SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

|X|  Annual report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the fiscal year ended December 31, 1996 or

|_|  Transition  report  pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

Commission file number: 0-21902

                            STARSIGHT TELECAST, INC.
             (Exact name of registrant as specified in its charter)

           California                                   94-3003250
(State or other jurisdiction                        (I.R.S. Employer
of incorporation or organization)                Identification Number)

  39650 Liberty Street, Fremont, CA                       94538
(Address of principal executive office)                 (Zip Code)

       Registrant's telephone number, including area code: (510) 657-9900

           Securities registered pursuant to Section 12(b) of the Act:

    Title of each class                              Name of each exchange
         None                                         on which registered
                                                              None


           Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value
                                (Title of Class)

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

      Yes    X       No  
           -----         -----

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

      The aggregate market value of the voting stock held by  non-affiliates  of
the  registrant,  based  upon the  closing  sale  price of the  Common  Stock on
February  18,  1997 as  reported  on The  Nasdaq  National  Market  System,  was
approximately  $108,328,000.  Shares of Common  Stock held by each  officer  and
director and by each person who owns 5% or more of the outstanding  Common Stock
have been  excluded in that such  persons may be deemed to be  affiliates.  This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

      As of February 18, 1997,  Registrant had outstanding  25,612,585 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Not applicable.
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

         Certain  statements in this Annual  Report on Form 10-K (the  "Report")
are forward-looking  statements based on current expectations and entail various
risks and  uncertainties  that could cause actual  results to differ  materially
from  those  expressed  in  such  forward-looking  statements.  Such  risks  and
uncertainties  are set  forth in the last  paragraph  under  "General,"  "Sales,
Marketing and  Licensing,"  "Manufacturing,"  "Intellectual  Property - Patents,
Trademarks, Copyrights and Proprietary Information," "Competition," "Engineering
and Development," "Government Regulation," "Employees," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and elsewhere in
this Report.

General

         StarSight Telecast,  Inc., a California corporation,  (the "Company" or
the  "Registrant")  was founded in 1986 to design and market an easy-to-use  and
accurate method of identifying,  selecting and recording television programming.
The  Company  has  developed  and  markets  a  patented  on-screen   interactive
television  program guide and VCR control service under the  StarSight(R)  brand
name into three distinct distribution  channels:  consumer electronics,  service
providers, such as cable or local telephone companies ("telcos"),  and licensing
the Company's  intellectual  property for  non-StarSight  products which provide
guide  features  based on the  Company's  proprietary  technology  and  patented
inventions.  Customers can currently subscribe to the StarSight service directly
from  the  Company  for use with  StarSight-capable  televisions,  VCRs,  TVCRs,
satellite  integrated receiver  descramblers  ("satellite  receivers") and stand
alone  StarSight  receivers.  StarSight  capability  is  currently  available to
consumers in limited  quantities of set-top  boxes,  televisions,  VCRs,  TVCRs,
satellite  receivers  and stand alone  StarSight  receivers.  The  Company  also
anticipates  that customers  will be able to subscribe to the StarSight  service
through service  providers,  such as their local cable or telco  operators.  The
StarSight   Electronic  Program  Guide  ("EPG")  offers  the  following  primary
features:

              Program   Schedules.   The  StarSight  EPG  enables  customers  to
              conveniently  view (i) up to seven days of  up-to-date  television
              program schedule  information  covering  substantially  all of the
              numerous available channels and (ii) information about programs in
              progress as the viewer  changes from one channel to another,  even
              during commercials.

              Program  Selection.  The StarSight EPG enables customers to easily
              select  a  desired  program  by  the  program's  title  or by  the
              program's theme, as well as by the traditional method of selection
              by channel number.

              One  Button  Recording.  With the  touch  of a button  on a remote
              control,  the StarSight EPG enables  customers to record a current
              or future  television  program or series of related  programs (for
              example,  a soap opera or  miniseries)  by  selecting  the program
              title to be recorded.

              Customized  Channel Set-Up. The StarSight EPG enables customers to
              set the order of channels  by  preference  and to delete  never or
              infrequently   watched   channels   from  the   program   schedule
              information.

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<PAGE>

         StarSight  and  the  StarSight  logo  are   registered   United  States
trademarks  of the  Company,  and  STARSIGHT  & STAR  DESIGN and STAR DESIGN are
trademarks of the Company.  This Report also  includes  trade names which may be
trademarks of companies other than the Company.

Proposed Merger with Gemstar

         On December  23,  1996,  the Company  and Gemstar  International  Group
Limited,  a British  Virgin  Islands  corporation,  ("Gemstar")  agreed to merge
pursuant to and subject to the terms and  conditions of an Agreement and Plan of
Merger ("Merger Agreement"),  whereby a wholly-owned  subsidiary of Gemstar will
merge with and into the Company.  The Company will survive the merger and become
a  wholly-owned  subsidiary  of Gemstar  (the  "Merger").  At the closing of the
Merger, shareholders of the Company will be entitled to receive 0.6062 shares of
Gemstar's ordinary shares, $0.01 par value ("Ordinary  Shares"),  for each share
of the Company's  Common Stock.  Each  outstanding  option and each  outstanding
warrant to purchase  shares of the  Company's  Common  Stock will be adjusted to
reflect  the  exchange   ratio  of  0.6062  and  will  be  assumed  by  Gemstar.
Consummation  of the Merger is subject to, among other  things,  (i) approval of
the Merger Agreement by the Company's shareholders, (ii) approval by the holders
of Gemstar's  Ordinary  Shares of the issuance of shares in connection  with the
Merger,  (iii)  certain  government  regulatory  approvals,  (iv) the filing and
effectiveness of a registration  statement for the Gemstar Ordinary Shares to be
issued with the Securities and Exchange Commission (the  "Commission"),  and (v)
the  satisfaction or waiver of certain other customary  conditions to closing of
the Merger. See "Item 12 -- Changes in Control" for a more detailed  description
of the Merger,  related  agreements  and the terms and  conditions of the Merger
Agreement.

Market Overview

         The Company believes that there is a significant market opportunity for
an easy-to-use,  on-screen,  interactive  television guide such as the StarSight
EPG.  Based  upon  industry  studies,  the  Company  estimates  that 97  million
households  in the  United  States  own at least one  television  and 85 million
households in the United States own a VCR. The Company further estimates,  based
upon industry studies,  that  approximately 65 million  households in the United
States (representing  approximately 67% of all television  households) subscribe
to a cable service and 8% have satellite  programming access, such as C-band and
direct broadcast satellite ("DBS").  Based upon industry trade publications,  as
of November 1996, the Company estimates that there were 53 channels available to
the average cable subscriber.  Cable operators are also providing consumers with
increasingly  wide  choices  of  pay-per-view   movies  and  other  pay-per-view
programming.  The Company  estimates that in this  environment  cable television
viewers  may  presently  choose  from  approximately  7,500  programs  per week,
depending on geographic area and channel capacity. In addition,  cable operators
have announced their intention to expand channel capacity in the future.

         The Company believes that the recent increase in the number of channels
is being  accompanied by a proliferation  of viewing choices as the libraries of
films and  syndicated  programs  available  for  broadcast  grow and  television
stations  demonstrate an increasing  willingness to embrace 24 hour  programming
schedules.  Consequently, the number of weekly programs available for television
viewers may increase significantly.  Currently available program schedule guides
consist  primarily of printed guides,  such as TV Guide,  local cable television
guides and local newspaper and advertising guides.  Based upon industry studies,
the Company estimates that  approximately  74% of households owning  televisions
obtain television schedule information from printed program guides. For example,
based upon  published  data,  the  Company  estimates  that more than 14 million
customers  use TV Guide.  In

                                       2
<PAGE>

addition to such printed guides,  non-interactive  on-screen  scrolling  program
guides are available on most cable systems.

         The Company  believes that the traditional  sources of program schedule
information  will  become  increasingly  inconvenient  as  the  number  and  the
diversity of programming  choices increase.  Printed schedule guides,  generally
produced in one-week intervals,  cannot be updated to reflect changes in program
scheduling  which  occur  after  such  guides are  printed  and  distributed  to
television  viewers and are thus  inherently  susceptible  to  inaccuracies.  In
addition,  the volume of information which can be presented in printed guides is
constrained  by space,  format and cost  limitations.  The majority of currently
commercially  available  on-screen  program guides  generally  present  schedule
information in a non-interactive  scrolling format. Such non-interactive program
guides  typically  provide  users with only a few hours of  current  programming
information,  and  viewers  must wait for such  guides to scroll to the  desired
channel.  In addition,  in order to display the  currently  available  on-screen
scrolling guides, a cable operator must dedicate a channel which could otherwise
be  used  to  broadcast  commercial  programming.  Both  printed  and  scrolling
programming guides generally  organize and present  information only by air time
and  channel   number   rather  than  program  title  or  program   theme.   See
"Competition."

         The Company  believes that the recent and expected future growth in the
number of television channels,  along with the proliferation of viewing choices,
has created a need for an  easy-to-use,  cost  effective and accurate  method of
identifying,  selecting and recording television programs.  The Company believes
that as consumer needs for improved  television  schedule  information grow, the
need for accurate and convenient methods of program selection and recording will
also grow.

Business Strategy

The Company offers the easy-to-use  StarSight  interactive  program guide which:
(i) meets the existing  demand for accurate and  up-to-date  television  program
schedule  information,  (ii) can accommodate the  anticipated  proliferation  of
viewing  choices,  (iii)  enables  customers  to record a  program  or series of
programs  with the touch of one  button,  and (iv) allows  customers  to set the
order of channels by  preference  and to delete  never or  infrequently  watched
channels.  The integration of StarSight  formatted program information into both
the  broadcast  data stream and the  StarSight-capable  hardware  that  receives
StarSight  data  gives  the  StarSight  EPG  the  ability  to  display   program
information  on  the  television   screen,   to  tune  to  desired  programs  by
highlighting  the title of the program and to program  the  viewer's  VCR at the
touch of one button. The Company believes that StarSight's on-screen interactive
format,  extensive  television/VCR  functionality  and ability to search for and
select programs by title or theme, as well as by channel number,  make it easier
to use and more convenient than both printed and on-screen scrolling guides. The
Company's business strategy is focused on three distinct distribution  channels:
consumer electronics,  service providers,  such as cable or telco, and licensing
the Company's  intellectual property for non-StarSight  products  ("Licensing").
The Company  believes  this three  pronged  strategy will not only maximize both
demand for StarSight EPG products and services but also  facilitate its delivery
to a large and  diverse  base of  customers.  The  Company  intends  to  provide
customers in the consumer electronics and service provider distribution channels
with as many StarSight-capable hardware choices as possible by broadly marketing
its EPG  products  and  services to hardware  manufacturers  across the consumer
electronics and service provider distribution channels. The Company licenses its
intellectual  property to others for use in products which provide certain guide
features based on the Company's proprietary technology and patented inventions.

                                       3
<PAGE>

         The  Company  has  entered  into  strategic  relationships  with  major
marketing and distribution partners and with prominent  manufacturers  presently
providing hardware across the targeted distribution channels.

         In the  consumer  electronics  distribution  channel,  the  Company has
entered  into  technology  development  and  licensing  agreements  with Thomson
Consumer  Electronics,  Inc.  ("TCE"),  a  wholly-owned  subsidiary  of  THOMSON
multimedia  S.A.  ("THOMSON")  (RCA, GE,  ProScan  brands),  Zenith  Electronics
Corporation  ("Zenith"),  Sony Electronics,  Inc. ("Sony"),  Mitsubishi Consumer
Electronics  America,  Inc.  ("Mitsubishi"),  Toshiba America Consumer Products,
Inc.  ("Toshiba"),  Matsushita  Television  Company  ("Matsushita")  (Panasonic,
Quasar brands),  Philips Consumer Electronics Company ("Philips")  (Magnavox and
Philips brands), Sharp Electronics  Corporation  ("Sharp"),  Samsung Electronics
America, Inc. ("Samsung"), LG Electronics U.S.A., Inc. ("GoldStar"),  and Daewoo
Electronics   Corp.   of   America   ("Daewoo")   for   the   incorporation   of
StarSight-enabling technology into televisions, VCRs and TVCRs. In addition, the
Company has entered into an agreement  with Uniden  America  ("Uniden")  for the
marketing and distribution of  StarSight-capable  satellite  receivers to C-band
satellite service customers.

         On March  8,  1996,  the  Company  finalized  strategic  and  financial
agreements  with  THOMSON  which  included  an equity  investment  by THOMSON of
$25,000,000.   This  relationship   includes  commitments  by  THOMSON  for  the
manufacture  and promotion of  StarSight-capable  consumer  electronic  products
across a broad range of products.  The commitments by THOMSON are driven in part
by strategic and financial  incentives  available to THOMSON which increase with
the  manufacture  of higher  unit  volumes of  StarSight-capable  products.  The
Company  believes  that as a result of  significant  changing  conditions in the
marketplace, including increased competition, certain aspects of these strategic
business  agreements with THOMSON,  such as THOMSON's volume commitments and the
Company's technology transfer commitments, will be renegotiated in the near term
as soon as market conditions have been clarified.


         The  Company  has also  manufactured  a limited  number of stand  alone
StarSight  receivers,  so  that  cable  and  telco  customers  and  over-the-air
broadcast  viewers  without  StarSight-capable  hardware  can  subscribe  to the
StarSight  service from the service  provider or directly from the Company.  See
"Manufacturing."

         In certain  instances,  the  Company's  licensed  consumer  electronics
manufacturers  have  experienced  significant  delays  in  the  development  and
commercial   release  of   StarSight-capable   hardware  and,  although  certain
manufacturers have indicated their intention to make such equipment available to
their customers in 1997, there can be no assurance that  significant  volumes of
StarSight-capable hardware will become available to customers. Further delays in
the  availability of  StarSight-capable  hardware will have an adverse effect on
the Company's business. See "Manufacturing."

         With respect to the service provider  distribution channel, the Company
is currently  distributing  the  StarSight  EPG to cable  customers on a limited
basis in cable systems in various  regions of Northern and Southern  California.
In addition,  the  StarSight  EPG is  distributed  on a limited basis with other
cable operators, primarily in the eastern United States. Recent consolidation in
the cable  industry has affected the  execution of the  Company's  marketing and
distribution  strategy  with  certain  cable and teleco  operators.  See "Sales,
Marketing and Licensing."  The Company has entered into license  agreements with
General  Instrument  Corp.  ("General  Instrument"),   Scientific-Atlanta,  Inc.
("Scientific-Atlanta")  and Zenith for the  incorporation of  StarSight-enabling
technology  into  set-top  boxes  to be  manufactured  by them for sale to cable
system operators who offer StarSight to their customers.

                                       4
<PAGE>

         In  1995,   the  Company   brought  an   arbitration   action   against
Scientific-Atlanta   concerning   Scientific-Atlanta's   alleged  delay  in  the
deployment of StarSight-capable set-top boxes and its development of a competing
electronic  program guide allegedly using the Company's  technology in violation
of its  licensing  agreement  with the Company.  On July 23, 1996,  the American
Arbitration  Association  ("AAA")  awarded the Company  $15,000,000  in monetary
damages plus attorney fees and arbitration costs against Scientific-Atlanta.  In
addition to the  monetary  award,  the Company  was  granted  injunctive  relief
prohibiting  Scientific-Atlanta,  except under certain limited conditions,  from
accepting any new customer orders for any products  incorporating an interactive
electronic  program guide that utilizes any information  derived either directly
or indirectly  from the Company for a period of three years  beginning  from the
date of the  award.  On  December  11,  1996,  the U.S.  District  Court for the
Northern  District of California  confirmed the AAA  arbitration  panel award of
$15,000,000,  plus attorney fees and arbitration  costs. In addition,  the court
confirmed the AAA panel's injunction prohibiting Scientific-Atlanta for a period
of three years from shipping to third parties any consumer product incorporating
an interactive  program guide, except for orders already committed to in writing
as of July 23,  1996,  the date of the AAA  panel  ruling.  See "Item 3 -- Legal
Proceedings" and Note 5 to Financial Statements.

         As a part of the Company's licensing business and strategy, the Company
has entered into licensing agreements with TCE, Sony, Toshiba, Panasonic, Uniden
and  Hughes  Network  Systems  ("HNS")  for  use of the  Company's  intellectual
property in certain non-StarSight digital satellite system ("DSS") equipment. In
addition,  on December 20,  1996,  the Company  entered  into an agreement  with
Microsoft  Corporation  ("Microsoft")  to license certain of its technologies to
Microsoft.  Under the  agreement,  Microsoft  paid the Company a  non-refundable
"lump sum" royalty payment of $20,000,000 for a non-exclusive, worldwide license
for the Company's  intellectual  property related to electronic  program guides,
which  technology  will be used by Microsoft  for future  software  products and
services on the PC platform. Additionally, Microsoft provided the Company with a
royalty free  license  under  certain of its  intellectual  property  related to
electronic program guides. See Note 4 to Financial Statements.

         The  Company  intends  to  continue  to  actively  explore   additional
opportunities to license its intellectual  property.  See "Sales,  Marketing and
Licensing."

Company Products and Services

StarSight EPG

         The  StarSight  EPG offers  several  program  schedule,  selection  and
recording  functions.  Since  there  is not  yet a  significant  market  for the
StarSight EPG,  there can be no assurance  that an acceptable  level of consumer
demand will be achieved. If significant demand does not develop or is low due to
lack of market acceptance,  technological change,  competition or other factors,
the Company's business would be materially adversely affected.

         Program  Schedules.  The  StarSight  EPG  provides  an  up-to-date  and
accurate on-screen program schedule, listing all programs by title. The database
for this television schedule  information is comprised of program data purchased
by the Company from data providers who provide similar information to newspapers
and other printed television  listings.  Unlike printed listings,  however,  the
Company's  database  is  updated  daily for  program  schedule  changes.  Unlike
currently  available  on-screen  scrolling  guides,  the  StarSight EPG provides
customers with 24 hours per day of schedule  information for up to seven days of
programming. The Company believes that this will keep the StarSight service more

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<PAGE>

accurate,  up-to-date and informative than any other currently available printed
or on-screen  scrolling guide.  StarSight offers the following  program schedule
features:

                  Program Selection by Grazing. The StarSight EPG allows viewers
to obtain  information  on  programs  in  progress  while  changing  channels or
"grazing,"  even during  commercials.  As the viewer  switches  from  channel to
channel,  a brief  description of the program then airing appears on the screen.
The StarSight EPG displays the program title, the broadcast time remaining,  and
a brief  description of the program and theme.  With the touch of a button,  the
viewer  is able  to  receive  a more  detailed  description  of the  program  in
progress.

                  Program Selection by Browsing.  The StarSight browsing feature
allows the viewer to  continue  to watch and  listen to the  current  television
program while  "browsing"  through the program titles and descriptions for other
programs in progress.

                  On-Screen TV Program Listings.  At the touch of a button,  the
StarSight  EPG  provides  the TV  viewer  with an  on-screen  localized  program
schedule displayed in a "grid" or "column" format similar to that of traditional
TV schedules.  The grid guide includes TV schedule  information  for up to seven
days in advance for the vast  majority of channels on the  viewer's  television.
The viewer is able to change the information on the screen to see what is on the
other channels and to see what is on later in that seven day period.  A menu bar
at the bottom of the screen shows the highlighted  program's  channel number and
network  and also  displays  the  current  time and  date.  StarSight's  program
schedule  automatically  opens  to the  current  time and  date  whenever  it is
activated.

                  Grid Guide Pop-up  Information.  While viewing the grid guide,
the  StarSight  EPG provides  detailed  information  for any program  within the
StarSight  program  schedule simply by pressing a button.  A pop-up screen gives
the viewer a description of the selected program title, broadcast date and time,
duration and program theme.

                  Program Guide By Channel.  The StarSight EPG allows the viewer
to see a listing of all the programs on a  particular  channel.  For example,  a
customer can view all of the  programming for Channel 4 on a given day. The user
is able to change  the  information  on the screen to see what will air later in
the day or in that seven day period on Channel 4.

         Program  Selection.  The  StarSight EPG offers a variety of methods for
customers to select a television program from the on-screen schedule.  Customers
are  able to  choose  and  tune to a  program  by its  title,  as well as by the
traditional  method of selection by channel number.  This process eliminates the
significance  of channel  numbers and the confusion  consumers face in selecting
programs by network or station  channel  numbers that are often  reallocated  by
cable  operators  or  assigned  to  non-corresponding  channel  numbers in cable
channel line-ups.  Customers also are able to select and view program titles and
descriptions for up to the following seven days from a list of displayed themes,
such as movies,  sports and educational  programs.  The following  describes the
steps a viewer might go through  using the  StarSight EPG to select a television
program by theme.

                  Step 1. A customer is able to choose  programs  according to a
                  favorite viewing category,  such as sports,  movies or comedy.
                  For  example,  a viewer  interested  in watching  sports would
                  highlight the "Sports" theme from the on-screen  theme display
                  list.

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<PAGE>


                  Step 2.  After the  viewer has  selected  "Sports,"  a list of
                  subcategorize  pops-up  and the viewer  then is able to select
                  from a list  of  sports.  For  example,  a  list  of  "Sports"
                  sub-themes  includes "All Sports,"  "Football,"  "Basketball,"
                  "Soccer" and "Golf."

                  Step 3. After the viewer has  selected the desired  theme,  an
                  up-to-seven-day   chronological   display  of  those  programs
                  falling  into that  subcategory  appears.  The list  shows the
                  channel,  day, start time,  title and duration of the relevant
                  programs.  The  viewer  would  select a desired  program,  for
                  example,  "New York Knicks at Orlando Magic," from the list of
                  "Sports--Basketball," then press a button to obtain additional
                  information regarding this program.

                  Step 4. If the desired program is in progress,  the viewer can
                  then  press a single  button and tune the  television  to that
                  program.  Alternatively,  the viewer can choose to activate or
                  set the VCR to record the program.

         One Button Recording.  Once the customer has chosen the desired program
by its title,  the  StarSight  EPG enables the customer to record the program by
touching one button.  The customer has the choice of recording  the program once
for just that  episode,  daily for each day's episode for shows like soap operas
or talk shows, or weekly for programs that are on once each week.

         Recordings.  This  feature  provides  the  customer  with a screen that
indicates which programs the customer has selected to be recorded.  It shows the
channel,  the day, the time, the program title and the length of each show to be
recorded.

         Series To Be Recorded.  This screen  displays  programs  selected to be
recorded daily and weekly. It shows the channel,  the day, the time, the program
title and the length of each show to be recorded.

         Customized  Channel Set-up.  The StarSight EPG allows  customers to set
the order of channels by preference and to delete never or infrequently  watched
channels from the program schedule information. This enables StarSight customers
to  customize  the  program  schedule   information  to  reflect  their  viewing
preferences  and reduce the time spent  grazing  through the  program  schedule.
Deleted  channels may be reselected if the viewer so desires.  The StarSight EPG
also  allows a  customer  to arrange  the  line-up of  channels  in the  program
schedule in order of preference.  For example, the viewer can choose CNN, Comedy
Central and Nickelodeon, in that order, to be at the top of the line-up.

