C CUBE MICROSYSTEMS INC, DEF 14A, 1998-03-30

C CUBE MICROSYSTEMS INC
DEF 14A, 1998-03-30
COMPUTER PERIPHERAL EQUIPMENT, NEC

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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_]Preliminary Proxy Statement
[_]Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[x]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12

C-Cube Microsystems Inc.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)

Payment of Filing Fee (Check the appropriate box)

[X]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1)Title of each class of securities to which transaction applies: N/A

(2)Aggregate number of securities to which transaction applies: N/A

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: N/A

(4)Proposed maximum aggregate value of transaction: N/A

(5)Total fee paid: N/A

[_]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1)Amount Previously Paid: N/A

(2)Form, Schedule, or Registration Statement No.: N/A

(3)Filing Party: N/A

(4)Date Filed: N/A

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[LOGO OF C-CUBE MICROSYSTEMS APPEARS HERE]

March 30, 1998

Dear Stockholder:

This year's Annual Meeting of Stockholders ("Annual Meeting") of C-Cube
Microsystems Inc. (the "Company") will be held on Friday, May 8, 1998 at
1:30 p.m., local time, at the Sheraton - Silicon Valley Hotel, located at
1801 Barber Lane, Milpitas, California. You are cordially invited to
attend.

The Notice of Annual Meeting and a Proxy Statement, which describe the
formal business to be conducted at the Annual Meeting, follow this letter.

After reading the Proxy Statement, please promptly mark, sign and return
the enclosed proxy in the prepaid envelope to assure that your shares will
be represented. Your shares cannot be voted unless you date, sign and
return the enclosed proxy or attend the Annual Meeting in person.
Regardless of the number of shares you own, your careful consideration of,
and vote on, the matters before our stockholders are important.

A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 is also enclosed for your information.

We look forward to seeing you at the Annual Meeting.

Very truly yours,

/s/ Alexandre A. Balkanski
-------------------------------------
Alexandre A. Balkanski
President and Chief Executive Officer

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C-CUBE MICROSYSTEMS INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 8, 1998

To the Stockholders:

The Annual Meeting of Stockholders ("Annual Meeting") of C-Cube
Microsystems Inc. (the "Company"), will be held on Friday, May 8, 1998, at
1:30 p.m., local time, at the Sheraton - Silicon Valley Hotel, 1801 Barber
Lane, Milpitas, California 95035, for the following purposes:

1. To elect one Class I Director to hold office for a three-year term and
until his successor has been duly elected and qualified.
2. To consider and vote upon a proposal to approve the 1998 Employee Stock
Purchase Plan and the reservation of 800,000 shares of Common Stock, plus
automatic annual increases equal to the lesser of (i) 500,000 shares,
(ii) 1% of the outstanding shares or (iii) a lesser amount determined by
the Board of Directors.
3. To consider and vote upon a proposal to ratify the appointment of
Deloitte & Touche LLP as the Company's independent public accountants for
the fiscal year ending December 31, 1998.
4. To transact such other business as may properly come before the
meeting.

Stockholders of record at the close of business on March 18, 1998 are
entitled to notice of, and to vote at, the Annual Meeting and any
adjournments thereof. For ten days prior to the meeting, a complete list of
the stockholders entitled to vote at the meeting will be available for
examination by any stockholder for any purpose relating to the meeting
during ordinary business hours at the principal office of C-Cube
Microsystems Inc., which is located at 1778 McCarthy Boulevard, Milpitas,
California 95035.

By order of the Board of Directors

/S/ Alexandre A. Balkanski
-------------------------------------
Alexandre A. Balkanski
President and Chief Executive Officer

Milpitas, California
March 30, 1998

IMPORTANT: PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY
CARD IN THE ACCOMPANYING PREPAID ENVELOPE TO ASSURE THAT YOUR SHARES ARE
REPRESENTED AT THE MEETING. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY
CHOOSE TO VOTE IN PERSON EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY
CARD.

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C-CUBE MICROSYSTEMS INC.

PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS

GENERAL

The accompanying proxy is solicited by the Board of Directors of C-Cube
Microsystems Inc., a Delaware corporation ("C-Cube" or the "Company"), for
use at the Annual Meeting of Stockholders ("Annual Meeting") to be held on
Friday, May 8, 1998, at 1:30 p.m., local time, or any adjournment thereof,
for the purposes set forth in the accompanying Notice of Annual Meeting of
Stockholders. The meeting will be held at the Sheraton - Silicon Valley
Hotel located at 1801 Barber Lane, Milpitas, California 95035. The date of
this Proxy Statement is March 30, 1998, the approximate date on which this
Proxy Statement and the accompanying form of proxy were first sent or given
to stockholders.

The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 is enclosed with this Proxy Statement.

SOLICITATION AND VOTING

The cost of soliciting proxies will be borne by the Company. The Company
has engaged Corporate Investor Communications Inc. ("CIC") to assist in the
solicitation of proxies for the Annual Meeting. The Company will pay
approximately $7,000 in fees for CIC's services and will reimburse CIC for
reasonable out-of-pocket costs.

In addition, the Company will request banks and brokers, and other
custodians, nominees and fiduciaries, to solicit their customers who have
stock of the Company registered in the names of such persons and will
reimburse them for their reasonable, out-of-pocket costs. The Company may
use the services of its officers, directors and regular employees to
solicit proxies, personally or by telephone, without additional
compensation.

Only stockholders of record as of the close of business on March 18,
1998, will be entitled to vote at the meeting and any adjournment thereof.
As of that date, there were 37,124,074 shares of common stock of the
Company, par value $.001 per share ("Common Stock"), issued and
outstanding. Stockholders may vote in person or by proxy. Each holder of
shares of Common Stock is entitled to one (1) vote for each share of stock
held on the proposals presented in this Proxy Statement.

QUORUM; VOTING OF PROXIES

The Company's By-Laws provide that a majority of all of the shares of the
stock entitled to vote, whether present in person or represented by proxy,
shall constitute a quorum for the transaction of business at the Annual
Meeting. Shares that are voted "FOR," "AGAINST" or "ABSTAIN" with respect
to a matter are treated as being present at the meeting for purposes of
establishing a quorum and are also treated as shares entitled to vote at
the Annual Meeting (the "Votes Cast") with respect to such matter.

While there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, the Company believes that
abstentions should be counted for purposes of determining both (i) the
presence or absence of a quorum for the transaction of business and (ii)
the total number of Votes Cast with respect to a proposal (other than the
election of directors and ratification of appointment of the Company's
independent public accountants). In the absence of controlling precedent to
the contrary, the Company intends to treat abstentions in this manner.
Accordingly, abstentions will have the same effect as a vote against the
proposal when considered as Votes Cast.

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In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence or absence of a quorum for the transaction of
business, broker non-votes should not be counted for purposes of
determining the number of Votes Cast with respect to the particular
proposal on which the broker has expressly not voted. Accordingly, the
Company intends to treat broker non-votes in this manner. Thus, a broker
non-vote will not affect the outcome of the voting on a proposal.

All valid proxies received prior to the Annual Meeting will be voted. All
shares represented by a proxy will be voted, and where a stockholder
specifies by means of the proxy a choice ("FOR," "AGAINST," "ABSTAIN" or
"WITHHELD") with respect to any matter to be acted upon, the shares will be
voted in accordance with the specification so made. If no choice is
indicated on the proxy, the shares will be voted in favor of the proposal
(other than instances of broker non-votes).

REVOCABILITY OF PROXIES

A stockholder giving a proxy has the power to revoke his or her proxy, at
any time prior to the time it is voted, by delivering to the Secretary of
the Company a written instrument revoking the proxy or a duly executed
proxy with a later date, or by attending the Annual Meeting and voting in
person.

PROPOSAL NO. 1
Election of Directors

The Company has a classified Board of Directors consisting of two Class I
Directors (Donald McKinney and one vacancy), three Class II Directors
(Donald T. Valentine, Alexandre A. Balkanski and Gregorio Reyes), and two
Class III Directors (T. J. Rodgers and Baryn S. Futa), who will serve until
the annual meetings of stockholders to be held in 1998, 1999 and 2000,
respectively, and until their respective successors are duly elected and
qualified. At each annual meeting of stockholders, directors are elected
for a full term of three years to succeed those directors whose terms
expire on the annual meeting dates. Vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification or other
cause (other than removal from office by vote of the stockholders) may be
filled by a majority vote of the directors then in office, and directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have
been elected expires.

