from historic highs, and may continue to experience significant
fluctuations in the future.

48
<PAGE> 50

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The historical financial statements have not been restated to give
retroactive effect to the sale of the DivCom business because that transaction
is subject to stockholder approval and therefore does not meet the measurement
date criteria for discontinued operations. The unaudited pro forma financial
statements have been prepared to give effect to the sale of the DivCom business
as if the transaction had taken place on January 1, 1996.

The following unaudited pro forma financial statements are presented for
illustrative purposes only and are not necessarily indicative of the financial
position or results of operations of future periods or the results that actually
would have been realized had the Semiconductor business been a separate company
during the specified periods. The pro forma financial statements, including the
notes thereto, are qualified in their entirety by reference to, and should be
read in conjunction with, the historical consolidated financial statements of
C-Cube Microsystems, including the notes thereto, included herein.

The following pro forma financial statements give effect to the proposed
spin-off of the DiviCom business. The financial statements of the Semiconductor
business exclude the results of operations and financial position of the DiviCom
business, which will be spun-off. The pro forma adjustments are preliminary and
based on management's estimates. In addition, management is in the process of
assessing and formulating its business plans. Management does not know the exact
amount of the restructuring costs but does not believe that they will be
material. Based on the timing of the closing of the transaction, the
finalization of the integration plans and other factors, final pro forma
adjustments may differ materially from those presented in these pro forma
financial statements.

Two balance sheets have been presented to give effect to a range of
possible results. Presentation (A) shows the estimated effect assuming a $975
million valuation of the Semiconductor business. Presentation (B) shows the
estimated effect assuming a $1.1 billion valuation of the Semiconductor
business. The Company estimates that each additional $100 million in valuation
will reduce cash and retained earnings by approximately $40 million. The Company
has debt financing available should the valuation of the Semiconductor business
exceed $1.1 billion.

The pro forma balance sheets assume that the spin-off took place on
September 30, 1999. The pro forma statement of operations assumes the spin-off
took place as of January 1, 1996.

49
<PAGE> 51

PRESENTATION (A)

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments........................... $277,373 $(148,000)(1)(2)(3) $ 129,373
Accounts receivable, net of allowances... 61,046 (52,504)(1) 8,542
Inventories.............................. 12,373 (9,948)(1) 2,425
Deferred income taxes.................... 11,723 (9,190)(1)(5) 2,533
Other current assets..................... 14,914 (6,174)(1) 8,740
-------- --------- ---------
Total current assets............. 377,429 (225,816) 151,613
Property and equipment -- net.............. 33,881 (14,063)(1) 19,818
Production capacity rights................. 5,164 -- 5,164
Distribution rights -- net................. 1,359 -- 1,359
Purchased technology -- net................ 5,139 (2,595)(1) 2,544
Other assets............................... 1,995 (499)(1) 1,496
-------- --------- ---------
Total............................ $424,967 $(242,973) $ 181,994
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 24,356 $ (11,592)(1) $ 12,764
Accrued liabilities...................... 31,195 9,385(1)(4) 40,580
Income taxes payable..................... 12,162 (6,649)(1) 5,513
Deferred revenue......................... 5,537 (5,537)(1) --
Current portion of long-term
obligations........................... 368 (11)(1) 357
-------- --------- ---------
Total current liabilities........ 73,618 (14,404) 59,214
Long-term obligations...................... 20,150 (48)(1) 20,102
Deferred income taxes...................... 3,230 (2,545)(1) 685
-------- --------- ---------
Total liabilities................ 96,998 (16,997) 80,001
-------- --------- ---------
Minority interest in subsidiary............ 409 -- 409
Stockholders' equity:
Preferred stock.......................... -- -- --
Common stock............................. 270,932 254,000(2) 524,932
Accumulated other comprehensive loss..... (1,992) 27(1) (1,965)
Retained earnings (deficit).............. 58,620 (480,003)(1)(2)(3)(4)(5) (421,383)
-------- --------- ---------
Total stockholders' equity....... 327,560 (225,976) 101,584
-------- --------- ---------
Total............................ $424,967 $(242,973) $ 181,994
======== ========= =========
</TABLE>

- ---------------

(A) Based on a $975 million valuation of the Semiconductor business.

50
<PAGE> 52

PRESENTATION (B)

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments........................... $277,373 $(233,000)(1)(2)(3) $ 44,373
Accounts receivable, net of allowances... 61,046 (52,504)(1) 8,542
Inventories.............................. 12,373 (9,948)(1) 2,425
Deferred income taxes.................... 11,723 (9,190)(1)(5) 2,533
Other current assets..................... 14,914 (6,174)(1) 8,740
-------- --------- ---------
Total current assets............. 377,429 (310,816) 66,613
Property and equipment -- net.............. 33,881 (14,063)(1) 19,818
Production capacity rights................. 5,164 -- 5,164
Distribution rights -- net................. 1,359 -- 1,359
Purchased technology -- net................ 5,139 (2,595)(1) 2,544
Other assets............................... 1,995 (499)(1) 1,496
-------- --------- ---------
Total............................ $424,967 $(327,973) $ 96,994
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 24,356 $ (11,592)(1) $ 12,764
Accrued liabilities...................... 31,195 9,385(1)(4) 40,580
Income taxes payable..................... 12,162 (6,649)(1) 5,513
Deferred revenue......................... 5,537 (5,537)(1) --
Current portion of long-term
obligations........................... 368 (11)(1) 357
-------- --------- ---------
Total current liabilities........ 73,618 (14,404) 59,214
Long-term obligations...................... 20,150 (48)(1) 20,102
Deferred income taxes...................... 3,230 (2,545)(1) 685
-------- --------- ---------
Total liabilities................ 96,998 (16,997) 80,001
-------- --------- ---------
Minority interest in subsidiary............ 409 -- 409
Stockholders' equity:
Preferred stock.......................... -- -- --
Common stock............................. 270,932 254,000(2) 524,932
Accumulated other comprehensive loss..... (1,992) 27(1) (1,965)
Retained earnings (deficit).............. 58,620 (565,003)(1)(2)(3)(4)(5) (506,383)
-------- --------- ---------
Total stockholders' equity....... 327,560 (310,976) 16,584
-------- --------- ---------
Total............................ $424,967 $(327,973) $ 96,994
======== ========= =========
</TABLE>

- ---------------
(B) Based on a $1.1 billion valuation of the Semiconductor business.

51
<PAGE> 53

PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED INCOME

NINE MONTHS ENDED SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
Net revenues:................................. $291,922 $(133,821)(1) $158,101
-------- --------- --------
Costs and expenses:
Cost of product revenues.................... 130,947 (67,852)(1) 63,095
Research and development.................... 61,659 (21,820)(1) 39,839
Selling, general and administrative......... 50,677 (20,595)(1)(4) 30,082
-------- --------- --------
Total............................... 243,283 (110,267) 133,016
-------- --------- --------
Income from operations........................ 48,639 (23,554) 25,085
Other income:
Interest income and other................... 7,084 (967)(1) 6,117
Interest expense and other.................. -- -- --
-------- --------- --------
Total............................... 7,084 (967) 6,117
Income before income taxes, minority interest
and extraordinary item...................... 55,723 (24,521) 31,202
Income tax expense............................ 16,717 (8,109)(1) 8,608
-------- --------- --------
Income before minority interest and
extraordinary item.......................... 39,006 (16,412) 22,594
Minority interest in net income of
subsidiary.................................. 381 -- 381
-------- --------- --------
Income before extraordinary item.............. 38,625 (16,412) 22,213
======== ========= ========
Basic earnings per share:
Income before extraordinary item............ $ 0.98 $ 0.56
======== ========
Diluted earnings per share:
Income before extraordinary item............ $ 0.91 $ 0.53
======== ========
Shares:
Basic....................................... 39,368 39,368
======== ========
Diluted..................................... 43,224 41,835
======== ========
</TABLE>

52
<PAGE> 54

PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED INCOME

YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------------
<S> <C> <C> <C>
Net revenues:................................ $351,797 $(142,715)(1) $209,082
-------- --------- --------
Costs and expenses:
Cost of product revenues................... 160,839 (75,088)(1) 85,751
Research and development................... 74,031 (21,449)(1) 52,582
Selling, general and administrative........ 60,512 (22,559)(1) 37,953
-------- --------- --------
Total.............................. 295,382 (119,096) 176,286
-------- --------- --------
Income from operations....................... 56,415 (23,619) 32,796
Other income:
Interest income and other.................. 8,511 (1,784)(1) 6,727
Interest expense and other................. (4,272) 33 (4,239)
-------- --------- --------
Total.............................. 4,239 (1,751) 2,488
Income before income taxes, minority interest
and extraordinary item..................... 60,654 (25,370) 35,284
Income tax expense........................... 18,196 (8,880)(1) 9,316
-------- --------- --------
Income before minority interest and
extraordinary item......................... 42,458 (16,490) 25,968
Minority interest in net loss of
subsidiary................................. (337) -- (337)
-------- --------- --------
Income before extraordinary item............. 42,795 (16,490) 26,305
======== ========= ========
Basic earnings per share:
Income before extraordinary item........... $ 1.14 $ 0.70
======== ========
Diluted earnings per share:
Income before extraordinary item........... $ 1.11 $ 0.68
======== ========
Shares:
Basic...................................... 37,382 37,382
======== ========
Diluted.................................... 40,754 38,729
======== ========
</TABLE>

53
<PAGE> 55

PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED INCOME

YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
Net revenues:.................................... $337,012 $(118,760)(1) $218,252
-------- --------- --------
Costs and expenses:
Cost of product revenues....................... 151,333 (59,965)(1) 91,368
Research and development....................... 64,204 (17,659)(1) 46,545
Selling, general and administrative............ 52,732 (15,423)(1) 37,309
-------- --------- --------
Total.................................. 268,269 (93,047) 175,222
-------- --------- --------
Income from operations........................... 68,743 (25,713) 43,030
Other income (expense):
Interest income and other...................... 4,291 (826)(1) 3,465
Interest expense and other..................... (6,048) -- (6,048)
-------- --------- --------
Total.................................. (1,757) (826) (2,583)
Income before income taxes and minority
interest....................................... 66,986 (26,539) 40,447
Income tax expense............................... 22,895 (9,760)(1) 13,135
-------- --------- --------
Income before minority interest.................. 44,091 (16,779) 27,312
Minority interest in net loss of subsidiary...... (248) -- (248)
-------- --------- --------
Net income....................................... $ 44,339 $ (16,779) $ 27,560
======== ========= ========
Earnings per share:
Basic.......................................... $ 1.21 $ 0.76
======== ========
Diluted........................................ $ 1.15 $ 0.71
======== ========
Shares:
Basic.......................................... 36,497 36,497
======== ========
Diluted........................................ 41,683 38,549
======== ========
</TABLE>

54
<PAGE> 56

PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS

YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
Net revenues:.................................... $319,758 $ (47,127)(1) $272,631
-------- --------- --------
Costs and expenses:
Cost of product revenues....................... 144,985 (22,817)(1) 122,168
Research and development....................... 44,177 (7,549)(1) 36,628
Selling, general and administrative............ 39,002 (4,666)(1) 34,336
Purchased in-process technology................ 131,349 (131,349)(1) --
-------- --------- --------
Total.................................. 359,513 (166,381) 193,132
-------- --------- --------
Income (loss) from operations.................... (39,755) 119,254 79,499
Other income (expense):
Interest income and other...................... 5,934 (61)(1) 5,873
Interest expense and other..................... (5,962) -- (5,962)
-------- --------- --------
Total.................................. (28) (61) (89)
Income (loss) before income taxes and minority
interest....................................... (39,783) 119,193 79,410
Income tax expense............................... 32,944 (4,714)(1) 28,230
-------- --------- --------
Income (loss) before minority interest........... (72,727) 123,907 51,180
Minority interest in net income of subsidiary.... 318 -- 318
-------- --------- --------
Net income (loss)................................ $(73,045) $ 123,907 $ 50,862
======== ========= ========
Earnings (loss) per share:
Basic.......................................... $ (2.15) $ 1.50
======== ========
Diluted........................................ $ (2.15) $ 1.37
======== ========
Shares:
Basic.......................................... 33,928 33,928
======== ========
Diluted........................................ 33,928 39,572
======== ========
</TABLE>

55
<PAGE> 57

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

1. To carve out results of operations and assets and liabilities associated with
the DiviCom business. Expense amounts exclude allocations of general and
administrative expenses in accordance with EITF 87-24.

2. To adjust for estimated cash inflows from the exercise of stock options of
$115 million and the estimated cash outflows associated with the transfer of
cash to Harmonic upon the consummation of the merger agreement. The cash
inflows were calculated based on the number and exercise price of vested
options that are required to be exercised as part of the merger/spin-off
transaction. Regarding cash outflow to DiviCom, the merger agreement
specifies that DiviCom will have $60 million in cash after the
merger/spin-off is completed.

3. To record the taxes estimated to be incurred upon the distribution of
Semiconductor. Estimated taxes under Presentation (A) are $203 million and
under Presentation (B) are $288 million.

4. To record estimated direct expenses of $22 million related to the merger.

5. In connection with the distribution and certain internal restructuring
transactions, Semiconductor may realize a tax basis step-up in certain
assets. To the extent there is a tax basis step-up in such assets,
Semiconductor will record a deferred tax asset with an offset in equity that
is not yet recorded in these proforma adjustments.

56
<PAGE> 58

MANAGEMENT

The following table lists the names, ages and positions of all directors
and executive officers of Semiconductor as of the distribution date. There are
no family relationships between any director or executive officer and any other
director or executive officer of Semiconductor. Executive officers serve at the
discretion of the board of directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Umesh Padval............................. 41 President, Chief Executive Officer and Director
Fred Brown............................... 55 Senior Vice President of Worldwide Sales
Fermi Wang, Ph.D......................... 46 Vice President, Home Media Division
Ray Newstead............................. 53 Vice President, Broadband Network Division
Didier Le Gall, Ph.D..................... 45 Vice President, Research and Development and Chief
Technology Officer
Walt Walczykowski........................ 48 Vice President, Finance, Chief Financial Officer
Alexandre A. Balkanski, Ph.D............. 39 Director
Baryn S. Futa............................ 44 Director
Donald McKinney.......................... 49 Director
Gregorio Reyes........................... 58 Director
T. J. Rodgers............................ 51 Director
Donald T. Valentine...................... 67 Director and Chairman
</TABLE>

Mr. Padval begins to serve as President, Chief Executive Officer and
Director as of the distribution date. Mr. Padval joined C-Cube Microsystems as
President of C-Cube Microsystems' Semiconductor division in October 1998. He has
over 15 years of broad management experience in the semiconductor industry. His
management experience includes business unit, marketing, sales and engineering
positions at VLSI Technology and Advanced Micro Devices. Prior to joining C-Cube
Microsystems, Mr. Padval served as Senior Vice President and General Manager of
the Consumer Digital Entertainment division at VLSI Technology, Inc from May
1997 to October 1998. In this position he managed marketing, engineering,
applications and operational aspects of the division which focused on providing
solutions into global digital set-top box deployments. From August 1994 to May
1997, Mr. Padval served as Vice President and General Manager for VLSI's
Computing Solutions division, which focused on the PC, workstation, mass storage
and peripherals market. Before joining VLSI Technology, Mr. Padval worked for
Advanced Micro Devices where he held variety of marketing and engineering
positions. Mr. Padval holds a bachelor of technology from Indian Institute of
Technology in Bombay, an M.S. degree from Pennsylvania State University and an
M.S. degree from Stanford University.

Mr. Brown joined C-Cube Microsystems in December of 1993 as Director of
Asia Pacific Sales, and was named Vice President in November 1995. Mr. Brown was
promoted to Vice President, Worldwide Sales in May 1998 and Senior Vice
President in November 1998. Prior to joining C-Cube Microsystems, he spent
eleven years at LSI Logic, most recently as Vice President, Asia Pacific Sales
located in Hong Kong. Mr. Brown holds a BSEE degree from Carnegie Institute of
Technology (now Carnegie Mellon University).