StarSight Service

         The Company charges customers  approximately $4.99 per month for direct
service,  before promotional  discounts,  and the monthly fee may be potentially
less if  offered  by cable and  telco  operators  as part of a package  to their
customers.  StarSight EPG  subscription  rates are currently  being offered with
various  free trial  periods and are subject to a one-time  activation  fee. The
Company's  determination  of such  monthly  service  fees depends on a number of
factors,  including the amounts which customers are currently paying for printed
guides,  the  willingness  of  customers  to pay for special  cable  services or
programs, the monthly price the market can be expected to support and any effect
the Cable  Television  and  Consumer  Protection  Act of 1992 ("1992 Cable Act")
and/or the Telecommunications Act of 1996 ("1996 Telecommunications Act") has or
may have on the pricing of subscription  services by cable and telco  operators.
See "Government  Regulation."  The Company's  pricing  structure also takes

                                       7
<PAGE>

into account information derived from market research, including data which have
been gathered by market  research firms  commissioned  by the Company to conduct
qualitative and quantitative research, including national consumer focus groups.
Data have been gathered from potential  consumers  regarding  their responses to
various proposed pricing levels for the  subscription  service,  activation fees
and the cost of acquiring  StarSight-capable hardware. The Company analyzes this
data, as well as the market  response to the current  pricing,  to determine the
appropriate  pricing  levels,  manner and  frequency  of billing and  subscriber
incentive programs to attempt to maximize subscriber penetration and revenues.

Sales, Marketing and Licensing

         The  Company  targets the  consumer  electronics  and service  provider
channels for the  distribution  of the StarSight  service to  customers.  In the
consumer  electronics  distribution  channel,  the Company markets the StarSight
service  directly to customers  who have  purchased  televisions,  VCRs,  TVCRs,
satellite  receivers or stand alone StarSight receivers into which the Company's
enabling  technology has been  incorporated and who do not subscribe  through an
affiliated cable or telco system offering the StarSight service or who choose to
receive the  StarSight EPG directly  from the Company.  In the service  provider
distribution  channel,  the Company  intends to market the StarSight EPG through
cable  and  telco  operators  who  offer  the  StarSight  service  to their  own
customers.

         Over time the Company  anticipates  that the marketing and promotion of
the  StarSight  service  across the consumer  electronics  and service  provider
distribution  channels  will  become  the  most  significant  operating  expense
incurred to support the StarSight service.  Currently,  the Company's  marketing
efforts  include public  relations  efforts,  trade show and industry  awareness
programs,  newspaper  and other  printed  advertising.  The  Company  intends to
continue to promote the  StarSight  EPG using its own  marketing  resources,  in
addition  to  those  of  affiliated   cable  operators  and   manufacturers   of
StarSight-capable  hardware.  The Company  currently  expects  that  cooperative
marketing    expenditures   with   the   manufacturers   and   distributors   of
StarSight-capable products could enhance recognition among potential subscribers
once more than limited  quantities  of  StarSight-capable  consumer  electronics
products are available in the market place. If significant  consumer demand does
not develop or is low due to lack of market  acceptance,  technological  change,
competition  or other  factors,  the  Company's  business  would  be  materially
adversely affected.

         Consumer  Electronics.   For  the  consumer  electronics   distribution
channel,  the Company is marketing  the  StarSight EPG directly to the owners of
StarSight-capable  televisions,  VCRs, TVCRs and a limited number of stand alone
StarSight receivers. Annually there are approximately 26 million new televisions
and approximately 13 million new VCRs sold in the United States. The Company has
entered into license  agreements with TCE (RCA, GE and ProScan brands),  Zenith,
Sony,  Mitsubishi,  Toshiba,  Matsushita (Panasonic and Quasar brands),  Philips
(Magnavox and Philips  brands),  Sharp,  Samsung,  GoldStar,  and Daewoo for the
incorporation of StarSight-enabling technology into televisions, VCRs and TVCRs.
The  Company's  current  consumer  electronics  manufacturing  partners  produce
approximately 70% of all televisions,  VCRs and TVCRs sold in the United States;
however,  to date only limited quantities of  StarSight-capable  televisions and
VCRs have been introduced into the consumer  electronics market place. There can
be no assurance  that the Company's  agreements  with third party  manufacturers
will result in the  availability of sufficient  quantities of  StarSight-capable
televisions and VCRs to allow the Company to achieve significant  penetration of
the consumer electronics distribution channel. The Company has also manufactured
and distributed a limited number of stand alone StarSight receivers.  See Note 9
to Financial Statements.

                                       8
<PAGE>

         In March  1996,  the  Company  entered  into  strategic  and  financial
agreements  with THOMSON,  pursuant to which THOMSON has agreed to  aggressively
promote and  incorporate  StarSight into selected  product lines in return for a
share of the  Company's  revenues  received  in  connection  with the  Company's
consumer electronics  business.  The commitments by THOMSON are driven, in part,
by strategic and financial  incentives  available to THOMSON which increase with
the manufacture of higher unit volumes of  StarSight-capable  products.  Adverse
market conditions or a lack of wide ranging consumer acceptance could negatively
impact the level at which THOMSON  promotes and  incorporates  the StarSight EPG
into THOMSON's  selected product lines. The Company believes that as a result of
significant   changing   conditions  in  the  marketplace,  including  increased
competition,  certain  aspects  of  these  strategic  business  agreements  with
THOMSON,  such as THOMSON's  volume  commitments  and the  Company's  technology
transfer  commitments,  will be  renegotiated in the near term as soon as market
conditions have been clarified.

          Customers who have C-band satellite  receivers are able to receive the
StarSight  service  via   StarSight-capable   satellite  receivers  marketed  by
StarSight licensees. The Company has a license agreement with Uniden pursuant to
which   Uniden  has   manufactured   and   distributed   a  limited   number  of
StarSight-capable  C-band  satellite  receivers.  Presently 4% of all television
households  have C-band  satellite  programming  access.  Currently,  the C-band
satellite  market  represents  a  small  opportunity  for  the  Company  due  to
significant  growth in the DBS market.  The Company believes that DBS technology
represents  additional  opportunities for the StarSight EPG and for licensing of
the Company's intellectual property.

         The  Company's  consumer  electronics  distribution  channel  marketing
strategy includes joint efforts with television,  VCR and TVCR  manufacturers to
promote the StarSight EPG through in-store promotion, as well as through package
insert  promotion,  targeted at  first-time  buyers.  In  addition,  the Company
provides  marketing  and sales  incentive  programs  for  retailers  to  promote
StarSight-capable  consumer  electronics  products.  The  Company  receives  the
greatest revenue per subscriber from the  distribution of the StarSight  service
in this market channel but also incurs all billing, technical support, marketing
and other distribution costs.

         Service Providers.  The Company believes that the most efficient method
of reaching a large  number of potential  customers  is to market the  StarSight
service primarily through a relatively small number of service  providers,  such
as major cable and telco operators.  The Company's service provider distribution
strategy  requires that cable and telco  operators  order new  StarSight-capable
set-top boxes from  manufacturers  for distribution to new customers and, in the
case  of  cable,  to  existing   customers  as  replacements   for  obsolete  or
nonfunctioning set-top boxes or, alternatively, for distribution to existing and
new customers as such cable and telco operators build,  rebuild or upgrade their
systems.  The Company  believes that delays in the availability of set-top boxes
incorporating  new analog and digital  technology have caused cable operators to
defer  purchases  of  new  set-top  boxes.  As  a  result,   the  deployment  of
StarSight-capable  set-top  boxes has been delayed.  The Company has  previously
entered into agreements with Viacom Cable, KBLCOM Incorporated  ("KBLCOM"),  The
Providence Journal Company ("Providence  Journal"),  and Cox Communications Inc.
("Cox")  regarding the marketing of the  StarSight  service to their  respective
cable  subscribers.  However,  recent  consolidation  in the cable  industry has
affected the distribution of the StarSight service by those cable operators.  In
particular,  TWI Cable, Inc., a subsidiary of Time Warner Companies, Inc. ("Time
Warner"),  has purchased KBLCOM,  and Continental Cable has acquired  Providence
Journal's cable operation,  Colony Cable.  During 1996,  Viacom Inc.  ("Viacom")
completed  the sale of Viacom Cable to  Tele-Communications  Inc.  ("TCI").  The
unstated or uncertain  commitment of the new operators of these cable systems to
offer the StarSight  service has  contributed  to delays in the execution of the
Company's  strategy for cable  distribution.  There can be no assurance that the
Company's  agreements and  arrangements  with cable operators will result in the
successful marketing of the StarSight EPG to cable customers or in the

                                       9
<PAGE>

commercial acceptance and viability of the StarSight service. In addition, there
can be no assurance  that the Company will be able to enter into  discussions or
affiliation  agreements with a sufficient  number of significant cable and telco
operators to achieve commercial  acceptance.  Finally, there can be no assurance
that the  Company's  current or  potential  future  agreements  with third party
manufacturers  will  result in the  availability  of  sufficient  quantities  of
StarSight-capable  set-top  boxes to allow the  Company to  achieve  significant
penetration of the service provider distribution channel.

         Given the large number of customers who can be reached through a single
service  provider,  the Company is directing its StarSight  marketing efforts to
complement the marketing  efforts of service  providers.  The Company's  current
plans provide for several options for offering the StarSight  service to service
provider customers. These options are either a single "premium" service separate
from other services offered by a cable or telco operator, or as part of a "tier"
of  services  which are sold as a  package,  or as part of the  "basic"  service
provided to all subscribers on that system. The Company and the service provider
each receive a portion of the  subscriber  revenue  generated  by the  StarSight
service that  depends,  in part, on the relative  amounts of billing,  technical
support, marketing and other distribution efforts of each party and, in part, on
whether the subscriber is paying for the StarSight service as a premium, tier or
basic service.  To the extent that the service provider  undertakes the billing,
technical  support,  marketing  and  other  distribution  efforts,  the  Company
receives a smaller portion of the revenue per subscriber.  The Company generally
receives a larger portion of the revenue per subscriber in cases where a service
provider offers the StarSight service as a premium service and a smaller portion
of the revenue per subscriber  when the service is offered as part of a basic or
tier service. However, inclusion of the StarSight EPG as part of a basic or tier
service is a desirable  marketing  method due to the larger  number of customers
involved.  Finally,  the Company  receives a smaller  portion of the revenue per
subscriber  as the  percentage of StarSight  customers in a particular  cable or
telco  system  increases.  To  date,  the  majority  of the  Company's  existing
agreements provide for the StarSight EPG as part of a basic service.

         On October  28,  1994,  the Company and Bell  Atlantic  Video  Services
Company ("Bell Atlantic")  entered into a strategic  agreement pursuant to which
the Company  granted  Bell  Atlantic  the right to  distribute  StarSight  on an
exclusive basis to homes having access to open video systems ("OVS") provided by
Bell  Atlantic  companies.  Subsequent  to this  agreement,  Bell  Atlantic,  in
conjunction with Nynex and Pacific Telesis, formed a joint venture, TeleTV. This
joint venture was  originally  established  to provide  programming  services to
their  customers  via MMDS (a microwave  transmission  technology)  currently in
development.  Recently, parts of TeleTV were disbanded and it is uncertain as to
Bell  Atlantic's  future  involvement  in the joint venture.  As a result,  Bell
Atlantic has not informed the Company of its  intention to deploy the  StarSight
EPG and,  correspondingly,  there can be no assurance that the StarSight service
will ever be implemented by Bell Atlantic.

         In  February  1996,  the  Company  entered  into a License of  Services
Agreement with GTE Communication  Systems Corporation  ("GTE"),  under which GTE
will offer the StarSight service to the subscribers of GTE's OVS systems,  cable
television  systems,  or any other GTE multichannel  systems,  where technically
feasible in exchange for certain  license fees to be paid by GTE to the Company.
In late 1996, GTE announced the initial  deployment of set-top boxes  containing
the StarSight EPG to customers in the Tampa Bay area of Florida.

         Licensing. The Company's strategy for the licensing of its intellectual
property has resulted in the signing of several licensing  agreements.  In 1995,
the  Company  entered  into  agreements  with  TCE and  Sony.  The TCE and  Sony
agreements  provide for the licensing of certain of the  Company's  intellectual
property rights which are incorporated in certain DSS equipment manufactured and
distributed by TCE and Sony. In 1996, the Company entered into similar licensing
agreements with  

                                       10
<PAGE>

Toshiba, Matsushita, Uniden and HNS for certain DSS equipment to be manufactured
and distributed by them. Such agreements  generally require the periodic payment
of per unit royalties to the Company based on units manufactured or sold.

         On December 20, 1996,  the Company  entered into a licensing  agreement
with Microsoft to license certain of its  technologies  to Microsoft.  Under the
agreement,  Microsoft  paid the  Company a  non-refundable  "lump  sum"  royalty
payment of $20,000,000 for a non-exclusive,  worldwide license for the Company's
intellectual  property  related to electronic  program guides,  which technology
will be used by Microsoft  for future  software  products and services on the PC
platform.  Additionally,  Microsoft  provided  the Company  with a royalty  free
license under certain of its intellectual property related to electronic program
guides. See Note 4 to Financial Statements.

         To support and  further  the  Company's  licensing  business  and other
business segments, the Company is pursuing U.S. and international protection for
its proprietary information,  technology and inventions.  The Company intends to
continue to actively explore  additional  opportunities to license the Company's
intellectual property.

Manufacturing

         The   Company    believes   that   securing   the    availability    of
StarSight-capable  hardware is crucial to the widespread commercial distribution
of the StarSight EPG. The Company's manufacturing strategy calls for third party
manufacturers  to  incorporate  the  StarSight  technology  into cable and telco
set-top boxes, televisions, VCRs, TVCRs and satellite receivers produced by such
manufacturers. Currently, the Company does not manufacture such hardware itself.
Given the Company's limited size and resources,  the large size of the potential
market for the StarSight  EPG and the  advantages of employing the resources and
expertise of experienced manufacturers,  the Company believes that manufacturing
by third parties represents the optimal strategy for maximizing the availability
of  StarSight-capable   consumer  electronics  products.  It  is  possible  that
manufacturers will reduce or delay the manufacture of StarSight-capable consumer
electronics   products  as  a  result  of  the   announcement,   expectation  or
consummation  of  the  Merger.  The  Company  recorded  an  inventory  valuation
allowance in the fourth quarter of Fiscal 1996 due to delays in the  manufacture
of  StarSight-capable  consumer  electronics products which the Company believes
were  attributable,  in part,  to  uncertainties  regarding  the  effects of the
Merger. Such manufacturing  delays and uncertainties are expected to continue at
least in the near term. See Note 9 to Financial Statements.

         To  date,  the  Company  has  entered  into a number  of  manufacturing
arrangements and continues to have  discussions  with other companies  regarding
the  incorporation  of  StarSight  into a wide  range  of  consumer  electronics
products. The Company has license agreements for televisions,  TVCRs and/or VCRs
with TCE (RCA,  GE and  ProScan  brands),  Zenith,  Sony,  Mitsubishi,  Toshiba,
Matsushita (Panasonic and Quasar brands), Philips (Magnavox and Philips brands),
Sharp,  Samsung,  GoldStar,  and  Daewoo.  In order  to  provide  incentive  for
manufacturers of consumer electronics products to manufacture  StarSight-capable
products,  the Company has agreed in initial  manufacturing  agreements to waive
licensing  and royalty fees for  deploying the StarSight EPG and, in some cases,
to reimburse  such  manufacturers  for a portion of the cost of modifying  their
products   to   accept   StarSight   technology.    For   the   manufacture   of
StarSight-capable  set-top  boxes,  the  Company  has  agreements  with  General
Instrument, Scientific-Atlanta and Zenith. During 1996, in an arbitration action
involving  Scientific-Atlanta,  the Company was awarded  $15,000,000  in damages
plus attorney fees and arbitration  costs, as well as certain injunctive relief.
See "Legal Proceedings" and Note 5 to Financial Statements.

                                       11
<PAGE>

         Initially,  the Company has not charged manufacturers a license fee for
manufacturing   StarSight-capable   products   which   incorporate   StarSight's
proprietary technology.  Ultimately,  the Company hopes that increased sales and
market  penetration  will allow it to negotiate  manufacturing  agreements  that
allow the  Company  to  charge  license  fees for the  StarSight  technology  to
contracting  manufacturers for  StarSight-capable  consumer electronic products.
There can be no assurance that the  availability of set-top boxes,  televisions,
VCRs and TVCRs incorporating the Company's proprietary technology will allow the
StarSight EPG to achieve market  acceptance or that the  manufacturing  entities
will devote  manufacturing  or distribution  resources  adequate to achieve such
market   acceptance.   In  addition,   there  can  be  no  assurance  that  such
manufacturers  will in fact  incorporate  the StarSight EPG into their products,
that these  manufacturing  agreements will not be terminated and, if terminated,
that  the  Company  would  be  able  to  negotiate   alternative   manufacturing
relationships on commercially acceptable terms.

         The Company has, in the past,  manufactured  a limited  number of stand
alone StarSight receivers. Currently, the Company is no longer manufacturing the
stand alone  StarSight  receiver  due to low consumer  acceptance  in the market
place. See Note 9 to Financial Statements.

         The incorporation of the StarSight EPG into set-top boxes, televisions,
VCRs, TVCRs, satellite receivers, and stand alone StarSight receivers requires a
chip set comprised of three separate  integrated  circuits  embodying  different
portions of the  StarSight  technology.  The Company has  arranged  with certain
integrated  circuit   manufacturers  for  the  design  and  manufacture  of  the
integrated  circuits which are sold to consumer  electronics  manufacturers that
have agreed to  incorporate  the  StarSight EPG into their  products.  The three
integrated   circuits   are  produced  by  two   separate   integrated   circuit
manufacturers  and are  available  only  from  those  manufacturers.  The  three
integrated circuits are manufactured by Zilog, Inc. ("Zilog") and Motorola, Inc.

         As  part  of a plan  to  lower  the  cost  of  incorporating  StarSight
technology  into consumer  electronics  products,  the Company has entered in an
agreement with Zilog and now has StarSight technology  incorporated into Zilog's
new Z89300 digital television  controller series.  Although the Company believes
that alternative sources of such components are available, qualification of such
alternative sources would require significant lead time. The Company's inability
to provide for sufficient quantities of such integrated circuits could delay the
incorporation of the StarSight EPG into StarSight-capable  products, which would
have a  material  adverse  effect  on the  Company's  business.  In  particular,
development  efforts  with  manufacturers  of  StarSight-capable  hardware  have
progressed more slowly than anticipated due in part to delays in the development
of the integrated chip set required for the  incorporation  of the StarSight EPG
into  equipment.  In addition,  there can be no assurance  that the Company will
continue to be successful in its efforts to  incorporate  its technology in such
integrated  circuits or that the  manufacturers  of set-top boxes,  televisions,
VCRs,  TVCRs and satellite  receivers  will be successful in  incorporating  the
integrated circuits into their products.  Furthermore, there can be no assurance
that the integrated circuit  manufacturers will successfully  produce sufficient
volumes  of   integrated   circuits  to  ensure  the  timely   availability   of
StarSight-capable  products in  commercial  quantities  or that such  integrated
circuits will be made available on commercially  reasonable  terms. A failure in
any one of the steps leading to the  successful  incorporation  of the StarSight
technology into such  StarSight-capable  products would have a material  adverse
effect on the Company's business.

         Currently  manufacturers  incorporating  the StarSight  technology into
StarSight-capable  products use the  StarSight-capable  integrated  circuits for
their initial  product  offering  rather than develop such  integrated  circuits
in-house  in  order  to  minimize  time to  market.  The  Company's  engineering
personnel are available to meet with each manufacturer's development team either
at  the  Company  or  the 

                                       12
<PAGE>

manufacturer's  location to provide development  assistance regarding the use of
the StarSight chip set as part of the technology  transfer to the  manufacturer.
The agreement with Zilog provides for Zilog to design and manufacture cell based
display integrated circuits for use by product  manufacturers to incorporate the
StarSight  system.  Zilog has enhanced its Z89300  family of digital  television
controllers  to incorporate  the StarSight  technology.  In addition,  Zilog has
designed an integrated  circuit,  currently  available to  manufacturers,  which
further  integrates various components of the StarSight hardware which, in turn,
reduces the cost of including  the  StarSight  EPG in  televisions  and VCRs. To
date, the Company has not charged any fee or royalty for the use of the chip set
by a  manufacturer.  The Company  will retain the right to approve the manner in
which the StarSight technology is incorporated in the manufacturer's  product in
order  to  maintain  a  consistent  look and  feel  for the  StarSight  consumer
interface.

StarSight Delivery System

         The StarSight  delivery system consists of a program schedule database,
a transmission network and order processing and customer support.

         Program Schedule  Database.  The Company purchases  television  program
schedule data and cable television channel line-up  information in an electronic
format from data  providers who provide  similar  information  to newspapers and
other printed listings. The data is processed at the Company's computer facility
in Fremont,  California to include subscriber authorization  information,  which
allows a customer's  StarSight-capable  hardware to receive only that portion of
the program schedule data which  corresponds to the customer's  geographic area,
method of reception  (cable,  broadcast or satellite) and system  configuration.
The program schedule data is then  distributed over the transmission  network to
StarSight-capable  hardware in customers'  homes.  Pursuant to an agreement with
the Company,  TV Data  Technologies  ("TVDT") is the initial provider of program
schedule data for the StarSight  EPG,  which data is delivered on a daily basis.
As a result,  the  StarSight  EPG will contain more  accurate  program  schedule
information  than printed  guides,  since the latter cannot  incorporate  new or
changed  information  once  they  have gone to  press.  TVDT  currently  updates
schedule  data 4-6 times per 24-hour  period based on receiving  program  change
information  from programming  sources.  TVDT has also developed and implemented
procedures for cable system channel  line-up  collection and  maintenance  which
allows the  Company to stay  informed  of  changes  by cable  operators  in such
line-ups and to adjust the delivered schedule information accordingly.

         Transmission  Network.  The  transmission  network  for  the  StarSight
service  functions  as  follows:  program  schedule  data  and  channel  line-up
information  is delivered by TVDT via leased data line from the TVDT Data Center
in Glens Falls,  New York to the StarSight  network support computer in Fremont,
California. Using computer workstations, the Company's employees modify the TVDT
data for use in the StarSight EPG, add  authorization  information  and transmit
the data via a leased data circuit to the Public  Broadcasting  Service  ("PBS")
Network Control Center in Alexandria,  Virginia. Such authorization  information
provides the security mechanism for the StarSight data transmissions by allowing
only authorized subscribers to receive the service.

         Under  television   standards  mandated  by  the  National   Television
Standards   Committee,   American  television  pictures  are  comprised  of  525
horizontal  lines which are  scanned  across the  television  screen to create a
visible  image.  The first 21 of these lines are known as the vertical  blanking
interval ("VBI"). Since the VBI is generally not visible on properly functioning
television  screens,  each of these lines can carry separate  signals to be used
for purposes other than viewing,  such as data for on-screen program  schedules.
Pursuant  to a network  service  and joint  development  agreement  between 

                                       13
<PAGE>

the Company and  National  Datacast,  Inc.  ("NDI"),  a  subsidiary  of PBS, PBS
inserts the program schedule data into its VBI at its Network Control Center and
then transmits it via satellite to approximately  168  participating  master PBS
stations across the country.  Under this agreement,  the Company is committed to
pay a monthly fee based on the number of designated  market  areas.  If services
are provided nationwide and subscriptions exceed a certain level, these fees may
increase to a maximum of $7,000,000 per year prior to adjustments  for inflation
and based upon the level of usage.

         These  participating  master PBS stations are equipped with a StarSight
provided  "station node," a network  computer which receives the nationwide feed
of schedule and  authorization  information and filters out information  that is
not applicable to that station's  geographic coverage area so as to minimize the
time needed to send schedule  information to subscribers and maximize the number
of  subscribers  to  be  supported.  These  master  PBS  stations  forward  this
information   to  an  additional   100  PBS  stations,   bringing   coverage  to
approximately  268 full  power PBS  stations  across the  country,  representing
approximately  98% of all United  States  television  households.  In  addition,
Viacom has agreed to use reasonable efforts to carry the  StarSight-embedded VBI
signal  on  certain  of  the  cable  program  networks,  over-the-air  broadcast
television stations and analog  satellite-delivered  services owned and operated
by  Viacom,  although  the  Company  currently  is not using  the VBI  signal on
Viacom's over-the-air broadcast stations. The Company also has an agreement with
Trinity  Broadcasting  Network ("TBN") to insert the StarSight  program schedule
into the VBI at its uplink facility in Tustin, California for satellite delivery
of  StarSight  program  data  to  customers  with  StarSight-capable   satellite
receivers.