The term of the Class I Director will expire on the date of the upcoming
Annual Meeting. One person is to be elected to serve as Class I Director of
the Board of Directors at that meeting. Management's nominee for election
by the stockholders to this position is Donald McKinney, the current Class
I Director of the Board of Directors. If elected, the nominee will serve as
director until the Company's annual meeting of stockholders held in 2001,
and until his successor is elected and qualified. The proxies will be
voted, unless the authorization to do so is withheld, for the election of
the nominee. If the nominee declines to serve, the proxies may be voted for
such substitute nominee as the Company may designate. It is not presently
expected that the nominee will decline to serve as a director.

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The directors of the Company, including the Class I Director nominee to
be elected at the Annual Meeting, and their ages as of March 18, 1998, are
as follows:

DIRECTOR
NAME AGE POSITIONS WITH THE COMPANY SINCE
- ----- ---- -------------------------- ---------
<S> <C> <C> <C>
CLASS I DIRECTOR NOMINATED FOR
ELECTION AT THE 1998 ANNUAL
MEETING OF STOCKHOLDERS:
Donald McKinney............... 48 Director 1997
CLASS II DIRECTORS WHOSE TERM
EXPIRES AT THE 1999 ANNUAL
MEETING OF STOCKHOLDERS:
Donald T. Valentine.... ...... 65 Director 1992
Alexandre A. Balkanski, Ph.D.. 37 President, Chief Executive 1993
Officer and Director
Gregorio Reyes................ 57 Director 1992
CLASS III DIRECTORS WHOSE TERM
EXPIRES AT THE 2000 ANNUAL
MEETING OF STOCKHOLDERS:
T.J. Rodgers.................. 50 Director 1994
Baryn S. Futa................. 43 Director 1994
</TABLE>

Mr. McKinney has served on the Board of Directors 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 its Chairman of the
Board and Chief Executive Officer. 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. He is a limited partner of certain entities
affiliated with Sequoia Capital. See "EXECUTIVE COMPENSATION AND OTHER
MATTERSCertain Relationships and Related Transactions."

Mr. Valentine has served as Chairman of the Board of Directors 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 Appliances Corporation, and Vice Chairman of the Board of Cisco
Systems, Inc.

Dr. Balkanski co-founded the Company in July 1988 as Vice President. He
served as Executive Vice President and Chief Operating Officer from
February 1994 to July 1995. He has served as President and Chief Executive
Officer since July 1995. He was elected to the Board of Directors in April
1993. Prior to co-founding C-Cube, Dr. Balkanski was the co-founder and
President of Diamond Devices Inc., a semiconductor company specializing in
the development of fast algorithms for signal processing. Dr. Balkanski
currently serves on the board of directors of PMC-Sierra, Inc. and CKS
Group, Inc. Dr. Balkanski holds a B.A. in physics from Harvard College, and
an M.S. in physics and a Ph.D. in business economics from Harvard

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University. He is a limited partner of certain entities affiliated with
Sequoia Capital. See "EXECUTIVE COMPENSATION AND OTHER MATTERS-Certain
Relationships and Related Transactions."

Mr. Reyes has served on the Board of Directors 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. Since
August 1994, Mr. Reyes has been on special assignment to the office of the
President of Sunward Technologies, Inc. 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 a
Chairman of the Board of Sync Research. Mr. Reyes also serves as a director
of Western Microtechnology and several privately-held companies. He is a
limited partner of certain entities affiliated with Sequoia Capital. See
"EXECUTIVE COMPENSATION AND OTHER MATTERS-Certain Relationships and Related
Transactions."

Mr. Rodgers has served on the Board of Directors since January 1994. He
founded Cypress Semiconductor Corporation in 1983, where he currently
serves as President, Chief Executive Officer and a director. Mr. Rodgers is
a limited partner of certain entities affiliated with Sequoia Capital. See
"EXECUTIVE COMPENSATION AND OTHER MATTERS-Certain Relationships and Related
Transactions."

Mr. Futa has served on the Board of Directors 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.

There is currently one Class I Director vacancy which will remain open
while the Board of Directors considers candidates to fill such vacancy.

See also "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." A
description of the business experience of the other executive officers of
the Company is contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, filed with the Securities and
Exchange Commission and enclosed herewith. There are no family
relationships between any of the Company's directors or executive officers.

BOARD MEETINGS AND COMMITTEES

During the fiscal year ended December 31, 1997, the Board of Directors
held eight (8) meetings. No director attended fewer than 75% of the total
number of meetings of the Board of Directors and of the committees of the
Board of Directors on which such director served during the fiscal year
ended December 31, 1997.

The Company has an Audit Committee and a Compensation Committee but does
not have a standing nominating committee.

The Audit Committee's function is to review, with the Company's
independent public accountants, management and the Board of Directors, the
Company's financial reporting processes and internal financial controls.
The Audit Committee reviews the results of the examination of the Company's
financial statements by the independent public accountants and the
independent public accountants' opinion. The Audit Committee also approves
all professional services performed by the independent public accountants,
recommends the retention of the independent public accountants to the Board
of Directors, subject to ratification by the stockholders, and periodically
reviews the Company's accounting policies and internal accounting and

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financial controls. During 1997, the members of the Audit Committee were
Donald T. Valentine and Baryn S. Futa. The Audit Committee held one (1)
meeting during the fiscal year ended December 31, 1997.

The Compensation Committee's primary function is to review and approve
the compensation of C-Cube's executive officers. The Compensation Committee
also administers the Company's stock option and purchase plans and is
responsible for determining the grants of stock options under such plans.
The members of the Compensation Committee are Donald T. Valentine and
Gregorio Reyes. The Compensation Committee met seven (7) times and
conducted numerous telephonic consultations during the fiscal year ended
December 31, 1997.

COMPENSATION OF DIRECTORS

In May 1995, the Board of Directors established a standard compensation
for members of the Board of Directors, whereby each director who is not an
employee of the Company (an "Outside Director") receives an annual retainer
of $12,000 plus $1,000 and reimbursement of reasonable travel expenses for
each meeting of the Board of Directors attended. The Company does not pay
additional amounts to directors for committee participation or special
assignments of the Board of Directors.

Directors who are not employees are also automatically granted
nonqualified options to purchase C-Cube's Common Stock under the Company's
1994 Outside Directors Stock Option Plan (the "Directors Plan"). A total of
450,000 shares of Common Stock have been reserved for issuance under the
Directors Plan. Each Outside Director holding office on the effective date
of the Directors Plan who did not then hold an option to acquire shares of
C-Cube's Common Stock received an option to purchase 40,000 shares of
Common Stock on the effective date of the Directors Plan. Each person who
is newly elected or appointed as an Outside Director after the effective
date of the Directors Plan receives an option to purchase 40,000 shares of
Common Stock on the day immediately following such initial election or
appointment. Thereafter, each Outside Director generally receives an option
to purchase 10,000 shares of Common Stock on each anniversary date. Options
granted under the Directors Plan vest over four years and generally must be
exercised within ten years. Shares of Common Stock underlying options
granted under the Directors Plan vest at the rate of one-fourth (1/4) of
the total number of shares of Common Stock underlying the option one year
after the date of grant and one forty-eighth (1/48) of such shares on the
last date of each full month thereafter until all of the shares of Common
Stock underlying the option have vested. The exercise price of the options
in all cases will be equal to the fair market value per share of the Common
Stock on the date of grant.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

The nominee for Class I Director receiving the highest number of votes
will be elected as the Class I Director.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION
OF MR. DONALD McKINNEY.

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PROPOSAL NO. 2
Approval of the 1998 Employee Stock Purchase Plan

As a result of a recent change in the financial accounting rules
regarding employee stock purchase plans, the Board of Directors determined
that it is in the best interests of the Company and its stockholders to
allow the current 1994 Employee Stock Purchase Plan to terminate and to
adopt a new 1998 Employee Stock Purchase Plan ("Purchase Plan") that
provides for an automatic share replenishment feature (described below). On
February 2, 1998, the Board of Directors adopted the Plan and reserved
800,000 shares of Common Stock, plus automatic annual increases equal to
the lesser of (i) 500,000 shares, (ii) 1% of the outstanding shares or
(iii) a lesser amount determined by the Board of Directors for issuance
thereunder subject to stockholder approval.