Dr. Wang joined C-Cube Microsystems in 1992 and was named to his current
position in 1999. He had previously headed the PC/CODEC Strategic Business Unit,
where he helped enable playback and recordability of digital video in desktop
and portable computers. Prior to joining C-Cube, Dr. Wang worked on video
compression algorithms for Vitel Semiconductor. As head of one of C-Cube's two
Strategic Business Units, Dr. Wang has responsibility for C-Cube's
market-leading MPEG solutions for DVDs and VCDs. He has also overseen
development of C-Cube's exclusive one-chip CODEC solution for applications such
as digital video recorders, and is one of the architects of C-Cube's next
generation technology.

Mr. Newstead joined C-Cube Microsystems in 1999 from NEC Corporation where
he had been Vice President and General Manager of the Microprocessor Group. In
this position, he focused on consumer
57
<PAGE> 59

market applications including digital set top box and HDTV as well as
communications and digital imaging markets. He had responsibility for the
design-in of MIPS processors and chipset solutions for customers including
General Instrument, ATT, Sony, Philips, Cisco, Bay Networks, Ascend, Lucent and
Compaq. With 25 years of industry experience, he has held marketing and
executive management positions at IDT, National Semiconductor and Adaptec. Mr.
Newstead was also a founder and CEO of ATI International. In his position at
C-Cube, Mr. Newstead heads one of the company's two Strategic Business Units. He
is responsible for the company's initiatives in Broadband areas including
set-top box applications, streaming media on the Web and video over the
Internet. He holds a bachelor's degree in management from Rochester Institute of
Technology.

Dr. Le Gall joined C-Cube in 1990. In his current role, he has overall
responsibility for C-Cube's Research and Development Program, which has been
responsible for Emmy award-winning technology breakthroughs in digital
television technology. Prior to joining C-Cube, Dr. Le Gall managed the Visual
Communications Group at Bell Communications Research (Bellcore), where he led
projects in areas such as HDTV compression. He also worked for Thomson-CSF's
Medical Imaging Division. Dr. Le Gall holds a Ph.D. in electrical engineering
from UCLA and a master's degree in physics and mathematics from Ecole Centrale
de Lyon in France.

Mr. Walczykowski joined C-Cube Microsystems as Corporate Controller in
September 1995, bringing nineteen years of financial management experience. He
was promoted to Vice President of Finance and Chief Financial Officer in July
1998. Prior to joining C-Cube Microsystems, Mr. Walczykowski served, from
January 1989 to August 1995, as Corporate Controller for Zycad Corporation, a
provider of technology and services to designers of integrated circuits and
systems. Since starting his career at Arthur Young and Company in San Francisco,
Mr. Walczykowski has held key positions at several Northern California high tech
companies including Measurex, Dataproducts Corporation, Triad Systems and Friden
Alcatel. Mr. Walczykowski holds an M.B.A. and a B.S. in Accounting from San Jose
State University.

Dr. Alexandre Balkanski co-founded C-Cube Microsystems in July 1988 and
served as President and Chief Executive Officer of C-Cube Microsystems from July
1995 until the distribution date. He had previously served as C-Cube
Microsystems' Executive Vice President and Chief Operating Officer. Prior to
joining C-Cube Microsystems, Dr. Balkanski co-founded and served as President of
Diamond Devices, a semiconductor company specializing in Digital Signal
Processing (DSP). Dr. Balkanski was elected to the Board of Directors of C-Cube
Microsystems in April 1993. He serves as an outside director on the board of
PMC-Sierra, Inc., a semiconductor company. Dr. Balkanski has a B.A. in physics
from Harvard College, and an M.S. in physics and a Ph.D. in business economics
from Harvard University.

Mr. Futa has served on the Board of Directors of C-Cube Microsystems since
February 1994. In July 1996, he founded MPEG LA, LLC, a company which was formed
to provide licensing access to essential MPEG-2 intellectual property to users
of the technology, where he currently serves as Manager and Chief Executive
Officer. From September 1988 to June 1996, he served as the Executive Vice
President and Chief Operating Officer of Cable Television Laboratories, Inc., a
research and development consortium of cable television system operators.

Mr. McKinney has served on the Board of Directors of C-Cube Microsystems
since February 1997. Mr. McKinney, the founder of International Network
Services, a network service provider, served as President and Chief Executive
Officer and Director of International Network Services from its date of
inception in August 1991 until January 1996, and has since served as Chairman of
the Board and Chief Executive Officer until July 1998, when he chose to be its
Chairman. Mr. McKinney served as the Vice President of Sales and Marketing of
Electronics for Imaging Inc., a provider of hardware and software products for
the digital color imaging market, from May 1989 to February 1991. Mr. McKinney
was the founding Vice President of Sales, Marketing and Customer Service at
Silicon Graphics, Inc. Later Mr. McKinney opened Silicon Graphics' international
operations and subsequently was General Manager of its OEM Subsystems Division.
Mr. McKinney worked for Silicon Graphics, Inc. from January 1982 to May 1987.
Mr. McKinney has also served in various sales, management and consulting
positions at Sequoia Capital, Chromatics and International Business Machines
Corporation.

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<PAGE> 60

Mr. Reyes has served on the Board of Directors of C-Cube Microsystems since
July 1992. Since August 1994, Mr. Reyes has been a private investor and
management consultant. From September 1990 to August 1994, he served as Chairman
and Chief Executive Officer of Sunward Technologies, Inc., a provider of rigid
disk magnetic recording head products for the data storage industry. From March
1986 to August 1990, Mr. Reyes was Chairman and Chief Executive Officer of
American Semiconductor Equipment Technologies. Since January 1995, Mr. Reyes has
served as Chairman of the Board of Sync Research. Mr. Reyes also serves as a
director of Diamond Multimedia and several privately-held companies.

Mr. Rodgers has served on the Board of Directors of C-Cube Microsystems
since January 1994. He founded Cypress Semiconductor Corporation in 1983, where
he currently serves as President, Chief Executive Officer and a director.

Mr. Valentine has served as Chairman of the Board of Directors of C-Cube
Microsystems since December 1992. He has been a General Partner of Sequoia
Capital, a venture capital firm, since 1974. Mr. Valentine is also Chairman of
the Board of Network Appliance, Inc. and Vice Chairman of the Board of Cisco
Systems, Inc.

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<PAGE> 61

EXECUTIVE COMPENSATION AND OTHER MATTERS

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the compensation of
the Chief Executive Officer of C-Cube Microsystems and the four other most
highly compensated executive officers of C-Cube Microsystems as of December 31,
1999:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
----------------------------------- COMPENSATION
OTHER ANNUAL AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS(#) COMPENSATION
- --------------------------- ---- ------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski...... 1999 312,500 346,500 7,200(2) 200,000 0
President and Chief 1998 216,329 294,250 6,975(2) 200,000 0
Executive Officer 1997 207,500 79,744 5,400(2) 400,000 0
Umesh Padval................ 1999 268,750 258,218 0 100,000 0
President, Semiconductor 1998 55,929(3) 175,000 0 500,000 0
Division
Tom Lookabaugh.............. 1999 259,791 150,000 0 100,000 0
President, DiviCom Inc., 1998 232,234 142,906 0 210,600(4) 0
a wholly owned subsidiary 1997 180,000(5) 45,000 0 127,000(4) 0
of the Company
Frederick Brown IV.......... 1999 200,000 92,432 7,200(2) 0 0
Senior Vice President, 1998 173,752(6) 205,557(7) 7,200(2) 95,000 0
Worldwide Sales 1997 150,000(6) 101,992 7,200(2) 100,000 0
Richard Foreman............. 1999 183,028 107,771 0 20,000 0
Vice President, Chief 1998 172,500 88,275 0 20,000 0
Information Officer and 1997 161,250 21,930 0 40,000 0
Corporate Secretary
</TABLE>

- ---------------
(1) The amounts shown under the Bonus column represents cash bonuses earned for
the indicated fiscal years.

(2) Consists of car allowances.

(3) Mr. Padval was hired as President, Semiconductor Division in October 1998.

(4) Includes options granted to Mr. Lookabaugh's spouse, an employee of the
Company, deemed to be beneficially owned by Mr. Lookabaugh.

(5) Mr. Lookabaugh has served as President of DiviCom Inc. since December 1997.
Mr. Lookabaugh's compensation for the period prior to his appointment to
President of DiviCom includes compensation he received while serving as
Senior Vice President and General Manager of DiviCom from March 1997 to
December 1997.

(6) Mr. Brown has served as Senior Vice President, Worldwide Sales since
November 1998. Mr. Brown's compensation for the period prior to his
appointment to Senior Vice President, Worldwide Sales includes compensation
he received while serving as Vice President, Worldwide Sales from May 1998
to November 1998, and while serving as Vice President, Asia Pacific Sales
for the period prior.

(7) Includes a retention bonus of $100,000, of which $50,000 will be vested on
December 31, 1999 and $50,000 vested on December 31, 2000, provided Mr.
Brown is an employee of the Company on those dates.

C-Cube Microsystems does not have employment contracts with any of the
persons named in the Summary Compensation Table, or any defined benefit or
actuarial plan under which benefits are determined primarily by final
compensation or average final compensation and years of service.

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<PAGE> 62

STOCK OPTION GRANTS

The following table provides the specified information concerning grants of
options to purchase the C-Cube Microsystems' common stock made during the year
ended December 31, 1999 to the persons named in the Summary Compensation Table:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1999
---------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES OF
GRANTED TO EXERCISE STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION --------------------------
NAME (#) YEAR ($/SH)(1) DATE 5% ($) 10% ($)
---- ------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski...... 200,000 4.1 19.1250 04/02/09 2,405,522 6,096,065
Fred Brown.................. 0 0.0 -- -- 0 0
Umesh Padval................ 100,000 2.0 19.1250 04/02/09 1,202,761 3,048,032
Tom Lookabaugh.............. 100,000 2.0 19.1250 04/02/09 1,202,761 3,048,032
Richard Foreman............. 20,000 0.4 19.1250 04/02/09 240,552 609,606
</TABLE>

- ---------------
(1) Options were granted at an exercise price equal to the fair market value per
share of C-Cube's Common Stock as of the date of the grant.

(2) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the future Common
Stock price. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock, overall market conditions and
the option holders' continued employment through the vesting period. This
table does not take into account any appreciation in the price of the Common
Stock from the date of grant to date.

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<PAGE> 63

STOCK OPTION EXERCISES

The following table provides the specified information concerning exercises
of options to purchase the C-Cube Microsystems' common stock in the year ended
December 31, 1999, and unexercised options held as of December 31, 1999, by the
persons named in the Summary Compensation Table:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
OPTIONS AT 12/31/99(2)
NUMBER OF UNEXERCISED ---------------------------
SHARES VALUE OPTIONS AT 12/31/99
ACQUIRED ON REALIZED --------------------------- EXERCISABLE UNEXERCISABLE
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE ($) ($)
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski.... 249,352 10,510,731 697,733 526,667 28,547,554 20,575,846
Umesh Padval.............. 0 0 133,334 466,666 6,260,447 21,802,053
Tom Lookabaugh(3)......... 6,744 153,426 204,167 340,833 8,776,057 14,851,443
Frederick Brown IV........ 0 0 158,247 135,871 7,334,881 5,888,546
Richard Foreman........... 0 0 148,485 91,515 6,950,897 3,904,103
</TABLE>

- ---------------
(1) Based upon the market price of the purchased shares on the exercise date
less the option exercise price paid for such shares.

(2) Based upon the market price of $62.25 per share, which was the closing price
per share of Common Stock on the Nasdaq National Market on December 31,
1999, less the option exercise price payable per share.

(3) Includes options held by Mr. Lookabaugh's spouse, an employee of the
Company, deemed to be beneficially owned by Mr. Lookabaugh.

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<PAGE> 64

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of February 4, 2000,
with respect to the beneficial ownership of the Company's Common Stock by (i)
all persons known by C-Cube Microsystems to be the beneficial owners of more
than 5% of the outstanding common stock of C-Cube Microsystems, (ii) each
director of C-Cube Microsystems, (iii) the Chief Executive Officer and the four
other most highly compensated executive officers of C-Cube Microsystems as of
December 31, 1999, whose salary and incentive compensation for the fiscal year
ended December 31, 1999 exceeded $100,000, and (iv) all executive officers and
directors of C-Cube Microsystems as a group:

<TABLE>
<CAPTION>
SHARES OWNED
-----------------------
NUMBER OF PERCENTAGE
FIVE-PERCENT STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS (1) SHARES OF CLASS
- --------------------------------------------------------------- --------- ----------
<S> <C> <C>
FIVE-PERCENT STOCKHOLDERS:
Entities affiliated with J. & W. Seligman & Co.
Incorporated(2)............................................. 4,574,900 9.9%
100 Park Avenue -- 8th Floor
New York, New York 10017

DIRECTORS AND EXECUTIVE OFFICERS:
Alexandre A. Balkanski(3)..................................... 1,302,141 2.8%
Donald T. Valentine(4)........................................ 1,129,083 2.4%
Tom Lookabaugh(5)............................................. 304,579 *
Frederick Brown IV(6)......................................... 183,253 *
Umesh Padval(7)............................................... 169,643 *
Richard Foreman(8)............................................ 168,022 *
T. J. Rodgers(9).............................................. 142,613 *
Walter Walczykowski(10)....................................... 82,730 *
Baryn S. Futa(11)............................................. 70,626 *
Donald McKinney(12)........................................... 40,101 *
Gregorio Reyes(13)............................................ 39,971 *
All executive officers and directors as a group (11
persons)(14)................................................ 3,632,762 7.9%
</TABLE>

- ---------------
* Represents less than 1%

(1) The persons named in this table have the sole voting and investment power
with respect to all shares shown as beneficially owned by them, subject to
community property laws where applicable and to the information contained
in the footnotes to this table. Unless otherwise indicated, the business
address of each of the beneficial owners listed in this table is 1778
McCarthy Boulevard, Milpitas, California 95035.

(2) Based on a filing with the Securities and Exchange Commission dated October
7, 1999, reporting beneficial ownership as of October 7, 1999. This joint
filing was made by J. & W. Seligman & Co. Incorporated (JWS) on behalf of
Seligman Communications and Information Fund, Inc. (the Fund) and William
C. Morris. The filing states that Mr. Morris is the owner of the majority
of outstanding voting securities of JWS, and that JWS is the investment
advisor to the Fund; therefore, the 4,574,900 shares held by JWS are deemed
to be beneficially owned by Mr. Morris.

(3) Includes 764,400 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.

(4) Includes 44,168 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000. Mr. Valentine
is a general partner of certain entities affiliated with Sequoia Capital
and, therefore, may be deemed to beneficially own the 920,687 shares of
Common Stock held by such entities. However, Mr. Valentine disclaims
beneficial ownership of all such shares held by entities affiliated with
Sequoia Capital, except those shares as to which he has a direct pecuniary
interest.

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<PAGE> 65

(5) Includes 236,781 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.

(6) Includes 172,004 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.

(7) Includes 166,667 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.

(8) Includes 118,454 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.

(9) Includes 136,251 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.

(10) Includes 79,783 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.

(11) Includes 70,624 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.

(12) Includes 38,749 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.

(13) Includes 34,168 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.

(14) Includes an aggregate of 1,862,049 shares subject to options that are
presently exercisable or will become exercisable by all executive officers
and directors as a group within 60 days of February 4, 2000, including
those shares listed in footnotes 3-13.

64
<PAGE> 66

ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS AND SEMICONDUCTOR

We have provided below a summary description of the master separation and
distribution agreement, effective as of , or the separation
agreement, and the key related agreements. You should read the full text of
these agreements, which have been filed with the Securities and Exchange
Commission as exhibits to the registration statement of which this prospectus is
a part.

MASTER SEPARATION AND DISTRIBUTION AGREEMENT

The master separation and distribution agreement contains the key
provisions relating to the separation and the distribution.