         After it is processed  through the station nodes, the StarSight data is
transmitted  on the VBI to StarSight  customers who receive the signal via local
cable  system  operators,   satellite  broadcast  and  over-the-air   broadcast.
Customers  access the  information  on  StarSight-capable  cable set-top  boxes,
televisions,  VCRs, satellite receivers or stand alone StarSight receivers. This
hardware receives and descrambles the data and gives customers  on-screen access
to the StarSight EPG.

         Local cable system  operators are currently  required under federal law
to include PBS programming in their channel line-up although this requirement is
under judicial  challenge.  Cable  operators which choose not to carry StarSight
might remove the VBI containing the StarSight  program  schedule data from their
signal transmissions. In addition, other interference within the transmission of
StarSight  program  schedule data could occur. The Company is aware of a limited
number of instances  where  StarSight  data has not been passed on to customers.
Although  StarSight  customers can  nevertheless  receive the StarSight  service
through the VBI contained in the  over-the-air  broadcast  transmissions of PBS,
the  removal of the  StarSight  program  schedule  data  transmitted  over cable
systems  makes it more  difficult  for cable  customers to receive the StarSight
service and thereby could limit the Company's  penetration  of the cable market.
Increased  costs  or  delays  associated  with  finding   alternative  means  to
distribute the StarSight EPG to a potentially  large number of cable subscribers
could have a material adverse effect on the Company's business.  There can be no
assurance, however, that VBI problems which affect the transmission of StarSight
data will not occur nor that the Company will not be required to re-engineer the
StarSight EPG to eliminate such problems.

         In the case of satellite delivery of the StarSight service to customers
with  StarSight-capable  satellite  receivers,  the  insertion of the  StarSight
program  schedule  data  into the VBI is at the PBS  Network  Control  Center in
Alexandria,  Virginia and at the TBN uplink facility in Tustin, California. From
there,  the StarSight  data is transmitted  via satellite  directly to receiving
dishes at the homes of customers.

                                       14
<PAGE>

         Order Processing and Customer Support.  For the customers who subscribe
to the  StarSight  service  directly  from the Company,  a  third-party  service
provider  bills  customers,  coordinates  authorizations  with the  Company  and
manages customer payments.  Technical  questions from customers are answered and
order  taking  services are  performed by the Company.  In the case of customers
receiving the StarSight EPG through the service provider  distribution  channel,
the service  provider,  rather than the Company,  performs the required  billing
functions  associated  with the service.  As a result,  such  service  providers
receive a portion of the revenue received from such customers to cover the costs
of fulfilling  such billing  functions.  The Company has developed an "in-house"
technical  support group  responsible for maintaining  customer  satisfaction in
those cases where technical expertise is sought by customers.  When the order is
taken by the Company,  regardless of whether the customer receives the StarSight
EPG through the consumer electronics or service provider  distribution  channel,
the  Company  or the  service  provider  maintains  control  over  the  customer
authorization  process by means of a conditional  access security chip contained
in the StarSight-capable hardware.

         The following chart  illustrates the transmission of StarSight  program
schedule data across the consumer electronics  (including satellite) and service
provider (i.e.,  cable) delivery systems to various  StarSight-capable  hardware
devices.  The StarSight data network signal is available in more than 98% of all
United States television households.



------------------
Description of graphic:
Graphic  representation of the transmission of StarSight program data to the end
user.  This graphic  depicts the  transmission of TV schedule data from the data
supplier to the Company's  facilities to the various uplink  facilities  through
various satellite transponders to the end users.

                                       15
<PAGE>

Strategic Relationships

Relationship with Viacom

         General.  In  September  1991,  Viacom and the Company  entered  into a
Series C Preferred Stock Purchase Agreement (the "Stock Agreement")  pursuant to
which Viacom  purchased  shares of the Company's  Preferred Stock. In connection
with this transaction,  the Company, Viacom, Michael Faber, Patrick Young, Scott
Wilson and Jeremiah  Milbank  (Messrs.  Faber,  Young,  Wilson and Milbank being
hereinafter  referred  to  as  the  "Principal  Shareholders")  entered  into  a
Corporate Partnership Agreement (the "Partnership  Agreement") pursuant to which
the Company granted to Viacom certain Warrants to purchase  additional shares of
capital stock of the Company and certain rights with respect to Viacom's  equity
ownership.  In April 1993, the Company entered into a network service  agreement
with Viacom Cable (the  "Network  Service  Agreement").  In November  1994,  the
Company  entered  into a service  agreement  with  Viacom  Cable  (the  "Service
Agreement").  The  following is a summary of the rights and  obligations  of the
parties  under the Stock  Agreement,  the  Partnership  Agreement,  the  Network
Service Agreement and the Service Agreement.

         Right of First Refusal/Top-Up Right. Pursuant to the terms of the Stock
Agreement,  the Company  granted to Viacom a right of first  refusal to purchase
all or part of any new  securities  issued by the  Company,  other than  certain
issuances by the Company. This right of first refusal terminates at such time as
Viacom  holds  less  than  3,173,508  shares  of  Common  Stock of the  Company.
Additionally,  pursuant to the terms of the Partnership Agreement,  in the event
the Company or any shareholder of the Company engages or proposes to engage in a
transaction  that  would  result in a new  shareholder  of the  Company  holding
greater than 25% of the Company's  outstanding  capital stock,  on an as-defined
fully diluted basis ("25%  Shareholder"),  Viacom has the right to purchase,  at
the fair market  value of the Common Stock as  determined  by the average of the
closing prices for a share of Common Stock of the Company on the ten consecutive
trading  days  preceding  the date of exercise,  additional  shares of Preferred
Stock to  enable it to  maintain  up to a 1.4:1  ratio  between  its  percentage
ownership of the Company,  on an as-defined fully diluted basis, and that of the
new 25%  Shareholder,  provided  that  Viacom may not,  pursuant  to this right,
increase  its  percentage  ownership  to  greater  than  51%  of  the  Company's
outstanding  capital  stock on an  as-defined  fully  diluted basis (the "Top-Up
Right").  Viacom at its option may elect to  purchase a like number of shares of
Common  Stock  at the  same  price  if  Preferred  Stock  is not  available.  In
connection  with the THOMSON  investment  of  approximately  $25,000,000  in the
Company,  Viacom  agreed  that  THOMSON  may  acquire  greater  than  25% of the
Company's  outstanding  capital stock without initiating  Viacom's Top-Up Right.
The Top-Up Right expires at such time as Viacom holds less than 3,173,508 shares
of Common Stock of the Company. In connection with the Merger, Viacom waived its
right of first  refusal and Top-Up  Right with respect to the option to purchase
up to  5,276,034  shares of the  Company's  Common  Stock  (the  "Company  Stock
Option"),  issued to  Gemstar.  See "Item 12 --  Changes  in  Control -- Related
Agreements."

         Special   Registration   Right.   Viacom  has  the  right,  in  certain
circumstances,  to require the Company on not more than one occasion,  to file a
registration  statement  under the Securities Act at the Company's  expense with
respect to the shares of Common Stock held by Viacom. This registration right is
in addition to registration  rights granted to Viacom which are equivalent,  and
expire  concurrent  with,  to the  registration  rights  held by  certain  other
shareholders of the Company.

         Co-Sale  Rights.  Pursuant to the terms of the  Partnership  Agreement,
Viacom and the Principal  Shareholders have granted each other the right, in the
event that one or more of the other parties  proposes to sell at any time in the
future  shares of capital stock  representing  at least 25% of the Company on an
as-defined fully diluted basis, to participate on a pro rata basis in such sale.
Viacom  also has a right of first  refusal in the event of a sale or transfer of
shares of Common Stock by the Principal Shareholders.

                                       16
<PAGE>

         Board  Representation.  In the event that,  pursuant to the Articles of
Incorporation  of  the  Company  and  California  law,  Viacom  should  hold  an
insufficient  number of shares of the Common  Stock to elect its  nominee to the
Board of Directors,  the Company and the Principal  Shareholders  have agreed to
take such action as may be necessary to nominate and elect  Viacom's  designated
representative  until such time as Viacom  holds less than  3,173,508  shares of
Common  Stock  of  the  Company.   Mr.  Edward  D.   Horowitz,   Executive  Vice
President-Advanced  Development  at Citicorp  and former  Senior Vice  President
Technology,  Viacom Inc.,  and Mr. John W. Goddard,  former  President of Viacom
Cable, currently serve as Directors on the Company's Board in this capacity. Mr.
Thomas  E.  Dooley,  Deputy  Chairman,   Executive  Vice  President,   Corporate
Development  and  Communications  of Viacom Inc.,  also serves on the  Company's
Board of Directors as a representative of Virgin Interactive Entertainment Inc.
("Virgin") by virtue of Viacom's majority interest in Virgin.

         Network Service Agreement. The Company entered into a five-year Network
Service Agreement with Viacom, pursuant to which Viacom agreed to use reasonable
efforts  to  insert  the  StarSight  signal  into the VBI of each of a number of
Viacom's network services, including Nickelodeon, MTV, VH-1, Showtime, The Movie
Channel,  analog  satellite-delivered  services and Viacom's  owned and operated
over-the-air  broadcast  television  stations.  The  Company  currently  is  not
transmitting  the StarSight signal on the VBI of Viacom's  broadcast  television
stations.

         Viacom  Cable  Services  Agreement.  The Company  had  entered  into an
agreement with Viacom Cable to make StarSight  available to its subscriber  base
in the  upgraded  fiber-optic  cable  system in Castro  Valley,  California.  As
previously discussed,  Viacom has recently completed the sale of Viacom Cable to
TCI. The Company is currently  analyzing the effect of the sale on the Company's
previous agreement with Viacom Cable.

         Proposed  Merger  with  Gemstar.  In  connection  with the Merger  with
Gemstar,  Viacom agreed to certain  modifications to its right of first refusal,
top-up right and special  registration right, solely as such rights apply to the
option  granted  to Gemstar by the  Company  in  connection  with the Merger and
related transactions. See "Item 12 -- Changes in Control -- Related Agreements."

Relationship with THOMSON multimedia S.A.

         General.  On March 8, 1996,  THOMSON purchased  3,333,333 shares of the
Company's Common Stock at $7.50 per share for a total of $25,000,000 pursuant to
a Securities  Purchase  Agreement (the "Stock  Agreement")  entered into between
THOMSON and the Company in February 1996. In connection  with this  transaction,
the Company granted certain Warrants to THOMSON to purchase additional shares of
capital stock of the Company. See Note 22 of Notes to Financial  Statements.  In
addition,  the  Company  and  THOMSON  entered  into a Right  of  First  Refusal
Agreement  (the  "Rights  Agreement")  pursuant to which the Company  granted to
THOMSON  certain  rights with respect to  THOMSON's  equity  ownership.  Also in
connection with this transaction, the Company, Viacom and THOMSON entered into a
Shareholders  Agreement  (the  "Shareholders  Agreement")  with  respect  to the
election of directors as described  below.  The Company and THOMSON also entered
into a Strategic Cooperation Agreement (the "Cooperation Agreement") pursuant to
which  THOMSON  has  agreed  to  incorporate  the  Company's  technology  into a
significant  portion of THOMSON's suitable products (namely,  high end TVs, VCRs
and/or TVCRs) in exchange for a share of the Company's revenues derived from the
Company's consumer electronics business,  among other things. The following is a
summary of the rights and obligations of the parties under the Stock  Agreement,
the Rights Agreement and the Cooperation Agreement.

         Right of First Refusal.  Pursuant to the terms of the Rights Agreement,
the Company  granted to THOMSON a right of first refusal to purchase all or part
of any new securities issued by the Company, other than certain issuances by the
Company.  This right of first refusal expires at such time as THOMSON holds less
than  3,173,508  shares of Common Stock of the Company.  In connection  with the
Merger,  THOMSON  waived 

                                       17
<PAGE>

its right to first  refusal in  connection  with the  Company's  issuance  of an
option to purchase up to 5,276,034  shares of the Company's  Common  Stock.  See
"Item 12 -- Changes in Control -- Related Agreements."

         Special   Registration  Right.   THOMSON  has  the  right,  in  certain
circumstances,  to require the Company on not more than one occasion,  to file a
registration  statement  under the Securities Act at the Company's  expense with
respect to the shares of Common Stock held by THOMSON.  This registration  right
is in addition to  registration  rights  granted to THOMSON which are equivalent
to, and expire  concurrent with, the  registration  rights held by certain other
shareholders of the Company.

         Board Representation. Under the Shareholders Agreement, the Company has
agreed to  nominate,  and Viacom has agreed to vote the shares held by Viacom in
favor of, the election of two  representatives of THOMSON to the Company's Board
of Directors  for so long as THOMSON  holds in excess of 10% of the  outstanding
shares  of Common  Stock of the  Company.  Under  the terms of the  Shareholders
Agreement,  THOMSON  has  agreed  to vote the  shares  held by  THOMSON  for the
election of two  representatives  of Viacom to the Company's  Board of Directors
for so long as Viacom holds in excess of 3,173,508 shares of Common Stock of the
Company.   Mr.  James  E.  Meyer,   Executive   Vice   President,   Marketing  &
Sales-Americas, Thomson Consumer Electronics, Inc., a wholly-owned subsidiary of
THOMSON  multimedia  S.A., and Mr. Jacques  Thibon,  Vice  President,  Corporate
Business  Development,  THOMSON multimedia S.A., currently serve as Directors on
the Company's Board in this capacity.

         Cooperation  Agreement.   The  Company  has  entered  into  a  ten-year
Strategic  Cooperation Agreement with THOMSON, with THOMSON having the option to
extend the term for an additional five years, pursuant to which the parties have
agreed to jointly develop a program to incorporate and aggressively  promote the
Company's  technology  and  related  services  throughout  a range  of  selected
consumer  electronics  products  distributed  by  THOMSON in North  America.  In
consideration  of THOMSON's  commitment to incorporate the Company's  technology
into THOMSON's suitable products, the Company has agreed to, among other things,
pay THOMSON a certain  percentage  of the  Company's  revenues  derived from the
Company's consumer electronics business. In addition, the parties have agreed to
each  contribute  specific  dollar  advertising  commitments to the promotion of
their brand  identities and services in 1997 and 1998. The Company believes that
as a result of significant  changing  conditions in the  marketplace,  including
increased competition,  certain aspects of these strategic  business  agreements
with THOMSON,  such as THOMSON's volume commitments and the Company's technology
transfer  commitments,  will be  renegotiated in the near term as soon as market
conditions have been clarified.




         Proposed  Merger with Gemstar.  In connection  with the proposed merger
with  Gemstar,  THOMSON  agreed to certain  modifications  to its right of first
refusal,  top-up  right and special  registration  right,  solely as such rights
apply to the options  granted to Gemstar by the Company in  connection  with the
Merger and related  transactions.  See "Item 12 -- Changes in Control -- Related
Agreements."

Intellectual  Property  -  Patents,   Trademarks,   Copyrights  and  Proprietary
Information

         As part of its business strategy,  the Company has aggressively pursued
and continues to  aggressively  pursue a strong patent  portfolio to protect its
technology.  In the United  States,  the Company  currently  holds eight  issued
patents.  In  addition,  the  Company has a number of U.S.  and  foreign  patent
applications  pending.  The Company pursues  foreign patent  protection in those
countries that present market and licensing  opportunities for the StarSight EPG
and currently has three issued foreign patents.

         Because  the  Company  has   intellectual   property   rights  and,  in
particular,  has obtained patents covering many of the features of the Company's
products  and  services,   the  Company  believes  that  competitors  will  have
difficulty  producing and marketing a commercially  desirable scheduling service
with program  schedule,  program  selection,  one button  recording  and channel
set-up functions similar to the StarSight EPG products without 

                                       18
<PAGE>

infringing on the Company's  intellectual  property.  The Company  believes that
several  of  its  competitors  are  currently   offering  or  propose  to  offer
competitive products which may violate the Company's  intellectual property. The
Company considers its patents and other intellectual property to be important to
the success of its business and believes that its patent  strategy  enhances its
competitive position. The Company plans to vigorously enforce its patents and to
protect its trade secrets and other  know-how to the full extent of the law. The
Company could incur substantial cost in prosecuting  patent  infringement  suits
against  competitors,  and there can be no assurance  that the Company  would be
successful in such actions. See "Legal Proceedings" and "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations."  In addition,
there can be no assurance that the Company's patents or patent applications will
be adequate to ensure the  Company's  competitive  position or that  competitors
will not be able to produce non-infringing competitive products and services.

         The following is a summary of the Company's issued U.S. patents:

         TV Schedule.  This patent, granted in the United States in 1987, covers
a wide variety of program  schedule  and  selection  features,  relating to: (i)
controlling a television tuner to tune by program title,  (ii) providing program
description and title upon each channel change  (program  selection by grazing),
(iii) sorting of program  schedule  information by theme  (program  selection by
theme),  (iv) the continuous update of program  schedules  (on-screen TV program
listings),  (v) the display of time remaining in a given program (program pop-up
information),  (vi) the linking of programs in a series (series to be recorded),
(vii) the  control of the  program  recorder  through  the  supply of  broadcast
information and serial recording  demands,  and (viii) the use of menus and menu
selection  for  recording  and the update of a recording  calendar from a stored
database of pending recordings as schedule changes occur (one button recording).
In December  1991,  a potential  competitor  of the Company  requested  that the
United States Patent and Trademark Office (PTO) conduct a re-examination of this
patent,  claiming that the patent was invalid. In response to this request,  the
Company  introduced  to the PTO all prior art of which it was  aware.  After the
re-examination process was completed, the PTO upheld the validity of the patent.

         VCR  Scheduling.  This  patent,  granted in the United  States in 1990,
covers  certain  features  relating  to  StarSight  playback  indexing  and  the
interactive  consumer  information service currently under development.  Some of
the features  covered by this patent  include  recording and indexing  broadcast
information  where the recording  device stores and indexes by program title and
allows interactive selection and recording of supplemental broadcast information
pertaining to the primary  broadcast  upon user response to an on-screen  cue. A
re-examination  of this patent was also  requested  in March 1992 by a potential
competitor  claiming that the patent was invalid.  After review,  the PTO upheld
the validity of this patent.

         Automatic  Unattended  Recording  of Cable  Television  Programs.  This
patent was granted in the United States in 1992. The patent covers primarily the
recording  features of the  StarSight EPG when a cable decoder box is present as
well as certain  other  features  related  to future  services  currently  under
development.   This  patent  covers  features  that,  either  through  schedules
installed in a recording  device or implemented in an external  device,  control
the cable  decoder in a variety of ways,  including  automatically  changing the
cable decoder channel to the requested channel at the time of recording.

         Background  TV  Schedule  Guide.  This patent was granted in the United
States in 1994.  This  patent  covers TV  schedule  guide  features  relating to
operational  characteristics  as the  guide  is  moved  between  foreground  and
background modes of operation.

         TV Schedule  Guide (Channel  Ordering).  This patent was granted in the
United States in 1995. The patent relates to an interactive  television schedule
display system providing for irregular cursor movement over

                                       19
<PAGE>

an irregular grid of television schedule information and configured to allow the
user to select the order in which TV channels are listed.

         TV Schedule Grid (Program Note Overlay). This patent was granted in the
United  States in 1995.  This  patent,  related to the channel  ordering  patent
described  above,  includes the TV schedule  display  system with the  irregular
cursor  movement  combined  with the ability to display  program  note  overlays
describing a cursor selected program.

         Background  TV Schedule  System.  This patent was granted in the United
States in 1996.  The  technology  covered by this patent  provides the TV viewer
with a means of obtaining program schedule  information  without having to leave
the program  currently viewed.  As a result,  the viewer can obtain  information
about other  programs  currently in progress or scheduled for showing at a later
time.

         "Seamless" Guide for Multiple Program Sources.  This patent was granted
in the United States in 1996. This patent provides for the merging of television
schedule  information  received from multiple program sources,  such as cable TV
and DBS, into a unified or "seamless" guide.

         The Company has an exclusive patent license agreement with Personalized
Media  Communications  ("PMC") in the field of Program  Schedule  Navigation and
Navigation  Information  for a series of patents  including PMC's six issued and
other pending patent applications.  Under the agreement,  the two companies will
jointly complete  development work and apply for patents.  In consideration  for
the license  agreement,  the Company paid a license fee consisting of a one-time
payment of  $500,000 in March 1994 and monthly  installments  of $25,000  over a
three year period. See Note 7 to Financial Statements.  In addition, the Company
will  pay all  costs,  including  all  patent  office  fees and  attorney  fees,
associated with filing and prosecution, and grant to PMC 20,000 shares of Common
Stock of the Company  for each of the  patents  for which the Company  elects to
receive an exclusive license under the agreement.

         While the Company has obtained patents covering many of the features of
StarSight  EPG products and  services,  competitors  or other third  parties may
assert  claims that  StarSight  EPG products and  services  infringe  patents or
rights of such third parties.  Litigation may be necessary to defend the Company
against such claims.  The  resolution  of such claims  would  generally  involve
complex legal and factual questions and would  consequently be highly uncertain.
In particular,  any litigation  involving such claims would entail  considerable
cost to the Company and the diversion of the efforts of  management.  See "Legal
Proceedings" and  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations." In the event of an adverse determination in any such
litigation,  the Company  could be required to expend  significant  resources to
develop non-infringing  technology or to obtain licenses with respect to the use
of the infringing  technology.  There can be no assurance that the Company would
be  successful  in  such  development  or that  third-party  licenses  would  be
available  on  acceptable  terms.  In the event that a third party was to make a
successful  claim against the Company or its customers,  or that the Company was
unable  to obtain a license  with  respect  to such  third-party  technology  on
commercially  reasonable  terms,  the  commercialization  of the  StarSight  EPG
products and services could be delayed or foreclosed and the Company's  business
would be materially adversely affected.

         The Company enters into  confidentiality  agreements with its employees
and  consultants  that prohibit the  disclosure of  confidential  information to
anyone  outside  the Company  both during and  subsequent  to  employment.  Such
agreements  also  require  disclosure  to the Company of ideas,  discoveries  or
inventions  relating to or  resulting  from work  performed  for the Company and
assignment to the Company of all proprietary  rights to such ideas,  discoveries
or inventions. The Company also relies on trade secrets and proprietary know-how
that it seeks to protect,  in part, through the  non-disclosure  agreements with
its employees and consultants and by requiring similar  agreements in connection
with its  manufacturing  and  other  strategic  relationships.  There  can be no
assurance that these agreements will be not be breached,  that the Company would
have adequate 

                                       20
<PAGE>

remedies for any breach,  or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors.

Competition

         The market for delivery of television  program schedule  information is
highly  competitive.  To compete  successfully  in this  market,  a company must
produce and provide  products or services  which are  relatively low in cost and
easy for consumers to use.  There are a number of companies  with  substantially
greater  financial,  sales and marketing  resources than the Company who produce
and market television  schedule  information in various formats which compete or
will compete with the StarSight EPG. These alternative formats currently include
printed television schedules,  on-screen,  passive  (non-interactive)  scrolling
program  guides,  interactive  program guides and other  interactive  electronic
scheduling  products  or  services  that will  compete  more  directly  with the
StarSight EPG.