In order to reduce dilution to stockholders, the Board of Directors, in
conjunction with the adoption of the Purchase Plan, approved an amendment
to the 1994 Employee Stock Plan that (beginning in 1999) reduces the
automatic annual share replenishment from 5% of the outstanding shares of
Common Stock to 4% of the outstanding shares Common Stock, subject to
approval by the stockholders of this proposal.

As of the date of stockholder approval of the Purchase Plan, no options
had been granted pursuant to the Purchase Plan.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

The affirmative vote of a majority of the Votes Cast is required for
approval of this proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THE 1998 EMPLOYEE STOCK PURCHASE PLAN AND THE RESERVATION OF SHARES
THEREUNDER.

Description of the Purchase Plan

GENERAL. The purpose of the Purchase Plan is to provide employees with
an opportunity to purchase Common Stock of the Company through payroll
deductions.

ADMINISTRATION. The Purchase Plan may be administered by the Board of
Directors (the "Board") or a committee appointed by the Board. All
questions of interpretation or application of the Purchase Plan are
determined by the Board or its appointed committee, and its decisions are
final, conclusive and binding upon all participants.

ELIGIBILITY. Each employee of the Company (including officers), whose
customary employment with the Company is at least twenty (20) hours per
week and more than five (5) months in any calendar year, is eligible to
participate in an Offering Period (as defined below); provided, however,
that no employee shall be granted an option under the Purchase Plan (i) to
the extent that, immediately after the grant, such employee would own 5% of
either the voting power or value of the stock of the Company, or (ii) to
the extent that his or her rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds twenty-
five thousand dollars ($25,000) worth of stock (determined at the fair
market value of the shares at the time such option is granted) for each
calendar year. Eligible employees become participants in the Purchase Plan
by filing with the Company a subscription agreement authorizing payroll
deductions prior to the beginning of each Offering Period unless a later
time for filing the subscription agreement has been set by the Board. As of
the date of this Proxy Statement, approximately 790 Company employees were
eligible to participate in the Purchase Plan.

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PARTICIPATION IN AN OFFERING. The Purchase Plan is implemented by
consecutive overlapping offering periods generally lasting for two (2)
years (an "Offering Period"), with a new Offering Period commencing on the
first trading day on or after February 1 and August 1 of each year;
provided, however, that the first Offering Period under the Plan will
commence on the first trading day on or after May 16, 1998 and the second
Offering Period under the Plan will commence on the first trading day on or
after February 1, 1999. Common Stock may be purchased under the Purchase
Plan every six (6) months (a "Purchase Period"), provided, however, that
the first Purchase Period under the Plan will end on the last trading day
on or before January 31, 1999, unless the participant withdraws or
terminates employment earlier. To the extent the fair market value of the
Common Stock on any exercise date in an Offering Period is lower than the
fair market value of the Common Stock on the first day of the Offering
Period, then all participants in such Offering Period will be automatically
withdrawn from such Offering Period immediately after the exercise of their
options on such exercise date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof. The
Board may change the duration of the Purchase Periods or the length or date
of commencement of an Offering Period. To participate in the Purchase Plan,
each eligible employee must authorize payroll deductions pursuant to the
Purchase Plan. Such payroll deductions may not exceed 10% of a
participant's compensation. Once an employee becomes a participant in the
Purchase Plan, the employee will automatically participate in each
successive Offering Period until such time as the employee withdraws from
the Purchase Plan or the employee's employment with the Company terminates.
At the beginning of each Offering Period, each participant is automatically
granted options to purchase shares of the Company's Common Stock. The
option expires at the end of the Purchase Period or upon termination of
employment, whichever is earlier, but is exercised at the end of each
Purchase Period to the extent of the payroll deductions accumulated during
such Purchase Period. Participation in the Purchase Plan is voluntary and
is dependent on each eligible employee's election to participate and his or
her respective determination as to the level of payroll deductions.
Accordingly, future purchases under the Purchase Plan are not determinable
as of the date hereof.

PURCHASE PRICE; SHARES PURCHASED. Shares of Common Stock may be
purchased under the Purchase Plan at a price not less than 85% of the
lesser of the fair market value of the Common Stock on (i) the first day of
the Offering Period or (ii) the last day of the Purchase Period; provided,
however, that under certain circumstances, the Purchase Price may be
adjusted to a price not less than 85% of the lesser of the fair market
value of the Common Stock on (i) the date the Company's stockholders
approve a subsequent increase in shares reserved for issuance under the
Purchase Plan or (ii) the last day of the Purchase Period. The "fair market
value" of the Common Stock on any relevant date will be the closing price
per share as reported on The Nasdaq National Market (or the mean of the
closing bid and asked prices, if no sales were reported) as quoted on such
exchange or reported in The Wall Street Journal. The number of shares of
Common Stock a participant purchases in each Purchase Period is determined
by dividing the total amount of payroll deductions withheld from the
participant's compensation during that Purchase Period by the Purchase
Price; provided, however, that the number of shares subject to the option
may not exceed 10,000 shares of the Company's Common Stock per Purchase
Period.

TERMINATION OF EMPLOYMENT. Termination of a participant's employment for
any reason, including disability or death, or the failure of the
participant to remain in the continuous scheduled employ of the Company for
at least 20 hours per week, cancels his or her option and participation in
the Purchase Plan immediately. In such event, the payroll deductions
credited to the participant's account will be returned to him or her or, in
the case of death, to the person or persons entitled thereto as provided in
the Purchase Plan.

ADJUSTMENT UPON CHANGE IN CAPITALIZATION. In the event that the stock of
the Company is changed by reason of any stock split, reverse stock split,
stock dividend, combination, reclassification or other change in the
capital structure of the Company effected without the receipt of
consideration, appropriate proportional adjustments shall be made in the
number and class of shares of stock subject to the Purchase Plan, the
number and class of shares of stock subject to options outstanding under
the Purchase Plan, and the exercise price of any such outstanding options.

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Any such adjustment shall be made by the Board, whose determination shall
be conclusive.

DISSOLUTION OR LIQUIDATION. In the event of a proposed dissolution or
liquidation, the Offering Period then in progress will be shortened and a
new exercise date will be set.

MERGER OR ASSET SALE. In the event of a merger of the Company with or
into another corporation or a sale of substantially all of the Company's
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 PLAN. The Board of Directors may at any
time terminate or amend the Purchase Plan. An Offering Period may be
terminated by the Board of Directors at the end of any Purchase Period if
the Board determines that termination of the Purchase Plan is in the best
interests of the Company and its shareholders. No amendment shall be
effective unless it is approved by the holders of a majority of the votes
cast at a duly held shareholders' meeting, if such amendment would require
shareholder approval in order to comply with Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Purchase Plan will
terminate in 2008.

WITHDRAWAL. Generally, a participant may withdraw from an Offering
Period at any time without affecting his or her eligibility to participate
in future Offering Periods. However, once a participant withdraws from a
particular offering, that participant may not participate again in the same
offering.

FEDERAL TAX INFORMATION FOR PURCHASE PLAN. The Purchase Plan, and the
right of participants to make purchases thereunder, is intended to qualify
under the provisions of Sections 421 and 423 of the Code. Under these
provisions, no income will be taxable to a participant until the shares
purchased under the Purchase Plan are sold or otherwise disposed of. Upon
sale or other disposition of the shares, the participant will generally be
subject to tax and the amount of the tax will depend upon the holding
period. If the shares are sold or otherwise disposed of more than two (2)
years from the first day of the Offering Period or more than one (1) year
from the date of transfer of the stock to the participant, then the
participant will recognize ordinary income measured as the lesser of
(i) the excess of the fair market value of the shares at the time of such
sale or disposition over the purchase price, or (ii) an amount equal to 15%
of the fair market value of the shares as of the first day of the Offering
Period. Any additional gain will be treated as long-term capital gain. If
the shares are sold or otherwise disposed of before the expiration of this
holding period, the participant will recognize ordinary income generally
measured as the excess of the fair market value of the shares on the date
the shares are purchased over the purchase price. Any additional gain or
loss on such sale or disposition will be long-term or short-term capital
gain or loss, depending on the holding period. The Company is not entitled
to a deduction for amounts taxed as ordinary income or capital gain to a
participant except to the extent of ordinary income is recognized by
participants upon a sale or disposition of shares prior to the expiration
of the holding period(s) described above.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED
UNDER THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE
PROVISIONS OF THE CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX
CONSEQUENCES OF A PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE
OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.