The Separation. The separation is scheduled to occur on or around
. On or before the separation date, C-Cube Microsystems and
Semiconductor will sign the general assignment and assumption agreement which
provides for the transfer to Semiconductor (or companies to be owned by
Semiconductor) of assets and liabilities from C-Cube Microsystems, effective on
the separation date. C-Cube Microsystems will deliver additional agreements
governing various interim and ongoing relationships between C-Cube Microsystems
and us following the separation date. The ancillary agreements include:

- a general assignment and assumption agreement;

- an employee matters agreement;

- a tax sharing agreement;

- a transitional services agreement;

- a real estate matters agreement;

- a master confidential disclosure agreement; and

- an indemnification and insurance matters agreement.

To the extent that the terms of any of these ancillary agreements conflict with
the separation agreement, the terms of these agreements govern. These agreements
are described more fully below.

Cash to be Transferred to Semiconductor. C-Cube Microsystems will provide
to Semiconductor all cash of C-Cube Microsystems and its subsidiaries (other
than Semiconductor) other than the following amounts which will be retained by
C-Cube Microsystems:

- sixty million dollars ($60,000,000);

- cash to pay all taxes of C-Cube Microsystems and its subsidiaries accrued
through the separation date (but not including taxes related to the
spin-off of Semiconductor);

- cash in an amount sufficient to pay the fees and expenses associated with
the transactions contemplated by the merger agreement, including, but not
limited to, the fees and expenses of C-Cube Microsystems' investment
bankers, attorneys, accountants and other professional advisors;

- cash to pay the corporate tax liability arising in connection with the
spin-off of Semiconductor; and

- cash in an amount sufficient to make all severance payments to any
employee of C-Cube Microsystems who will not be employed by either
Semiconductor or Harmonic after the merger.

The Distribution. On or prior to the date the distribution is effective,
C-Cube Microsystems intends to distribute the shares of common stock of
Semiconductor that C-Cube Microsystems holds to C-Cube Microsystems stockholders
on a pro rata basis. C-Cube Microsystems may, in its sole discretion, change the
distribution date. C-Cube Microsystems intends to consummate the distribution
only if the following conditions are met (any of which may be waived by C-Cube
Microsystems):

- all required government approvals must be in effect; and

- no legal restraints must exist preventing the distribution.
65
<PAGE> 67

Covenants Between C-Cube Microsystems and Semiconductor. In addition to
signing documents that transfer control and ownership of various assets and
liabilities of C-Cube Microsystems relating to our business, we have agreed with
C-Cube Microsystems to enter into additional service level agreements, exchange
information, engage in certain auditing practices and resolve disputes in
particular ways.

Information Exchange. Both C-Cube Microsystems and we have agreed to share
information with each other, at no cost to the requesting party, for the
following purposes, unless the sharing would be commercially detrimental:

- Each party has agreed to maintain adequate internal accounting to allow
the other party to satisfy its own reporting obligations and prepare its
own financial statements.

- Each party will retain records that may be beneficial to the other party
for a specified period of time. If the records are going to be destroyed,
the destroying party will give the other party an opportunity to retrieve
all relevant information from the records.

- Each party will do its best to provide the other party with personnel,
directors, officers or agents who may be used as witnesses in legal
proceedings.

Dispute Resolution. If problems arise between us and C-Cube Microsystems,
we have agreed to the following procedures:

- The parties will make a good faith effort to first resolve the dispute
through negotiation.

- If negotiations fail, the parties agree to attempt to resolve the dispute
through non-binding mediation.

- If mediation fails, the parties can resort to litigation. In addition,
nothing prevents either party acting in good faith from initiating
litigation at any time if failure to do so would substantially
disadvantage the party.

Termination of the Agreement. Both C-Cube Microsystems and Semiconductor
must agree to terminate the separation agreement and all ancillary agreements at
any time between the closing of this offering and the distribution.

GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT

The general assignment and assumption agreement identifies the assets
C-Cube Microsystems will transfer to us and the liabilities we will assume from
C-Cube Microsystems in the separation. The agreement also describes when and how
these transfers and assumptions will occur.

Asset Transfer. Effective on the separation date, C-Cube Microsystems will
transfer the following assets to us, except as provided in an ancillary
agreement or other agreement:

- all assets reflected on our unaudited consolidated balance sheet as of
September 30, 1999, minus any assets disposed of after September 30,
1999;

- all written off, expensed or fully depreciated assets that would have
appeared on our balance sheet as of September 30, 1999 if we had not
written off, expensed or fully depreciated them;

- all assets that C-Cube Microsystems acquired after September 30, 1999
that would have appeared in our financial statements as of the separation
date if we prepared such financial statements using the same principles
we used in preparing our balance sheet dated September 30, 1999;

- all assets that our business primarily uses as of the separation date but
are not reflected in our balance sheet as of September 30, 1999 due to
mistake or omission;

- all claims or other rights of C-Cube Microsystems or the Semiconductor
business that primarily relate to the Semiconductor business;

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<PAGE> 68

- all rights under all contracts in which C-Cube Microsystems is a party or
by which any of its assets is bound;

- all computers, desks, equipment and other assets used primarily by
employees of C-Cube Microsystems who will become our employees due to the
separation;

- all accounts receivable and other rights to payment for goods and
services payable to C-Cube Microsystems as of the separation date;

- all rights in the trade and service marks and domain names incorporating
or based on the name "C-CUBE";

- all Intellectual Property owned or transferable by C-Cube Microsystems or
Semiconductor that arises out of the activities of, or that is primarily
related to, Semiconductor, including all Intellectual Property listed on
Schedule A to this agreement, and all rights to sue for, recover and
retain any damages from any third party's infringement of any such
Intellectual Property rights;

- cash or cash equivalents, bank accounts, lock boxes and other deposit
arrangements;

- all outstanding shares of all subsidiaries conducting Semiconductor
business that are currently owned directly by C-Cube Microsystems;

- specified rights under existing insurance policies; and

- other specified assets.

Excluded Assets. The general assignment and assumption agreement also
provides that C-Cube Microsystems will not transfer certain assets to us,
including the C-Cube Microsystems registered intellectual property as set forth
in the merger agreement related to the DiviCom business.

Assumption of Liabilities. Effective on the separation date, we will
assume the following liabilities from C-Cube Microsystems, except as provided in
an ancillary agreement or other agreement:

- all liabilities reflected as liabilities on our unaudited consolidated
balance sheet as of September 30, 1999, minus any liabilities that were
discharged after such date of the balance sheet;

- all liabilities of C-Cube Microsystems that arise after September 30,
1999, that would have appeared in our financial statements as of the
separation date if we prepared such financial statements using the same
principles we used in preparing our balance sheet of Semiconductor as of
September 30, 1999;

- all liabilities that are primarily related to or primarily arise out of
our business, or the operation of any business conducted by us, at the
separation date but are not reflected in our balance sheet as of
September 30, 1999 due to mistake or omission;

- any liability of C-Cube Microsystems or Semiconductor that primarily
related to the semiconductor business, including any liability for
corporate taxes incurred in connection with the spin-off and any
liability for taxes attributable to our pre-merger operations;

- all liabilities (other than taxes) primarily resulting from the operation
of our business, or resulting from any asset that C-Cube Microsystems
transferred to us;

- all liabilities arising out of specified terminated, divested or
discontinued businesses and operations specifically set forth in the
merger agreement;

- all fees and expenses of C-Cube Microsystems incurred in connection with
the merger;

- all accounts payable and other obligations of payment for goods or
services purchased, leased or otherwise received in the conduct of the
semiconductor business;

- all employee compensation liabilities relating to employees of the
semiconductor business;

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<PAGE> 69

- all severance payments and related liabilities arising out of the
termination of employees that will not continue to be employed by either
Semiconductor or Harmonic; and

- other specified liabilities.

Excluded Liabilities. The general assignment and assumption agreement
provides that we will not assume specified liabilities, including:

- all liabilities to the extent that it is covered by a C-Cube Microsystems
insurance policy under which the Semiconductor business is not entitled
to benefits;

- all liabilities of pre-spin-off taxes not attributable to the
semiconductor business that result from audits or similar adjustments;
and

- all agreements and obligations of C-Cube Microsystems under the
agreements governing the distribution.

Terms of Other Ancillary Agreements Govern. To the extent that another
ancillary agreement expressly provides for the transfer of an asset or an
assumption of a liability, the terms of such other ancillary agreement will
determine the manner of the transfer and assumption.

Obtaining Approvals and Consents. The parties agree to use all reasonable
efforts to obtain any required consents, substitutions or amendments required to
novate or assign all rights and obligations under any contracts that will be
transferred in the separation.

Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that
are not allocated in the separation agreement or any other ancillary agreement
shall be the responsibility of the party that incurs the costs and expenses.

INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT

General Release of Pre-Separation Claims. Effective as of the separation
date, we will release C-Cube Microsystems and its affiliates, agents, successors
and assigns, and C-Cube Microsystems will release us, and our affiliates,
agents, successors and assigns, from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the merger and the
distribution. This provision will not impair a party from enforcing the
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.

Indemnification. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify C-Cube Microsystems and its affiliates, agents, successors and assigns
from all liabilities arising from:

- our business, any of our liabilities or any of our contracts; and

- any breach by us of the separation agreement or any ancillary agreement.

C-Cube Microsystems has agreed to indemnify us and our affiliates, agents,
successors and assigns from all liabilities arising from:

- C-Cube Microsystems' business other than the businesses transferred to us
pursuant to the separation; and

- any breach by C-Cube Microsystems of the separation agreement or any
ancillary agreement.

The indemnifying party will make all indemnification payments net of
insurance proceeds that the indemnified party receives. The agreement also
contains provisions governing notice and indemnification procedures.

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<PAGE> 70

EMPLOYEE MATTERS AGREEMENT

Semiconductor and C-Cube Microsystems will enter into an employee matters
agreement to allocate assets, liabilities and responsibilities relating to
current and former employees of Semiconductor and their participation in the
benefit plans, including stock plans, that C-Cube Microsystems currently
sponsors and maintains.

All eligible Semiconductor employees will continue to participate in the
C-Cube Microsystems benefit plans on comparable terms and conditions to those
for C-Cube Microsystems employees until Semiconductor establishes comparable
benefit plans for current and former, as applicable, Semiconductor employees.
Semiconductor intends to establish these plans no later than the time of the
distribution.

Once Semiconductor establishes its own corresponding benefit plans,
Semiconductor may modify or terminate each such plan in accordance with the
terms of the plan and Semiconductor policies. No Semiconductor benefit plan will
provide benefits that overlap benefits under the corresponding C-Cube
Microsystems benefit plan at the time of the distribution. Each Semiconductor
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding C-Cube Microsystems benefit plan will be taken into account under
that Semiconductor benefit plan.

Each Semiconductor benefit plan will assume any liabilities under the
corresponding C-Cube Microsystems benefit plan for Semiconductor active and
former employees. Assets relating to the employee liabilities will also be
transferred to Semiconductor or the related Semiconductor plans and trusts and
other funding vehicles associated with Semiconductor's benefit plans.

Options. All vested options to purchase C-Cube Microsystems common stock
held by Semiconductor employees will terminate on the date of the separation.
All unvested options to purchase C-Cube Microsystems common stock held by
Semiconductor employees will be replaced with substitute options to purchase
Semiconductor common stock, also referred to as spin-off Semiconductor options.
The number of shares and the exercise price of options to purchase C-Cube
Microsystems common stock that convert into spin-off Semiconductor options will
be adjusted using a conversion formula. The conversion formula will be based on
the closing per-share price of C-Cube Microsystems common stock immediately
prior to the distribution, and the first trading per-share price of
Semiconductor common stock on the distribution. The resulting spin-off
Semiconductor options will maintain the original vesting provisions and option
period.

All options held by non-employee directors of C-Cube Microsystems will
accelerate immediately prior to the merger with Harmonic and become exercisable
for all of the shares of C-Cube Microsystems common stock then subject to the
option. Immediately upon the merger, each such non-employee director option will
terminate.

Stock Purchase Plan. We anticipate that Semiconductor employees will
continue to participate in the C-Cube Microsystems stock purchase plan until the
distribution. On or before the distribution Semiconductor will adopt a stock
purchase plan that is comparable to the C-Cube Microsystems stock purchase plan.

TAX SHARING AGREEMENT

C-Cube Microsystems, Semiconductor and Harmonic have entered into a tax
sharing agreement providing for each of the party's obligations concerning
various tax liabilities. Consistent with the Merger Agreement, the tax sharing
agreement provides that Semiconductor will pay all federal, state, local and
foreign taxes attributable to for any taxable period or portion of a taxable
period ending on or prior to the Effective Time and all taxes related to the
distribution of the Semiconductor stock. Further, Semiconductor is obligated to
indemnify C-Cube Microsystems and Harmonic for all increases in taxes related to
the Semiconductor business prior to the spin-off or taxes incurred in connection
with the spin-off.

The tax sharing agreement further provides for cooperation with respect to
tax matters, the exchange of information and the retention of records which may
affect the income tax liability of either party.

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REAL ESTATE MATTERS AGREEMENT

The real estate matters agreement addresses real estate matters relating to
the C-Cube Microsystems properties that C-Cube Microsystems will transfer to or
share with Semiconductor. The agreement describes the manner in which C-Cube
Microsystems will transfer to or share with Semiconductor various leased
properties, including the following types of transactions:

- assignments to Semiconductor of C-Cube Microsystems' leases for specified
leased properties; and

- subleases back to C-Cube Microsystems by Semiconductor of portions of
specified leased properties to be assigned to us.

The real estate matters agreement includes a description of each property
to be transferred to or shared with Semiconductor for each type of transaction.
The standard forms of the proposed transfer documents (e.g., assignment and
sublease) are contained in schedules.

The real estate matters agreement also requires both parties to use
reasonable efforts to obtain any landlord consents required for the proposed
transfers of leased sites, including C-Cube Microsystems paying commercially
reasonable consent fees and negotiating other commercially reasonable amendments
to the leases, if required by the landlords, and Semiconductor agreeing to
provide the security required under the applicable leases.

The real estate matters agreement further provides that Semiconductor will
be required to accept the transfer of all sites allocated to Semiconductor, even
if a site has been damaged by a casualty before the separation date. Transfers
with respect to leased sites where the underlying lease is terminated due to
casualty or action by the landlord prior to the separation date will not be
made, and neither party will have any liability related thereto.

The real estate matters agreement also gives the parties the right to
change the allocation and terms of specified sites by mutual agreement based on
changes in the requirements of the parties. The real estate matters agreement
provides that all reasonable costs required to effect the transfers (including
landlord consent fees and landlord attorneys' fees) will be paid by C-Cube
Microsystems.

MASTER TRANSITIONAL SERVICES AGREEMENT

Semiconductor will enter into a transitional services agreement with C-Cube
Microsystems covering the provision of various transitional services, including
telecommunications, networks, enterprise applications and other services by
Semiconductor to C-Cube Microsystems and, if necessary in certain circumstances,
vice versa. Except for the items for which substantially all of the use is by or
for the benefit of the DiviCom business, all infrastructure hardware and
software (including, but not limited to, telecommunications, networks, servers,
desktop computers and enterprise applications, unless prohibited by a third
party) shall be owned by Semiconductor. The services to be provided will
generally be provided for a fee equal to the actual direct and indirect costs of
providing the services plus 10%. The transition services agreement will
generally have a term of two years or less from the date of separation.

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DESCRIPTIONS OF EMPLOYEE BENEFITS PLANS

2000 STOCK PLAN

Semiconductor intends to adopt a 2000 stock plan to provide for the grant
of incentive stock options to employees, including officers and employee
directors, and for the grant of nonstatutory stock options to employees,
directors and consultants. The total number of shares of our common stock that
Semiconductor will reserve for issuance under the 2000 stock plan equals
25,000,000 shares, plus annual increases will be added to the 2000 stock plan,
beginning in 2001, equal to the lesser of 2,000,000 shares, 3% of the
outstanding shares or a lesser amount determined by the board of directors.