         Printed  television  schedule  competitors  of the  Company  include TV
Guide,  local cable television guides and local newspaper  guides,  all of which
have a significant presence in the market place resulting from their familiarity
to television  viewers,  their broad base of distribution and their presentation
of feature  articles  and  entertainment  news.  The Company  believes  that the
StarSight EPG will compete  effectively with printed program guides on the basis
of accuracy  and  timeliness  of program  schedule  information,  the ability to
accommodate  ever  increasing  viewer  choices,  the ability to present  program
information by broadcast time, by title or by theme, as well as by channel,  the
convenience  of  on-screen  presentation,  the  ability  to  interact  with  the
television,  VCR,  or  other  StarSight  device,  and ease of use.  The  Company
believes that the StarSight EPG will compete  effectively  on the basis of price
with printed program guides offered for sale, such as TV Guide, and on the basis
of enhanced features with printed program guides distributed for free. While the
Company  believes the  StarSight  EPG will compete  effectively  with respect to
these factors,  the established  market presence of printed program guides gives
them a  competitive  advantage.  In  addition,  there can be no  assurance  that
publishers  of printed  guides will not be able to produce  publications  in the
future that meet growing consumer demands.

         The Company also competes with companies  producing passive  electronic
program  guides for the cable  market such as that  offered by Prevue  Networks,
Inc.  ("Prevue").  The Company  believes  that the  StarSight  EPG will  compete
effectively with passive  electronic program guides on the basis of accuracy and
timeliness of program schedule information, convenience to the user, the ability
to  interact  with  the  television,   VCR,  or  other  StarSight  device,   and
profitability to the cable operator.  Although such guides are typically offered
as a part of the basic cable  service,  the Company  believes the  StarSight EPG
will compete effectively based on its enhanced features.  However,  there can be
no  assurance  that  existing or planned  electronic  guide  companies  will not
develop and market  interactive  electronic  program  guides that offer features
similar to the StarSight EPG.

         Several  companies have announced their intentions to market electronic
program guides in set-top boxes which appear to be very similar to the StarSight
EPG.  Prevue has announced its intention to offer several  levels of interactive
services  which will work in concert  with the Prevue  Channel and provide  user
control of the scroll and which will include  features such as direct tune,  one
touch  record  reminders,  sorting by genre and browse  features and up to seven
days of listings.  Prevue has also  announced  that it plans to offer  Quickvue,
which will deliver data  directly into set-top boxes and offer 30 minutes to two
hours of program information, as well as varying amounts of program descriptions
and days of listings,  depending on the capabilities of the set-top box. Many of
such companies have  significantly  greater resources than the Company to devote
to the  development  and  commercialization  of such products.  If developed and
commercialized as currently described, such products would present a significant
competitive challenge to the Company.

         In  1995  VideoGuide,   Inc.  ("VideoGuide")  (since  December  1996  a
wholly-owned subsidiary of Gemstar) introduced a stand alone set-top box with an
on-screen  guide  allowing  users  to  display  one week of  television 

                                       21
<PAGE>

program information.  Additional features include direct tuning of set-top boxes
and  televisions,  automated  VCR recording  and remote  control  consolidation.
VideoGuide also offers news,  sports and weather  information  services with its
product.  VideoGuide  delivers the data to the end user via the BellSouth Mobile
Comm paging company. Customers subscribe directly from VideoGuide to receive the
service.  National  distribution  of the  VideoGuide  product began in September
1995.

         An additional product which may present a competitive  challenge to the
StarSight EPG is VCR Plus. VCR Plus, which is produced by Gemstar,  is a product
designed to simplify VCR programming. VCR Plus works in conjunction with printed
program  guides that  include code  numbers  adjacent to certain  shows in their
program  listings.  VCR Plus only competes with the VCR control functions of the
StarSight EPG; it does not contain  on-screen  program  schedule  information or
program selection capabilities.  With respect to the VCR control functions,  the
Company  believes  that the  StarSight  EPG will compete  effectively  with this
product  on the  basis of  convenience  of  on-screen  presentation  of  program
information.  The VCR Plus system  requires  codes  printed in the  newspaper to
utilize  the  service.  Introduction  of  another  Gemstar  product,  IndexPlus,
occurred in VCRs in late 1995. This technology utilizes VBI to provide on-screen
index of programs taped in videocassette.

         In November 1995 Gemstar announced that it had entered into an alliance
with News Corporation's TV Guide to deliver a new interactive electronic program
guide  to  consumers.  TV  Guide  Plus+  is  intended  to be  incorporated  into
television sets and VCRs. TV Guide Plus+ is an interactive  on-screen guide with
listings for television  programs up to 48 hours in advance.  As announced,  the
product  integrates  the video  picture into the program  listing,  allowing the
viewer to watch a  television  program  even when  accessing  program  listings.
Additionally,  the  product  offers the users the  ability  to  display  program
information by theme. TV Guide Plus+ will also  incorporate  Gemstar's VCR Plus+
recording technology,  allowing simplified VCR recording. Products incorporating
the TV Guide Plus+ feature were  introduced in the consumer  electronics  market
place in late 1996.

         On December  23,  1996,  the Company  and Gemstar  International  Group
Limited,  a British  Virgin  Islands  corporation,  ("Gemstar")  agreed to merge
pursuant to and  subject to the terms and  conditions  of the Merger  Agreement,
whereby a  wholly-owned  subsidiary  of  Gemstar  will  merge  with and into the
Company.  The  Company  will  survive  the  Merger  and  become  a  wholly-owned
subsidiary of Gemstar. At the closing of the Merger, shareholders of the Company
will be entitled to receive 0.6062 shares of Gemstar's  Ordinary Shares for each
share  of  the  Company's  Common  Stock.  Each  outstanding   option  and  each
outstanding  warrant to purchase  shares of the  Company's  Common Stock will be
adjusted to reflect the exchange ratio of 0.6062 and will be assumed by Gemstar.
Consummation  of the Merger is subject to, among other  things,  (i) approval of
the Merger Agreement by the Company's shareholders, (ii) approval by the holders
of Gemstar's  Ordinary  Shares of the issuance of shares in connection  with the
Merger,  (iii)  certain  government  regulatory  approvals,  (iv) the filing and
effectiveness of a registration  statement for the Gemstar Ordinary Shares to be
issued with the Commission,  and (v) the satisfaction or waiver of certain other
conditions  to closing of the Merger.  See "Item 12 -- Changes in Control" for a
more detailed  description of the Merger,  related  agreements and the terms and
conditions of the Merger Agreement.

         Viewers who receive television programming via satellite have access to
a subscription  service called SuperGuide  offered by Satellite Service Company.
SuperGuide  provides  satellite  subscribers  with  on-screen  program  schedule
information. Using a remote control, SuperGuide subscribers can tune to shows by
program  title  and can  also  call up  brief  text  descriptions  of  programs.
SuperGuide automatically updates program listings daily storing up to 12 days of
schedules  for 60 channels.  SuperGuide  presents a  competitive  service to the
StarSight  service in the  satellite  distribution  channel and would present an
additional competitive challenge if extended to other distribution channels.

         Manufacturers  of set-top boxes have indicated that the next generation
of  set-top  boxes  will be able to provide an  interactive  guide  which  would
provide some features  similar to those to the StarSight EPG. Final 

                                       22
<PAGE>

features and delivery  schedule of these  products are unclear at this time and,
therefore,  the  competitive  effect on the StarSight EPG is currently  unknown.
Many of these companies have significantly greater resources than the Company to
devote to the development and  commercialization of such products.  If developed
and  commercialized  as  currently  described,  such  products  would  present a
significant competitive challenge to the Company.

         The  personal  computing  industry  has made  strides  in the  areas of
multimedia and has begun announcing products that resemble televisions. Included
in the functionality of these products are interactive electronic program guides
that offer potential competition to the Company.  Companies such as Gateway 2000
have announced their intention to offer PCTVs using an interactive program guide
developed by Harman  Interactive  Group,  a subsidiary  of Harman  International
Corporation.  (Certain assets of Harman Interactive Group were recently acquired
by  Intel  Corporation.)  In  addition,   many  other  entities  have  announced
internet-based  guide products which have many features similar to the StarSight
EPG. The cost of any entity to create such a guide is minimal.  The  combination
of  these   internet-based   guides  and  the  present  and  future   widespread
availability of internet enabled consumer  electronics  devices  (including TVs)
could pose a significant competitive challenge to the Company's products.  While
there is no evidence that such a product will ever be  successfully  introduced,
it is  possible  that this  emerging  category  will give birth to a new wave of
interactive program guide companies that will compete directly with the Company.

         Although the Company  believes that its competitive  position is strong
with respect to known  competitors,  there may be competitors  with  significant
competitive  strengths  which are not known to the Company or discussed  herein.
Such potential  competitors may include larger,  more  established  companies in
both the interactive  multimedia services and interactive television fields that
could  enter  the  on-screen  program  guide  delivery  market.  There can be no
assurance that the StarSight EPG will achieve market  acceptance or that it will
be able to compete successfully with such known or unknown competitors,  some of
which may possess substantially greater financial, sales and marketing resources
than those of the Company.

Engineering and Development

         The Company  currently  concentrates  its  engineering  and development
efforts on completing or acquiring hardware and software to: (i) enable customer
support  personnel to  efficiently  access  customer  authorization  and network
status  data,  (ii)  improve  on  aspects  of the PBS data  network,  (iii) make
available  alternate data delivery  technologies to various  service  providers,
such as cable  and  telco  operators,  (iv)  integrate  the  StarSight  EPG into
televisions, VCRs, TVCRs and other applicable consumer electronics products, (v)
reduce the cost to consumer  electronic  manufacturers  for incorporation of the
StarSight EPG into TVs, VCRs, TVCRs and other consumer electronics products, and
(vi)  integrate  the  StarSight  EPG in  set-top  boxes  for the cable and telco
industry,  including the development of advanced analog and digital applications
of StarSight technology.

         Rapid   technological   developments  are  expected  to  occur  in  the
interactive  television services industry. The Company believes that its success
will depend upon its ability to develop,  market and  introduce  products  which
meet  changing  user  needs and which  successfully  anticipate  or  respond  to
technological  changes on a cost  effective  and timely  basis.  There can be no
assurance  that  technological  changes  or  other  significant  changes  in the
television industry will not render the Company's products and services obsolete
or that the Company will be able to keep pace with  technological  developments.
Many of the Company's  present and  potential  future  competitors  have, or may
have,  substantially  greater  resources  than the  Company to devote to further
technological and new product developments.

                                       23
<PAGE>

Government Regulation

         The cable  television  and telco  industries  are subject to  extensive
regulations by federal, state and local agencies.  These regulations,  while not
directly affecting the Company, do affect cable operators and telcos, upon which
the Company will  significantly  rely for the marketing and  distribution of the
StarSight  service  to  potential  customers.  As such,  these  regulations  may
adversely affect the Company's  business.  In October 1992, Congress enacted the
1992 Cable Act, as an amendment to the Communication Act of 1934, which provides
a  significant  regulatory  framework  for the  operation  of  cable  television
systems.  The 1992 Cable Act introduced  substantial rate regulation for certain
services  and  equipment  provided by most cable  systems in the United  States.
Pursuant to the 1992 Cable Act, the Federal  Communications  Commission  ("FCC")
adopted regulations with respect to rates charged for certain cable services and
for equipment to receive those  services.  The FCC also imposed new  regulations
under the 1992 Cable Act in the areas of customer service,  technical standards,
rates for leased access channels and disposition of a customer's home wiring. In
addition,  the FCC also imposed new regulations in the area of  compatibility of
cable equipment with other consumer  electronic  equipment such as "cable ready"
televisions and VCRs.

         In January 1996, Congress passed the 1996  Telecommunications Act which
substantially  amends but does not replace the  Communications  Act of 1934. The
1996  Telecommunications  Act,  among  other  things,  sets forth  rules for the
development of competitive  markets in  telecommunications,  deregulates certain
cable  rates,  enables  telcos  and  other  common  carriers  to  provide  video
programming  to  subscribers,   abolishes  the  FCC's  video  dialtone   ("VDT")
regulations  (although  allows  existing VDT systems to continue to exist),  and
directs the FCC to require TV set  manufacturers to install "V-chips" in TV sets
to allow users to block the reception of objectionable programming. With respect
to  telcos  and  other  entities  entering  the  video  market  place,  the 1996
Telecommunications  Act  establishes a regulatory  regime  called OVS,  which is
meant  to  replace  VDT.  The 1996  Telecommunications  Act  directs  the FCC to
prescribe  regulations  to prohibit OVS operators  from  discriminating  against
unaffiliated  video  programming  providers  with  regard to  program  selection
material  provided  to  subscribers  and, specifically,  to  prohibit  them from
omitting  unaffiliated video programming services carried on the system from any
navigational device, guide or menu.

         Depending  on the  outcome of the  Company's  business  strategy in the
cable and telco distribution  channels and the availability of StarSight-capable
set-top boxes through third party licensed manufacturers, the Company may derive
a  significant  portion of its  customer  revenue from the  distribution  of the
StarSight  service  through cable and telco  operators.  The extent to which the
effects of the 1992 Cable Act on cable operators and the regulatory requirements
for telcos may be somewhat lessened under the 1996  Telecommunications  Act will
depend  to a  significant  degree on the final  form and  implementation  of the
regulations  to be adopted by the FCC. To the extent that the 1992 Cable Act and
the 1996  Telecommunications  Act and regulations  adopted thereunder  adversely
affect cable operators and/or telcos and the manner in which they can market the
StarSight  EPG,  such  regulations  could also  adversely  affect the  Company's
business.  It is uncertain the extent to which the 1996  Telecommunications  Act
will  increase  the number of service  providers  in a market and what effect it
will have on the Company's business strategy in the cable and telco distribution
channels or on the adoption and distribution of the StarSight EPG.

Employees

         As of January 31, 1997, the Company employed 127  individuals,  of whom
26 were  engaged  directly in  engineering  and  development  activities,  13 in
administrative  positions,  36 in sales and marketing,  and 52 in operations and
customer  service.  The Company  believes that it has been successful to date in
attracting  and retaining  qualified  personnel.  The Company  believes that its
future success will depend in part on its continued  ability to recruit,  retain
and motivate qualified management, sales, marketing and technical personnel. The

                                       24
<PAGE>

Company's  operating  results  would be  adversely  affected if the Company were
unable to attract,  assimilate or retain these personnel.  None of the Company's
employees is represented by a labor union.  The Company has not  experienced any
work stoppages and considers its relations with its employees to be good.

         The Company  has  experienced  and  expects to  continue to  experience
growth in the number of employees,  consultants and subcontractors  necessary to
support  the  Company's  business  operations.  This  growth has placed and will
continue to place a substantial strain on the Company's management, operational,
financial  and  accounting   resources.   The  need  to  support  the  Company's
engineering  and  development  and proposed  marketing  efforts will require the
Company to increase the number of  employees,  consultants  and  subcontractors,
which in turn will require a substantial amount of training and other resources.
The Company's need to manage growth effectively will also require it to continue
to implement and improve its operational,  financial and management  information
systems and to motivate and manage its employees and consultants.  The Company's
failure to manage growth effectively would have a material adverse effect on the
Company's  business.  Presently it is uncertain what effect,  if any, the Merger
with Gemstar will have on the Company's future personnel needs and growth in the
number of employees, consultants and subcontractors.


ITEM 2.  PROPERTIES

         The  Company  leases  approximately  60,000  square  feet  in  Fremont,
California  pursuant to leases that expire in March 2002.  The Company  believes
that its existing office space will serve its foreseeable  needs through the end
of 1997 and believes that sufficient additional space will be available to it at
that  time,  either  in  its  current  building  or  at  another  location,   on
commercially reasonable terms.


ITEM 3.  LEGAL PROCEEDINGS

Gemstar Litigation

         The Company and Gemstar are  currently  in  litigation  with each other
over their  respective  intellectual  property  rights as  described  more fully
below.  The Company and  Gemstar,  however,  have agreed to cease  ("stay")  all
activity with respect to the pending  litigation  between them until the earlier
of the consummation of the Merger or termination of the Merger Agreement.

         In October 1993,  the Company filed suit in the District  Court for the
Northern District of California,  San Jose Division, against Gemstar and Michael
R. Levine  ("Levine")  seeking:  (1) a preliminary and permanent  injunction and
treble  damages  for  Gemstar's  willful  infringement  of one of the  Company's
patents  (United  States  Patent  No.  5,151,789,   the  "789  patent");  (2)  a
declaration that the Company does not infringe any claim of United States Patent
No.  4,908,713  (the "713 patent")  and/or that any such claim is invalid and/or
unenforceable; (3) a preliminary and permanent injunction and treble damages for
Gemstar's  violation of certain  antitrust  laws; and (4) monetary and exemplary
damages  for  Gemstar's  tortious  business   activities.   Gemstar  and  Levine
counterclaimed on January 4, 1994 for a preliminary and permanent injunction and
treble damages for the Company's alleged  infringement of the `713 patent claims
and for a declaration of noninfringement, invalidity, and/or unenforceability of
the claims of the  Company's  `789  patent.  In  addition,  on  December 8, 1993
Gemstar  and  Levine  moved to dismiss  the  Company's  antitrust  claim and the
Company's  declaratory relief claim to the extent it sought a declaration of the
unenforceability  of the `713 patent due to Levine's alleged inequitable conduct
during the  prosecution  of the `713  patent.  Pursuant  to a court  order,  the
Company's  antitrust claim was dismissed with prejudice.  In addition,  the case
has been phased to permit  resolution of validity and infringement  issues prior
to resolving all other disputed issues. The court conducted trial in August 1996
regarding Levine's alleged unequitable conduct. A decision has not been rendered
in view of the aforementioned stay.

                                       25
<PAGE>

         In November  1993,  Gemstar filed an action  against the Company in the
District Court for the Central District of California seeking: (1) a preliminary
and permanent  injunction and treble damages for the Company's alleged violation
of certain  federal and state  antitrust  laws;  (2) for monetary and  exemplary
damages for the Company's allegedly tortious business activities;  and (3) for a
declaration of the noninfringement,  invalidity,  and/or unenforceability of the
claims of three of the Company's  patents (United States Patent Nos.  5,151,789,
4,706,121, and 4,977,455). In May, 1994, the Central District action was ordered
to be transferred to the Northern District of California,  San Jose Division, to
be consolidated with the above mentioned  litigation for discovery and pre-trial
purposes. In addition,  pursuant to a court order,  Gemstar's declaratory relief
claims  against the  Company's  United States  Patent Nos.  4,706,121  (the "121
patent") and 4,977,455 (the "455 patent") were  dismissed.  A trial date has not
yet been set and discovery has been stayed pursuant to the Merger Agreement.

         In October  1994,  SuperGuide  Corporation  ("SuperGuide")  and Gemstar
filed a further  lawsuit  against  the  Company  in the  District  Court for the
Northern District of California,  San Jose Division. In this action,  SuperGuide
and  Gemstar  are  seeking,  among  other  things,   preliminary  and  permanent
injunctions  and treble  damages for the  alleged  willful  infringement  by the
Company of one or more claims of United States Patent Nos.  4,751,578  (the "578
patent") and  5,038,211  (the "211  patent").  On December 8, 1994,  the Company
filed counterclaims  seeking, among other things, a declaration that the Company
does not infringe any such claims of the `578 and `211 patents, and/or that such
claims are invalid and/or unenforceable.  On May 5, 1995, SuperGuide amended its
complaint to add a count  asserting  that the  Company's  `121 patent is invalid
and/or unenforceable and is not infringed upon by SuperGuide.  The Company filed
a motion to  dismiss  SuperGuide's  causes of action  with  respect  to the `121
patent  for  lack  of  subject  matter   jurisdiction   (based  on  no  case  or
controversy);  on August 8, 1995, the Company's motion was granted. This lawsuit
also has been  consolidated  with the above  mentioned  cases for  discovery and
pre-trial  purposes.  A trial date has not yet been set and  discovery  has been
stayed pursuant to the aforementioned Merger Agreement.

United Video Litigation

         In October 1993, United Video and its Trakker,  Inc. subsidiary brought
suit against the Company in the United  States  District  Court for the Northern
District  of  Oklahoma,  seeking a  declaratory  judgment  that its  interactive
program guide products do not infringe the Company's `121, `455 or `789 patents.
The Company  counterclaimed  charging  infringement of the `121 patent.  Through
subsequent  procedural  motions,  the lawsuit expanded to include a total of ten
patents to which the  Company has rights to and federal  antitrust  claims.  The
Court has  deferred  consideration  of all the other  claims  and  counterclaims
pending the resolution of the infringement,  validity and enforceability  issues
of the `121 patent. A phased bench trial began on May 8, 1996, with United Video
essentially  presenting  its case in chief on the  validity  and  enforceability
issues related to the `121 patent. The Court has set the trial date for the next
phase for May 5, 1997. The Company will present witnesses during this next phase
relating to the validity, enforceability and infringement of the `121 patent.

Scientific-Atlanta Arbitration and Litigation

         In  1995,   the  Company   brought  an   arbitration   action   against
Scientific-Atlanta   concerning   Scientific-Atlanta's   alleged  delay  in  the
deployment of StarSight-capable set-top boxes and its development of a competing
electronic  program guide allegedly using the Company's  technology in violation
of its  licensing  agreement  with the  Company.  In  apparent  response  to the
arbitration  action,  Scientific-Atlanta  filed a lawsuit in the  United  States
District  Court for the  Northern  District of Georgia (the  "Atlanta  suit") in
February 1996 against the Company and Philips  alleging that the Company's stand
alone   StarSight   receiver   infringed   on  three  U.S.   patents   owned  by
Scientific-Atlanta. The Company filed a demand on April 30, 1996 for arbitration
on the issue of whether  the  Company is  licensed  to use  Scientific-Atlanta's
patents. The arbitrators have been selected, but 

                                       26
<PAGE>

there has been no  discovery  and no hearing date has been set. The judge in the
Atlanta  suit has stayed  proceedings  pending the outcome of the April 30, 1996
arbitration.  On July 23, 1996,  the American  Arbitration  Association  ("AAA")
awarded the Company  $15,000,000  in monetary  damages  plus  attorney  fees and
arbitration costs against Scientific-Atlanta. In addition to the monetary award,
the Company was granted injunctive relief prohibiting Scientific-Atlanta, except
under certain limited conditions, from accepting any new customer orders for any
products incorporating an interactive electronic program guide that utilizes any
information  derived either directly or indirectly from the Company for a period
of three years  beginning from the date of the award.  On December 11, 1996, the
U.S.  District Court for the Northern  District of California  confirmed the AAA
arbitration  panel award of  $15,000,000,  plus  attorney  fees and  arbitration
costs. In addition,  the court confirmed the AAA panel's injunction  prohibiting
Scientific-Atlanta  for a period of three years from  shipping to third  parties
any consumer  product  incorporating  an interactive  program guide,  except for
orders already  committed to in writing as of July 23, 1996, the date of the AAA
panel ruling. On December 24, 1996,  Scientific-Atlanta  appealed $10,000,000 of
the award to the U.S.  District  Court of  Appeals  for the Ninth  Circuit.  The
matter is currently pending and no briefs have been filed.

         In January 1997,  the Company  received a payment of  $7,715,000  for a
portion of the award,  consisting  of  $5,000,000  in  damages,  $2,485,000  for
attorney fees and arbitration costs and $230,000 in accrued interest. See Note 5
to Financial Statements.

         The Company intends to vigorously defend the allegations against it and
to actively pursue its claims against each party.  The outcome of these lawsuits
cannot presently be determined.  Management  believes,  based upon the advice of
counsel,  that the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial statements taken as a whole.


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

         Not Applicable.



                               27


<PAGE>

                                     PART II

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

         The  Company's  Common  Stock is quoted on The Nasdaq  National  Market
under the symbol  "SGHT." The following  table  indicates the quarterly high and
low sale prices per share of the Common  Stock of the Company as reported on The
Nasdaq National Market for the period from January 1, 1995 through  December 31,
1996:

                                                    High          Low

 Quarter ended March 31, 1995                      $9.75        $5.50
 Quarter ended June 30, 1995                        7.75         4.63
 Quarter ended September 30, 1995                   6.00         3.25
 Quarter ended December 31, 1995                    6.88         2.25

 Quarter ended March 31, 1996                       7.50         4.50
 Quarter ended June 30, 1996                       11.75         5.38
 Quarter ended September 30, 1996                  10.25         5.25
 Quarter ended December 31, 1996                   10.00         5.88

         As of  February  18,  1997,  there  were 339  holders  of record of the
Company's Common Stock.