8
<PAGE>

PROPOSAL NO. 3
Ratification of Appointment of Independent Public Accountants

The Board of Directors of the Company has selected Deloitte & Touche LLP
as independent public accountants to audit the financial statements of the
Company for the fiscal year ending December 31, 1998. Deloitte & Touche LLP
has acted in such capacity since its appointment in 1991. Notwithstanding
this selection, the Board, in its sole discretion, may direct the
appointment of new independent accountants at any time during the year, if
the Board concludes that such change is in the best interest of the Company
and its stockholders. A representative of Deloitte & Touche LLP is expected
to be present at the annual meeting, will have the opportunity to make a
statement if the representative desires to do so, and is expected to be
available to respond to appropriate questions.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

The affirmative vote of a majority of the Votes Cast is required for
approval of this proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31,
1998.

9
<PAGE>

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of March 18, 1998,
with respect to the beneficial ownership of the Company's Common Stock by
(i) all persons known by the Company to be the beneficial owners of more
than 5% of the outstanding Common Stock of the Company, (ii) each director
of the Company, (iii) the Chief Executive Officer and the four other most
highly compensated executive officers of the Company as of December 31,
1997, whose salary and incentive compensation for the fiscal year ended
December 31, 1997 exceeded $100,000, and (iv) all executive officers and
directors of the Company as a group:

<TABLE>
<CAPTION>
SHARES OWNED
---------------------------
FIVE-PERCENT STOCKHOLDERS, NUMBER OF PERCENTAGE
DIRECTORS AND EXECUTIVE OFFICERS (1) SHARES OF CLASS
------------------------------------ --------- ----------
<S> <C> <C>
FIVE-PERCENT STOCKHOLDERS: N/A N/A
DIRECTORS AND EXECUTIVE OFFICERS:
Donald T. Valentine (2).................. 1,109,915 3.0%
Alexandre A. Balkanski (3)............... 844,370 2.2%
T. J. Rodgers (4)........................ 121,357 *
Mark K. Allen (5)........................ 99,372 *
Alexander D. Daly (6).................... 80,244 *
Richard Foreman (7)...................... 58,833 *
Baryn S. Futa (8)........................ 51,253 *
John J. Hagedorn (9)..................... 33,401 *
Gregorio Reyes (10)...................... 19,659 *
Donald McKinney (11)..................... 13,852 *
All executive officers and directors as a
group (10 persons) (2)-(12)............. 2,432,256 6.4%
</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) Includes 25,000 shares subject to an option that is exercisable within
60 days of March 18, 1998. Mr. Valentine is a general partner of
certain entities affiliated with Sequoia Capital and, therefore, may be
deemed to beneficially own the shares of Common Stock held by such
entities, including 868,349 shares held by Sequoia Capital Growth Fund
and 52,338 shares held by Sequoia Technology Partners III. 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.

(3) Includes 558,336 shares subject to options that are exercisable within
60 days of March 18, 1998.

(4) Includes 100,000 shares subject to a vested option that is immediately
exercisable, and 2,504 shares held of record by entities affiliated
with Sequoia Capital which are beneficially owned by Mr. Rodgers, who
is a limited partner of such entities. Also includes 17,499 shares
subject to an option that is exercisable within 60 days of March 18,
1998.

(5) Includes 95,777 shares subject to options that are exercisable within
60 days of March 18, 1998.

(6) Includes 77,765 shares subject to options that are exercisable within
60 days of March 18, 1998.

10
<PAGE>

(7) Includes 52,500 shares subject to options that are exercisable within
60 days of March 18, 1998.

(8) Includes 35,000 shares subject to a vested option that is immediately
exercisable. Also includes 16,251 shares subject to options that are
exercisable within 60 days of March 18, 1998.

(9) Includes 32,500 shares subject to an option that is exercisable within
60 days of March 18, 1998.

(10) Includes 15,000 shares subject to options that are
exercisable within 60 days of March 18, 1998. Also includes 1,144
shares held of record by entities affiliated with Sequoia Capital which
are beneficially owned by Mr. Reyes, who is a limited partner of such
entities.

(11) Includes 12,500 shares subject to an option that
is exercisable within 60 days of March 18, 1998.

(12) Includes 135,000 shares subject to vested options
that are immediately exercisable. Also includes 903,128 shares subject
to options that are exercisable within 60 days of March 18, 1998.

11
<PAGE>

EXECUTIVE COMPENSATION AND OTHER MATTERS

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company as of December 31, 1997:

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 1997 207,500 79,744 5,400(2) 400,000 0
President and Chief 1996 199,999 487,153 5,400(2) 150,000 0
Executive Officer 1995 187,500(3) 277,345(3) 5,400(2) 500,000 0
John J. Hagedorn 1997 119,300(4) 14,952 0 150,000 0
Vice President of Finance 1996 -- -- -- -- --
and Administration, Chief 1995 -- -- -- -- --
Financial Officer and
Assistant Corporate
Secretary
Alexander D. Daly 1997 168,750 21,930 0 153,182(5) 0
Senior Vice President 1996 150,000 153,105 0 0 0
of Sales and Corporate 1995 83,500(6) 98,876 0 240,000 0
Marketing
Mark K. Allen 1997 182,500 23,923 0 198,651(5) 0
Senior Vice President 1996 175,000 167,024 0 40,000 0
of Operations 1995 145,337(7) 173,143 0 240,000 0
Richard Foreman 1997 161,250 21,930 0 180,000(5) 0
Vice President, Chief 1996 146,250 168,105 0 100,000 0
Information Officer 1995 131,250(8) 78,181 0 0 0
and 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) Dr. Balkanski has served as President and Chief
Executive Officer since July 1995. Dr. Balkanski's compensation for 1995
includes compensation he received for his service as Executive Vice
President and Chief Operating Officer until his appointment to the
office of President and Chief Executive Officer in July 1995.
(4) Mr. Hagedorn became an employee of the Company in
March 1997.
(5) In July 1997, the Company repriced stock options
that had an exercise price in excess of the fair market value in effect
on the date of repricing. Some of the option grants indicated reflect
previously granted options that were repriced as if such options had
been newly granted in July 1997. See "Stock Option Repricing."
(6) Mr. Daly became an employee of the Company in June 1995.
(7) Mr. Allen became an employee of the Company in February 1995.
(8) Includes compensation earned by Mr. Foreman as
Director of Information Technology through December 1995.

The Company 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.

12
<PAGE>

STOCK OPTION GRANTS

The following table provides the specified information concerning grants
of options to purchase the Company's Common Stock made during the fiscal
year ended December 31, 1997 to the persons named in the Summary
Compensation Table:

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1997
---------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES
OPTIONS OF STOCK PRICE
GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES OR BASE 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.. 400,000 3.7 23.5000 04/04/07 5,911,609 14,981,179
John J. Hagedorn........ 150,000 1.4 26.0000 03/31/07 2,452,689 6,215,596
Alexander D. Daly....... 60,000 0.5 23.5000 04/04/07 886,741 2,247,177
Alexander D. Daly....... 60,000(3) 0.5 19.9375 04/04/97 726,185 1,825,753
Alexander D. Daly....... 33,182 0.3 18.5000 12/12/07 386,058 978,346
Mark K. Allen........... 9,318 0.09 18.5000 12/12/07 108,411 274,734
Mark K. Allen..... ..... 75,000(3) 0.7 19.9375 04/04/07 907,731 2,282,192
Mark K. Allen........... 75,000 0.7 23.5000 04/04/06 1,108,427 2,808,971
Mark K. Allen...... .... 39,333(3) 0.4 19.9375 04/11/06 417,162 1,020,070
Richard Foreman......... 40,000 0.4 23.5000 04/04/07 591,161 1,498,118
Richard Foreman......... 100,000(3) 0.9 19.9375 01/17/06 1,026,487 2,493,899
Richard Foreman......... 40,000(3) 0.4 19.9375 04/04/07 484,123 1,217,169
</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.
(3) In July 1997, the Company repriced stock options that had an
exercise price in excess of the fair market value in effect on the date of
repricing. The option grants indicated reflect previously granted options
that were repriced as if such options had been newly granted in July 1997.