Administration

Semiconductor's board of directors or a committee of the board of directors
will administer the 2000 stock plan. The administrator of our 2000 stock plan
will have the power to determine among other things:

- the terms of the options granted, including the exercise price of the
option;

- the number of shares subject to each option;

- the exercisability of each option; and

- the form of consideration payable upon the exercise of each option.

Options

The exercise price of all incentive stock options granted under the 2000
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options granted
under the 2000 stock plan is determined by the administrator, but with respect
to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code,
the exercise price must be at least equal to the fair market value of
Semiconductor common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
the our outstanding capital stock, the exercise price of any incentive stock
option granted must be at least equal 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years. The
term of all other options granted under the 2000 stock plan may not exceed ten
years.

During any fiscal year, each optionee may be granted options to purchase a
maximum of [500,000] shares. In addition, in connection with an optionee's
initial employment with Semiconductor, such optionee may be granted an option
covering an additional [500,000] shares.

Options granted under the 2000 stock plan must generally be exercised
within three months after the end of optionee's status as an employee, director
or consultant of Semiconductor, or within twelve months after such optionee's
termination by death or disability, but in no event later than the expiration of
the option's term. Upon the death of an optionee, vesting and exercisability of
the optionee's options will accelerate on the date of death as to that number of
shares which would have become vested and exercisable if optionee had remained
employed until the date one year following the date of death.

Transferability of Options

Unless determined otherwise by the administrator, options granted under the
2000 stock plan are generally not transferable by the optionee, and each option
and stock purchase right is exercisable during the lifetime of the optionee only
by such optionee.

Adjustments upon Certain Transfers of Control

The 2000 stock plan provides that in the event of a transfer of control of
Semiconductor, which includes certain mergers or consolidations of Semiconductor
or a sale of all or substantially all of Semiconductor's assets or stock, each
option shall be assumed or an equivalent option substituted for by

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the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the options will terminate.

Amendment and Termination of the 2000 Stock Plan

The administrator will have the authority to amend, suspend or terminate
the 2000 stock plan, so long as no such action affects any shares of common
stock previously issued and sold or any option previously granted under the 2000
stock plan. Unless terminated sooner, the 2000 stock plan will terminate
automatically ten years from the date of its adoption.

2000 EMPLOYEE STOCK PURCHASE PLAN

Semiconductor intends to adopt a 2000 employee stock purchase plan to
encourage employee stock ownership. The total number of shares of Semiconductor
common stock that will be reserved for issuance under the 2000 employee stock
purchase plan equals [500,000] shares, plus annual increases will be added to
the 2000 employee stock purchase plan, beginning in 2001, equal to the lesser of
[500,000] shares, [1%] of the outstanding shares or a lesser amount determined
by Semiconductor's board of directors.

Structure of the 2000 Employee Stock Purchase Plan

The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains consecutive, overlapping,
twenty-four month offering periods. Each offering period includes four six-month
purchase periods. The offering periods generally start on the first trading day
on or after February 1 and August 1 of each year, except for the first such
offering period which will commence on the first trading day following the
distribution and continue until January 31, 2002.

Eligibility

Employees are eligible to participate if they are customarily employed by
Semiconductor or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, employees may not be
granted an option to purchase stock under the 2000 employee stock purchase plan
if they either:

- immediately after grant, own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or

- hold rights to purchase stock under our employee stock purchase plans
which exceeds $25,000 worth of stock for each calendar year.

Purchases

The 2000 employee stock purchase plan permits participants to purchase our
common stock through payroll deductions of up to [10%] of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings, commissions, overtime, profit sharing and bonuses, but exclusive
of payments for shift premium, incentive compensation, incentive payments and
other compensation. The maximum number of shares a participant may purchase
during a single purchase period is [10,000] shares.

Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 purchase plan is generally 85% of the lower of the fair
market value of the common stock either:

- the day before the beginning of the offering period; or

- on the day of the purchase.

In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. The new
offering period will use

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the fair market value as of the day before the start of the new offering period
to determine the purchase price for future purchase periods. Participants may
end their participation at any time during an offering period, and they will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with Semiconductor.

Transferability of Rights

Rights granted under the 2000 employee stock purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the 2000 employee stock purchase
plan.

Merger or Asset Sale

The 2000 employee stock purchase plan provides that, in the event we merge
with or into another corporation or there is a sale of substantially all of our
assets, each outstanding option may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding options, the offering period then in progress
will be shortened and a new exercise date will be set.

Amendment and Termination of the 2000 Employee Stock Purchase Plan

The 2000 employee stock purchase plan will terminate in 2010. Our board of
directors has the authority to amend or terminate the 2000 employee stock
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 2000 employee stock purchase plan.

2000 DIRECTOR OPTION PLAN

We intend to adopt a 2000 director option plan to help attract and retain
non-employee directors. The total number of shares of our common stock that we
will reserve for issuance under the 2000 stock plan equals [450,000] shares.

Administration

Our board of directors or a committee of the board of directors will
administer the 2000 director option plan.

Option Grants

The 2000 director option plan provides for an automatic initial grant of an
option to purchase [40,000] shares of our common stock to each non-employee
director on the date which the later of the following events occur:

- the effective date of the 2000 director option plan, if such non-employee
director does not then hold an option to acquire shares of our stock; or

- the date when a person first becomes a non-employee director.

After the initial grant, a non-employee director will automatically be
granted subsequent options to purchase [10,000] shares of our common stock each
year on his or her anniversary date, if on such date he or she is serving as a
non-employee director of Semiconductor. If a non-employee director holds office
on the effective date of the 2000 director option plan then his or her
anniversary date is the anniversary of the effective date of the director option
plan.

Any non-employee director may waive his or her option grant by filing an
irrevocable election with Semiconductor.

Each initial option grant and each subsequent option grant shall have a
term of 10 years. Generally, each option grant will vest as to 25% of the shares
subject to the option on the anniversary of its date of grant and 1/48 of the
shares subject to the option shall vest each month thereafter, subject to the
optionee's

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continuous service as a director of Semiconductor. The exercise price of all
options will be 100% of the fair market value per share of Semiconductor common
stock on the date of grant.

Options granted under the 2000 director option plan must be exercised
within three months of the end of the optionee's tenure as a director of
Semiconductor, or within six months after such director's termination by death
or disability, but in no event later than the expiration of the option's ten
year term.

Transferability of Options

No option granted under the 2000 director option plan is transferable by
the optionee other than by will or the laws of descent and distribution, and
each option is exercisable, during the lifetime of the optionee, only by the
optionee.

Transfer of Control

The 2000 director option plan provides that in the event of certain
transfers of control of Semiconductor within the first two years after the
effective date of the director option plan, including a merger of Semiconductor
with or into another corporation, or a sale of substantially all of
Semiconductor's assets, the board of directors may arrange to have the successor
entity to assume all outstanding options. Any options not so assumed will be
cancelled. If the transfer of control occurs more than two years after the
effective date of the director option plan, all outstanding options will
accelerate and become immediately exercisable and vested immediately prior to
such transfer of control, provided such transfer of control is actually
consummated.

Amendment and Termination of the 1999 Director Option Plan

The administrator will have the authority to amend, suspend or terminate
the 2000 director option plan, so long as no such action affects any shares of
common stock previously issued and sold or any option previously granted under
the 2000 director option plan. Unless terminated sooner, the 2000 director
option plan will terminate automatically ten years from the effective date of
this director option plan.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH C-CUBE MICROSYSTEMS

The Company has entered, or will enter into various arrangements with
C-Cube Microsystems which set forth both companies' duties and responsibilities
in the separation and distribution. Please see "Arrangements Between C-Cube
Microsystems and Semiconductor" beginning on page for further details.

INDEMNIFICATION AGREEMENTS

The Company has entered, or will enter, into indemnification agreements
with each of its directors and executive officers prior to the distribution.
Please see "Indemnification of Directors and Officers" beginning on page and
the form of Officers' and Directors' Indemnification Agreement attached hereto
as Exhibit 10.6, for further information.

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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain material federal income tax
considerations of the spin-off and the merger. Insofar as this discussion
relates to C-Cube Microsystems stockholders, it does not include all federal
income tax considerations that may be relevant to particular C-Cube Microsystems
stockholders in light of their particular circumstances, or to C-Cube
Microsystems stockholders who are subject to special tax rules, such as dealers
in securities, banks or other financial institutions, insurance companies,
individuals who are not citizens or residents of the United States, foreign
entities, or tax-exempt organizations. This discussion also assumes that C-Cube
Microsystems stockholders hold their shares as capital assets, and it does not
apply to C-Cube Microsystems stockholders who are subject to alternative minimum
tax or mark-to-market rules, stockholders who hold their shares as part of a
hedge, straddle or other risk reduction or conversion transaction, or
stockholders who acquired their C-Cube Microsystems common stock through stock
option or stock purchase programs or otherwise as compensation. In addition, it
does not address the tax consequences of the spin-off or the merger under
foreign, state or local tax laws. This discussion is based on the Internal
Revenue Code, applicable Treasury Regulations, judicial decisions and
administrative rulings and practice, all as of the date hereof, all of which are
subject to change. Any such changes could be applied retroactively and could
affect the accuracy of the statements and conclusions in this discussion and the
tax consequences of the spin-off and the merger to C-Cube Microsystems, Harmonic
and their stockholders. No ruling has been or will be requested from the
Internal Revenue Service with regard to any of the tax consequences of the
spin-off or the merger.

STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES TO THEM OF THE SPIN-OFF AND THE MERGER BASED ON THEIR OWN
CIRCUMSTANCES, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE SPIN-OFF AND THE MERGER.

Material Federal Income Tax Considerations of the Spin-Off -- Stockholder Tax
Considerations

Tax-Free Treatment. Although the completion of the distribution is not
contingent on the receipt of a tax opinion with respect to the distribution, we
have been advised by Ernst & Young LLP that in their opinion, for federal income
tax purposes, the distribution will qualify as a spin-off that will be tax-free
to C-Cube Microsystems stockholders under Section 355(a) of the Internal Revenue
Code. Provided the distribution so qualifies:

- You will not recognize income, gain or loss as a result of your receipt
of Semiconductor stock.

- Your tax basis in your Semiconductor stock and your C-Cube Microsystems
stock (which will be converted into Harmonic stock in the merger) will be
determined by allocating your basis in the C-Cube Microsystems stock
immediately before the distribution and merger between the Harmonic stock
received in the merger and the Semiconductor stock received in proportion
to their relative fair market values on the date of the distribution.

- Your holding period in the Semiconductor stock received in the
distribution will include the holding period of the C-Cube Microsystems
stock with respect to which the Semiconductor stock is distributed,
provided the C-Cube Microsystems stock was held as a capital asset on the
date of the distribution.

- You will recognize gain or loss with respect to cash you receive instead
of fractional shares of Semiconductor stock. This gain or loss will be a
capital gain or loss provided your C-Cube Microsystems stock was held as
a capital asset on the date of the distribution, and it will be a long-
term capital gain or loss if you have held your C-Cube stock for more
than one year on the date of the distribution.

- Upon the future sale or other disposition of your Semiconductor stock,
you should have a taxable gain or loss equal to the difference between
the value of the consideration received and your basis in your
Semiconductor stock.

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The Ernst & Young LLP opinion referred to above will be based on and
subject to certain limitations, qualifications, assumptions and representations
provided by C-Cube Microsystems and Semiconductor. C-Cube Microsystems is not
aware of any present facts or circumstances which would make such assumptions or
representations untrue. However, certain future events not within the control of
C-Cube Microsystems or Semiconductor, including, for example, certain
dispositions of Semiconductor stock, could cause the distribution of
Semiconductor stock not to qualify for tax-free treatment to our stockholders.
In addition, even in the absence of an inaccurate assumption or representation,
the IRS is not precluded from successfully asserting that the distribution is
taxable to the C-Cube shareholders. The opinion of Ernst & Young LLP merely
represents its interpretation of existing authorities and is not binding on the
IRS.

Risk of Taxable Treatment. If the distribution of Semiconductor stock did
not qualify for tax-free treatment for the stockholders of C-Cube Microsystems,
each holder of C-Cube Microsystems stock who received Semiconductor stock would
be treated as receiving a taxable distribution, which might be treated as
taxable capital gains or taxable ordinary income up to the value of the stock
distributed.

MATERIAL FEDERAL INCOME TAX CONSIDERATIONS OF THE SPIN-OFF -- CORPORATE TAX
CONSIDERATIONS.

Notwithstanding the treatment of the transaction for our stockholders, the
spin-off will be taxable to C-Cube Microsystems. C-Cube Microsystems will
recognize a taxable gain approximately equal to the difference between the fair
market value of Semiconductor on the date of distribution, minus our basis in
the assets (net of liabilities) that we will transfer to Semiconductor, minus
certain expenses related to the spin-off transaction. C-Cube Microsystems has
estimated, based on certain assumptions, including an assumed fair market value
for the stock of the spin-off semiconductor business, that this tax liability
will be approximately $203 million based on an assumed valuation of
Semiconductor of $975 million. The actual tax liability may differ significantly
from the estimate based on the facts and circumstances existing at the time of
the distribution. For example, the value of the stock of the spun-off
semiconductor business will likely fluctuate and if such value at the time of
the distribution exceeds the assumed value, the actual tax liability will exceed
the estimated tax liability.

Under Semiconductor's tax sharing agreement with Harmonic, Semiconductor
will be liable for the originally calculated corporate tax incurred as a result
of the spin-off, plus any increase in that corporate tax liability (plus certain
related costs) that results, for example, from an IRS audit. C-Cube Microsystems
will retain, and transfer to Harmonic, cash reserves in an amount sufficient to
pay this corporate tax liability. In addition, Semiconductor has agreed to
indemnify and hold Harmonic harmless from and against these tax liabilities to
the extent they relate to the semiconductor business, including the spin-off,
and exceed the retained cash reserve set aside for the payment of taxes.

THE FOREGOING SUMMARY OF MATERIAL INCOME TAX CONSIDERATIONS IS ONLY A
GENERAL DESCRIPTION. EACH C-CUBE MICROSYSTEMS STOCKHOLDER SHOULD CONSULT SUCH
HOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE
DISTRIBUTION IN LIGHT OF SUCH STOCKHOLDER'S PARTICULAR CIRCUMSTANCES, INCLUDING
APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN LAWS, AND THE EFFECT OF
POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE ABOVE DISCUSSION.

Material Federal Income Tax Considerations of the Merger.

For information regarding the material federal income tax considerations of
the merger of C-Cube Microsystems and Harmonic, please see the section entitled
"Federal Income Tax Consequences of the Merger and the Spin-off" beginning on
page 45 of the joint proxy statement/prospectus/information statement of
Harmonic and C-Cube Microsystems to which this information statement is
attached.

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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK

Following the distribution, Semiconductor authorized capital stock will
consist of 200,000,000 shares of common stock, $.001 par value, and 10,000,000
shares of preferred stock, $.001 par value. The description set forth below is
incomplete and is qualified by reference to certificate of incorporation or
certificate and bylaws, which are set forth in Exhibits 3.1 and 3.2.

COMMON STOCK

The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Except as
otherwise provided by law, the holders of common stock vote together with the
holders of preferred stock as one class. Subject to the rights of holders of any
shares of preferred stock which may at the time be outstanding, holders of
common stock will be entitled to such dividends as the board of directors may
declare out of funds legally available therefor. Subject to the prior rights of
creditors and holders of any preferred stock which may be outstanding from time
to time, the holders of common stock are entitled, in the event of liquidation,
dissolution or winding up of Semiconductor, to share pro rata in the
distribution of all remaining assets. The common stock is not liable for any
calls or assessments and is not convertible into any other securities. In
addition, there are no redemption or sinking fund provisions applicable to the
common stock.

PREFERRED STOCK

The certificate provides that the board of directors is authorized to
provide for the issuance of shares of preferred stock, from time to time, in one
or more series. Prior to the issuance of shares in each series, the board of
directors is required by the certificate and the DGCL to adopt resolutions and
file a Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof or the Certificate of Designation with the
Secretary of State of Delaware, fixing for each such series the designations,
preferences and relative, participating, optional or other special rights
applicable to the shares to be included in any such series and any
qualifications, limitations or restrictions thereon, including, but not limited
to, dividend rights, dividend rate or rates, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences as are permitted by
Delaware law.