         The Company has never  declared or paid cash  dividends  and  currently
intends to retain any future  earnings for use in the  development and operation
of its business.  Accordingly, the Company does not expect to pay cash dividends
in the foreseeable future.

                                       28
<PAGE>
<TABLE>

ITEM 6:  SELECTED FINANCIAL DATA
<CAPTION>

                                                                 Six Months
                                                                    ended
Statement of                   Twelve Months ended December 31,   December 31,          Twelve Months ended June 30,
Operations Data:                    1996            1995            1994           1994             1993            1992
------------------------------  ------------    ------------    ------------    ------------    ------------    ------------
                                                         (in thousands, except per share amounts)
<S>                               <C>             <C>             <C>             <C>             <C>             <C>         

Revenues                          $      8,698    $      1,913    $         70

Cost of goods sold                       1,544             676
Inventory reserves and
  write-offs                               801           4,931           1,450
                                  ------------    ------------    ------------    
Gross profit (loss)                      6,353          (3,694)         (1,380)
                                  ------------    ------------    ------------    
Costs and expenses:
  General and administrative            10,311           9,848           8,302    $      8,228    $      3,767    $      1,765
  Litigation costs                       4,776           2,880           1,644
  Engineering and
     development                         3,420           3,539           2,128           6,843           3,131           1,563
  Marketing                              7,480           6,823           4,325           4,478           2,044             332
  Network services and
     other expenses                      6,127           5,570           3,292           2,682             913             514
                                  ------------    ------------    ------------    ------------    ------------    ------------
       Total costs and expenses         32,114          28,660          19,691          22,231           9,855           4,174
Interest income, net                       712             574             810           1,676             168             150
                                  ------------    ------------    ------------    ------------    ------------    ------------
Loss before cumulative
  effect of accounting
  change                               (25,049)        (31,780)        (20,261)        (20,555)         (9,687)         (4,024)
Cumulative effect of
  accounting change                                                     (1,172)
                                  ------------    ------------    ------------    ------------    ------------    ------------
Net loss                          $    (25,049)   $    (31,780)   $    (21,433)   $    (20,555)   $     (9,687)   $     (4,024)
                                  ============    ============    ============    ============    ============    ============
Loss per common share:
  Loss before cumulative
    effect of accounting
    change                        $      (1.01)   $      (1.50)   $      (0.97)   $      (1.08)   $      (0.70)   $      (0.29)
  Cumulative effect of
    accounting change                                                    (0.06)
                                  ------------    ------------    ------------    ------------    ------------    ------------
Net loss                          $      (1.01)   $      (1.50)   $      (1.03)   $      (1.08)   $      (0.70)   $      (0.29)
                                  ============    ============    ============    ============    ============    ============
Number of shares used
  for calculation of net
  loss per common share             24,783,159      21,163,768      20,799,445      19,082,759      13,762,475      13,755,743
                                  ============    ============    ============    ============    ============    ============

                                                  December 31,                                     June 30,
                                  --------------------------------------------    --------------------------------------------
Balance Sheet Data:                   1996            1995             1994          1994            1993             1992
                                  ------------    ------------    ------------    ------------    ------------    ------------


Cash and cash equivalents              $25,708          $8,787         $10,141         $24,087         $25,690         $4,196
Short-term investments                   1,989                          16,940          13,883                  
Working capital                         15,603           3,914          23,939          36,422          23,900          3,122
Long-term investments                                                    5,004          10,024                  
Total assets                            35,031          16,333          40,831          56,695          28,037          5,175
Long-term license fee payable                               74             363             502              64             85
Long-term deferred revenue               9,700
Accumulated deficit                   (115,735)        (90,686)        (58,906)        (37,473)        (16,918)        (7,231)
Total shareholders' equity               9,838           8,343          34,179          52,768          25,366          3,987

</TABLE>
                                       29
<PAGE>


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

         The  following  Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations  contains  forward-looking  statements  that
involve  risks and  uncertainties  that  could  cause  actual  results to differ
materially  from those  anticipated  in these  forward-looking  statements  as a
result of certain factors discussed  herein.  These  forward-looking  statements
include,  but are  not  limited  to,  the  statements  regarding  the  Company's
expectation of continuing to incur substantial  losses and substantive  negative
cash flow from operating  activities,  the statement  regarding the  anticipated
impact of the  Company's  on-going  licensing  efforts in its overall  operating
success,  the  statement  regarding  the  Company's   expectation  of  incurring
additional  legal costs  related to the  enforcement  of the  Company's  patents
involved in the current and potential future suits, the statement  regarding the
anticipated use of its cash resources, and the statements below under "Liquidity
and Capital Resources"  regarding the Company's future cash requirements and the
length of time  that the  Company's  resources  will be  sufficient  to meet its
capital requirements.

Proposed Merger with Gemstar

         On December 23, 1996,  the Company and Gemstar agreed to merge pursuant
to and subject to the terms and  conditions of the Merger  Agreement,  whereby a
wholly-owned  subsidiary  of Gemstar will merge with and into the  Company.  The
Company will survive the merger and become a wholly-owned subsidiary of Gemstar.
At the closing of the Merger,  shareholders  of the Company  will be entitled to
receive  0.6062  shares of  Gemstar's  Ordinary  Shares,  for each  share of the
Company's Common Stock. Each outstanding option and each outstanding  warrant to
purchase  shares of the  Company's  Common Stock will be adjusted to reflect the
exchange  ratio of 0.6062 and will be assumed by  Gemstar.  Consummation  of the
Merger is subject to, among other things,  (i) approval of the Merger  Agreement
by the  Company's  shareholders,  (ii)  approval  by the  holders  of  Gemstar's
Ordinary Shares of the issuance of shares in connection  with the Merger,  (iii)
certain government regulatory approvals,  (iv) the filing and effectiveness of a
registration  statement  for the Gemstar  Ordinary  Shares to be issued with the
Commission,  and (v) the  satisfaction  or waiver  of  certain  other  customary
conditions  to closing of the Merger.  See "Item 12 -- Changes in Control" for a
more detailed  description of the Merger,  related  agreements and the terms and
conditions of the Merger Agreement.

Overview and Recent Developments

         The Company was incorporated in May 1986. Since inception,  the Company
has  devoted  substantially  all of its  resources  toward the  development  and
commercial  introduction of a patented on-screen interactive  television program
guide and VCR control  service  marketed  under the  StarSight  brand name.  The
Company generates  revenue from  subscription  sales of the StarSight service to
customers, either through service providers, such as cable operators and telcos,
or directly  from the  Company.  The Company  also  generates  revenues  through
licensing  the  Company's   intellectual   property  for  non-StarSight  capable
products.  The Company has been unprofitable  since its inception and expects to
incur  substantial  losses for the foreseeable  future. As of December 31, 1996,
the Company had accumulated a deficit of $115,735,000.

         In September  1994, the Company changed its fiscal year from one ending
June 30 to one ending December 31 beginning on January 1, 1995. Accordingly, the
accompanying  financial  statements are for the twelve months ended December 31,
1996 and 1995 ("Fiscal  1996" and "Fiscal 1995,"  respectively), 

                                       30
<PAGE>

the six months ended December 31, 1994 ("Transition 1994") and the twelve months
ended June 30, 1994 ("Fiscal 1994").

         The Company has  entered  into  technology  development  and  licensing
agreements  with key  manufacturers  for the  manufacture  of  StarSight-capable
televisions,  VCRs, TVCRs and C-band satellite  receivers.  These  manufacturers
include TCE, Zenith, Sony,  Mitsubishi,  Toshiba,  Matsushita,  Philips,  Sharp,
Samsung,  GoldStar,  and  Daewoo.  The  Company has also  entered  into  license
agreements  with  General  Instrument,  Scientific-Atlanta  and  Zenith  for the
incorporation  of  StarSight-enabling   technology  into  set-top  boxes  to  be
manufactured  by them for sale to cable system  operators who offer StarSight to
their  customers.  It is possible  that  manufacturers  will reduce or delay the
manufacture of  StarSight-capable  consumer  electronics products as a result of
the  announcement,  expectation  or  consummation  of the  Merger.  The  Company
recorded an inventory  valuation  allowance in the fourth quarter of Fiscal 1996
due to delays  in the  manufacture  of  StarSight-capable  consumer  electronics
products which the Company believes were attributable, in part, to uncertainties
regarding the effects of the Merger. Such manufacturing delays and uncertainties
are  expected  to continue  at least in the near term.  See Note 9 to  Financial
Statements.

         The  Company  believes  its  intellectual  property  applies to several
business segments,  including but not limited to DBS, PC/TV, the Internet, MMDS,
and  cable/telco  digital  set-top box  electronic  program guide  applications.
Hence, the Company devotes  significant  management time and effort to identify,
negotiate and enter into royalty bearing licensing  agreements.  As part of this
licensing  business and strategy,  the Company has entered into royalty  bearing
license agreements with TCE, Sony,  Toshiba,  Panasonic,  Uniden and HNS for the
use of certain of the Company's intellectual property in connection with certain
DSS equipment  manufactured  and distributed by them. Such agreements  generally
require the periodic payment of per unit royalties to the Company based on units
manufactured or sold.

         On December 20, 1996,  the Company  entered into a licensing  agreement
with Microsoft to license certain of its  technologies  to Microsoft.  Under the
agreement,  Microsoft  paid the  Company  a  non-refundable  "lump-sum"  royalty
payment of $20,000,000 (the "Royalty  Payment") for a  non-exclusive,  worldwide
license for the Company's  intellectual  property related to electronic  program
guides,  which technology will be used by Microsoft for future software products
and services on the PC platform.  Additionally,  Microsoft  provided the Company
with a royalty free license under certain of its  intellectual  property related
to electronic  program guides.  Microsoft also agreed to pay the Company certain
additional  per unit  royalties  related to  additional  features  of  StarSight
licensed product and a percentage of advertising revenues derived from Microsoft
licensed  products.  The  Company  agreed  to  pay  Microsoft  a  percentage  of
subscription revenues derived from StarSight licensed products. The Company will
recognize  revenue related to the Royalty Payment ratably during the initial two
year period of the agreement based on the projected installed units of Microsoft
licensed product.

         The Company believes its on-going  licensing efforts are likely to have
a significant impact on the Company's overall operating success.

         In March 1996, the Company and THOMSON  finalized  agreements to form a
long-term  strategic  relationship  to  aggressively   incorporate  and  promote
StarSight technology and related services in selected THOMSON product lines. The
key terms and conditions of these agreements follow:

         o        The  Company  sold  3,333,333  shares of its  Common  Stock to
                  THOMSON at $7.50 per share or $25,000,000 in total.

                                       31

<PAGE>

         o        The Company  granted  THOMSON a warrant to purchase  2,000,000
                  shares  of  the  Company's  Common  Stock  as  follows:  up to
                  1,000,000 shares at $7.50 per share on or prior to February 1,
                  1998 and up to the  balance  of the shares at $10.00 per share
                  on or prior to  February 1, 1999.  The total  number of shares
                  purchasable  by THOMSON  under the warrant is limited to 19.6%
                  of the Company's issued and outstanding Common Stock.

         o        THOMSON  will  put  StarSight  capability  into a  significant
                  portion of THOMSON's  suitable  consumer  electronic  products
                  over the ten year life of the agreement.

         o        The  Company  will pay  THOMSON a per  subscriber  fee for new
                  subscribers using a THOMSON  StarSight-capable  product.  Fees
                  under this  agreement are limited to certain  annual  maximums
                  through the year 2000.

         o        The Company will pay THOMSON a percentage of all  subscription
                  fees  derived from THOMSON  StarSight-capable  products.  Fees
                  under  this  agreement  begin  after  the  achievement  of  an
                  agreed-upon  minimum  of  THOMSON  StarSight-capable  products
                  manufactured or procured by THOMSON. In addition,  the Company
                  will pay  THOMSON a  percentage  of all  revenues  related  to
                  consumer electronics products whether or not the subscriber is
                  using a THOMSON  StarSight-capable  product.  Such fees  under
                  this agreement  begin after the  achievement of an agreed-upon
                  minimum of THOMSON StarSight-capable  products manufactured or
                  procured by THOMSON. This agreement expires in 2010.

         o        The Company and THOMSON each agree to  contribute  significant
                  specific dollar advertising  commitments in each year 1997 and
                  1998   for    advertising    and    promotion    of    THOMSON
                  StarSight-capable products.

         The  Company  believes  that  as  a  result  of  significant   changing
conditions in the marketplace,  including increased competition, certain aspects
of these strategic  business  agreements with THOMSON,  such as THOMSON's volume
commitments  and  the  Company's  technology  transfer   commitments,   will  be
renegotiated in the near term as soon as market conditions have been clarified.


Results of Operations

         As a result of incurring  significant  expenses in its  development and
operating activities without generating  significant  revenues,  the Company has
incurred  significant  losses.  The  Company's net losses were  $25,049,000  for
Fiscal 1996,  $31,780,000  for Fiscal 1995,  $21,433,000 for Transition 1994 and
$20,555,000 for Fiscal 1994.

         Revenues  for  Fiscal  1996,  Fiscal  1995  and  Transition  1994  were
$8,622,000, $1,913,000 and $70,000, respectively. The Company had no revenues in
Fiscal  1994.  Revenues  increased in such periods due to an increase in license
revenues and, to a lesser extent,  increased subscription revenues.  Fiscal 1996
license revenues were derived principally from license agreements  incorporating
non-StarSight-capable  DSS equipment  manufactured  and distributed by TCE, Sony
and other consumer electronics manufacturers.

         Cost of goods  sold was  $1,544,000  and  $676,000  in Fiscal  1996 and
Fiscal 1995,  respectively,  and  primarily  represents  costs  associated  with
license  revenues.  In Fiscal 1996, the Company  recorded an additional lower of
cost  or  market  inventory  valuation  allowance  of  $801,000  related  to raw
materials  (i.e.,  integrated  circuits  and  other  components)  purchased  for
manufacturers for use in StarSight-capable  consumer electronics products.  This
inventory   valuation  allowance  was  due  to  delays  in  the  manufacture  of
StarSight-capable

                                       32
<PAGE>

consumer electronics  products which the Company believes were attributable,  in
part,  to  uncertainties  regarding  the effects of the Merger.  Fiscal 1995 and
Transition  1994 include  inventory  reserves and  write-offs of $4,931,000  and
$1,450,000,  respectively, related to the Company's agreement with a third party
manufacturer  (the  "Manufacturer")  for the  manufacture  of as many as 100,000
stand  alone  StarSight  receivers  ("Receivers")  on a  subcontract  basis.  In
connection with this agreement,  the Company provided the  Manufacturer  certain
raw  materials to complete the  manufacture  of the  Receivers.  At December 31,
1994,  the Company had recorded an inventory  valuation  allowance of $1,450,000
related to this agreement  covering  approximately  25,000  Receivers  which the
Company  had  committed  to  purchase.   Such  inventory   valuation   allowance
represented  the  Company's  estimate of the excess of cost over net  realizable
value on  work-in-process  and  finished  products  inventories  to reflect  the
anticipated  sales price of the Company's stand alone StarSight  receiver at the
time.

      During the first  quarter  of 1995,  the  Company  committed  to  purchase
another  10,000  Receivers  and  recorded  an  additional   inventory  valuation
allowance of $930,000. In September 1995, the Company canceled its commitment to
purchase the remaining 65,000 Receivers from the Manufacturer. Such cancellation
did not result in any additional cost or liability to the Company.  However,  in
September  1995,  as a  result  of the  completion  of this  agreement  with the
Manufacturer and a significant  reduction in the anticipated  sales price of the
Receivers,  the Company recorded an additional lower of cost or market inventory
valuation allowance of $2,340,000. In addition, the Company expensed $960,000 of
excess   work-in-process   inventories   originally  acquired  for  use  in  the
manufacture of the remaining  65,000  receivers.  In the fourth quarter of 1995,
the Company recorded an additional  lower of cost or market inventory  valuation
allowance  of  $701,000.  As a result,  the total  1995  inventory  reserve  and
write-off was $4,931,000.

         General and  administrative  expense primarily consists of salaries and
benefits of management and administrative  personnel in the corporate,  finance,
personnel,  legal and facilities  departments,  professional and consulting fees
and  general  corporate  expenditures.  General and  administrative  expense for
Fiscal 1996,  Fiscal 1995,  Transition  1994,  and Fiscal 1994 was  $10,311,000,
$9,848,000, $8,302,000 and $8,228,000, respectively. The increase in Fiscal 1996
is   primarily    the   result   of   certain    professional    advisors'   and
transaction-related  costs in  connection  with the  Merger  with  Gemstar.  The
increase in Fiscal 1995, when compared to Transition  1994, was primarily due to
$668,000  in  expenses  in  connection  with the  hiring  of the  Company's  new
President and Chief  Executive  Officer and $700,000 in executive  bonuses.  The
increase in general and  administrative  expense for Transition 1994 compared to
Fiscal 1994 was  primarily  due to $3,117,000  for  manufacturer  reimbursements
pursuant to an agreement to reimburse a  manufacturer  for specific  incremental
manufacturing   costs  of  incorporating   StarSight   technology  into  certain
StarSight-capable products offset by only six months of activity.

         The Company is a named plaintiff and  counterclaimant  in several legal
proceedings  where the Company is primarily  alleging that others are infringing
the Company's  patents and other  intellectual  property rights.  The Company is
also a named defendant in legal proceedings  where patent  infringement has been
alleged  against the Company.  From  inception  through  December 31, 1996,  the
Company has expensed  $10,472,000  in legal and other costs in  connection  with
such  litigation.  Litigation  costs increased to $4,776,000 in Fiscal 1996 from
$2,880,000 in Fiscal 1995 and $1,644,000  for  Transition  1994. The increase in
such  litigation  costs  over the past two  fiscal  periods is the result of the
arbitration hearing involving  Scientific-Atlanta which commenced in April 1996,
the United  Video  patent  infringement  trial which began in May 1996,  and the
Gemstar patent infringement trial which began in August 1996.  Effective July 1,
1994,  the  Company  changed  its method of  accounting  to expense  legal costs
incurred in connection with the aforementioned  patent infringement  litigation.
Previously  all  such 

                                       33
<PAGE>

legal costs were  capitalized  and amortized over the remaining  useful lives of
the  related  patents.  The  Company  believes  that  this  change  in method is
preferable  because  it  conforms  to the  predominant  industry  practice.  The
cumulative  effect at July 1, 1994 of  adopting  this  accounting  change was an
increase in the Company's net loss for Transition 1994 of $1,172,000  ($0.06 per
share). See Item 3, "Legal Proceedings." The Company expects to incur additional
litigation  costs in future periods  related to the enforcement of the Company's
patents involved in the current and potential future suits.

         Engineering and development  expense is composed primarily of personnel
costs in the  areas of  product  design  and  development.  Engineering  efforts
include  development  of  the  broadcast  network  architecture  and  supporting
software  and  the  design  of  the  StarSight-enabling   technology,  which  is
incorporated within televisions,  VCRs, TVCRs,  satellite  receivers,  cable and
telco  set-top  boxes,  and stand alone  StarSight  receivers.  Engineering  and
development  expense  decreased  slightly  in  Fiscal  1996 to  $3,420,000  from
$3,539,000  in Fiscal 1995.  The decrease was  primarily  due to lower  staffing
levels  when  compared  to  the  previous  year's   activity.   Engineering  and
development  expense  increased from $2,128,000 in Transition 1994 to $3,539,000
in Fiscal 1995, representing twelve months of activity, compared with six months
for Transition 1994. Engineering and development expense decreased to $2,128,000
for Transition 1994 compared to $6,843,000 in Fiscal 1994. A portion of this pro
rata decrease is  attributable  to the gradual  shifting of the Company's  focus
from early development and engineering  efforts to preparation for manufacturing
and commercial operations. In addition, during Fiscal 1994, the Company expensed
approximately   $1,322,000  in  connection  with  an  exclusive  patent  license
agreement with another company. See Note 7 to Financial Statements.

         Marketing  expense  consists   primarily  of  salaries  for  sales  and
marketing   personnel,   product   launch  costs,   advertising,   manufacturing
incentives,  consultants,  market  research  costs,  and trade show and industry
awareness costs.  Marketing expense for Fiscal 1996 increased to $7,480,000 from
$6,823,000  for Fiscal  1995.  The  increase is  primarily  due to  manufacturer
incentives of $812,000 and certain target market advertising expense. For Fiscal
1995,  marketing  expense  increased to $6,823,000  compared to  $4,325,000  for
Transition 1994. The increase principally represents the effect of twelve months
of activity compared with six months for the prior fiscal period.

         Network services and other expenses  consist  primarily of the combined
cost of purchasing  television  scheduling  data from a television data supplier
(TVDT) and broadcasting that data over the data distribution network operated by
PBS. The Company's  contracts with these service providers have a base fee and a
per customer  monthly cost with annual  maximums on the cost.  The combined cost
for the purchase and broadcast of the television  scheduling  data through these
contracts  is  limited  to  $8,115,000  per year  (for  each  year in which  the
contracts  overlap)  subject  to annual  adjustments  related  to changes in the
consumer price index. In addition,  network and other expenses include operating
expenses  related to  subscription  order  processing,  customer  and  technical
support and  manufacturing  operations and support.  Network  services and other
expenses  increased to $6,127,000 in Fiscal 1996 from $5,570,000 in Fiscal 1995,
$3,292,000 for  Transition  1994 and $2,682,000 in Fiscal 1994. The increase was
primarily  attributable  to an increase in expenses  related to the operation of
the data  distribution  network for the  StarSight  service and costs related to
order processing and customer and technical support.

         Interest income was $726,000 for Fiscal 1996, $607,000 for Fiscal 1995,
$833,000 for  Transition  1994 and  $1,695,000  in Fiscal 1994.  The decrease in
interest  income is  attributable  to a decrease in the Company's  cash and cash
equivalents,  short-term investment and long-term investment balances during the
last three fiscal periods.

                                       34
<PAGE>

         There can be no assurance that the Company will ever be able to achieve
revenues in excess of expenses.  The Company expects to incur substantial losses
and substantial  negative cash flow from operating activities in the foreseeable
future.  The Company is  dependent  on licensing  and  subscription  revenues of
StarSight  products  and services in order to minimize  negative  cash flow from
operations.  Because of its limited commercial operating history, the Company is
subject to all of the risks and expenses  inherent in the establishment of a new
business  enterprise.  To address  these risks and  expenses,  the Company must,
among other things,  respond to competitive  developments,  attract,  retain and
motivate qualified  personnel and support the expense of marketing a new service
based upon innovative technology. In addition, the Company must be successful in
the  commercial  distribution  of its products  and  services,  obtain  adequate
financing to fulfill its marketing plan and successfully market its products and
services to  potential  subscribers  and license its  intellectual  property for
non-StarSight-capable products.

Liquidity and Capital Resources

         The Company has financed its operations  through private  placements of
equity securities to individual  investors and those corporations with which the
Company has strategic  relationships.  These private  placements  have yielded a
total of $77,125,000 through December 31, 1996 (including  $24,625,000 in Fiscal
1996). In addition,  the Company  completed an initial public offering in August
1993, raising $42,300,000,  net of issuance costs. In December 1996, the Company
received  $20,000,000 in connection with a license  agreement with Microsoft for
use of the  Company's  intellectual  property in future  software  products  and
services on the PC platform. See Note 4 to Financial Statements. At December 31,
1996,  the  Company had cash and cash  equivalents  and  short-term  investments
available  for sale of  $27,697,000.  In January  1997,  the Company  received a
partial payment of its arbitration award of $7,715,000 from  Scientific-Atlanta.
See Note 5 to Financial Statements.