13
<PAGE>

STOCK OPTION EXERCISES

The following table provides the specified information concerning
exercises of options to purchase the Company's Common Stock in the fiscal
year ended December 31, 1997, and unexercised options held as of December 31,
1997, by the persons named in the Summary Compensation Table:

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

VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/97 OPTIONS AT 12/31/97(2)
SHARES VALUE ---------------------------- --------------------------
ACQUIRED ON REALIZED EXERCISABLE UNEXERCISABLE
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE ($) ($)
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski 0 0 457,293 616,459 3,286,678 1,562,308
John J. Hagedorn...... 0 0 0 150,000 0 0
Alexander D. Daly..... 20,000 325,000 50,000 183,182 215,625 388,125
Mark K. Allen......... 0 0 70,000 193,651 643,125 643,125
Richard Foreman....... 0 0 46,250 153,750 355,547 105,703
</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 $16.6875 per share,
which was the closing price per share of Common Stock on the Nasdaq
National Market on December 31, 1997, less the option exercise price
payable per share.

STOCK OPTION REPRICING

The following table sets forth all repricings of stock options held by
the Company's executive officers since the Company's initial public
offering in April 1994. See "REPORT OF THE BOARD OF DIRECTORS AND
COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION-Stock Option Repricing."

TEN-YEAR OPTION REPRICINGS

<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET PRICE EXERCISE ORIGINAL TERM
SECURITIES OF STOCK AT PRICE AT REMAINING AT
UNDERLYING TIME OF TIME OF DATE OF
OPTIONS/SARS REPRICING OR REPRICING OR NEW REPRICING OR
REPRICED OR AMENDMENT AMENDMENT EXERCISE AMENDMENT
NAME DATE AMENDED (#) ($) ($) PRICE (YEARS/DAYS)
---- ------- ------------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexander D. Daly... 7/14/97 60,000 19.9375 23.5000 19.9375 9/264
Mark K. Allen....... 7/14/97 39,333 19.9375 38.1250 19.9375 8/271
Mark K. Allen....... 7/14/97 75,000 19.9375 23.5000 19.9375 9/264
Richard Foreman..... 7/14/97 100,000 19.9375 38.1250 19.9375 8/187
Richard Foreman..... 7/14/97 40,000 19.9375 23.5000 19.9375 9/264
</TABLE>

14
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee reviews and approves the compensation of
C-Cube's executive officers and administers the Company's stock option and
purchase plans. Donald T. Valentine and Gregorio Reyes served during the
fiscal year ended December 31, 1997 as members of the Compensation
Committee of the Board of Directors. No member of the Compensation
Committee has a relationship that would constitute an interlocking
relationship with executive officers or directors of another entity.

In June 1997, the Company granted options to Pierre Lamond to purchase up
to 10,000 shares of the Company's Common Stock at a price per share of
$20.00. Such options were granted in connection with Mr. Lamond's providing
certain services and assistance to the Company. Mr. Valentine and
Mr. Lamond are general partners of Sequoia Capital.

CHANGE-IN-CONTROL ARRANGEMENTS

The Company's 1990 Stock Plan (the "1990 Plan") provides that in the
event of a transfer of control (as defined in the 1990 Plan) of the
Company, the Board of Directors will either (i) provide that any
unexercisable and/or unvested portion of the outstanding awards shall be
immediately exercisable and vested as of a date prior to the transfer of
control or (ii) arrange with the surviving, continuing, successor or
purchasing corporation, as the case may be (the "Acquiring Corporation"),
to either assume the Company's rights and obligations under outstanding
awards or substitute awards for the Acquiring Corporation's stock for such
outstanding awards. Any awards which are neither exercised as of the date
of the transfer of control nor assumed nor substituted by the Acquiring
Corporation shall terminate effective as of the date of the transfer of
control.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In payment of the exercise price of options to purchase the Company's
Common Stock exercised in February 1993 by William J. O'Meara, the Company
accepted a promissory note from Mr. O'Meara in the principal amount of
$525,000, with interest payable thereon at the rate of 6.22% per annum.
Such loan was paid in full in March 1997. Mr. O'Meara was a director of the
Company as of December 31, 1996 and retired from that position effective
February 18, 1997.

The Company granted a nonqualified stock option to Donald T. Valentine in
February 1993 but through an oversight, failed to deliver the option to
Mr. Valentine in a timely manner. As a result, Mr. Valentine incurred less
favorable tax consequences when he exercised the option than he would have
incurred had the option been timely issued by the Company and exercised
immediately thereafter by Mr. Valentine. The Company, however, gained from
this oversight by receiving a tax benefit. To rectify this matter, in June
1994, the Company entered into a tax agreement with Mr. Valentine pursuant
to which the Company (i) made payments to Mr. Valentine of $192,267, the
amount necessary to compensate him for the adverse tax consequences, (ii)
guaranteed a loan from a bank to Mr. Valentine in the amount of $279,647
and (iii) made payments to Mr. Valentine in an amount sufficient to
compensate Mr. Valentine for the interest thereon. The results of this
arrangement have not adversely affected the Company's cash flow, and the
Company believes that overall consequences of this arrangement to the
Company's financial performance in any period were not significant.

15
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock for fiscal year 1997 to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission. Such persons are required by the
Commission's regulations to furnish the Company with copies of all Section
16(a) forms filed by such persons.

Based solely on the Company's review of such forms furnished to the
Company for fiscal year 1997 and written representations from certain
reporting persons, the Company believes that all filing requirements
applicable to the Company's executive officers, directors and more than 10%
stockholders were complied with.

16
<PAGE>

REPORT OF THE BOARD OF DIRECTORS AND COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION

The Compensation Committee of the Company's Board of Directors (the
"Committee") has the exclusive authority to establish the cash compensation
for all executive officers of the Company, including the Chief Executive
Officer. The Committee also administers the Company's stock option and
purchase plans and makes grants to executive officers under such plans. The
Committee makes general recommendations regarding the plans to the Board
and reviews grants to executive officers. The Committee and the Board
consult with management and approve the compensation offered to newly hired
executives at the time offers are made to them. Thereafter, on an annual
basis at the time of each executive officer's performance review, the
Committee and the Board meets to review and approve the compensation of
each individual executive officer.

The goals of the Committee and the Board are to:

* attract, retain and motivate highly qualified employees and executive
officers who contribute to the long-term success of the Company

* align the compensation of executives with business objectives and
performance

* align incentives for executive officers with the interests of
stockholders in maximizing stock value

Through 1994, it had been the Committee's objective to provide
compensation exclusively through fixed salaries and long-term stock-based
incentive awards which serve to align the interests of the executive
officers and stockholders. The Committee had set salaries at levels which,
in the Committee members' experience, were at or below the median level for
technology companies that are comparable to the Company in age, number of
employees and revenue. Commencing with fiscal year 1995, the Committee and
the Board adopted the Management and Key Employee Performance Bonus Plan
which provides for an annual variable performance award payable in cash
tied to specific measures of the Company's financial performance as well as
individual performance based upon individual performance objectives. The
Committee and the Board adopted this change in order to provide strong
performance-based incentives.

As a result of federal tax law, the Company is not allowed a federal
income tax deduction for compensation paid to certain executive officers to
the extent that compensation exceeds $1 million per officer in any fiscal
year. No officer of the Company has received compensation in excess of
$1 million to date. The Committee and the Board will continue to monitor this
issue and will formulate a policy with respect to this limitation on
deductibility if and when appropriate.

BASE SALARY

For fiscal year 1997, the base salary of each executive officer was set
based upon the results of the executive's performance review. Each
executive is reviewed annually by the Chief Executive Officer and other
members of management and given specific objectives, with the objectives
varying based upon the executive's position and responsibilities and the
specific objectives for that position for the coming year. At the next
annual review, the management of the Company reviews the performance of the
executive versus the objectives. The results of this review are then
reported to the Compensation Committee along with management's compensation
recommendation and the Compensation Committee then determines whether base
salary should be adjusted for the coming year.

17
<PAGE>

LONG-TERM INCENTIVE COMPENSATION

Through fiscal year 1994, the executive officers of the Company had been
granted options only at the time the officer joined the Company. Grants of
stock options are designed to align the interests of executive officers
with those of stockholders. The size of these grants is generally set at a
level which the Board feels is in proportion with the role and
responsibility of the executive, as well as his or her opportunity to
affect the Company's performance, while also being sufficient to attract
the executive to accept employment with the Company. The Board had
generally not made additional awards to executive officers once they joined
the Company except upon a promotion. However, beginning in fiscal year
1995, the Board made additional awards based on annual performance reviews
of each executive officer and the Board will continue to grant future
additional options on a case-by-case basis depending on the annual
performance review.