DISTRIBUTION AGENT; TRANSFER AGENT AND REGISTRAR

The Distribution Agent, Transfer Agent and Registrar for the common stock
and preferred stock is Boston Equiserve.

CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW

After the distribution, certain provisions of the certificate and bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control. The certificate provides, among other things, for a
classified board of directors and eliminates the right of stockholders to take
action by written consent. The issuance of preferred stock authorized in the
certificate could have the effect of delaying or preventing a change in control.
Such preferred stock could be utilized to implement, without stockholder
approval, a stockholders' rights plan that could be triggered by certain change
in control transactions, which could delay or prevent a change in control or
could impede a merger, consolidation, takeover or other business combination
involving Semiconductor. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. We have no current plans
to issue shares of preferred stock.

In addition, the bylaws provide, among other things, that special meetings
of our stockholders may be called only by the board of directors or, the
chairman of the board of directors. The bylaws also establish procedures,
including advance notice procedures with regard to the nomination, other than by
or at the direction of the board of directors, of candidates for election as
directors.
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We are subject to the provisions of Section 203 of the DGCL, an
antitakeover law. In general, the statute prohibits a publicly held Delaware
corporation from entering into a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or transaction resulting in
a financial benefit to the interested stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of our voting capital stock.

THE PROVISIONS OF THE CERTIFICATE, BYLAWS AND DELAWARE LAW ARE INTENDED TO
ENCOURAGE POTENTIAL ACQUIRORS TO NEGOTIATE WITH US AND ALLOW OUR BOARD OF
DIRECTORS THE OPPORTUNITY TO CONSIDER ALTERNATIVE PROPOSALS IN THE INTEREST OF
MAXIMIZING STOCKHOLDER VALUE. SUCH PROVISIONS, HOWEVER, MAY ALSO HAVE THE EFFECT
OF DISCOURAGING ACQUISITION PROPOSALS OR DELAYING OR PREVENTING A CHANGE IN
CONTROL, WHICH MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF THE COMMON
STOCK.

RECENT SALES OF UNREGISTERED SECURITIES

In February 2000, Semiconductor entered into a Securities Purchase
Agreement with Thomson Multimedia S.A.. The Securities Purchase Agreement
provides that, for a purchase price of $19.78 per share of common stock, Thomson
will receive 474,747 shares of Semiconductor's common stock on a post-
investment basis and a warrant to purchase 949,494 shares of Semiconductor's
common stock post-investment basis at an exercise price of $19.78. The warrant
is fully-vested upon issuance and is exercisable approximately seven (7) years
from the date of the agreement. Notwithstanding this provision, if Thomson
attains certain milestones, the warrant will be accelerated and exercisable in
part pursuant to its terms. All of the securities issued to Thomson pursuant to
the agreement are restricted securities that have not been registered under the
Securities Act and that have been acquired for investment purposes and not to
resell.

If Thomson wishes to dispose of 33% or more of the securities that it
obtained pursuant to the agreement, Semiconductor will have the first right to
repurchase the shares in whole or in part for cash at the amount specified in
the transfer notice provided to Semiconductor by Thomson. If Semiconductor
chooses not to exercise this right, Thomson is free to transfer the shares on
terms not materially less favorable than those offered to Semiconductor to the
potential purchaser. Transfers to "qualified institutional buyers" are exempt
from this right of first refusal.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all future earnings, if any, for use in the operation
and expansion of our business and do not anticipate declaring or paying cash
dividends.

78
<PAGE> 80

INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by the DGCL, Semiconductor has included in its certificate a
provision to eliminate the personal liability of its directors for monetary
damages for breach or alleged breach of their fiduciary duties as directors,
subject to certain exceptions. In addition, the bylaws require the companies to
(i) indemnify their officers and directors under certain circumstances,
including those circumstances in which indemnification would otherwise be
discretionary, and (ii) advance expenses to their officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified. We have entered into indemnification agreements with our officers
and directors containing provisions that are in some respects broader than the
specific indemnification provisions contained in the DGCL. The indemnification
agreements may require the companies, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' and officers' insurance if available on reasonable terms.
We believe that these charter provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.

We understand that the staff of the Securities and Exchange Commission is
of the opinion that statutory, charter and contractual provisions as are
described above have no effect on claims arising under the federal securities
laws.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Semiconductor common stock is
Boston EquiServe, L.P., 150 Royall Street, Canton, MA 02021; telephone: (781)
575-3120.

79
<PAGE> 81

ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
Condensed Consolidated Balance Sheets at September 30,
1999 and December 31, 1998............................. F-23
Condensed Consolidated Statements of Income for the
quarters ended and the nine-month periods ended
September 30, 1999 and 1998............................ F-24
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1999 and 1998... F-25
Notes to Condensed Consolidated Financial Statements...... F-26
</TABLE>

F-1
<PAGE> 82

[DELOITTE & TOUCHE LOGO]

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
C-Cube Microsystems Inc.:

We have audited the accompanying consolidated balance sheets of C-Cube
Microsystems Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, such consolidated financial statements present fairly, in
all material respects, the financial position of C-Cube Microsystems Inc. and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

San Jose, California
January 21, 1999

F-2
<PAGE> 83

C-CUBE MICROSYSTEMS INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS, EXCEPT
PAR VALUE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $108,224 $145,034
Short-term investments.................................... 99,603 21,316
Accounts receivable, net of allowances: 1998 -- $17,034,
1997 -- $10,175........................................ 36,980 40,606
Inventories............................................... 16,073 15,270
Deferred income taxes..................................... 11,170 11,496
Other current assets...................................... 19,977 14,666
-------- --------
Total current assets.............................. 292,027 248,388
Property and equipment -- net............................... 29,622 23,561
Production capacity rights.................................. 12,600 18,200
Distribution rights -- net.................................. 1,483 1,648
Purchased technology -- net................................. 5,921 9,408
Other assets................................................ 1,518 2,903
-------- --------
Total............................................. $343,171 $304,108
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 19,942 $ 9,221
Accrued compensation and benefits......................... 12,379 9,639
Other accrued liabilities................................. 16,628 14,167
Income taxes payable...................................... 15,551 2,467
Deferred contract revenue................................. 6,706 3,895
Current portion of long-term obligations.................. 355 608
-------- --------
Total current liabilities......................... 71,561 39,997
Long-term obligations....................................... 23,557 87,462
Deferred income taxes....................................... 4,650 869
-------- --------
Total liabilities................................. 99,768 128,328
-------- --------
Minority interest in subsidiary............................. 28 365
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares
authorized............................................. -- --
Common stock, $0.001 par value, 150,000 shares authorized;
shares outstanding: 1998 -- 38,261, 1997 -- 36,787..... 225,265 203,728
Accumulated other comprehensive loss...................... (1,852) (1,986)
Retained earnings (deficit)............................... 19,962 (26,327)
-------- --------
Total stockholders' equity........................ 243,375 175,415
-------- --------
Total............................................. $343,171 $304,108
======== ========
</TABLE>

See notes to consolidated financial statements.
F-3
<PAGE> 84

C-CUBE MICROSYSTEMS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues............................................... $351,797 $337,012 $319,758
-------- -------- --------
Costs and expenses:
Cost of product revenues................................. 160,839 151,333 144,985
Research and development................................. 74,031 64,204 44,177
Selling, general and administrative...................... 60,512 52,732 39,002
Purchased in-process technology.......................... -- -- 131,349
-------- -------- --------
Total............................................ 295,382 268,269 359,513
-------- -------- --------
Income (loss) from operations.............................. 56,415 68,743 (39,755)
Other income (expense):
Interest income and other................................ 8,511 4,291 5,934
Interest expense and other............................... (4,272) (6,048) (5,962)
-------- -------- --------
Total............................................ 4,239 (1,757) (28)
-------- -------- --------
Income (loss) before income taxes, minority interest and
extraordinary item....................................... 60,654 66,986 (39,783)
Income tax expense......................................... 18,196 22,895 32,944
-------- -------- --------
Income (loss) before minority interest and extraordinary
item..................................................... 42,458 44,091 (72,727)
Minority interest in net income (loss) of subsidiary....... (337) (248) 318
-------- -------- --------
Income (loss) before extraordinary item.................... 42,795 44,339 (73,045)
Extraordinary gain on repurchase of convertible notes (net
of tax).................................................. 3,494 -- --
-------- -------- --------
Net income (loss).......................................... $ 46,289 $ 44,339 $(73,045)
======== ======== ========
Basic earnings (loss) per share:
Income (loss) before extraordinary item.................. $ 1.14 $ 1.21 $ (2.15)
Extraordinary item (net of tax).......................... 0.09 -- --
-------- -------- --------
Net income (loss)........................................ $ 1.24 $ 1.21 $ (2.15)
======== ======== ========
Diluted earnings (loss) per share:
Income (loss) before extraordinary item.................. $ 1.11 $ 1.15 $ (2.15)
Extraordinary item (net of tax).......................... 0.09 -- --
-------- -------- --------
Net income (loss)........................................ $ 1.19 $ 1.15 $ (2.15)
======== ======== ========
Shares:
Basic.................................................... 37,382 36,497 33,928
======== ======== ========
Diluted.................................................. 40,754 41,683 33,928
======== ======== ========
</TABLE>

See notes to consolidated financial statements.
F-4
<PAGE> 85

C-CUBE MICROSYSTEMS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK DEFERRED RECEIVABLE OTHER RETAINED
----------------- STOCK FROM COMPREHENSIVE EARNINGS
SHARES AMOUNT COMPENSATION STOCKHOLDERS LOSS (DEFICIT)
------ -------- ------------ ------------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1996.................... 32,363 $ 87,124 $(635) $(459) $ (874) $ 2,379
Net loss.................. (73,045)
Accumulated translation
adjustments............. (378)
Unrealized gain on
investments............. 1
Comprehensive loss........
Common stock issued under
stock plans............. 1,359 7,302
Common stock issued and
stock options assumed in
connection with business
acquisition............. 2,291 76,580
Tax benefit from employee
stock transactions...... 20,038
Amortization of deferred
stock compensation...... 385
Collection of notes
receivable from
stockholders............ 154
------ -------- ----- ----- ------- --------
BALANCES, DECEMBER 31,
1996.................... 36,013 191,044 (250) (305) (1,251) (70,666)
Net income................ 44,339
Accumulated translation
adjustments............. (731)
Unrealized loss on
investments............. (4)
Comprehensive income......
Common stock issued under
stock plans............. 774 9,111
Tax benefit from employee
stock transactions...... 3,573
Amortization of deferred
stock compensation...... 250
Collection of notes
receivable from
stockholders............ 305
------ -------- ----- ----- ------- --------
BALANCES, DECEMBER 31,
1997.................... 36,787 203,728 -- -- (1,986) (26,327)
Net income................ 46,289
Accumulated translation
adjustments............. 41
Unrealized gain on
investments............. 93
Comprehensive income......
Common stock issued under
stock plans............. 1,474 20,111
Tax benefit from employee
stock transactions...... 1,426
------ -------- ----- ----- ------- --------
BALANCES, DECEMBER 31,
1998.................... 38,261 $225,265 $ -- $ -- $(1,852) $ 19,962
====== ======== ===== ===== ======= ========

<CAPTION>
TOTAL
TOTAL COMPREHENSIVE
STOCKHOLDERS' INCOME
EQUITY (LOSS)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCES, JANUARY 1,
1996.................... $ 87,535
Net loss.................. (73,045) $(73,045)
Accumulated translation
adjustments............. (378) (378)
Unrealized gain on
investments............. 1 1
--------
Comprehensive loss........ $(73,422)
========
Common stock issued under
stock plans............. 7,302
Common stock issued and
stock options assumed in
connection with business
acquisition............. 76,580
Tax benefit from employee
stock transactions...... 20,038
Amortization of deferred
stock compensation...... 385
Collection of notes
receivable from
stockholders............ 154
-------- --------
BALANCES, DECEMBER 31,
1996.................... 118,572
Net income................ 44,339 $ 44,339
Accumulated translation
adjustments............. (731) (731)
Unrealized loss on
investments............. (4) (4)
--------
Comprehensive income...... $ 43,604
========
Common stock issued under
stock plans............. 9,111
Tax benefit from employee
stock transactions...... 3,573
Amortization of deferred
stock compensation...... 250
Collection of notes
receivable from
stockholders............ 305
-------- --------
BALANCES, DECEMBER 31,
1997.................... 175,415
Net income................ 46,289 $ 46,289
Accumulated translation
adjustments............. 41 41
Unrealized gain on
investments............. 93 93
--------
Comprehensive income...... $ 46,423
========
Common stock issued under
stock plans............. 20,111
Tax benefit from employee
stock transactions...... 1,426
--------
BALANCES, DECEMBER 31,
1998.................... $243,375
========
</TABLE>

See notes to consolidated financial statements.
F-5
<PAGE> 86

C-CUBE MICROSYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 46,289 $ 44,339 $(73,045)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on repurchase of convertible notes... (3,494) -- --
Minority interest in subsidiary......................... (337) (248) 318
Depreciation and amortization........................... 22,577 17,396 7,728
Deferred income taxes................................... 4,107 3,356 (9,007)
Purchased in-process technology......................... -- -- 131,349
Changes in assets and liabilities:
Receivables........................................... 4,138 (146) (890)
Inventories........................................... (490) 12,712 (6,751)
Production capacity rights............................ -- -- (24,500)
Prepaids and other assets............................. (4,457) 10,956 (455)
Accounts payable...................................... 10,153 (8,993) (6,685)
Income taxes payable.................................. 10,680 2,147 (9,789)
Deferred contract revenue............................. 2,811 (2,815) 6,710
Accrued liabilities................................... 6,352 9,926 238
--------- -------- --------
Net cash provided by operating activities................. 98,329 88,630 15,221
--------- -------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments............ 69,736 14,850 54,701
Purchases of short-term investments....................... (147,322) (29,956) (49,297)
Capital expenditures...................................... (20,037) (13,572) (17,141)
Acquisition of business (net of $8.4 million cash acquired
in 1996)................................................ -- -- (58,568)
Other assets.............................................. 207 368 (126)
--------- -------- --------
Net cash used in investing activities..................... (97,416) (28,310) (70,431)
--------- -------- --------
Cash flows from financing activities:
Bank borrowings........................................... 39,541 -- --
Repayment of bank borrowings.............................. (39,541) -- --
Notes payable -- net...................................... -- -- (8,836)
Payment of purchase consideration......................... (1,125) -- --
Payments of capital lease obligations..................... (369) (467) (626)
Repurchase of convertible subordinated notes.............. (56,099) -- --
Sale of common stock, net of notes receivable............. 20,111 9,111 7,302
Collection of stockholder notes receivable................ -- 305 154
--------- -------- --------
Net cash provided by (used in) financing activities....... (37,482) 8,949 (2,006)
--------- -------- --------
Exchange rate impact on cash and equivalents................ (241) (476) 43
--------- -------- --------
Net increase (decrease) in cash and equivalents............. (36,810) 68,793 (57,173)
Cash and equivalents, beginning of period................... 145,034 76,241 133,414
--------- -------- --------
Cash and equivalents, end of period......................... $ 108,224 $145,034 $ 76,241
========= ======== ========
Supplemental schedule of noncash investing and financing
activities:
Unrealized gain (loss) on investments..................... $ 93 $ (4) $ 1
Purchase of production capacity rights for note payable... -- -- (24,500)
Forgiveness of note payable for production capacity
rights.................................................. -- 24,500 --
Equipment acquired under lease............................ 861 -- --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest.................................................. $ 4,410 $ 5,609 $ 5,852
Income taxes.............................................. 1,092 11,473 38,127
</TABLE>

See notes to consolidated financial statements.
F-6
<PAGE> 87

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

C-Cube Microsystems Inc. (the "Company" or "C-Cube") was founded in July
1988. The Company operates in two segments as a leading provider of both digital
video semiconductor solutions which implement international standards for
digital video, including MPEG-1 and MPEG-2, and digital video networks for
broadcast communications applications.