         The Company  may seek  additional  investments  from its current or new
strategic  investors.  In addition,  the Company may consider  issuance of other
debt or equity  securities.  To the extent the Company raises additional cash by
issuing equity securities,  ownership  dilution to the existing  shareholders of
the Company  will result.  Debt or equity  financing  may not be available  when
needed or on terms acceptable to the Company.

         As of December  31,  1996,  the Company had an  accumulated  deficit of
$115,735,000.  The accumulated deficit increased from $90,686,000 as of December
31, 1995.

         Negative  cash flow from  operations  was  $5,506,000  for Fiscal 1996,
$27,608,000 for Fiscal 1995,  $17,092,000 for Transition 1994 and $19,717,000 in
Fiscal 1994. The large reduction in negative  operating cash flow in Fiscal 1996
was primarily  due to the Royalty  Payment of  $20,000,000  received in December
1996 related to the Microsoft licensing agreement.

         Only limited  revenues  have been  generated  to date.  There can be no
assurance  that the  Company  will be able to  achieve  revenues  in  excess  of
expenses.  The  Company  expects to incur  substantial  negative  cash flow from
operating activities for the foreseeable future.

         The Company  anticipates  expending a  significant  portion of its cash
resources for sales and marketing, expanding public awareness and other expenses
associated with the delivery of StarSight to customers.  The Company anticipates
expending  additional cash resources to provide  incentives for manufacturers to
incorporate the StarSight EPG into  StarSight-capable  products  manufactured by
them. For a description of certain future  commitments of the Company,  see Note
12 to Financial Statements.

                                       35
<PAGE>

         Through  December 31, 1996, the Company  expensed  $10,472,000 in legal
and other costs in connection with patent infringement litigation (see Note 7 to
Financial  Statements).  The Company expects to incur  additional legal costs in
future periods related to the enforcement of the Company's  patents  involved in
the current and potential  future suits. No estimate of the total amount of such
additional litigation costs can be made at this time.

         The Company is dependent on 1997  license and  subscription  revenue to
minimize  negative  cash flow from  operations.  The Company  believes  that the
availability of StarSight-capable TVs, VCRs, TVCRs,  satellite receivers,  cable
and telco  set-top  boxes,  and stand alone  StarSight  receivers  in the market
place, combined with an intellectual property licensing program, is essential to
the Company's 1997 revenues and cash flow.

         The  Company's  future cash  requirements  will depend on many factors,
including:  (i) the rate at which  manufacturers  of televisions,  VCRs,  TVCRs,
satellite receivers, and cable and telco set-top boxes incorporate the Company's
proprietary  technology into new hardware products  manufactured and marketed by
them, (ii) the rate at which customers subscribe to the StarSight service, (iii)
the rate at which cable and telco operators  introduce and market  StarSight EPG
products and services to their customers,  (iv) the level of marketing  required
to  increase  subscribers  and to attain a  competitive  position  in the market
place,  (v) the rate at  which  the  Company  is  successful  in  licensing  its
intellectual property for  non-StarSight-capable  products, and (vi) the rate at
which the Company invests in engineering  and development and patent  protection
with respect to existing and future technology.

         The Company  believes that its existing cash and cash  equivalents  and
short-term investments will be sufficient to sustain the Company's current level
of operations and meet its financial obligations through the end of 1997.

                                       36
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Company's financial statements and the independent auditors' report
appear on pages F-1 through F-25 of this Report.


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

         Not applicable.




                                       37
<PAGE>

                                    PART III
<TABLE>

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<CAPTION>

        Name                            Age                    Position                                     Director Since

<S>                                     <C> <C>                                                                   <C>
Larry W. Wangberg                       54  Chairman of the Board of Directors and  Chief Executive               1993
                                            Officer

Brian L. Klosterman                     39  President, Chief Operating Officer and Director                       1996
Martin W. Henkel(1)                     50  Executive Vice President, Chief Financial Officer and Director        1992

Jack C. Clifford (1)(2)                 63  Director                                                              1993
Ajit M. Dalvi (1)                       55  Director                                                              1993
Donn M. Davis (3)                       34  Director                                                              1995
Thomas E. Dooley (1)(3)                 40  Director                                                              1995
John F. Doyle (3)                       67  Director                                                              1990
John W. Goddard (1)(2)                  55  Director                                                              1994
Edward D. Horowitz                      49  Director                                                              1993
James E. Meyer (1)                      42  Director                                                              1996
Jacques Thibon                          33  Director                                                              1996
<FN>
----------------
(1) Member of the Finance Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
</FN>
</TABLE>

         There is no family  relationship  between  any  director  or  executive
officer of the Company.

         Mr.  Wangberg has served as the Chairman of the Board of Directors  and
Chief Executive  Officer since April 1996. From February 1995 to April 1996, Mr.
Wangberg  served as the Company's  President and Chief  Executive  Officer.  Mr.
Wangberg was elected to the Board of Directors of the Company in May 1993.  From
1983 to February  1995,  Mr.  Wangberg  served as President and Chief  Executive
Officer of Times Mirror Cable  Television,  Inc., a provider of  broadband-based
network and cable television  services.  Mr. Wangberg  simultaneously  served as
Senior  Vice  President  of  the  parent  The  Times  Mirror  Company,  a  major
information  provider.  Mr.  Wangberg is a past  chairman of the National  Cable
Television  Association  (NCTA).  Mr.  Wangberg has also served on the boards of
directors of Zilog, Inc. and USCS International, Inc. since April 1996.

                                       38
<PAGE>

         Mr.  Klosterman  has  served  as  the  Company's  President  and  Chief
Operating  Officer  since April 1996 and was elected to the Board of the Company
in April  1996.  From March 1995 to April  1996,  Mr.  Klosterman  served as the
Company's Senior Vice President,  Marketing,  and from March 1993 to March 1995,
he served as Senior Vice President, Consumer Electronics Marketing. From 1988 to
1993, Mr.  Klosterman held various  positions with Sony  Corporation of America,
most recently as Vice  President.  From 1985 to 1988, Mr.  Klosterman  served in
various positions with THOMSON Consumer  Electronics,  Inc.,  including his last
position as Manager of Television Marketing.

         Mr. Henkel has served as Executive Vice  President  since December 1994
and as Chief  Financial  Officer  since  November  1991.  From  November 1991 to
December  1994,  Mr. Henkel served as Vice  President,  Operations.  He became a
director  of the Company in July 1992.  From 1989 to January  1992,  Mr.  Henkel
served as Vice  President of Operations  and Chief  Financial  Officer of Phylon
Communications,  Inc., an integrated  circuit design and hardware  manufacturing
company.  From  1987  to  1989,  Mr.  Henkel  was  President  of  Martin  Henkel
Consulting,  a financial and administrative  consulting firm. From 1985 to 1987,
Mr. Henkel was Corporate  Controller of Telcom General  Corporation.  Mr. Henkel
was a divisional Controller at Apple Computer, Inc. from 1982 to 1985.

         Mr.  Clifford  was elected to the Board of  Directors of the Company in
May 1993.  Since  February  28,  1997,  Mr.  Clifford  has been a  self-employed
consultant.  From 1996 to February 28, 1997,  Mr.  Clifford was  Executive  Vice
President,  Broadcasting,  Programming  & Electronic  Media,  of The  Providence
Journal Company, and from 1989 to 1996, he was Vice President-Telecommunications
of The Providence Journal Company.  From 1982 to October 1995, he also served as
Chairman of Colony Communications, a cable operator and former subsidiary of The
Providence Journal Company.

         Mr.  Dalvi was  elected  to the Board of  Directors  of the  Company in
November  1993.  Mr. Dalvi has served as Senior Vice  President of Marketing and
Programming for Cox Communications,  a cable operator, since 1987. Since joining
Cox in 1982 as Director  of  Marketing,  Mr.  Dalvi has held  several  positions
there,  including Vice President of Marketing and Programming  from 1985 to 1987
and Vice President of Marketing,  Planning and Development from 1984 until 1985.
Mr.  Dalvi  also  serves  on  the  boards  of  The  Discovery   Channel  and  E!
Entertainment Television.

         Mr.  Davis was  elected  to the Board of  Directors  of the  Company in
August  1995.  Mr.  Davis  has  served  as  President  of  Tribune  Ventures,  a
development  unit of Tribune  Company,  since February 1995. From August 1992 to
February 1995, he served as Senior Counsel for the Tribune Company.  Previously,
he was an attorney in private practice at Sidley & Austin. Mr. Davis also serves
on the board of Excite, Inc.

         Mr.  Dooley was  elected to the Board of  Directors  of the  Company in
April 1995.  Mr. Dooley was  appointed a Director and Deputy  Chairman of Viacom
Inc.  ("Viacom")  in January  1996 and has been an  executive  officer of Viacom
since 1987 In March 1994,  he was elected  Executive  Vice  President - Finance,
Corporate  Development  and  Communications  of Viacom.  From July 1992 to March
1994,  Mr.  Dooley served as Senior Vice  President,  Corporate  Development  of
Viacom. From August 1993 to March 1994, he also served as President, Interactive
Television.  In December 1990, Mr. Dooley was named Vice  President,  Finance of
Viacom,  and he served as Viacom's Vice  President  and  Treasurer  from 1987 to
1994.  Mr.  Dooley joined  Viacom  International,  Inc. in 1980 in the corporate
finance area and has held  various  positions in the  corporate  and  divisional
finance areas.

         Mr. Doyle was elected to the Board of Directors of the Company in April
1990.  Since April 1992,  Mr. Doyle has been the president of his own consulting
company,  Doyle  Consulting.  From 1986 to April 1992,  Mr. Doyle was a founding
partner of The Verity Group, a market research  company.

                                       39
<PAGE>

From 1971 to 1986,  Mr. Doyle  served as President  and Chairman of the Board of
Pioneer  Electronic  Corp.  (USA).  During that time he also served two terms as
Chairman of the Board of the Consumer Electronics Division and also was a member
of the Board of Governors of the Electronics Industry Association.

         Mr. Goddard was elected to the Board of Directors of the Company in May
1994. Since January 1997, Mr. Goddard has been a self-employed  consultant.  Mr.
Goddard was a  consultant  for Viacom  International,  Inc.  from August 1996 to
January  1997.  From 1980 to 1996,  Mr.  Goddard  served as President  and Chief
Executive Officer of the cable division of Viacom International Inc. Mr. Goddard
has served as a director of TCI Satellite  Entertainment,  Inc.  since  December
1996.

         Mr.  Horowitz  was elected to the Board of  Directors of the Company in
November 1993. Mr. Horowitz is Executive Vice President-Advanced  Development at
Citicorp,  with global responsibility for incorporating  electronic  interactive
delivery into product lines and customer distribution systems.  Prior to joining
Citicorp in January 1997, Mr. Horowitz was Senior Vice  President-Technology  at
Viacom Inc. and Chairman and Chief Executive Officer of Viacom Interactive Media
from 1989 to 1994. He was also a member of the Viacom Executive Committee.  From
1974 to 1989, Mr. Horowitz held senior management positions with Home Box Office
(HBO), a subsidiary of Time Warner,  Inc. Mr.  Horowitz has served as a director
of Ariel Corporation since May 1995.

         Mr.  Meyer was  elected  to the Board of  Directors  of the  Company in
February 1996. Since joining Thomson Consumer Electronics,  Inc., a wholly-owned
subsidiary  of  THOMSON  multimedia  S.A.,  in 1988,  Mr.  Meyer  has  served as
Executive  Vice  President  Marketing and  Sales-Americas.  Prior to his current
position,  Mr. Meyer served as Senior Vice  President,  Product  Management  for
three years.  Before that, he was Senior Vice President,  TV  Division-Americas.
Mr.  Meyer also  serves on the board of  directors  of  THOMSON/Sun  Interactive
Alliance.

         Mr.  Thibon was  elected to the Board of  Directors  of the  Company in
February  1996.  Mr.  Thibon has  served as Vice  President  Corporate  Business
Development for THOMSON  multimedia  S.A. since February 1997,  after serving as
General  Manager  Strategic  Alliances  since March 1995.  From 1987 to February
1995, Mr. Thibon served as Manager, General Manager and Deputy Director and then
Major Financial  Accounts  Director for France Telecom,  a supplier in France of
telephone  communications.  Mr.  Thibon also serves on the board of directors of
THOMSON-LCD S.A.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  Exchange Act of 1934 (the  "Exchange
Act") requires the Company's  executive officers and directors,  and persons who
own  more  than ten  percent  of a  registered  class  of the  Company's  equity
securities,  to file  reports of  ownership  and changes in  ownership  with the
Commission and the National  Association of Securities  Dealers,  Inc. Executive
officers,  directors and greater than ten percent  stockholders  are required by
SEC  regulation  to furnish the Company  with copies of all Section  16(a) forms
they file.  Based  solely in its review of the copies of such forms  received by
it, or written  representations  from  certain  reporting  persons,  the Company
believes that all executive  officers and directors of the Company complied with
all applicable filing requirements.

                                       40
<PAGE>



ITEM 11. EXECUTIVE COMPENSATION

                           Summary Compensation Table
<TABLE>

         The following Summary Compensation Table sets forth certain information
regarding the compensation  during the periods  indicated of the Chief Executive
Officer  of the  Company  and the next four most  highly  compensated  executive
officers  of the  Company  during the 1996  fiscal  year (the  "Named  Executive
Officers"):
<CAPTION>

                                                                                              Long-Term
                                                                                             Compensation
                                                                                                Awards
                                                                                             ------------
                                                                                 Other        Securities     All Other
                                 Fiscal                                          Annual       Underlying      Compen-
Name and Principal Position      Year(1)              Salary        Bonus(2)  Compensation     Options(#)     sation(3)
---------------------------      -------              ------        --------  ------------     ----------     ---------
<S>                           <C>                    <C>           <C>         <C>                 <C>          <C>
Larry W. Wangberg(4)                1996             $519,000      $911,400    $       --               --      $13,874
   Chairman of the Board and        1995              437,500       300,000     545,118(5)         800,000           --    
   Chief Executive Officer    Transition 1994             --             --            --               --           --
                                    1994                  --             --            --               --           --

Martin W. Henkel                    1996              234,723       121,599     492,673(6)              --        7,238
  Executive Vice President,         1995              243,648       100,000     246,337(6)          40,000        7,238
  Chief Financial Officer     Transition 1994         102,053       100,000     211,146(6)              --        3,480
  and Director                      1994              210,366        88,440     312,590(6)          15,000        6,960
                                                                                                    
Brian L. Klosterman(7)              1996              240,000       494,000            --               --       12,000
  President and Chief               1995              173,360       120,000            --          150,000        6,960
  Operating Officer and        Transition 1994         79,336        38,162            --               --        3,480
  Director                          1994              140,004        38,000      50,099(5)              --        6,960

Kenneth A. Milnes                   1996              169,199        25,403            --           20,000           --
  Vice President,                   1995              133,793        19,035            --           40,000           --
  Engineering                  Transition 1994         63,225        22,047            --              --            --
                                    1994              115,008            --            --              --            --

Jonathan B. Orlick (8)              1996              160,244        63,457      77,579(5)          30,000           --
  Vice President,                   1995                   --            --            --              --            --
  Intellectual                 Transition 1994             --            --            --              --            --
  Property and General              1994                   --            --            --              --            --
  Counsel                                                  --            --            --              --            --
                                                                                                                     
<FN>

(1)      "1996" refers to the fiscal year ended December 31, 1996. "1995" refers
         to the fiscal year ended  December 31, 1995.  In  September  1994,  the
         Board of Directors approved a change to the Company's  operating fiscal
         year from a fiscal year ending June 30 to a fiscal year ending December
         31. In  connection  with this  change,  the Company  filed a transition
         report on Form 10 -K with the Commission  covering the period from July
         1, 1994 to December  31, 1994 (the  "Transition  Period").  "Transition
         1994" refers to the Transition Period. "1994" refers to the fiscal year
         ended June 30, 1994.

(2)      Represents  bonuses  paid  during the  respective  calendar  years from
         January 1 to December 31 to each of the Named Executive Officers.

(3)      Represents car allowances paid during 1996,  1995,  Transition 1994 and
         1994 to each of the Named Executive Officers.

                                       41
<PAGE>

(4)      Mr.  Wangberg  joined  the  Company  in  February  1995 and  became the
         Chairman of the Board of Directors and Chief Executive Officer in April
         1996.

(5)      Represents  compensation  to  defray  the  costs of  relocating  to the
         Company's geographic area.

(6)      Amount represents  additional  compensation and reimbursement of income
         tax  liabilities  related to the exercise of stock  options  originally
         granted in November 1991.

(7)      Mr.  Klosterman  became the  Company's  President  and Chief  Operating
         Officer and a member of the Board of Directors in April 1996.

(8)      Mr.  Orlick  joined  the  Company in  January  1996 as Vice  President,
         Intellectual Property and became General Counsel in June 1996.
</FN>
</TABLE>

                                       42

<PAGE>

                        OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>

         The  following  table  provides  information  concerning  each grant of
options to purchase the Company's Common Stock made during the fiscal year ended
December 31, 1996 to the Named Executive Officers:
<CAPTION>

                                                                                              Potential Realizable   
                                                                                              Value Minus Exercise   
                          Individual Grants                                                 Price at Assumed Annual  
                         ------------------                                                   Rates of Stock Price   
                              Number of          % of Total        Exercise                 Appreciation for Option  
                             Securities        Options Granted    Price Per                         Term(1)          
                         Underlying Options    to Employees in   Share ($/sh)  Expiration   ------------------------
          Name               Granted(#)          Fiscal Year      (2)(3)(4)       Date          5%           10%
          ----               ----------          -----------      ---------       ----          --           ---
 <S>                           <C>                   <C>           <C>          <C>            <C>          <C>
 Larry W. Wangberg               --                  --               --           --
 Martin W. Henkel                --                  --               --           --
 Brian L. Klosterman             --                  --               --           --
 Kenneth A. Milnes             20,000                6.2%          $6.625       08/01/06       $ 85,729     $226,183
 Jonathan B. Orlick            30,000                9.3            7.00        02/01/06        135,872      358,479
<FN>

(1)   Potential  realizable  value is based on the  assumption  that the  Common
      Stock of the  Company  appreciates  at the annual  rate shown  (compounded
      annually)  from the date of grant  until  the  expiration  of the ten year
      option  term.  These  numbers  are  calculated  based on the  requirements
      promulgated by the Commission and do not reflect the Company's estimate of
      future stock price growth.

(2)   All options shown granted in fiscal 1996 become  exercisable  as to 1/48th
      of the shares subject to the option  exercisable  each month provided that
      the  option  may not be  exercised  for one  year  following  the  vesting
      commencement  date. Under the 1989 Stock Incentive  Program,  the Board of
      Directors retains the discretion to modify the terms,  including the price
      of outstanding options.

(3)   Options were  granted at an exercise  price equal to the fair market value
      of the Company's  Common Stock,  as determined by reference to the closing
      sales price of the Common Stock on The Nasdaq  National Market on the date
      of grant.

(4)   Exercise  price  may be paid in cash,  promissory  note,  by  delivery  of
      already-owned  shares  subject to certain  conditions,  or  pursuant  to a
      cashless exercise procedure under which the optionee provides  irrevocable
      instructions to a brokerage firm to sell the purchased shares and to remit
      to the Company, out of the sale proceeds,  an amount equal to the exercise
      price plus all applicable withholding taxes.
</FN>
</TABLE>
                                       43
<PAGE>

                           AGGREGATED OPTION EXERCISES
              IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>

         The  following  table  sets forth  certain  information  regarding  the
exercise  of stock  options by the Named  Executive  Officers in the fiscal year
December 31, 1996 and the value of stock options held as of December 31, 1996 by
such individuals.
<CAPTION>
                                                         Number of Securities Underlying        Value of Unexercised  
                                  Shares                      Unexercised Options at          In-the-Money Options at 
                                 Acquired                      December 31, 1996(#)           December 31, 1996 ($)(1)
                                   on          Value           --------------------           ----------------------- 
                                Exercise     Realized
             Name                  (#)        ($)(1)      Exercisable     Unexercisable     Exercisable    Unexercisable
             ----                  ---        ------      -----------     ------------      -----------    -------------
<S>                               <C>       <C>              <C>                <C>            <C>             <C>     
Larry W. Wangberg                     --    $      --        366,666            433,334        $779,165        $920,835
Martin W. Henkel                  13,333       43,332         22,395             32,605          63,644         171,356
Brian L. Klosterman                   --           --        105,625            111,042         380,541         655,710
Kenneth A. Milnes                 17,500       67,500         24,859             48,474         138,269         231,729
Jonathan B. Orlick                    --           --             --             30,000              --          71,250
<FN>

(1)      Market value of the  Company's  Common  Stock at the  exercise  date or
         December 31, 1996, as the case may be, minus the exercise price.
</FN>
</TABLE>

Employment Contracts and Change-In-Control Arrangements

         The Company  has  entered  into  employment  agreements  with Martin W.
Henkel,  dated November 30, 1995, Brian L. Klosterman,  dated December 21, 1995,
Kenneth A. Milnes,  dated March 13, 1996, and Jonathan B. Orlick,  dated June 1,
1996  (collectively  the "Employees").  Pursuant to said employment  agreements,
Messrs. Henkel, Klosterman, Milnes, and Orlick are paid monthly base salaries of
$20,266, $20,000, $11,250, and $15,000, respectively. The foregoing salaries may
be increased by the Board of Directors from time to time. The foregoing salaries
are also subject to annual cost of living  increases,  with the exception of Mr.
Orlick,  whose  monthly base salary is subject to  adjustment on the basis of an
annual merit review and whose first merit  increase shall be retroactive to June
1, 1996.  Each of the  Employees  is eligible to  participate  in the  Company's
employee benefit plans and executive compensation programs.

         In addition,  each of the Employees is entitled to periodic  bonuses at
the  discretion of the Board of Directors  under the Company's  Executive  Bonus
Plan, with Mr.  Klosterman  guaranteed an annual bonus equal to a minimum of 50%
of  his annual base salary for each full year of employment under his employment
agreement.  Mr.  Klosterman is also entitled to an auto  allowance of $1,000 per
month during the term of his employment agreement.

         In connection  with his June 1, 1996 employment  agreement,  Mr. Orlick
received a one-time  relocation  assistance  allowance of $25,000 in  connection
with the close of escrow on his personal residence.

         The terms of the  existing  employment  agreements  continue  until the
earlier to occur of (i) December 1, 1998 for Mr.  Henkel,  December 20, 1998 for
Mr.  Klosterman,  March 12,  1998 for Mr.  Milnes,  and  October 1, 1998 for Mr.
Orlick, or (ii) "Involuntary  Termination" or "Constructive  Termination" by the
Company  or  until   voluntarily   terminated  by  the  Employee.   "Involuntary
Termination" means

                                       44
<PAGE>

termination by the Company,  including upon death or disability of the Employee,
for any reason other than cause, and "Constructive Termination" means a material
reduction  in salary or  benefits,  a  material  change in  responsibilities,  a
requirement  to  relocate  beyond  a  specified   distance,   or  subjection  to
unreasonable or illegal working conditions.