CHIEF EXECUTIVE OFFICER COMPENSATION

The salary for the Company's President and Chief Executive Officer,
Alexandre A. Balkanski, was $207,500 for fiscal year 1997. Dr. Balkanski
was also given a bonus of $79,744 and granted options to purchase 400,000
shares in light of his significant contributions to the Company. In making
its decision the Committee reviewed, in addition to the factors considered
for each executive officer as described above, Dr. Balkanski's experience
and contribution to the Company's performance during the prior fiscal year
and each of the Committee members' experience with the compensation levels
of similarly situated chief executive officers.

STOCK OPTION REPRICING

In July 1997, the Board of Directors offered all employees (except the
President and the Chief Financial Officer) the opportunity to cancel
outstanding options with exercise prices in excess of $19.9375 per share
(the fair market value of the Company's Common Stock at that time) in
exchange for options exercisable at $19.9375 per share. The terms of the
repriced options were identical to those of the canceled options except
that the repriced options are subject to a six-month extension of the
vesting period beginning on the respective dates they were issued, and
executive officers are subject to an additional twelve-month blackout on
exercising repriced options. The option exchange was an acknowledgment of
the importance to the Company of having equity incentives in the hands of
key employees. Stock options which are "out of the money" provide no
particular compensatory incentive if an employee is considering alternative
opportunities. The renewed vesting period incurred in the option exchange
was viewed as a means of retaining the services of valued employees for a
longer period of time. The Committee decided to include officers in the
exchange because of the importance of their administrative and technical
leadership to the success of the Company's business.

BOARD OF DIRECTORS COMPENSATION COMMITTEE

Donald T. Valentine Donald T. Valentine
Alexandre A. Balkanski Gregorio Reyes
Gregorio Reyes
T.J. Rodgers
Baryn S. Futa
Donald McKinney

18
<PAGE>

COMPARISON OF STOCKHOLDER RETURN

Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the
cumulative total return of the Nasdaq Composite Index and the Electronic
Components Index for the period commencing on April 20, 1994(1) and ending
on December 31, 1997(2).

Comparison Of Cumulative Total Return
From April 20, 1994 Through December 31, 1997:(3)

PERFORMANCE GRAPH APPEARS HERE

MEASUREMENT PERIOD C-CUBE NASDAQ STOCK NASDAQ ELECTRONIC
(FISCAL YEAR COVERED) MICROSYSTEMS INC MARKET COMPONENTS STOCKS
- --------------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
Measurement Pt - 04/20/94 $100 $100 $100
FYE 12/31/94 $127 $103 $109
FYE 12/31/95 $833 $146 $181
FYE 12/31/96 $493 $180 $313
FYE 12/31/97 $218 $221 $328
</TABLE>

<TABLE>
<CAPTION>
APRIL DECEMBER DECEMBER DECEMBER DECEMBER
1994 1994 1995 1996 1997
----- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nasdaq Stock Market (US) 100 103 146 180 221
Nasdaq Electronics Components Stocks 100 109 181 313 328
C-Cube Microsystems Inc. 100 127 833 493 218
</TABLE>
- -----
(1) The Company's initial public offering commenced on
April 21, 1994. For purposes of this presentation, the Company has
assumed that its initial offering price of $7.50 would have been the
closing sale price on April 20, 1994, the day prior to commencement of
trading.
(2) Assumes $100 invested on April 20, 1994 in each
investment.
(3) Total return assumes reinvestment of dividends.
Past results are not an indication of future investment returns.

19
<PAGE>

STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING

Proposals of stockholders intended to be presented at the next annual
meeting of the stockholders of the Company must be received by the Company
at its offices at 1778 McCarthy Boulevard, Milpitas, California 95035, no
later than November 30, 1998, and satisfy the conditions established by
the Securities and Exchange Commission for stockholder proposals to be
included in the Company's proxy statement for that meeting.

TRANSACTION OF OTHER BUSINESS

At the date of this Proxy Statement, the only business that the Board of
Directors intends to present or knows that others will present at the
meeting is as set forth above. If any other matter or matters are properly
brought before the meeting, or any adjournment thereof, it is the intention
of the persons named in the accompanying form of proxy to vote the proxy on
such matters in accordance with their best judgment.

By Order of the Board of Directors

/s/ Alexandre A. Balkanski
-------------------------------------
Alexandre A. Balkanski
President and Chief Executive Officer

March 30, 1998

20
<PAGE>

APPENDIX A

C-CUBE MICROSYSTEMS INC.

1998 EMPLOYEE STOCK PURCHASE PLAN

The following constitute the provisions of the 1998 Employee Stock
Purchase Plan of C-Cube Microsystems Inc.

1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company through accumulated payroll deductions. It is
the intention of the Company to have the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The provisions of the Plan, accordingly, shall be construed so as
to extend and limit participation in a manner consistent with the
requirements of that section of the Code.

2. Definitions.

(a) "Board" shall mean the Board of Directors of the Company.

(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.

(d) "Company" shall mean C-Cube Microsystems Inc. and any
Designated Subsidiary of the Company.

(e) "Compensation" shall mean all base straight time gross
earnings, commissions, overtime and bonuses, but exclusive of payments for
shift premium, incentive compensation, incentive payments and other
compensation.

(f) "Designated Subsidiary" shall mean any Subsidiary which has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.

(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is
at least twenty (20) hours per week and more than five (5) months in any
calendar year. For purposes of the Plan, the employment relationship shall
be treated as continuing intact while the individual is on sick leave or
other leave of absence approved by the Company. Where the period of leave
exceeds 90 days and the individual's right to reemployment is not
guaranteed either by statute or by contract, the employment relationship
shall be deemed to have terminated on the 91st day of such leave.

(h) "Enrollment Date" shall mean the first day of each Offering
Period.

(i) "Exercise Date" shall mean the last trading day of each
Purchase Period.

<PAGE>

(j) "Fair Market Value" shall mean, as of any date, the
value of Common Stock determined as follows:

(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day on the date of such
determination, as reported in The Wall Street Journal or such other source
as the Administrator deems reliable, or;

(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean of the closing bid and asked prices for the Common
Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;

(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by
the Board, or;

(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan
may be exercised, commencing on the first Trading Day on or after February 1
and August 1 of each year and terminating on the last Trading Day in the
periods ending twenty-four months later; provided, however, that the first
Offering Period under the Plan shall commence on the first Trading Day on
or after May 16, 1998 and shall end on the last Trading Day on or before
July 31, 2000, and the second Offering Period under the Plan shall commence
on the first Trading Day on or after February 1, 1999, and shall end on the
last Trading Day on or before January 31, 2001. The duration and timing of
Offering Periods may be changed pursuant to Section 4 of this Plan.

(l) "Plan" shall mean this 1998 Employee Stock Purchase Plan.

(m) "Purchase Price" shall mean 85% of the Fair Market
Value of a share of Common Stock on the Enrollment Date or on the Exercise
Date, whichever is lower, unless otherwise provided in Section 13(b)
hereof.

(n) "Purchase Period" shall mean the approximately six
month period commencing after one Exercise Date and ending with the next
Exercise Date, except that the first Purchase Period of the first Offering
Period shall commence on the Enrollment Date and end on the last Trading
Day on or before January 31, 1999.

(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and
the number of shares of Common Stock which have been authorized for
issuance under the Plan but not yet placed under option.

2
<PAGE>

(p) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or
a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.

(q) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.

3. Eligibility.

(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.

(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent
that, immediately after the grant, such Employee (or any other person whose
stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock of the Company and/or hold outstanding
options to purchase such stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of the capital stock of
the Company or of any Subsidiary, or (ii) to the extent that his or her
rights to purchase stock under all employee stock purchase plans of the
Company and its subsidiaries accrues at a rate which exceeds Twenty-Five
Thousand Dollars ($25,000) worth of stock (determined at the fair market
value of the shares at the time such option is granted) for each calendar
year in which such option is outstanding at any time.