Consolidation

The consolidated financial statements include the Company, its wholly owned
subsidiaries and C-Cube Japan, Inc. (a 65% owned Japanese subsidiary) after
elimination of intercompany accounts and transactions.

Cash and Equivalents and Short-term Investments

All highly liquid debt instruments purchased with a remaining maturity of
three months or less are classified as cash equivalents.

Management determines the classification of debt and equity securities at
the time of purchase and reevaluates the classification at each balance sheet
date. Short-term investments are classified as available-for-sale when the
Company generally has the ability and intent to hold such securities to
maturity, but, in certain circumstances, may potentially dispose of such
securities prior to their maturity to implement management strategies.
Securities available-for-sale are reported at fair value with unrealized gains
and losses reported as a separate component of stockholders' equity. All
available-for-sale securities are classified as current assets.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs which approximate actual cost on a
first-in, first-out basis.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives of three years. Equipment
under capital lease and leasehold improvements are amortized over the shorter of
their estimated useful lives, generally three years, or the lease term.

Investments in Companies

Investments in 20% to 50% owned companies are accounted for using the
equity method. Investments in less than 20% owned companies are accounted for
using the cost method unless the Company can exercise significant influence or
the investee is economically dependent upon the Company, in which case the
equity method is used. Such investments are included in other assets.

Production Capacity Rights

Production capacity rights are allocated between current and long-term
assets and are amortized over the shorter of the contract period or the actual
delivery of wafers in relation to the total amount of wafers purchased under the
agreement.

F-7
<PAGE> 88

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

Revenue Recognition and Accounts Receivable

The Company records product sales to customers and distributors at the time
of shipment. Certain of the Company's agreements with its distributors permit
limited stock rotation and provide for price protection. Allowances for returns
and adjustments, including price protection, are provided at the time sales are
recorded.

Revenue from systems contracts is recognized based on performance of
specific tasks with approval and acceptance by the customer. Completion of these
tasks are natural milestones used in measuring the progress to completion of the
project. Such tasks include design, assembly and configuration of equipment and
system performance tests at factory and at customer sites. Losses, if any, are
recorded when determinable. Unbilled receivables result from completion of tasks
as described above in advance of billing schedules. Deferred revenue arises from
billing schedules in advance of completion of tasks. It is anticipated that all
unbilled receivables from such contracts will be collected within one year.

Research and Development

Research and development expenses include costs and expenses associated
with the development of the Company's design methodology and the design and
development of new products, including initial nonrecurring engineering and
product verification charges from foundries. Research and development is
expensed as incurred.

Income Taxes

The accounting for income taxes requires an asset and liability approach
and requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities and net operating
loss and tax credit carryforwards.

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues and
expenses as of the dates and for the periods presented. Actual results could
differ from those estimates.

Fair Value of Financial Instruments

Financial instruments include cash equivalents, short-term investments, a
promissory note and convertible subordinated notes. Cash equivalents and
short-term investments are stated at fair value based on quoted market prices.
Fair value of convertible subordinated notes is determined using market
information and valuation methodologies considered to be appropriate. The
estimated fair value of the Company's convertible subordinated notes was $38
million and $70 million at December 31, 1998 and 1997, respectively. The
estimated fair value of all other financial instruments at December 31, 1998 and
1997 was not materially different from the values presented in the consolidated
balance sheets.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, accounts receivable and financial instruments used in hedging
transactions. By policy, the Company places its investments only with financial
institutions meeting its credit guidelines and, other than U.S. Government
Treasury instruments, limits the amounts
F-8
<PAGE> 89

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

invested in any one institution or in any type of instrument. Almost all of the
Company's accounts receivable are derived from sales to manufacturers and
distributors in the consumer electronics, computer and communications markets.
The Company performs ongoing credit evaluations of its customers' financial
condition and manages its exposure to losses from bad debts by limiting the
amount of credit extended whenever deemed necessary and generally does not
require collateral.

The Company is subject to credit risks related to sales made into Asia,
where an economic crisis, which resulted in several countries sharply devaluing
their currencies in 1998, is reducing the cash flows and the access to credit of
some of the Company's major customers. Approximately 49% of the Company's sales
in 1998 were into Asia. The Company is requiring letters of credit for
substantially all of its sales into Asia, except for those made into Japan and
Taiwan. Nevertheless, banks have failed in some of these countries in recent
months, and it is possible that there will be more such failures before the
crisis is settled. Bank failures could cause the letters of credit upon which
the Company is relying on not to be paid or to be paid much later than is called
for in the contract. To reduce this risk, the Company is requiring its customers
in Asia to obtain letters of credit from only the largest banks in the
customer's country, or in the case of China, the largest banks in Hong Kong and
China. However, there can be no assurance that the largest banks in these
countries will not fail, causing defaults against letters of credit.

Product and Geographic Risks

Sales of the Company's VideoCD and Chaoji VCD decoder products represent a
significant percentage of the Company's total net revenues. Declines in demand
for these products, whether as a result of competition, technological change or
otherwise, would have a material adverse effect on the Company's business and
results of operations.

The Asian consumer electronics markets accounted for approximately 49%, 55%
and 62% of total Company sales in 1998, 1997 and 1996, respectively. The
economic crisis in Asia has been characterized by increases in idle production
capacity, real estate vacancies, unemployment and bank failures, and has
resulted in currency devaluation, falling consumer spending and domestic price
deflation. Any of these factors could significantly reduce the demand for the
end user goods in which the Company's products are incorporated. Most of the
Company's sales in Asia were of decoder chips, which are used in VideoCD
players. There can be no assurance that the Company will not experience reduced
sales of its products into Asia because of declining consumer spending or
because of its customers' increasing difficulty in obtaining letters of credit,
which the Company requires prior to shipment.

Foreign Currency Translation

The functional currency of C-Cube Japan is the Japanese yen. Accordingly
all assets and liabilities of C-Cube Japan are translated at the current
exchange rate at the end of the period and revenues and costs at average
exchange rates in effect during the period. Gains and losses from foreign
currency translation are recorded as a separate component of stockholders'
equity.

Forward Exchange Contracts

In the normal course of business, the Company has exposure to foreign
currency fluctuations arising from foreign currency purchases and intercompany
sales, among other things. The Company enters into forward exchange contracts to
neutralize the impact of foreign currency fluctuations on assets and
liabilities. All foreign exchange contracts are designated as and effective as
hedges. Gains and losses on forward exchange contracts are deferred and
recognized in income when the related transactions being hedged are recognized.
The costs of entering into such contracts are not material to the Company's
financial results. The fair value of exchange

F-9
<PAGE> 90

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

contracts is determined by obtaining quoted market prices of comparable
contracts at the balance sheet date, adjusted by interpolation where necessary
for maturity differences.

At December 31, 1998, the Company had $0.6 million of outstanding foreign
exchange contracts to buy Japanese yen and $1.6 million of outstanding foreign
exchange contracts to sell Japanese yen. The net carrying value of contracts at
December 31, 1998 was $1.0 million and estimated fair value of these contracts
was $1.0 million. These contracts mature through March 1999. Also, at December
31, 1998, the Company had $4.2 million of outstanding foreign exchange contracts
to sell British pounds. The estimated fair value of these contracts was $4.2
million. These contracts mature through February 1999. Unrealized losses on
forward exchange contracts at December 31, 1998 were not material. The Company's
risk in these contracts is the cost of replacing, at current market rates, these
contracts in the event of default by the other party. These contracts are
executed with credit worthy financial institutions and are denominated in the
currency of major industrial nations.

At December 31, 1997, the Company had $13.4 million of outstanding foreign
exchange contracts to buy Japanese yen and $1.3 million of outstanding foreign
exchange contracts to sell Japanese yen, maturing through April 1998. The net
carrying value of contracts at December 31, 1997 was $12.1 million and estimated
fair value of these contracts was $11.7 million. Unrealized losses on forward
exchange contracts at December 31, 1997 were $0.4 million. Prior to 1997, the
Company held no foreign exchange contracts.

Intangibles

The Company amortizes distribution rights over 15 years and other
intangible assets over five years. The Company reviews intangibles and other
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of intangibles and other long-lived assets is measured by
comparison of its carrying amount to future net cash flows the intangibles and
other long-lived assets are expected to generate. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the intangible or other long-lived assets exceeds
its fair market value, as determined by discounted cash flows using a discount
rate reflecting the Company's average cost of funds.

During 1995, the Company and Kubota Corporation contributed additional
equity to C-Cube Japan and the Company recorded a $768,000 adjustment to paid-in
capital to reflect subsidiary losses previously recognized.

Earnings (Loss) Per Share

Basic earnings per share (EPS) excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.

Stock-Based Compensation

The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees."

Recently Issued Accounting Standards

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the
F-10
<PAGE> 91

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

statement of financial position and measure those instruments at fair value.
Adoption of this statement is not expected to materially impact the Company's
consolidated financial position, results of operations or cash flows. The
Company is required to adopt this statement in the first quarter of fiscal year
2000, with early adoption permitted.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on net income, net loss
or stockholders' equity.

NOTE 2. ACQUISITIONS

On August 28, 1996, the Company acquired DiviCom Inc., a digital video
networking company. C-Cube paid $65.7 million in cash, issued 2.3 million shares
of its common stock valued at $69.6 million, assumed options exercisable for
264,000 shares of its common stock valued at $7.0 million and incurred $1.35
million in other costs in exchange for the outstanding shares of DiviCom stock
that C-Cube did not already own. The purchase price was allocated on the basis
of the estimated fair value of the assets acquired and liabilities assumed as
follows (in thousands):

<TABLE>
<S> <C>
Fair value of tangible assets acquired (including cash of
$8,448)................................................... $ 53,741
Purchased technology........................................ 14,159
In-process technology....................................... 131,349
Liabilities assumed (including deferred tax liabilities of
$5,239)................................................... (55,653)
--------
Purchase consideration...................................... $143,596
========
</TABLE>

The purchased technology is being amortized over 5 years. The Company
incurred acquisition-related charges of $133 million, which include the
in-process technology write-off and bonuses paid to DiviCom employees.

The acquisition of DiviCom was accounted for as a purchase and therefore
DiviCom financial results from the date of acquisition, August 28, 1996, are
included in C-Cube's consolidated financial results.

Excluding the one-time charge of $133 million, intercompany sales and cost
of sales, and including amortization of purchased technology, pro forma revenue,
net income and diluted earnings per share would be $354 million, $49 million and
$1.27, respectively for the year ended December 31, 1996, assuming DiviCom had
been acquired at the beginning of the period. The pro forma results are not
necessarily indicative of what actually would have occurred if the acquisition
had been in effect for the entire period presented or of future operations of
the combined companies.

NOTE 3. PRODUCTION CAPACITY RIGHTS

In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) to provide
additional wafer production capacity in the years 1996 to 2001. The agreement
with TSMC provided that TSMC would produce and ship wafers to C-Cube at
specified prices and required C-Cube to make two advance payments totaling $49
million. An advance payment of $24.5 million was made in June 1996. In May 1997,
the Company amended its agreement with TSMC which resulted in a reduction of the
Company's future wafer purchase commitments and the forgiveness of the second
advance payment of $24.5 million. TSMC will apply the June 1996 prepayment
against a portion of the wafer cost as product is delivered to C-Cube. Advance
payments associated with wafer production capacity rights are amortized over the
shorter of the contract

F-11
<PAGE> 92

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

period or the actual delivery of wafers in relation to the total amount of
wafers purchased under the agreement. At December 31, 1998, $5.6 million of the
remaining $18.2 million production capacity rights is included in other current
assets. In January 1999, the Company signed a second amendment to its agreement
with TSMC which will result in a refund to the Company of $11.7 million from the
remaining $18.2 million balance in prepaid capacity.

NOTE 4. SHORT-TERM INVESTMENTS

Short-term investments include the following available-for-sale securities
as of December 31, 1998 and 1997:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED MARKET HOLDING HOLDING
COST VALUE GAINS LOSSES
--------- ------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998:
Commercial paper....................... $40,554 $40,550 $ 20 $(24)
Municipal bonds........................ 32,856 32,929 88 (15)
U.S. government agencies............... 26,117 26,124 7 --
------- ------- ---- ----
Total short-term investments... $99,527 $99,603 $115 $(39)
======= ======= ==== ====
1997:
Commercial paper....................... $21,333 $21,316 $ -- $(17)
======= ======= ==== ====
</TABLE>

The Company's holdings of commercial paper and U.S. government agencies
mature within one year. Holdings of municipal bonds maturing within one year
have a market value of $10.7 million, and maturing in one to five years have a
market value of $22.3 million.

The Company realized net gains of $80,000 on the sale of investments in
1998, and no gains or losses on the sale of investments in 1997 or 1996.

NOTE 5. INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods........................................... $ 3,566 $ 9,158
Work-in-process.......................................... 6,281 3,852
Raw materials............................................ 6,226 2,260
------- -------
Total.......................................... $16,073 $15,270
======= =======
</TABLE>

F-12
<PAGE> 93

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

NOTE 6. PROPERTY AND EQUIPMENT

Property and equipment consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equipment under capital lease.......................... $ 2,108 $ 2,834
Machinery and equipment -- principally computers....... 52,355 44,307
Furniture and fixtures................................. 4,542 3,559
Leasehold improvements................................. 5,529 4,727
-------- --------
Total........................................ 64,534 55,427
Accumulated depreciation and amortization.............. (34,912) (31,866)
-------- --------
Property and equipment -- net.......................... $ 29,622 $ 23,561
======== ========
</TABLE>

NOTE 7. LINE OF CREDIT AND NOTES PAYABLE TO BANKS

At December 31, 1998, the Company had an available bank line of credit of
$30,000,000 which expires May 1, 1999. Borrowings bear interest at LIBOR plus
1.25% or the bank's prime rate (7.75% at December 31, 1998). The line of credit
agreement requires the Company, among other things, to maintain a minimum
tangible net worth, annual net income (no quarterly loss exceeding $3,000,000)
and certain financial ratios. In addition, the bank agreement prohibits the
payment of cash dividends. At December 31, 1998, the Company was in compliance
with these covenants, and there were no outstanding balances under this line.

NOTE 8. LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Convertible notes (see below)............................ $22,790 $86,250
Purchase consideration (see below)....................... -- 1,125
Capital lease obligations (see Note 9)................... 717 225
Other long-term obligations.............................. 405 470
------- -------
23,912 88,070
Current portion.......................................... (355) (608)
------- -------
Long-term portion........................................ $23,557 $87,462
======= =======
</TABLE>

In November 1995, the Company completed a public debt offering of $86.3
million of convertible subordinated notes. The notes mature in 2005. Interest is
payable semi-annually at 5.875% per annum. The notes are convertible at the
option of the note holders into the Company's common stock at an initial
conversion price of $30.70 per share, subject to adjustment. Beginning in
November 1997, the notes are redeemable at the option of the Company at an
initial redemption price of 104.7% of the principal amount.

During 1998, the Company repurchased $63.5 million of the face value of the
notes at 88.4% of the principal amount, with accrued interest to the date of
repurchase. Upon repurchase of the notes, the Company recognized extraordinary
gains of $3.5 million, or $0.09 per diluted share, net of related income taxes
of $2.4

F-13
<PAGE> 94

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

million. The Company has reserved 742,345 shares of common stock for conversion
of the notes outstanding at December 31, 1998. Total offering costs of $793,000
are included in other assets and are amortized on a straight-line basis as an
adjustment to interest expense over the remaining term of the notes.

On November 1995, the Company acquired all of the outstanding capital stock
of Media Computer Technologies, Inc. (MCT), and withheld $1.1 million of the
purchase price for indemnification against unknown claims, which was included in
long-term obligations at December 31, 1997. In 1998, the Company released the
purchase consideration to MCT shareholders and option holders, as specified
under the merger agreement.