         Upon Involuntary Termination,  Constructive Termination, or termination
of an Employee upon a "Change in Control" of the Company (as defined below), (i)
Messrs. Henkel and Klosterman are entitled to a lump-sum severance payment equal
to each  Employee's  respective  remaining base salary and fees for the contract
period, but in no event less than 100% of each Employee's respective annual base
salary  and  fees,  and up to one year of  Company-paid  group  health  and life
insurance coverage,  (ii) Mr. Milnes is entitled to a lump-sum severance payment
equal to his remaining base salary for the contract period, but in no event less
than 100% of his annual base salary and fees, and up to one year of Company-paid
group health and life insurance coverage,  and (iii) Mr. Orlick is entitled to a
lump-sum severance payment equal to his annual base salary then in effect and up
to one year of  Company-paid  group  health and life  insurance  coverage.  Upon
voluntary  termination by Mr. Henkel, he is entitled to a lump-sum equivalent to
50% of the lump-sum  referred to in the  previous  sentence for him and up to 16
months of Company-paid  group health and life insurance  coverage.  In addition,
except with respect to Mr. Orlick,  upon Involuntary  Termination or a Change in
Control,  the stock options outstanding prior to the execution of the employment
agreements and granted during the term of such employment agreements held by the
Employees  shall  become fully vested and  immediately  exercisable.  "Change in
Control" is defined to mean:  (i) the  acquisition  of securities of the Company
representing   40%  or  more  of  the  total  voting  power  of  the   Company's
then-outstanding  securities except pursuant to a negotiated  agreement with the
Company and the purchase of such securities  from the Company,  (ii) a change in
the  composition  of the  Board of  Directors  displacing  a  majority  of those
directors  incumbent,  elected or  nominated  for election as of the date of the
employment agreement, (iii) the approval by the shareholders of the Company of a
merger of the Company with any other  corporation  after which the  shareholders
own less than 50% of the voting securities of the surviving  corporation or (iv)
the approval by the  shareholders  of the Company of the  liquidation or sale of
substantially all of the Company's assets.

         Pursuant to their existing employment agreements, each of the Employees
has agreed  that,  during  his  employment  and for a period of 12 months  after
voluntary  termination,  the Employee will not own,  control or manage or become
affiliated with or permit his name to be used in connection with any business or
enterprise that is or expects to become directly  competitive  with any business
conducted by the Company.

         On February 2, 1995, the Company  entered into an employment  agreement
with Larry W. Wangberg,  under which Mr.  Wangberg serves as the Chief Executive
Officer  of the  Company  and is paid a  monthly  base  salary  of  $43,250.  In
addition,  Mr.  Wangberg is entitled to receive an annual  bonus of up to eighty
percent (80%) of his base salary,  provided,  however,  that Mr.  Wangberg shall
receive a minimum  annual bonus of $200,000.  In 1996, Mr.  Wangberg  received a
cash bonus of $500,000  pursuant to his employment  agreement which provides for
the payment of such bonus at the time the Company raises at least $20,000,000 in
financing subsequent to said agreement. The bonus was payable as a result of the
Company raising  approximately  $30,000,000  subsequent to said  agreement.  The
foregoing  base salary may be increased  by the Board of Directors  from time to
time and is subject to annual cost of living  increases.  Mr.  Wangberg  also is
eligible to  participate in the Company's  employee  benefit plans and executive
compensation programs.

         The Company granted Mr.  Wangberg an option to purchase  500,000 shares
of the Company's Common Stock under the 1989 Stock Incentive  Program at a price
per share of $7.25 equal to the fair

                                       45
<PAGE>

market  value of the  Company's  Common  Stock.  In  addition,  the Company also
granted  Mr.  Wangberg  an option to purchase  300,000  shares of the  Company's
Common  Stock  under the 1989  Stock  Incentive  Program at a price per share of
$7.25 equal to the fair market value of the Company's  Common  Stock,  provided,
however, that such option shall become immediately  exercisable when the Company
achieves certain performance milestones.

         Mr. Wangberg's  February 2, 1995 employment  agreement  continues until
the  earlier of (i) January  31,  2001,  or (ii)  "Involuntary  Termination"  or
"Constructive Termination" by the Company or until voluntarily terminated by Mr.
Wangberg.  "Involuntary  Termination"  is  defined  to mean  termination  by the
Company,  including  upon death or  disability of Mr.  Wangberg,  for any reason
other than cause, and  "Constructive  Termination" is defined to mean a material
reduction  in salary or  benefits,  a  material  change in  responsibilities,  a
requirement  to  relocate  beyond  a  specified   distance,   or  subjection  to
unreasonable  or  illegal  working  conditions.  Upon  Involuntary  Termination,
Constructive  Termination,  or  termination  of an  Employee  upon a "Change  in
Control" of the Company (as defined  below),  Mr.  Wangberg is entitled to (i) a
lump-sum  severance  payment equal to his remaining base salary and fees for the
contract period (in no event less than 200% of his annual base salary and fees),
and (ii) up to two  years  of  Company-paid  group  health  and  life  insurance
coverage. Upon voluntary termination, Mr. Wangberg is entitled to (i) a lump sum
equivalent  to 100% of the lump sum  referred to in the previous  sentence,  and
(ii) up to 12 months of Company-paid  group health and life insurance  coverage.
In addition, upon Involuntary  Termination,  the stock options outstanding prior
to the execution of the employment agreement and granted during the term of such
employment  agreement  held  by Mr.  Wangberg  shall  become  fully  vested  and
immediately  exercisable.  "Change  in  Control"  is  defined  to mean:  (i) the
acquisition of securities of the Company  representing  40% or more of the total
voting power of the Company's  then-outstanding  securities except pursuant to a
negotiated  agreement with the Company and the purchase of such  securities from
the  Company,  (ii) a  change  in the  composition  of the  Board  of  Directors
displacing a majority of those  directors  incumbent,  elected or nominated  for
election as of the date of the employment  agreement,  (iii) the approval by the
shareholders  of  the  Company  of a  merger  of  the  Company  with  any  other
corporation  after  which  the  shareholders  own less  than  50% of the  voting
securities of the surviving corporation or (iv) the approval by the shareholders
of the Company of the liquidation or sale of substantially  all of the Company's
assets.

         Pursuant to the February 2, 1995 employment agreement, Mr. Wangberg has
agreed that, during his employment and for a period of 12 months after voluntary
termination,  he will not own,  control or manage or become  affiliated  with or
permit his name to be used in connection with any business or enterprise that is
or expects to become  directly  competitive  with any business  conducted by the
Company.

         Effect of Gemstar Merger on Employment Agreements

         Severance  Provisions.  Each existing employment  agreement between the
Company and the executives  contains  provisions for lump sum severance payments
that  will  be  triggered  by the  Merger.  In the  case  of  Messrs.  Wangberg,
Klosterman and Henkel, upon consummation of

                                       46
<PAGE>

the Merger,  the Company will make a lump sum payment  equal to the  executive's
base salary,  car allowance and  guaranteed  bonus for the remaining term of the
prior employment agreement,  less applicable withholding.  The lump sum payments
are  expected to total  approximately  $3,385,164,  approximately  $678,090  and
approximately   $636,437   for   Messrs.   Wangberg,   Klosterman   and  Henkel,
respectively.  In the case of  Messrs.  Milnes  and  Orlick,  such lump sum cash
payment shall be equal to one year of each  Employee's  respective  current base
salary,  less applicable  withholdings  and are expected to total  approximately
$190,000  and  approximately  $180,000,  respectively,  for  Messrs.  Milnes and
Orlick.  In addition,  the  severance  provisions of the  employment  agreements
provide that each  Employee's  stock options will  accelerate in accordance with
the terms of such Employee's prior employment  agreement.  As of March 15, 1997,
the  number  of  options  subject  to  acceleration  pursuant  to the  severance
provisions  of each  executive's  existing  employment  agreement  are  383,334,
99,792,  30,313,  47,917 and 21,875 for Messrs.  Wangberg,  Klosterman,  Henkel,
Milnes and  Orlick,  respectively.  Furthermore,  if the  benefits  to which the
executive is entitled  pursuant to the severance  provisions  or otherwise  give
rise to an excise  tax as a result of the  application  of  Section  4999 of the
Code,  the  Company  must pay the  executive  an  amount  sufficient  to put the
executive in the same after-tax  position that such executive would have been in
had such executive not been required to pay the excise tax.

         In  connection  with the  existing  employment  agreements  of  Messrs.
Wangberg and Klosterman and pursuant to two separate letter  agreements  entered
into at the request of the Company and dated as of  December  23,  1996,  by and
among the Company and Mr.  Wangberg  and Mr.  Klosterman,  Messrs.  Wangberg and
Klosterman  have agreed to accept from the Company in 1996 certain lump sum cash
payments (the  "Accelerated  Payments")  to which they are entitled  under their
respective prior employment agreements. Messrs. Wangberg and Klosterman received
Accelerated Payments of $100,000 and $350,000,  respectively,  and the amount of
such Accelerated  Payments will be deducted from the lump sum severance payments
to which each of Messrs.  Wangberg and  Klosterman are entitled upon the closing
of the Merger.  In the event the Merger is not  consummated  after such payments
have been made,  each of Messrs.  Wangberg and  Klosterman,  as the case may be,
have  agreed to use  reasonable  efforts  in  seeking  any  available  refund or
reduction in tax liability  relating to the Accelerated  Payments.  In the event
that Mr.  Wangberg or Mr.  Klosterman,  as the case may be, receives a refund or
realizes a  reduction  to his tax  liability  with  respect  to the  Accelerated
Payments,  Mr.  Wangberg or Mr.  Klosterman  shall  reimburse the Company in the
amount of such refund or reduction in tax  liability.  Whether or not the Merger
is consummated, in the event Mr. Wangberg or Mr. Klosterman, as the case may be,
becomes liable for any taxes as a result of the Accelerated  Payments being paid
that would not have been payable had such payments been made  immediately  after
consummation  of the Merger,  or as a result of any payment made by Mr. Wangberg
or Mr.  Klosterman,  as the case may be, to the  Company  pursuant to the letter
agreement,  the Company will indemnify Mr.  Wangberg or Mr.  Klosterman,  as the
case may be, on an  after-tax  basis so as to make  such  executive  whole  with
respect to any tax liability.

         On December  23,  1996,  in  connection  with the  Merger,  the Company
entered into new employment agreements with each of Larry W. Wangberg, Martin W.
Henkel,  Brian L.  Klosterman,  Kenneth A.  Milnes,  and Jonathan B. Orlick (the
"Executive  Employment  Agreements").  Each Executive  Employment Agreement will
become effective only upon the consummation of the Merger (the "Effective Time")
and the  Executive  Employment  Agreements  provide for the  employment  of such
persons for a period (the "Employment  Period") of one year for Mr. Milnes,  two
years for Messrs.  Wangberg and Orlick,  three years for Mr.  Klosterman and six
months for Mr.  Henkel.  The Executive  Employment  Agreements  acknowledge  the
Company's  obligations to make lump sum severance payments pursuant to the terms
of each Executive's prior employment agreement upon the closing of the Merger.

         Termination  Provisions.  Each of the Executive  Employment  Agreements
provides that the Employment Period shall terminate automatically upon the death
of the  executive  or for  disability  if, in the sole opinion of the Company 's
Board and subject to certain conditions, the Employee is prevented from properly
performing  his duties by reason of any  physical or mental  incapacity.  If the
Employee is terminated for disability,  the Company shall be required to pay the
Employee's  annual  salary (or  monthly  salary,  in the case of Mr.  Henkel) up
through the last day of the month in which the Company's  Board  determines that
the Employee is disabled. In the event of the death of the Employee, the Company
shall  pay to  the  executive's  beneficiaries  or  estate  the  portion  of the
Employee's  annual salary (or monthly salary, in the case of Mr. Henkel) payable
by the Company through the end of the month in which death occurs.  In addition,
the Company may terminate the  Employee's  employment  with or without Cause (as
defined  below).  In the event that the  termination is with Cause,  the Company
shall have no  liability to  Employee.  If  termination  is without  Cause,  the
Company shall pay a lump sum payment upon such termination of an amount equal to
the remaining annual salary through the Employment Period,  and thereafter,  all
obligations of the Company shall terminate;  provided,  however, in the cases of
Messrs. Klosterman, Milnes and Orlick, the Company shall pay Mr. Klosterman, Mr.
Orlick,  or Mr. Milnes, as the case may be, an amount equal to the lesser of (x)
such  Employee's  annual salary and (y) the remaining  annual salary through the
applicable  Employment Period. In addition,  the Klosterman Employment Agreement
provides that upon termination of Mr.  Klosterman's  employment,  Mr. Klosterman
shall be entitled to receive a portion of the bonus to which he is entitled,  on
the date it would  otherwise  be payable,  proportional  to the period which Mr.
Klosterman was employed compared to the

                                       47
<PAGE>

period for which the bonus is paid. Under the Executive  Employment  Agreements,
termination  shall be for "Cause" if: (i) the Employee has engaged in illegal or
other wrongful conduct  substantially  detrimental to the business or reputation
of the Company or any affiliated  company,  or is charged with or convicted of a
felony;  (ii) the  executive  refuses  or fails  to act in  accordance  with any
reasonable direction or order of the Company's Board;  provided that the Company
Board has given executive written notice of such refusal or failure and Employee
fails to comply with such  direction or order within  thirty days after the date
of such notice;  or (iii) the  Employee has engaged in any fraud,  embezzlement,
misappropriation or similar conduct against the Company.

         Noncompetition Provisions.  Each of the Executive Employment Agreements
provides that during the Employment  Period the Employee will not (i) accept any
other  employment  or  (ii)  engage  in any  other  business  activity  that  is
competitive with, or places him in a competing  position to that of, the Company
or any affiliated  company. In addition,  subject to certain  conditions,  for a
period of one year after the termination of the Employment  Period, the Employee
will not for himself or any third party,  directly or indirectly,  (i) divert or
attempt to divert from the Company or any affiliated company any business of any
kind in which it is engaged,  including without limitation,  the solicitation of
or interference with any of its suppliers or customers; (ii) employ, solicit for
employment,  or recommend  for  employment  and person  employed by the Company,
during the period of such  person's  employment  by the Company and for one year
thereafter;  or (iii) engage in any business  activity that is competitive  with
the  Company;  provided  that in no event  shall  the  executive  engage in such
competitive  activities during the period which he continues to receive payments
pursuant to the termination  provisions of the applicable  Executive  Employment
Agreement. For the purposes of the Executive Employment Agreements, "competitive
activities" is defined as business activities that are directly competitive with
any  existing  or  presently  planned  business  of the  Company  on the date of
termination,  which activity  constitutes  or is anticipated to constitute  more
than 15% of the revenues of the Company.

         Wangberg  Employment  Agreement.   Mr.  Wangberg's  December  23,  1996
employment agreement ("Wangberg Employment Agreement") provides that the Company
will  employ  Mr.  Wangberg  on a part  time  basis  for the  Employment  Period
commencing  at the  Effective  Time and  ending  the  earlier  of (i) two  years
following the date of the Effective  Time (the "Term Date") and (ii) the date of
termination  otherwise in accordance  with the terms of the Wangberg  Employment
Agreement.  The scope of Mr.  Wangberg's  employment  will be  determined by the
Company's  Board and Mr. Wangberg has agreed to devote to the Company a total of
four  normal work days per month  throughout  the period of the  agreement.  Mr.
Wangberg's  employment will be automatically  renewed for an additional one year
period on the Term Date and on each  anniversary  thereof  unless  either  party
gives written notice to the other party that the employment is to be terminated.
Mr.  Wangberg's annual salary under the Wangberg  Employment  Agreement shall be
$120,000 a year. In addition,  Mr.  Wangberg shall be eligible for benefits made
available generally to other employees of the company.

         Klosterman  Employment  Agreement.  Mr. Klosterman's  December 23, 1996
employment  agreement  ("Klosterman  Employment  Agreement")  provides  that the
Company will employ Mr. Klosterman as President commencing at the Effective Time
and ending the earlier of (i) three years  following  the date of the  Effective
Time (the "Term Date") and (ii) the date of termination  otherwise in accordance
with  the  terms  of  the  Klosterman  Employment  Agreement.  Mr.  Klosterman's
employment  will be  automatically  renewed for an additional one year period on
the Term Date and on each anniversary  thereof unless either party gives written
notice  to  the  other  party  that  the  employment  is to be  terminated.  Mr.
Klosterman's  annual salary under the Klosterman  Employment  Agreement shall be
$240,000 a year. In addition Mr. Klosterman shall be eligible to receive, in the
discretion of the Company's Board, an annual performance bonus (or other special
bonuses), in such amounts as determined by the Company's

                                       48
<PAGE>

Board  in its  sole  and  absolute  discretion,  but not  less  than  50% of Mr.
Klosterman's  current  base  salary.  Mr.  Klosterman  will also be eligible for
benefits made available  generally to other  employees of the Company.  Upon the
Effective  Time, the Company will grant to Mr.  Klosterman a nonqualified  stock
option under Gemstar's 1994 Stock  Incentive Plan to purchase  100,000 shares of
Gemstar  Ordinary  Shares at a price per share equal to the fair market value of
Gemstar  Ordinary  Shares at the Effective  Time. Such option shall become fully
exercisable upon a Change of Control,  which shall be deemed to have occurred if
(i) there shall be  consummated  (x) any  consolidation  or merger of Gemstar in
which  Gemstar is not the  continuing  or surviving  corporation  or pursuant to
which  shares  of  Gemstar's  Ordinary  Shares  would be  converted  into  cash,
securities  or other  property,  other  than a merger  of  Gemstar  in which the
holders of Gemstar's  Ordinary Shares  immediately  prior to the merger have the
same  proportionate  ownership  of  common  stock of the  surviving  corporation
immediately  after the merger,  (y) any reverse  merger in which  Gemstar is the
continuing or surviving corporation but in which securities possessing more than
51% if the total combined voting power of Gemstar's  outstanding  securities are
transferred to a person or persons different from those who hold such securities
immediately  prior to the  merger,  or (z) any sale,  lease,  exchange  or other
transfer  (in one  transaction  or series of related  transactions)  or all,  or
substantially  all,  of the  assets of  Gemstar  or (ii) the  members of Gemstar
approve a plan or proposal for the liquidation or dissolution of Gemstar.

         Henkel Employment Agreement.  Mr. Henkel's December 23, 1996 employment
agreement ("Henkel Employment  Agreement") provides that the Company will employ
Mr. Henkel  commencing  at the Effective  Time and ending the earlier of (i) six
months  following the date of the Effective  Time (the "Term Date") and (ii) the
date of  termination  otherwise  in  accordance  with the  terms  of the  Henkel
Employment Agreement.  Mr. Henkel's employment will be automatically renewed for
an additional  six-month period on the Term Date and on each anniversary thereof
unless either party gives notice to the other party that the employment is to be
terminated.  The scope of Mr.  Henkel's  employment  will be  determined  by the
Company's  Board and Mr.  Henkel has agreed to devote to the  Company a total of
ten normal work days per month  throughout the period of the  agreement.  During
the Employment  Period and commencing  immediately  upon the Effective Time, Mr.
Henkel shall be entitled to a paid sabbatical of two months duration pursuant to
the terms of the  Company's  Sabbatical  Program  at full  salary  (based on Mr.
Henkel's  salary then in effect on the Effective Date of the merger).  Following
the  sabbatical,  Mr.  Henkel  shall be paid a  monthly  salary of  $10,000.  In
addition,  Mr. Henkel shall be eligible for benefits made available generally to
other employees of the Company.

         Milnes Employment  Agreement.  Mr. Milnes' December 23, 1996 employment
agreement ("Milnes Employment  Agreement") provides that the Company will employ
Mr. Milnes  commencing  at the Effective  Time and ending the earlier of (i) one
year  following  the date of the  Effective  Time (the "Term Date") and (ii) the
date of  termination  otherwise  in  accordance  with the  terms  of the  Milnes
Employment Agreement.  The scope of Mr. Milnes' employment will be determined by
the Company's Board. Mr. Milnes' employment will be automatically renewed for an
additional  one year  period  on the Term Date and on each  anniversary  thereof
unless either party gives notice to the other party that the employment is to be
terminated at least 90 days prior to the Term Date.  Mr.  Milnes'  annual salary
under the Milnes Employment Agreement shall be $190,000 a year. In addition, Mr.
Milnes  shall  be  eligible  for  benefits  made  available  generally  to other
employees of the Company.  Upon the Effective  Time,  the Company shall grant to
the executive a nonqualified  stock option under  Gemstar's 1994 Stock Incentive
Plan to purchase  30,000 shares of Gemstar  Ordinary Shares at a price per share
equal to the fair market value of the Gemstar  Ordinary  Shares at the Effective
Time.  Mr.  Milnes will also be eligible  to receive,  in the sole and  absolute
discretion of the Company's  Board, an annual bonus in such amount as determined
by the Company's Board.

                                       49
<PAGE>

         Orlick Employment Agreement.  Mr. Orlick's December 23, 1996 employment
agreement ("Orlick Employment  Agreement") provides that the Company will employ
Mr. Orlick  commencing  at the Effective  Time and ending the earlier of (i) two
years  following the date of the  Effective  Time (the "Term Date") and (ii) the
date of  termination  otherwise  in  accordance  with the  terms  of the  Orlick
Employment Agreement. The scope of Mr. Orlick's employment will be determined by
the Company's Board. Mr. Orlick's  employment will be automatically  renewed for
an additional one year period on the Term Date and on each  anniversary  thereof
unless either party gives notice to the other party that the employment is to be
terminated at least 90 days prior to the Term Date. Mr.  Orlick's  annual salary
under the Orlick Employment Agreement shall be $180,000 a year. In addition, Mr.
Orlick  shall  receive an  automobile  allowance  of $750 per month and shall be
eligible  for  benefits  made  available  generally  to other  employees  of the
Company.  Upon the  Effective  Time,  the Company shall grant to the executive a
nonqualified  stock option under Gemstar's 1994 Stock Incentive Plan to purchase
30,000 shares of Gemstar  Ordinary Shares at a price per share equal to the fair
market value of the Gemstar  Ordinary  Shares at the Effective  Time. Mr. Orlick
will also be eligible to receive,  in the sole and  absolute  discretion  of the
Company's  Board,  an annual bonus in such amount as determined by the Company's
Board.

Compensation of Directors

         Each non-employee  director of the Company receives a fee of $5,000 per
calendar year,  $1,000 for each meeting  attended,  and $500 for each telephonic
meeting of the Company's  Board of Directors.  Additionally,  each  non-employee
director  receives a fee of $500 for each  committee  meeting  of the  Company's
Board of Directors attended.  Fees are only paid to those non-employee directors
who can accept such  compensation  on their own behalf  rather than on behalf of
their  respective  corporations.  During the last fiscal year,  Messrs.  John F.
Doyle  and  James  E.  Meyer  received  such  compensation.  Directors  are also
reimbursed  for certain  expenses in  connection  with  attendance  at board and
committee meetings.

         The  Company's   1989  Stock   Incentive   Program   provides  for  the
non-discretionary  automatic  grant of an option to  purchase  10,000  shares of
Common  Stock to each  non-employee  director of the Company on the date of each
Annual Meeting of Shareholders.  Each new director who becomes a director within
six months after an Annual Meeting of Shareholders is  automatically  granted an
option to  purchase  10,000  shares  upon the date on which  such  person  first
becomes a director. Options granted to directors have an exercise price equal to
the fair  market  value as of the date of grant and vest at a rate of 1/12th per
calendar  month  following  the date of grant  during the  period  the  optionee
remains a director of the  Company.  On May 16, 1996,  each of the  non-employee
directors,  Messrs.  Jack C. Clifford,  Ajit M. Dalvi, Donn M. Davis,  Thomas E.
Dooley, John F. Doyle, John W. Goddard,  Edward D. Horowitz,  James E. Meyer and
Jacques Thibon was granted an option to purchase  10,000 shares of the Company's
Common Stock at an exercise price of $6.75 per share.