4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the
first Trading Day on or after February 1 and August 1 of each year, or on
such other date as the Board shall determine, and continuing thereafter
until terminated in accordance with Section 20 hereof; provided, however,
that the first Offering Period under the Plan shall commence with the first
Trading Day on or after May 16, 1998, and shall end on the last Trading Day
on or before July 31, 2000, and the second Offering Period under the Plan
shall commence on the first Trading Day on or after February 1, 1999, and
shall end on the last Trading Day on or before January 31, 2001. The
Board shall have the power to change the duration of Offering Periods
(including the commencement dates thereof) with respect to future offerings
without shareholder approval if such change is announced at least five (5)
days prior to the scheduled beginning of the first Offering Period to be
affected thereafter.

5. Participation.

(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll
office prior to the applicable Enrollment Date.

(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last
payroll in the Offering Period to which such authorization is applicable,

3
<PAGE>

unless sooner terminated by the participant as provided in Section 10
hereof.

6. Payroll Deductions.

(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each
pay day during the Offering Period in an amount not exceeding ten percent
(10%) of the Compensation which he or she receives on each pay day during
the Offering Period.

(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in
whole percentages only. A participant may not make any additional payments
into such account.

(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase or decrease the
rate of his or her payroll deductions during the Offering Period by completing
or filing with the Company a new subscription agreement authorizing a
change in payroll deduction rate. The Board may, in its discretion, limit
the number of participation rate changes during any Offering Period. The
change in rate shall be effective with the first full payroll period
following five (5) business days after the Company's receipt of the new
subscription agreement unless the Company elects to process a given change
in participation more quickly. A participant's subscription agreement
shall remain in effect for successive Offering Periods unless terminated as
provided in Section 10 hereof.

(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at
any time during a Purchase Period. Payroll deductions shall recommence at
the rate provided in such participant's subscription agreement at the
beginning of the first Purchase Period which is scheduled to end in the
following calendar year, unless terminated by the participant as provided
in Section 10 hereof.

(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the
Company's federal, state, or other tax withholding obligations, if any,
which arise upon the exercise of the option or the disposition of the
Common Stock. At any time, the Company may, but shall not be obligated to,
withhold from the participant's compensation the amount necessary for the
Company to meet applicable withholding obligations, including any
withholding required to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by the
Employee.

7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be
granted an option to purchase on each Exercise Date during such Offering
Period (at the applicable Purchase Price) up to a number of shares of the

4
<PAGE>

Company's Common Stock determined by dividing such Employee's payroll
deductions accumulated prior to such Exercise Date and retained in the
Participant's account as of the Exercise Date by the applicable Purchase
Price; provided that in no event shall an Employee be permitted to purchase
during each Purchase Period more than 10,000 shares of the Company's Common
Stock (subject to any adjustment pursuant to Section 19), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided
in Section 8 hereof, unless the participant has withdrawn pursuant to Section
10 hereof. The option shall expire on the last day of the Offering
Period.

8. Exercise of Option.

(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at
the applicable Purchase Price with the accumulated payroll deductions in
his or her account. No fractional shares shall be purchased; any payroll
deductions accumulated in a participant's account which are not sufficient
to purchase a full share shall be retained in the participant's account for
the subsequent Purchase Period or Offering Period, subject to earlier
withdrawal by the participant as provided in Section 10 hereof. Any other
monies left over in a participant's account after the Exercise Date shall
be returned to the participant. During a participant's lifetime, a
participant's option to purchase shares hereunder is exercisable only by
him or her.

(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.

9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery
to each participant, as appropriate, of a certificate representing the
shares purchased upon exercise of his or her option. Shares to be
delivered to a participant under the Plan shall be registered in the name
of the participant or in the name of the participant and his or her spouse.

10. Withdrawal.

(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to
exercise his or her option under the Plan at any time by giving written
notice to the Company in the form of Exhibit B to this Plan. All of the
participant's payroll deductions credited to his or her account shall be
paid to such participant promptly after receipt of notice of withdrawal and
such participant's option for the Offering Period shall be automatically
terminated, and no further payroll deductions for the purchase of shares
shall be made for such Offering Period. If a participant withdraws from an
Offering Period, payroll deductions shall not resume at the beginning of
the succeeding Offering Period unless the participant delivers to the
Company a new subscription agreement.

5
<PAGE>

(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding
Offering Periods which commence after the termination of the Offering
Period from which the participant withdraws.

11. Termination of Employment.

Upon a participant's ceasing to be an Employee, for any reason,
he or she shall be deemed to have elected to withdraw from the Plan and the
payroll deductions credited to such participant's account during the
Offering Period but not yet used to exercise the option shall be returned
to such participant or, in the case of his or her death, to the person or
persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee
for the participant's customary number of hours per week of employment
during the period in which the participant is subject to such payment in
lieu of notice.

12. Interest. No interest shall accrue on the payroll deductions of
a participant in the Plan.

13. Stock.

(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of
the Company's Common Stock which shall be made available for sale under the
Plan shall be eight hundred thousand (800,000) shares, plus an annual
increase to be added on the first day of the Company's fiscal year
(beginning 1999) equal to the lesser of (i) 500,000 shares, (ii) one
percent (1%) of the number of outstanding shares on the last Trading Day of
the immediately preceding fiscal year or (iii) a lesser amount determined
by the Board. If, on a given Exercise Date, the number of shares with
respect to which options are to be exercised exceeds the number of shares
then available under the Plan, the Company shall make a pro rata allocation
of the shares remaining available for purchase in as uniform a manner as
shall be practicable and as it shall determine to be equitable.

(b) If, the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may
exceed the number of shares of Common Stock that are available for sale
under the Plan, the Board may in its sole discretion (i) provide that the
Company shall make a pro rata allocation of the shares of Common Stock
available for purchase in as uniform a manner as shall be practicable and
as it shall determine to be equitable among all participants exercising
options to purchase Common Stock on such Exercise Date, notwithstanding any

6
<PAGE>

subsequent authorization of additional shares of Common Stock for issuance
under the Plan by the Company's stockholders, (ii) provide that the Company
shall make a pro rata allocation of the shares available for purchase in as
uniform a manner as shall be practicable and as it shall determine to be
equitable among all participants exercising options to purchase Common
Stock on such Exercise Date and terminate all Offering Periods pursuant to
Section 20 hereof or (iii) provide that, if the Fair Market Value of a
share of Common Stock on the date on which additional shares of Common
Stock are authorized for issuance hereunder by the Company's stockholders
(the "Authorization Date") is higher than the Fair Market Value of a share
of Common Stock on the Enrollment Date of any outstanding Offering Period
that commenced prior to the Authorization Date, the Purchase Price for
authorized shares available to be issued on any remaining Exercise Date of
any Offering Period in effect on the Authorization Date shall be 85% of the
Fair Market Value of a share of Common Stock on the Authorization Date or
on the Exercise Date, whichever is lower.

14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine
eligibility and to adjudicate all disputed claims filed under the Plan.
Every finding, decision and determination made by the Board or its
committee shall, to the full extent permitted by law, be final and binding
upon all parties.

15. Designation of Beneficiary.

(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's
death subsequent to an Exercise Date on which the option is exercised but
prior to delivery to such participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who
is to receive any cash from the participant's account under the Plan in the
event of such participant's death prior to exercise of the option. If a
participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.

(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under
the Plan who is living at the time of such participant's death, the Company
shall deliver such shares and/or cash to the executor or administrator of
the estate of the participant, or if no such executor or administrator has
been appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such shares and/or cash to the spouse or to any one
or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as
the Company may designate.

16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an
option or to receive shares under the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way (other than by will, the laws
of descent and distribution or as provided in Section 15 hereof) by the
participant. Any such attempt at assignment, transfer, pledge or other
disposition shall be without effect, except that the Company may treat such
act as an election to withdraw funds from an Offering Period in accordance
with Section 10 hereof.

17. Use of Funds. All payroll deductions received or held by the

7
<PAGE>

Company under the Plan may be used by the Company for any corporate
purpose, and the Company shall not be obligated to segregate such payroll
deductions.

18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to
participating Employees at least annually, which statements shall set forth
the amounts of payroll deductions, the Purchase Price, the number of shares
purchased and the remaining cash balance, if any.

19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.

(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the Reserves, the maximum number of
shares each participant may purchase each Purchase Period (pursuant to
Section 7), as well as the price per share and the number of shares of
Common Stock covered by each option under the Plan which has not yet been
exercised shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to
an option.

(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in
progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"), and shall terminate immediately prior to the consummation
of such proposed dissolution or liquidation, unless provided otherwise by
the Board. The New Exercise Date shall be before the date of the
Company's proposed dissolution or liquidation. The Board shall notify each
participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date
the participant has withdrawn from the Offering Period as provided in
Section 10 hereof.