NOTE 9. LEASE COMMITMENTS

Equipment with a cost and accumulated depreciation of $2,108,000 and
$1,391,000, respectively, at December 31, 1998 (cost of $2,834,000 fully
depreciated at December 31, 1997) has been leased under capital leases. In
addition, the Company rents office and research facilities under operating lease
agreements which expire through April 2005.

Future minimum annual operating and capital lease commitments at December
31, 1998 are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $ 4,425 $ 304
2000........................................................ 3,297 304
2001........................................................ 1,436 152
2002........................................................ 1,329 --
2003........................................................ 1,338 --
Thereafter.................................................. 1,037 --
------- -----
Total minimum lease payments................................ $12,862 760
=======
Amount representing interest................................ (43)
-----
Present value of minimum lease payments..................... 717
Current portion............................................. (278)
-----
Long-term portion........................................... $ 439
=====
</TABLE>

Rent expense for operating leases was approximately $3,586,000, $3,385,000
and $2,048,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.

NOTE 10. STOCKHOLDERS' EQUITY

Preferred Stock

The number of shares of preferred stock authorized to be issued is
5,000,000 with a par value of $0.001 per share. Preferred stock may be issued
from time-to-time in one or more series. The Board of Directors is authorized to
provide for the rights, preferences, privileges and restrictions of the shares
of such series. As of December 31, 1998, no shares of preferred stock had been
issued.

F-14
<PAGE> 95

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

Common Stock

The Company has authorized 38,626,670 shares of its common stock for
issuance to founders, employees and others as designated by the Board of
Directors through the Company's stock option plans or through stock purchase
agreements. Notes receivable from stockholders were collected in 1997.

Employee Stock Option Plans

The Company's stock option plans (the "Plans") authorize the issuance of
35,777,670 shares of common stock (included in the 38,626,670 authorized shares
discussed above) for the grant of incentive or nonstatutory stock options and
the direct award or sale of shares to employees, directors, contractors and
consultants. Under the Plans, options are generally granted at fair value at the
date of grant. Such options become exercisable over periods of one to five years
and expire up to 10 years from the grant date.

Upon the acquisition of DiviCom in August 1996, 268,285 outstanding options
under DiviCom's Stock Option Plan at an average exercise price of $7.75 were
assumed by C-Cube. These options retained their original terms.

The Company repriced 6,429,078 options to $19.94, the market price on July
14, 1997, and 3,532,716 options to $38.13, the market price on September 11,
1996. The repriced shares are treated as canceled and regranted; however, the
vesting terms on the 1997 regrants were extended six months. The 1996 regrants
retained their original vesting terms.

Option activity under the Plans was as follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1996 (1,316,523 exercisable at a
weighted average price of $4.16)......................... 6,013,818 $ 12.20
Granted (weighted average fair value of $17.87)............ 8,076,424 40.57
Exercised.................................................. (1,189,523) (4.56)
Canceled................................................... (3,899,002) (44.38)
----------
Outstanding, December 31, 1996 (2,301,108 exercisable at a
weighted average price of $9.36)......................... 9,001,717 24.63
Granted (weighted average fair value of $13.02)............ 11,025,405 21.38
Exercised.................................................. (570,164) (8.47)
Canceled................................................... (7,542,412) (31.90)
----------
Outstanding, December 31, 1997 (3,699,655 exercisable at a
weighted average price of $12.93)........................ 11,914,546 17.80
Granted (weighted average fair value of $11.82)............ 5,416,528 18.60
Exercised.................................................. (1,250,803) (13.14)
Canceled................................................... (1,861,978) (19.95)
----------
Outstanding, December 31, 1998............................. 14,218,293 $ 18.23
==========
</TABLE>

F-15
<PAGE> 96

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

Additional information regarding options outstanding as of December 31,
1998 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED
AVERAGE OPTIONS EXERCISABLE
REMAINING ----------------------------
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.14 - $ 1.50 314,225 3.98 $ 0.54 314,225 $ 0.54
2.87 - 14.75 2,221,839 6.90 9.69 1,612,265 8.17
14.81 - 19.50 4,819,212 9.12 17.93 701,221 17.70
19.56 - 19.94 5,012,486 7.73 19.93 1,935,004 19.94
20.06 - 63.00 1,850,531 8.76 27.68 419,932 32.33
---------- ---- ------ --------- ------
$ 0.14 - $63.00 14,218,293 8.12 $18.23 4,982,647 $15.64
========== ==== ====== ========= ======
</TABLE>

At December 31, 1998, 871,511 shares were available for future grants.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan, under which eligible
employees may authorize payroll deductions of up to 10% of their compensation
(as defined in the plan) to purchase common stock at a price equal to 85% of the
lower of the fair market values as of the beginning or the end of the offering
period. There are 1,580,000 shares authorized under this plan. Stock issued
under the plan was 223,000, 211,000 and 171,000 shares in 1998, 1997 and 1996 at
weighted average prices of $15.52, $20.52 and $11.07, respectively. The weighted
average fair value of the 1998, 1997 and 1996 awards was $7.06, $9.46 and
$10.39, respectively. At December 31, 1998, 800,300 shares of common stock were
available for issuance under this plan.

Additional Stock Plan Information

As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements which are
granted with exercise prices equal to the fair market value at grant date.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 5.60 in 1998, 5.50 years
in 1997 and 6.25 years in 1996; stock volatility, 68% in 1998, 63% in 1997 and
66% in 1996; risk free interest rates, 5.2% in 1998, 6.1% in 1997 and 6.1% in
1996; and no dividends during the expected term. The Company's calculations are
based on a single option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the 1998, 1997 and 1996 awards had
been amortized to expense over the vesting period of the awards, pro forma net
income would have been $15.2 million ($0.52 per

F-16
<PAGE> 97

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

share) in 1998, $18.0 million ($0.54 per share) in 1997 and net loss would have
been $85.6 million ($2.52 per share) in 1996. However, the impact of outstanding
non-vested stock options granted prior to 1995 has been excluded from the pro
forma calculation; accordingly, the 1998, 1997 and 1996 pro forma adjustments
are not indicative of future period pro forma adjustments, when the calculation
will apply to all applicable stock options. Per share amounts above represent
diluted earnings per share under SFAS 128 (see Note 1).

Deferred Stock Compensation

In connection with the grants of certain stock options to employees in 1994
and 1993, the Company recorded deferred stock compensation for the difference
between the deemed fair value for accounting purposes and the option price as
determined by the Board at the grant dates. Deferred stock compensation was
amortized over the vesting period of the related stock options and was fully
amortized by December 31, 1997.

NOTE 11. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
------------------- ------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1998 1997 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) before extraordinary
item................................... $12,424 $11,597 $42,795 $44,339 $(73,045)
Extraordinary item........................ -- -- 3,494 -- --
------- ------- ------- ------- --------
Numerator for basic earnings (loss) per
share.................................. 12,424 11,597 46,289 44,339 (73,045)
Addback interest expense after tax related
to convertible shares.................. 211 883 2,242 3,532 --
------- ------- ------- ------- --------
Numerator for diluted earnings (loss) per
share.................................. $12,635 $12,480 $48,531 $47,871 $(73,045)
Denominator:
Weighted-average shares -- denominator for
basic earnings (loss) per share........ 37,884 36,738 37,382 36,497 33,928
Convertible shares........................ 743 2,809 1,871 2,809 --
Dilutive common stock equivalents, using
treasury stock method.................. 2,081 2,476 1,501 2,377 --
------- ------- ------- ------- --------
Denominator for diluted earnings (loss)
per share.............................. 40,708 42,023 40,754 41,683 33,928
======= ======= ======= ======= ========
Basic earnings (loss) per share............. $ 0.33 $ 0.32 $ 1.24 $ 1.21 $ (2.15)
======= ======= ======= ======= ========
Diluted earnings (loss) per share........... $ 0.31 $ 0.30 $ 1.19 $ 1.15 $ (2.15)
======= ======= ======= ======= ========
</TABLE>

NOTE 12. COMPREHENSIVE INCOME

In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from nonowner sources. SFAS 130 requires
unrealized gains or losses on investments and foreign currency translation
adjustments,

F-17
<PAGE> 98

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income; however, the adoption of this Statement
had no impact on net income or stockholders' equity. The Company has presented
its comprehensive income or loss in the Statement of Changes in Stockholders'
Equity. Prior year amounts have been reclassified to conform to the requirements
of SFAS 130.

The following are the components of accumulated other comprehensive loss:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Unrealized gain (loss) on investments:
Unrealized holding gains (losses) arising during period... $ 93 $ (4)
Less: reclassification adjustment for losses included in
net income............................................. (17) (13)
------- -------
Net unrealized gain (loss) on investments................... 76 (17)
Accumulated translation adjustments......................... (1,928) (1,969)
------- -------
Total............................................. $(1,852) $(1,986)
======= =======
</TABLE>

NOTE 13. INCOME TAXES

The provision for income taxes is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $10,348 $14,336 $37,087
State............................................... 1,598 2,938 4,686
Foreign............................................. 2,143 2,265 170
------- ------- -------
Total....................................... 14,089 19,539 41,943
Deferred:
Federal............................................. 4,430 3,105 (6,660)
State............................................... (323) (899) (1,189)
Foreign............................................. -- 1,150 (1,150)
------- ------- -------
Total....................................... 4,107 3,356 (8,999)
------- ------- -------
Total................................................. $18,196 $22,895 $32,944
======= ======= =======
</TABLE>

The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable by $1,426,000, $3,573,000 and $20,038,000 for
1998, 1997 and 1996, respectively.

F-18
<PAGE> 99

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

Income tax expense differs from the amount computed by applying the federal
statutory income tax rate to income before taxes as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit) computed at federal statutory
rate............................................... $21,228 $23,445 $(14,035)
State income taxes, net of federal effect............ 1,329 1,248 (1,865)
Tax credits.......................................... (2,609) (2,646) (4,710)
Change in valuation allowance........................ -- -- (1,324)
Purchased in-process technology...................... -- -- 52,080
Foreign operations taxed at different rates.......... (2,533) 1,068 1,239
Other................................................ 781 (220) 1,559
------- ------- --------
Income tax expense................................. $18,196 $22,895 $ 32,944
======= ======= ========
</TABLE>

The components of the net deferred tax asset as of December 31 were as
follows:

<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves recognized in different periods..... $11,719 $11,603
Net operating loss carryforwards.......................... 444 289
Tax credit carryforwards.................................. -- 1,607
Deferred revenue.......................................... 1,700 --
Tax basis depreciation.................................... -- 990
Other..................................................... -- 972
------- -------
Total............................................. 13,863 15,461
Valuation allowance......................................... (444) (218)
------- -------
Net............................................... 13,419 15,243
Deferred tax liabilities:
Purchased technology...................................... (2,925) (4,616)
Unrepatriated foreign earnings............................ (3,974) --
------- -------
Net deferred tax assets................................... $ 6,520 $10,627
======= =======
</TABLE>

At December 31, 1998, the Company has foreign net operating loss
carryforwards of approximately $966,000 expiring through 2003.

U.S. income taxes were not provided on a cumulative total of approximately
$17 million and $13 million of undistributed earnings from foreign subsidiaries
for the years ending December 31, 1998 and 1997, respectively. The Company
intends to reinvest these earnings indefinitely in foreign operations. It is not
practicable to estimate the income tax liability that might be incurred upon the
remittance of such earnings. The valuation allowance relates to foreign net
operating losses which the Company believes may not be realized.

NOTE 14. EXTRAORDINARY ITEM

During 1998, the Company repurchased $63.5 million of the face value of the
Company's 5.875% subordinated convertible notes due in 2005 at 88.4% of the
principal amount, with accrued interest to the

F-19
<PAGE> 100

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

date of repurchase. Upon repurchase of the notes, the Company recognized
extraordinary gains of $3.5 million, or $0.09 per diluted share, net of related
income taxes of $2.4 million.

NOTE 15. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) tax-deferred savings plan under which participants
may contribute up to 20% of their compensation, subject to certain Internal
Revenue Service limitations. The Company is not required to contribute and has
not contributed to the plan to date.

NOTE 16. DEVELOPMENT AGREEMENTS

The Company enters into development agreements with other companies for
which it receives development fees with certain payments contingent upon
attaining contract milestones. The Company generally retains ownership of the
products developed under the agreements; however, some agreements limit the
product markets in which the Company may sell the developed product. In
addition, under certain of the agreements, the Company is required to pay
royalties based on a percentage of the net sales of the products developed under
the agreements. Royalty expense was $587,000 in 1998, $1,960,000 in 1997 and
$1,860,000 in 1996.

NOTE 17. SEGMENT INFORMATION

On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which established standards for reporting information about
operating segments in annual financial statements, along with related
disclosures about products and services, geographic areas, and major customers.
The information for 1997 and 1996 has been restated from the prior year's
presentation to conform to the 1998 presentation.

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker. By this definition, C-Cube has two operating
segments: DiviCom, a wholly-owned subsidiary, and Semiconductor, a division of
C-Cube Microsystems Inc. Each of these operating segments requires its own
development and marketing strategies and therefore has separate management
teams. C-Cube acquired DiviCom in 1996 and retained the management team at that
time. DiviCom develops and integrates products and systems that enable the
transmission of digital video, audio and data over satellite, broadcast, cable
and wireless networks. These products and services allow its customers to create
"end-to-end" digital video systems. DiviCom's products include program encoders,
multiplexers, control and automation products and integration services. C-Cube's
Semiconductor division provides powerful, highly integrated, standards-based
digital video compression and decompression semiconductors. This technology has
enabled the development of a significant number of new or enhanced applications
in the consumer electronics and communications markets including VideoCD and DVD
players, desktop video production systems, decoders for digital set-top boxes
and broadcast and professional encoders.

F-20
<PAGE> 101

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

The Company evaluates performance and allocates resources based on profit
or loss from operations before interest, income taxes and extraordinary items.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.

Segment Profit and Assets

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996(2)
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:(1)
Semiconductor............................................ $209,082 $218,252 $270,631
DiviCom.................................................. 142,715 118,760 49,127
-------- -------- --------
Consolidated net revenues.................................. $351,797 $337,012 $319,758
======== ======== ========
Income (loss) from operations:
Semiconductor............................................ $ 33,113 $ 38,648 $(54,794)
DiviCom.................................................. 23,302 30,095 15,039
-------- -------- --------
Consolidated income (loss) from operations................. $ 56,415 $ 68,743 $(39,755)
======== ======== ========
Interest expense:
Semiconductor............................................ $ 3,766 $ 5,574 $ 5,446
DiviCom.................................................. -- -- 59
-------- -------- --------
$ 3,766 $ 5,574 $ 5,505
======== ======== ========
Interest income:
Semiconductor............................................ $ 5,789 $ 3,941 $ 5,544
DiviCom.................................................. 1,852 718 120
-------- -------- --------
$ 7,641 $ 4,659 $ 5,664
======== ======== ========
Depreciation and amortization expense:
Semiconductor............................................ $ 15,896 $ 10,866 $ 6,557
DiviCom.................................................. 6,681 6,530 1,171
-------- -------- --------
$ 22,577 $ 17,396 $ 7,728
======== ======== ========
Segment assets:
Semiconductor............................................ $259,297 $233,959 $232,497
DiviCom.................................................. 83,874 70,149 47,018
-------- -------- --------
Consolidated net assets.................................... $343,171 $304,108 $279,515
======== ======== ========
Capital expenditures:
Semiconductor............................................ $ 12,867 $ 7,918 $ 15,783
DiviCom.................................................. 7,170 5,654 1,358
-------- -------- --------
Consolidated capital expenditures.......................... $ 20,037 $ 13,572 $ 17,141
======== ======== ========
</TABLE>

- ---------------
(1) Revenues are shown net of eliminations of intersegment revenues. This
presentation is consistent with the Company's internal presentation of
financial information to management.

(2) DiviCom revenues, income from operations and capital expenditures for 1996
are presented subsequent to the August 28, 1996 date of acquisition. In
1996, acquisition-related charges of $131.3
F-21
<PAGE> 102

C-CUBE MICROSYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)

million and $2.6 million are included in income (loss) from operations for
Semiconductor and DiviCom, respectively.

Geographic Information

<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
NET NET NET
REVENUES(1) PROPERTY REVENUES(1) PROPERTY REVENUES(1) PROPERTY
----------- -------- ----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
North America........... $132,513 $27,462 $119,575 $22,392 $105,301 $21,538
China................... 120,348 155 123,100 122 91,731 19
Europe.................. 42,441 629 31,464 174 16,738 93
Japan................... 20,143 483 23,443 480 39,089 621
Other Asia.............. 30,345 893 38,854 393 66,624 382
Rest of World........... 6,007 -- 576 -- 275 --
-------- ------- -------- ------- -------- -------
Total......... $351,797 $29,622 $337,012 $23,561 $319,758 $22,653
======== ======= ======== ======= ======== =======
</TABLE>

- ---------------
(1) Revenues are broken out geographically by the ship-to location of the
customer.

Major Customers

During 1998, no individual customer accounted for 10% or more of the
Company's consolidated revenues. Revenues from one customer of the Company's
semiconductor segment accounted for $67.7 million and $39.1 million of the
Company's consolidated revenues in 1997 and 1996, respectively.

NOTE 18. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S
REPORT

On October 27, 1999, C-Cube entered into an Agreement and Plan of Merger
and Reorganization with Harmonic Inc., a Delaware corporation ("Harmonic"),
pursuant to which, subsequent to the sale or spin-off of C-Cube's semiconductor
business, C-Cube has agreed to merge with and into Harmonic (the "Merger"). This
Agreement was amended and restated on December 9, 1999. The Merger will be
effected through the issuance of 0.5427 shares of Harmonic stock for each share
of common stock of C-Cube outstanding immediately prior to the consummation of
the Merger. The Merger is subject to the approval of the stockholders of each
company, customary closing conditions, including applicable regulatory
clearances, and the spin-off or sale of the semiconductor business.

ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

F-22
<PAGE> 103

C-CUBE MICROSYSTEMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PAR VALUE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $117,098 $108,224
Short-term investments.................................... 160,275 99,603
Accounts receivable -- net................................ 61,046 36,980
Inventories............................................... 12,373 16,073
Deferred income taxes..................................... 11,723 11,170
Other current assets...................................... 14,914 19,977
-------- --------
Total current assets.............................. 377,429 292,027
Property and equipment -- net............................... 33,881 29,622
Production capacity rights.................................. 5,164 12,600
Distribution rights -- net.................................. 1,359 1,483
Purchased technology -- net................................. 5,139 5,921
Other assets................................................ 1,995 1,518
-------- --------
Total............................................. $424,967 $343,171
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 24,356 $ 19,942
Accrued liabilities....................................... 31,195 29,007
Income taxes payable...................................... 12,162 15,551
Deferred contract revenue................................. 5,537 6,706
Current portion of long-term obligations.................. 368 355
-------- --------
Total current liabilities......................... 73,618 71,561
Long-term obligations....................................... 20,150 23,557
Deferred income taxes....................................... 3,230 4,650
-------- --------
Total liabilities................................. 96,998 99,768
-------- --------
Minority interest in subsidiary............................. 409 28
Stockholders' equity:
Common stock, $0.001 par value, 150,000 shares authorized;
shares outstanding: 1999 -- 40,477; 1998 -- 38,261..... 270,932 225,265
Accumulated other comprehensive loss...................... (1,992) (1,852)
Retained earnings......................................... 58,620 19,962
-------- --------
Total stockholders' equity........................ 327,560 243,375
-------- --------
Total............................................. $424,967 $343,171
======== ========
</TABLE>

See notes to condensed consolidated financial statements.
F-23
<PAGE> 104

C-CUBE MICROSYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues..................................... $101,368 $86,162 $291,922 $255,997
-------- ------- -------- --------
Costs and expenses:
Cost of revenues............................... 45,210 38,757 130,947 116,768
Research and development....................... 21,094 18,867 61,659 55,134
Selling, general and administrative............ 17,462 15,207 50,677 43,756
-------- ------- -------- --------
Total.................................. 83,766 72,831 243,283 215,658
-------- ------- -------- --------
Income from operations........................... 17,602 13,331 48,639 40,339
Other income, net................................ 2,657 1,636 7,084 2,547
-------- ------- -------- --------
Income before income taxes, minority interest and
extraordinary item............................. 20,259 14,967 55,723 42,886
Income tax expense............................... 6,078 4,490 16,717 12,869
-------- ------- -------- --------
Income before minority interest and extraordinary
item........................................... 14,181 10,477 39,006 30,017
Minority interest in net income (loss) of
subsidiary..................................... 148 (185) 381 (354)
-------- ------- -------- --------
Income before extraordinary item................. 14,033 10,662 38,625 30,371
Extraordinary gain on repurchase of convertible
notes (net of tax)............................. -- 2,356 33 3,494
-------- ------- -------- --------
Net income....................................... $ 14,033 $13,018 $ 38,658 $ 33,865
======== ======= ======== ========
Basic earnings per share:
Income before extraordinary item............... $ 0.35 $ 0.29 $ 0.98 $ 0.82
Extraordinary item (net of tax)................ -- 0.06 -- 0.09
-------- ------- -------- --------
Net income..................................... $ 0.35 $ 0.35 $ 0.98 $ 0.91
======== ======= ======== ========
Diluted earnings per share:
Income before extraordinary item............... $ 0.32 $ 0.28 $ 0.91 $ 0.79
Extraordinary item (net of tax)................ -- 0.06 -- 0.09
-------- ------- -------- --------
Net income..................................... $ 0.32 $ 0.34 $ 0.91 $ 0.88
======== ======= ======== ========
Shares:
Basic.......................................... 40,097 37,424 39,368 37,215
======== ======= ======== ========
Diluted........................................ 45,021 39,686 43,224 40,769
======== ======= ======== ========
</TABLE>

See notes to condensed consolidated financial statements.
F-24
<PAGE> 105

C-CUBE MICROSYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 38,658 $ 33,865
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary gain on repurchase of convertible notes,
net of taxes.......................................... (33) (3,494)
Minority interest in subsidiary........................ 381 (354)
Depreciation and amortization.......................... 14,397 13,327
Deferred income taxes.................................. (1,973) 207
Changes in assets and liabilities:
Receivables.......................................... (23,758) 7,519
Inventories.......................................... 3,749 (1,314)
Other current assets................................. 858 2,926
Accounts payable..................................... 3,926 7,731
Accrued liabilities.................................. 7,089 1,946
Income taxes payable................................. (3,412) 11,195
Production capacity rights........................... 11,800 --
Deferred revenue..................................... (1,169) 1,195
--------- --------
Net cash provided by operating activities................. 50,513 74,749
--------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments............ 188,565 26,956
Purchases of short-term investments....................... (247,989) (36,073)
Capital expenditures...................................... (17,051) (14,778)
Other assets.............................................. (2,780) 592
--------- --------
Net cash used in investing activities..................... (79,255) (23,303)
--------- --------
Cash flows from financing activities:
Bank borrowings........................................... -- 39,541
Repayment of bank borrowings.............................. -- (39,541)
Repayments of capital lease obligations................... 4 (411)
Sale of common stock...................................... 40,562 7,704
Repurchase of convertible subordinated notes.............. (3,271) (56,077)
--------- --------
Net cash provided by (used in) financing activities....... 37,295 (48,784)
--------- --------
Exchange rate impact on cash and equivalents................ 321 99
--------- --------
Net increase in cash and equivalents........................ 8,874 2,761
Cash and equivalents, beginning of period................... 108,224 145,034
--------- --------
Cash and equivalents, end of period......................... $ 117,098 $147,795
========= ========
Supplemental schedule of noncash investing and financing
activities:
Unrealized gain (loss) on investments..................... $ (295) $ 87
Equipment acquired under lease............................ -- 1,382
Conversion of notes at option of holder................... 48 --
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest............................................... $ 818 $ 3,659
Income taxes........................................... 11,985 1,011
</TABLE>

See notes to condensed consolidated financial statements.
F-25
<PAGE> 106

C-CUBE MICROSYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements contained in this
report have been prepared by C-Cube Microsystems Inc. ("C-Cube" or the
"Company"). In the opinion of management, such financial statements include all
normal recurring adjustments and accruals necessary for a fair presentation of
the Company's financial position as of September 30, 1999, and the results of
operations for the quarters and nine months ended September 30, 1999 and 1998
and cash flows for the nine months ended September 30, 1999 and 1998. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. This unaudited quarterly information should
be read in conjunction with the audited consolidated financial statements of
C-Cube and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.

2. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs which approximate actual cost on a
first-in, first-out basis. Inventories consist of:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods..................................... $ 8,097 $ 3,566
Work-in-process.................................... 2,547 6,281
Raw materials...................................... 1,729 6,226
------- -------
Total.................................... $12,373 $16,073
======= =======
</TABLE>

3. PRODUCTION CAPACITY RIGHTS

In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provided that TSMC would produce and ship wafers to C-Cube
at specified prices and required C-Cube to make two advance payments totaling
$49 million. An advance payment of $24.5 million was made in June 1996. In May
1997, the Company amended its agreement with TSMC which resulted in a reduction
of the Company's future wafer purchase commitments and the forgiveness of the
second advance payment of $24.5 million. In January 1999, TSMC refunded $11.8
million of the advance payment to the Company. TSMC will apply the remaining
prepayment against a portion of the wafer cost as product is delivered to
C-Cube. Accordingly, the prepaid amount, which has been allocated between
current and long-term assets, will be amortized to inventory as wafers are
received.

F-26
<PAGE> 107
C-CUBE MICROSYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item.................... $14,033 $10,662 $38,625 $30,371
Extraordinary item.................................. -- 2,356 33 3,494
------- ------- ------- -------
Numerator for basic earnings per share.............. 14,033 13,018 38,658 33,865
Addback interest income after tax related to
convertible shares................................ 186 333 577 2,031
------- ------- ------- -------
Numerator for diluted earnings per share............ $14,219 $13,351 $39,235 $35,896
======= ======= ======= =======
Denominator:
Weighted-average shares -- denominator for basic
earnings per share................................ 40,097 37,424 39,368 37,215
Convertible shares.................................. 633 1,216 660 2,247
Dilutive common stock equivalents, using treasury
stock method...................................... 4,291 1,046 3,196 1,307
------- ------- ------- -------
Denominator for diluted earnings per share.......... 45,021 39,686 43,224 40,769
======= ======= ======= =======
Basic earnings per share............................ $ 0.35 $ 0.35 $ 0.98 $ 0.91
======= ======= ======= =======
Diluted earnings per share.......................... $ 0.32 $ 0.34 $ 0.91 $ 0.88
======= ======= ======= =======
</TABLE>

5. COMPREHENSIVE INCOME

For the quarters ended September 30, 1999 and 1998, comprehensive income,
which was comprised of the Company's net income for the periods, changes in
accumulated translation adjustments and unrealized gains (losses) on
investments, was $14.3 million and $13.1 million, respectively. For the nine
months ended September 30, 1999 and 1998, comprehensive income was $38.5 million
and $34.0 million, respectively.

6. EXTRAORDINARY ITEM

During the nine months ended September 30, 1999, the Company repurchased
$3.4 million of the face value of the Company's 5 7/8% Convertible Subordinated
Notes (the "Notes") due 2005 at 95.5% of the principal amount, with related
accrued interest to the date of repurchase, and recognized an extraordinary gain
of approximately $33,000 (zero effect per diluted share), net of related income
taxes of approximately $23,000. During the quarter and nine months ended
September 30, 1998, the Company repurchased $42.8 million and $63.5 million of
the face value of the Notes at 88.4% of the principal amount, with related
accrued interest to the date of repurchase, and recognized extraordinary gains
of $2.4 million and $3.5 million, or $0.06 and $0.09 per diluted share, net of
related income taxes of $1.6 million and $2.4 million, respectively.

7. SEGMENT INFORMATION

On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and
Related Information." Readers are referenced to

F-27
<PAGE> 108
C-CUBE MICROSYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Item 8, Note 17. Segment Information" in the Company's most recent Annual
Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC")
on March 23, 1999, for further discussion.

Segment information based on internal company reports used by the chief
operating decision maker is as follows (in thousands):

<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Semiconductor.................................. $ 52,308 $47,867 $158,101 $153,700
DiviCom........................................ 49,060 38,295 133,821 102,297
-------- ------- -------- --------
Consolidated net revenues........................ $101,368 $86,162 $291,922 $255,997
======== ======= ======== ========
Income from operations:
Semiconductor.................................. $ 8,807 $ 6,373 $ 27,427 $ 24,721
DiviCom........................................ 8,795 6,958 21,212 15,618
-------- ------- -------- --------
Consolidated income from operations.............. $ 17,602 $13,331 $ 48,639 $ 40,339
======== ======= ======== ========
</TABLE>

8. RECENTLY ISSUED ACCOUNTING STANDARDS

Recently Issued Accounting Standard

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed for Internal Use" SOP 98-1 requires the capitalization of
certain expenditures for software that is purchased or internally developed,
once certain criteria are met. As required, the Company adopted SOP 98-1 in
fiscal year 1999. At September 30, 1999, the Company had capitalized
approximately $661,000 of costs. Capitalized costs represent external direct
costs as well as direct payroll related costs incurred during the application
development and integration stages of the project in accordance with the
provisions of SOP 98-1. All costs incurred during the preliminary assessment of
the project were expensed as incurred. When the software is placed into service
such capitalized costs will be amortized over the estimated useful life of the
asset of three years.

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Adoption of this statement is not expected to
materially impact the Company's consolidated financial position, results of
operations or cash flows. The Company is required to adopt this statement in the
first quarter of fiscal year 2001, with early adoption permitted.

9. SUBSEQUENT EVENT

On October 27, 1999, C-Cube entered into an Agreement and Plan of Merger
and Reorganization with Harmonic Inc., a Delaware corporation ("Harmonic"),
pursuant to which, subsequent to the sale or spin-off of C-Cube's semiconductor
business, C-Cube has agreed to merge with and into Harmonic (the "Merger"). This
Agreement was amended and restated on December 9, 1999. The Merger will be
effected through the issuance of 0.5427 shares of Harmonic stock for each share
of common stock of C-Cube outstanding immediately prior to the consummation of
the Merger. The merger is subject to the approval of the stockholders of each
company, customary closing conditions, including applicable regulatory
clearances, and the spin-off or sale of the semiconductor business. The closing
is anticipated to take place during Q1 2000. Readers are referenced to the
Company's Form 8-K filed with the SEC on October 29, 1999 for more information.

F-28
<PAGE> 109

ITEM 15(b). EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1* Certificate of Incorporation of C-Cube Semiconductor Inc.
3.2* Bylaws of C-Cube Semiconductor Inc.
10.1* Form of Separation and Distribution Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.2+ Form of Tax Sharing Agreement between C-Cube Microsystems
Inc. and C-Cube Semiconductor Inc.
10.3* Form of Assignment and Assumption Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.4+ Form of Indemnification and Insurance Matters Agreement
between C-Cube Microsystems Inc. and C-Cube Semiconductor
Inc.
10.5+ Form of Transitional Services Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.6* Form of Officers' and Directors' Indemnification Agreement
10.7* Securities Purchase Agreement by and between C-Cube
Semiconductor Inc. and Thomson Multimedia S.A. dated as of
February 11, 2000.
10.8* Form of Warrant for Thomson Multimedia S.A.
</TABLE>

- ------------------------

* Previously filed.

+ To be filed with an amendment.
<PAGE> 110

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, Semiconductor Inc. has duly caused this Registration Statement on Form
10 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Milpitas, State of California on February 23, 2000.

C-CUBE SEMICONDUCTOR INC.

By: /s/ UMESH PADVAL
------------------------------------
Umesh Padval
President and Chief Executive
Officer
<PAGE> 111

INDEX TO EXHIBITS

- ------------------------

* Previously filed.

+ To be filed with an amendment.