(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or
a Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the option, any
Purchase Periods then in progress shall be shortened by setting a new
Exercise Date (the "New Exercise Date") and any Offering Periods then in

8
<PAGE>

progress shall end on the New Exercise Date. The New Exercise Date shall
be before the date of the Company's proposed sale or merger. The Board
shall notify each participant in writing, at least ten (10) business days
prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise
Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.

20. Amendment or Termination.

(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section
19 hereof, no such termination can affect options previously granted,
provided that an Offering Period may be terminated by the Board of
Directors on any Exercise Date if the Board determines that the termination
of the Offering Period is in the best interests of the Company and its
shareholders. Except as provided in Section 19 hereof, no amendment may
make any change in any option theretofore granted which adversely affects
the rights of any participant. To the extent necessary to comply with
Section 423 of the Code (or any successor rule or provision or any other
applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as
required.

(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected,"
the Board (or its committee) shall be entitled to change the Offering
Periods, limit the frequency and/or number of changes in the amount
withheld during an Offering Period, establish the exchange ratio applicable
to amounts withheld in a currency other than U.S. dollars, permit payroll
withholding in excess of the amount designated by a participant in order to
adjust for delays or mistakes in the Company's processing of properly
completed withholding elections, establish reasonable waiting and
adjustment periods and/or accounting and crediting procedures to ensure
that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole
discretion advisable which are consistent with the Plan.

21. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have
been duly given when received in the form specified by the Company at the
location, or by the person, designated by the Company for the receipt
thereof.

22. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to an option unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, the rules and regulations promulgated thereunder,
and the requirements of any stock exchange upon which the shares may then
be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.

9
<PAGE>

As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the
time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation
is required by any of the aforementioned applicable provisions of law.

23. Term of Plan. The Plan shall become effective upon the earlier
to occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section 20 hereof.

24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if
the Fair Market Value of the Common Stock on any Exercise Date in an Offering
Period is lower than the Fair Market Value of the Common Stock on the
Enrollment Date of such Offering Period, then all participants in such
Offering Period shall be automatically withdrawn from such Offering Period
immediately after the exercise of their option on such Exercise Date and
automatically re-enrolled in the immediately following Offering Period as
of the first day thereof.

10
<PAGE>

EXHIBIT A
---------

C-CUBE MICROSYSTEMS INC.

1998 EMPLOYEE STOCK PURCHASE PLAN

SUBSCRIPTION AGREEMENT

_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)

1. _____________________________________________________ hereby elects to
participate in the C-Cube Microsystems Inc. 1998 Employee Stock
Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Employee Stock Purchase Plan.

2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (not to exceed 10%) during
the Offering Period in accordance with the Employee Stock Purchase
Plan. (Please note that no fractional percentages are permitted.)

3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise
my option.

4. I have received a copy of the complete Employee Stock Purchase Plan.
I understand that my participation in the Employee Stock Purchase Plan
is in all respects subject to the terms of the Plan. I understand
that my ability to exercise the option under this Subscription
Agreement is subject to shareholder approval of the Employee Stock
Purchase Plan.

5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse only):
_____________________________________.

6. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Enrollment Date (the first day of
the Offering Period during which I purchased such shares) or one year
after the Exercise Date, I will be treated for federal income tax
purposes as having received ordinary income at the time of such
disposition in an amount equal to the excess of the fair market value
of the shares at the time such shares were purchased by me over the

<PAGE>

price which I paid for the shares. I hereby agree to notify the
Company in writing within 30 days after the date of any disposition of
my shares and I will make adequate provision for Federal, state or
other tax withholding obligations, if any, which arise upon the
disposition of the Common Stock. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to
meet any applicable withholding obligation including any withholding
necessary to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of
the 2-year and 1-year holding periods, I understand that I will be
treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of
(1) the excess of the fair market value of the shares at the time of
such disposition over the purchase price which I paid for the shares,
or (2) 15% of the fair market value of the shares on the first day of
the Offering Period. The remainder of the gain, if any, recognized on
such disposition will be taxed as capital gain.

7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase
Plan.

8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:

NAME: (Please print)______________________________________________
(First) (Middle) (Last)

__________________________ _____________________________________________
Relationship

_____________________________________________
(Address)

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<PAGE>

Employee's Social
Security Number: ____________________________________

Employee's Address: ____________________________________

____________________________________

I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT
THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.

Dated:____________________ _______________________________________
Signature of Employee

_______________________________________
Spouse's Signature (If beneficiary other than
spouse)

3
<PAGE>

EXHIBIT B
---------

C-CUBE MICROSYSTEMS INC.

1998 EMPLOYEE STOCK PURCHASE PLAN

NOTICE OF WITHDRAWAL

The undersigned participant in the Offering Period of the C-Cube
Microsystems Inc. 1998 Employee Stock Purchase Plan which began on
____________, 19____ (the "Enrollment Date") hereby notifies the Company
that he or she hereby withdraws from the Offering Period. He or she hereby
directs the Company to pay to the undersigned as promptly as practicable
all the payroll deductions credited to his or her account with respect to
such Offering Period. The undersigned understands and agrees that his or
her option for such Offering Period will be automatically terminated. The
undersigned understands further that no further payroll deductions will be
made for the purchase of shares in the current Offering Period and the
undersigned shall be eligible to participate in succeeding Offering Periods
only by delivering to the Company a new Subscription Agreement.

Name and Address of Participant:

________________________________

Signature:

________________________________

Date:__________________________

<PAGE>
APPENDIX B

PROXY C-CUBE MICROSYSTEMS INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS

The undersigned hereby appoints Alexandre A. Balkanski and Richard
Foreman, and each of them, with full power of substitution, to represent the
undersigned and to vote all of the shares of stock in C-Cube Microsystems Inc.
(the "Company") which the undersigned is entitled to vote at the Annual Meeting
of the Stockholders of the Company to be held at the Sheraton - Silicon Valley
Hotel, located at 1801 Barber Lane, Milpitas, California 95035 on May 8,
1998 at 1:30 p.m. Pacific Time and at any adjournment thereof (1) as
hereinafter specified upon the proposals listed on the reverse side and as more
particularly described in the Proxy Statement of the Company dated March 30,
1998 (the "Proxy Statement"), receipt of which is hereby acknowledged, and (2)
in their discretion, upon such other matters as may properly come before the
meeting. The undersigned hereby acknowledges receipt of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.

THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2 AND 3.
---

CONTINUED AND TO BE SIGNED ON REVERSE SIDE.

SEE REVERSE
SIDE

PLEASE MARK
VOTES AS IN
[X] THIS EXAMPLE

A VOTE FOR THE FOLLOWING PROPOSALS IS RECOMMENDED BY THE BOARD OF DIRECTORS.

1. ELECTION OF CLASS I 2. PROPOSAL TO FOR AGAINST ABSTAIN
DIRECTOR. APPROVE THE [_] [_] [_]
COMPANY'S 1998
NOMINEE: DONALD MCKINNEY EMPLOYEE STOCK
PURCHASE PLAN
FOR WITHHELD AND THE RESERVATION
[_] [_] OF 800,000 SHARES OF
COMMON STOCK, PLUS
AUTOMATIC ANNUAL
INCREASES EQUAL TO
THE LESSER OF (i)
500,000 SHARES, (ii)
1% OF THE OUTSTANDING
SHARES OR (iii) A
LESSER AMOUNT DETERMINED
BY THE BOARD OF DIRECTORS.

3. PROPOSAL TO FOR AGAINST ABSTAIN
RATIFY THE [_] [_] [_]
APPOINTMENT OF
DELOITTE &
TOUCHE LLP AS
THE COMPANY'S
INDEPENDENT
PUBLIC
ACCOUNTANTS FOR
THE FISCAL YEAR
ENDING DECEMBER
31, 1998.

MARK HERE IF YOU PLAN TO
ATTEND THE MEETING [_]

MARK HERE FOR ADDRESS
CHANGE AND NOTE AT LEFT [_]

WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON, YOU ARE URGED TO
SIGN AND PROMPTLY MAIL THIS PROXY IN
THE RETURN ENVELOPE SO THAT YOUR STOCK
MAY BE REPRESENTED AT THE MEETING.

Signature: ______________ Date _______ Signature: ______________ Date _______