         The Company has an agreement  dated  December 1, 1993 with Mr. Doyle to
provide  marketing  support,  consultation  and market  research to the Company.
Under the terms of the  agreement,  Mr. Doyle is required to provide the Company
with not less than an  average  of 48 hours per month and  reports  to the Chief
Executive Officer of the Company on the progress of such consulting  arrangement
on a monthly  basis.  Pursuant  to the  agreement,  Mr.  Doyle is paid a monthly
consulting  fee of $7,490 for the period  beginning  December 1, 1993 and ending
December 1, 1998,  subject to adjustments every twelfth month during such period
based on the consumer price index plus 2%. Pursuant to the agreement,  Mr. Doyle
received consulting fees in the amount of $98,904 during 1996. In addition,  the
Company  reimburses Mr. Doyle for all  pre-approved  out-of-pocket  expenses and
travel  expenses  incurred  during 

                                       50
<PAGE>

the term of the agreement.  The terms of the consulting  agreement  continue for
the period  described  above  unless  terminated  earlier  upon:  (i) good faith
determination by the Company of the failure of Mr. Doyle to perform his services
under the  agreement,  (ii) death or disability of Mr. Doyle,  and (iii) with 30
days' prior notice. As part of the consulting arrangement, Mr. Doyle has entered
into an  agreement  with  the  Company  not to  disclose  to any  third  parties
information obtained by him concerning  inventions,  trademarks and confidential
information of the Company.

         Pursuant to an employment agreement dated December 1, 1994, Mr. Michael
W. Faber was paid a monthly base salary of $32,910  until his date of retirement
from the  Company's  Board of Directors  on April 18,  1996.  As a result of his
voluntary  termination after ten years of service to the Company and pursuant to
the  agreement,  Mr. Faber  received a lump-sum  cash  payment of  approximately
$571,123  in 1996 and up to 16  months of  Company-paid  group  health  and life
insurance coverage.  Pursuant to the employment agreement, Mr. Faber agreed that
for a period of 12  months  after his  voluntary  termination,  he will not own,
control  or manage or become  affiliated  with or permit  his name to be used in
connection with any business or enterprise that is or expects to become directly
competitive with any business conducted by the Company.

Compensation Committee Interlocks and Insider Participation

         The  Compensation  Committee  consists of directors  Davis  (Chairman),
Doyle (Vice Chairman) and Dooley. Mr. Wangberg,  who is Chairman of the Board of
Directors  and Chief  Executive  Officer  of the  Company,  participates  in the
discussions and decisions regarding salaries and incentive  compensation for all
employees and  consultants to the Company,  except that Mr. Wangberg is excluded
from discussions regarding his own salary and incentive compensation.

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<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The table below sets forth,  as of February  18,  1997,  the number and
percentage of  outstanding  StarSight  Common Stock owned  beneficially  by each
person known by the Company to own beneficially  more than 5% of the outstanding
StarSight  Common Stock by each director and by each Named Executive  Officer of
the Company and by the executive officers and directors as a group.

                                                   Common Stock     Approximate
       Five Percent Shareholders, Directors        Beneficially     Percentage
         and Certain Executive Officers               Owned          Owned (1)
         ------------------------------               -----          ---------

 Viacom International Inc. (2)                       5,684,158          22.2%
   1515 Broadway
   New York, NY 10036
 THOMSON multimedia S.A.(3)                          5,333,333          19.3
   9 Place des Vosges
   92050 Paris la Defense
   Cedex, France
 Gemstar International Group Limited (4)             5,276,034          17.1
   125 North Los Robles Avenue, Suite 800
   Pasadena, California  91101
 Cox Communications, Inc.(5)                         2,166,647           8.5
   1400 Lake Hearn Drive, N.E.
   Atlanta, GA 30319
 Massachusetts Financial Services Company(6)         1,382,000           5.4
   500 Boyleston Street, 15th Floor
   Boston, MA  02116
 Tribune Company(7)                                  1,122,518           4.4
   435 No. Michigan Avenue
   Chicago, IL 60611
 The Providence Journal Company(8)                     791,897           3.1
   75 Fountain Street
   Providence, RI 02902
 Thomas E. Dooley(9)                                 5,710,557          22.2
 James E. Meyer(10)                                  5,342,499          19.3
 Jacques Thibon(11)                                  5,342,499          19.3
 Ajit M. Dalvi(12)                                   2,205,813           8.6
 Donn M. Davis(13)                                   1,131,684           4.4
 Larry W. Wangberg(14)                                 433,333           1.7
 Martin W. Henkel(15)                                  214,048            *
 John F. Doyle(16)                                     139,164            *
 Brian L. Klosterman(17)                               123,562            *
 Jack C. Clifford(18)                                   39,166            *
 John W. Goddard(19)                                    36,501            *
 Kenneth A. Milnes(20)                                  29,916            *
 Edward D. Horowitz(21)                                 10,467            *
 Jonathan B. Orlick(22)                                  8,750            *
 All directors and executive officers
  as a group (14 persons)(23)                       20,748,793          72.8

*  Less than one percent


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<PAGE>

(1)      Applicable percentage of ownership is based on 25,612,585 shares of the
         Company's  Common Stock  outstanding as of February 18, 1997,  together
         with applicable  options or warrants for such  shareholder.  Beneficial
         ownership is determined in accordance  with the rules of the Commission
         and includes voting and investment power with respect to shares. Shares
         of Common Stock subject to options and warrants  currently  exercisable
         or  exercisable  within 60 days  after  February  18,  1997 are  deemed
         outstanding  for  computing the  percentage  ownership of the person or
         entity holding such options or warrants but are not deemed  outstanding
         for computing the percentage of any other person.

(2)      Reflects ownership as reported on Schedule 13D/A dated February 7, 1997
         filed with the  Commission by Viacom  International,  Inc.  ("Viacom").
         Includes (i)  4,475,814  shares of the  Company's  Common Stock held by
         Viacom,  a  wholly-owned  subsidiary  of Viacom,  Inc., a company whose
         controlling  shareholder  is National  Amusements  Inc.  ("NAI");  (ii)
         1,124,176   shares  of  the  Company's  Common  Stock  held  by  Virgin
         Interactive  Entertainment  Inc.,  an  affiliate  of Viacom;  and (iii)
         97,498  shares of the  Company's  Common  Stock  issuable  pursuant  to
         options  exercisable  within 60 days after  February  18,  1997 held by
         current  or former  employees  of  Viacom  held for  Viacom's  benefit.
         Excludes (i) 36,500 shares of the Company's Common Stock held by Sumner
         M. Redstone, the controlling  shareholder of NAI; and (ii) 3,334 shares
         of the Company's Common Stock issuable pursuant to options  exercisable
         within 60 days after February 18, 1997 held by a former Viacom employee
         solely for such employee's benefit, as discussed in note (19) below.

(3)      Reflects ownership as reported by THOMSON multimedia S.A. on a Schedule
         13D filed  with the  Commission  on March 8, 1996.  Includes  2,000,000
         shares of the Company's  Common Stock subject to currently  exercisable
         Warrants held by THOMSON.  Excludes 18,332 shares issuable  pursuant to
         options to acquire the Company's Common Stock held by Messrs. Meyer and
         Thibon exercisable within 60 day of February 18, 1997.

(4)      Reflects  ownership  of an option to purchase  5,276,034  shares of the
         Company  Stock Option as reported on Schedule 13D dated January 2, 1997
         filed with the Commission by Gemstar.  Represents  Gemstar's beneficial
         ownership  interest of the Company  Stock Option  which is  exercisable
         within 60 days of  February  18, 1997  pursuant  to the  Company  Stock
         Option  Agreement  between the Company and Gemstar  dated  December 23,
         1996.  Gemstar may only  exercise the Company  Stock Option at any time
         after  the   termination   of  the  Merger   Agreement   under  certain
         circumstances.

(5)      Reflects ownership as reported on (i) Schedule 13 D/A dated January 28,
         1997 filed with the  Commission by Cox  Communications,  Inc.  ("CCI"),
         (ii) Schedule 13D/A dated January 28, 1997 filed with the Commission by
         Barbara Cox Anthony,  and (iii)  Schedule  13D/A dated January 28, 1997
         filed with the Commission by Anne Cox Chambers. CCI, Cox Communications
         Holdings,  Inc.,  Cox  Holdings,   Inc.,  and  Cox  Enterprises,   Inc.
         (collectively  the  "Cox  Corporations")  are  controlled  by Anne  Cox
         Chambers  and  Barbara  Cox  Anthony.  The Cox  Corporations  and Mses.
         Chambers  and  Anthony  may be  deemed  to have  the  power to vote and
         dispose of the 2,166,647 

                                       53
<PAGE>

         shares of the  Company's  Common  Stock  held by CCI.  Excludes  39,166
         shares of the Company's  Common Stock  issuable  pursuant to options to
         acquire the Company's  Common Stock held by Ajit M. Dalvi, an executive
         officer of CCI, exercisable within 60 days of February 18, 1997.

(6)      Reflects  ownership as reported on Schedule 13G dated February 11, 1997
         filed with the Commission by Massachusetts  Financial  Services Company
         ("MFSC").  Such Schedule 13G indicates  that MFSC has sole  despositive
         power and sole voting power with respect to 1,382,000.

(7)      Reflects  ownership as reported on Schedule 13D dated February 21, 1996
         filed with the Commission by Tribune Company ("Tribune"). Such Schedule
         13D indicates that Tribune has sole  despositive  power and sole voting
         power with respect to 1,122,518 of such shares.  Excludes  9,166 shares
         issuable pursuant to options to acquire the Company's Common Stock held
         by Mr. Davis exercisable within 60 days of February 18, 1997.

(8)      Effective  February  19,  1997,  The  Providence  Journal  Company  was
         purchased  by A.M.  Belo  Corporation  ("A.H.  Belo").  The  Providence
         Journal  Company will remain a  wholly-owned  subsidiary of A.H.  Belo.
         Excludes 39,166 shares of the Company's Common Stock issuable  pursuant
         to stock options held by Jack C. Clifford,  a former executive  officer
         of The Providence  Journal  Company,  exercisable  within 60 days after
         February 18, 1997.

(9)      Includes  5,684,158  shares  of the  Company's  Common  Stock  held and
         beneficially  owned by Viacom or over which  Viacom has voting power to
         which Mr.  Dooley  disclaims  beneficial  ownership  and 19,166  shares
         subject to stock  options held by Mr.  Dooley for the benefit of Viacom
         exercisable within 60 days after February 18, 1997.

(10)     Includes  5,333,333  shares  of the  Company's  Common  Stock  held and
         beneficially  owned by THOMSON to which Mr. Meyer disclaims  beneficial
         ownership.  Includes  9,166 shares of StarSight  Common Stock  issuable
         pursuant to stock options held by Mr. Meyer exercisable  within 60 days
         after February 18, 1997.

(11)     Includes  5,333,333  shares  of the  Company's  Common  Stock  held and
         beneficially owned by THOMSON to which Mr. Thibon disclaims  beneficial
         ownership. Includes 9,166 shares of the Company's Common Stock issuable
         pursuant to stock options held by Mr. Thibon exercisable within 60 days
         after February 18, 1997.

(12)     Includes  2,166,647  shares  of the  Company's  Common  Stock  held and
         beneficially  owned  by CCI to which  Mr.  Dalvi  disclaims  beneficial
         ownership.  Represents  39,166  shares of the  Company's  Common  Stock
         issuable pursuant to stock options held by Mr. Dalvi exercisable within
         60 days after February 18, 1997.

(13)     Includes  1,122,518  shares  of the  Company's  Common  Stock  held and
         beneficially  owned by  Tribune  Company to which Mr.  Davis  disclaims
         beneficial  ownership.  Represents 9,166 shares of the Company's Common
         Stock issuable  pursuant to stock options held by Mr. Davis exercisable
         within 60 days after February 18, 1997.

(14)     Includes 433,333 shares of the Company's Common Stock issuable pursuant
         to stock options held by Mr. Wangberg  exercisable within 60 days after
         February 18, 1997.

                                       54
<PAGE>

(15)     Includes  187,069  shares of the  Company's  Common  Stock  held by the
         Henkel  Family Trust TRUA  December 24, 1992 over which Mr.  Henkel has
         voting and investment  power.  Also includes 26,979 shares of StarSight
         Common Stock  issuable  pursuant to stock  options  held by Mr.  Henkel
         exercisable within 60 days after February 18, 1997.

(16)     Includes 83,166 shares of the Company's Common Stock issuable  pursuant
         to stock  options  held by Mr. Doyle  exercisable  within 60 days after
         February 18, 1997.

(17)     Includes 122,292 shares of the Company's Common Stock issuable pursuant
         to stock  options  held by Mr.  Klosterman  exercisable  within 60 days
         after February 18, 1997.

(18)     Excludes  791,897  shares  of  the  Company's  Common  Stock  held  and
         beneficially  owned  by  Providence  Journal,  to  which  Mr.  Clifford
         disclaims beneficial  ownership.  As of February 28, 1997, Mr. Clifford
         resigned his position with The Providence  Journal Company.  Represents
         39,166 shares of the Company's Common Stock issuable  pursuant to stock
         options held by Mr. Clifford  exercisable within 60 days after February
         18, 1997.

(19)     Includes  4,559,982  shares  of the  Company's  Common  Stock  held and
         beneficially  owned by Viacom or over which  Viacom has voting power to
         which Mr.  Goddard  disclaims  beneficial  ownership  and 25,833 shares
         subject to stock options held by Mr. Goddard for the benefit of Viacom.
         Includes 3,334 shares of the Company's  Common Stock issuable  pursuant
         to Stock Options held by Mr. Goddard  exercisable  within 60 days after
         February 18, 1997.

(20)     Includes 21,666 shares of the Company's Common Stock issuable  pursuant
         to stock  options held by Mr. Milnes  exercisable  within 60 days after
         February 18, 1997.

(21)     Excludes  4,559,982  shares  of the  Company's  Common  Stock  held and
         beneficially  owned by Viacom or over which  Viacom has voting power to
         which Mr.  Horowitz  disclaims  beneficial  ownership and 52,499 shares
         subject to stock options held by Mr. Horowitz for the benefit of Viacom
         exercisable within 60 days after February 18, 1997.

(22)     Includes 8,750 shares of the Company's  Common Stock issuable  pursuant
         to stock  options held by Mr. Orlick  exercisable  within 60 days after
         February 18, 1997.

(23)     Includes 851,603 shares of the Company's Common Stock issuable pursuant
         to options  granted to executive  officers  and  directors of StarSight
         exercisable within 60 days after February 18, 1997.

         Changes in Control

         On December 23, 1996,  the Company and Gemstar agreed to merge pursuant
to and subject to the terms and  conditions  of an Agreement  and Plan of Merger
between the Company, Gemstar, and G/S Acquisition Subsidiary ("Sub") dated as of
December  23, 1996 (the  "Merger  Agreement").  Upon the closing of the proposed
merger,  Sub will merge with and into the Company,  the outstanding common stock
of Sub will become the outstanding common stock of the Company,  and the Company
will survive as a wholly owned subsidiary of Gemstar (the "Merger").

                                       55
<PAGE>

                  The Merger

         In connection with the Merger,  (i) each share of the Company's  Common
Stock issued and outstanding as of the time the Merger becomes effective,  which
will  occur  upon  the  filing  of a merger  agreement  and any  other  required
documentation  with the California  Secretary of State (the  "Effective  Time"),
will be converted into 0.6062 share  (the "Exchange  Ratio") of Gemstar Ordinary
Shares;  (ii) each stock option to purchase shares of the Company's Common Stock
(the "Stock Options") outstanding  immediately prior to the Effective Time under
the Company's 1989 Stock  Incentive  Program (the "Stock Option Plan") which has
not been exercised in accordance with its terms, will be assumed by Gemstar; and
(iii) each stock purchase  warrant  issued by the Company to purchase  shares of
the  Company's  Common Stock will in accordance  with its terms,  be adjusted to
become  exercisable for, or exchangeable for a new warrant on substantially  the
same terms.

         In connection with the Merger, the Company and Gemstar will each hold a
special meeting of the holders of each entity's  shares.  At the Gemstar special
meeting,  the  holders of Gemstar  Ordinary  Shares will be asked to approve the
issuance of  Ordinary  Shares to the holders of the  Company's  Common  Stock in
connection with the Merger,  and at the StarSight special meeting the holders of
StarSight Common Stock will be asked to approve and adopt the Merger Agreement.

                 Related Agreements

         Employment   Agreements.   The  Company  has  entered  into  employment
agreements,  each dated  December 23,  1996,  with Larry W.  Wangberg,  Brian L.
Klosterman,  Martin W. Henkel,  Kenneth A. Milnes and Jonathan  Orlick,  and the
following  other  employees  of the  Company:  William  Scharninghausen,  Robert
Russman,  Daniel  Donnelly  and Michael  Hopkins.  Pursuant  to said  employment
agreements,  Messrs.  Wangberg,  Klosterman,  Scharninghausen,  Milnes,  Orlick,
Russman,  Donnelly  and Hopkins  will be paid annual base  salaries of $120,000,
$240,000,   $123,833,  $190,000,  $180,000,  $150,960,  $145,000  and  $123,000,
respectively.  Mr. Henkel will be paid $60,000, representing a $10,000 per month
base salary for six months.  All such employment  agreements become effective at
the Effective  Time of the Merger and provide for the employment of such persons
for a period  ("Employment  Period")  of one year for  Messrs.  Scharninghausen,
Milnes,  Russman,  Hopkins  and  Donnelly,  two years for Messrs.  Wangberg  and
Orlick, three years for Mr. Klosterman and six months for Mr. Henkel, unless, in
each case, the employment  agreement is otherwise  terminated in accordance with
its terms.  For  additional  information  regarding  the  employment  agreements
entered  into  with the  Named  Executive  Officers,  see  "Item  11,  EXECUTIVE
COMPENSATION -- Effect of Gemstar Merger on Employment Agreements."

          StarSight  Significant  Shareholder  Agreement. In connection with the
Merger  Agreement,  certain  significant  shareholders  of the Company  (THOMSON
multimedia S.A., Viacom  International Inc.  (formerly PVI Transmission,  Inc.),
Tribune Company,  Virgin  Interactive,  Inc. (formerly  Spelling  Entertainment,
Inc.),   Cox   Communications,   Inc.,  and  The  Providence   Journal   Company
(collectively,  the  "StarSight  Significant  Shareholders"))  entered  into the
Company Significant  Shareholder  Agreement,  dated as of December 23, 1996 (the
"Company  Significant  Shareholder  Agreement"),  with the  Company  and Gemstar
pursuant to which the StarSight Significant Shareholders agreed to vote or cause
to be voted  all  shares  of  capital  stock  of the  Company  owned of  record,
beneficially  owned,  held in any  capacity  by, or under  control  of, any such
StarSight  Significant  Shareholder  in favor of the  Merger  Agreement  and the
Merger  and  other  transactions  provided  for or  contemplated  by the  Merger
Agreement and against any inconsistent proposals or transactions. As of the date
of the StarSight Significant  Shareholder  Agreement,  the StarSight Significant
Shareholders own or have an interest in approximately  13,014,060  shares of the
Company's  Common Stock,  representing  approximately  51.0% of the  outstanding
Common Stock of the Company. In addition,  the Company  Significant  Shareholder
Agreement  provides that during the period from the date of the Merger Agreement
and  continuing to the earlier of its  termination  or the Effective  Time,  the
StarSight Significant  Shareholders shall not, and shall not agree to, transfer,
pledge or otherwise  dispose of any of such shares or interests  therein without
the express  written  consent of Gemstar.  The Company  Significant  Shareholder
Agreement  terminates on June 30, 1997 unless the Merger Agreement is terminated
earlier  or  extended,  in  which  case,  the  Company  Significant  Shareholder
Agreement will terminate on the same date as the Merger Agreement.

         Gemstar  Significant  Shareholder  Agreement.  In  connection  with the
Merger Agreement, certain significant shareholders of Gemstar (collectively, the
"Gemstar  Significant   Shareholders")   entered  into  the  Parent  Significant
Shareholder  Agreement,  dated as of December 23, 1996 (the "Parent  Significant
Shareholder  Agreement"),  with the Company  and  Gemstar  pursuant to which the
Gemstar Significant  Shareholders agreed to vote or cause to be voted all shares
of Gemstar  Ordinary  Shares owned of record,  beneficially  owned,  held in any
capacity by, or under control of, any such Gemstar  Significant 

                                       56
<PAGE>

Shareholder  in  favor  of  the  Merger  Agreement  and  the  Merger  and  other
transactions  provided for or contemplated  by the Merger  Agreement and against
any  inconsistent  proposals  or  transactions.  As of the  date  of the  Parent
Significant Shareholder Agreement,  the Gemstar Significant  Shareholders own or
have an interest in approximately  16,761,722 shares of Gemstar Ordinary Shares,
representing  approximately 53.6% of the outstanding Gemstar Ordinary Shares. In
addition,   the  Parent  Significant   Shareholder  Agreement  includes  similar
limitations  and  obligations  of  the  parties  to  those  described  above  in
connection with the Company Significant Shareholder Agreement.

         Company Option Agreement. Concurrently with the execution of the Merger
Agreement,  the Company and Gemstar  entered  into a Company  Option  Agreement,
dated as of December  23, 1996 (the  "Company  Option  Agreement"),  pursuant to
which the  Company  granted  Gemstar an  irrevocable  option to  purchase  up to
5,276,034 shares of the Company's Common Stock at a purchase price of $10.46 per
share (the "Company Stock Option"). The Company Stock Option is exercisable,  in
whole or in part, at any time and from time to time  following the occurrence of
a Company  Purchase  Event (as defined  below) and prior to  termination  of the
Company Option  Agreement.  A "Company  Purchase Event" means any termination of
the Merger Agreement pursuant to Section 7.1(h), (j) or (l) thereof. The Company
Stock  Option  will  terminate  and be of no further  force and effect  upon the
earliest to occur of (i) the  consummation of the  transactions  contemplated by
the  Merger  Agreement,  (ii) the later to occur of (a) June 23,  1998,  (b) the
closing  date of any Company  Takeover  Proposal (as such term is defined in the
Merger  Agreement)  plus 30 days,  or (iii) the  payment by the  Company and the
receipt by Gemstar of the Company  Termination Fee of $15,000,000.  Gemstar will
receive certain demand and piggyback  registration rights in connection with the
exercise of the Company  Stock Option which rights are effective for up to three
years  thereafter.  In the  alternative,  should a Company Purchase Event occur,
Gemstar  or Sub may elect to have the shares  acquired  in  connection  with the
Company Stock Option repurchased by the Company

         Parent Option Agreement.  Concurrently with the execution of the Merger
Agreement, the Company and Gemstar entered into a Parent Option Agreement, dated
as of December  23,  1996 (the  "Parent  Option  Agreement,"  together  with the
Company  Option  Agreement,  the "Stock Option  Agreements"),  pursuant to which
Gemstar  granted the Company an  irrevocable  option to purchase up to 6,341,824
shares of Gemstar  Ordinary  Shares at a purchase price of $17.25 per share (the
"Parent Stock Option").  The Parent Stock Option is exercisable,  in whole or in
part, at any time and from time to time  following the  occurrence of a Purchase
Event  (as  defined  below)  and  prior  to  termination  of the  Parent  Option
Agreement.  A "Purchase  Event" means any  termination  of the Merger  Agreement
pursuant to Section  7.1(i),  (k) or (m)  thereof.  The Parent Stock Option will
terminate  and be of no further  force and effect upon the  earliest to occur of
(i) the consummation of the transactions  contemplated by the Merger  Agreement,
(ii) the later to occur of (a) June 23, 1998, (b) the closing date of any Parent
Takeover  Proposal  (as such term is defined in the  Merger  Agreement)  plus 30
days,  or (iii) the  payment by Gemstar  and the  receipt by the  Company of the
Parent  Termination Fee of $15,000,000.  The Company will receive certain demand
and piggyback  registration rights in connection with the exercise of the Parent
Stock  Option  which are  effective  for up to three  years  thereafter.  In the
alternative,  should a Purchase  Event occur,  the Company may elect to have the
shares  acquired in  connection  with the Parent  Stock  Option  repurchased  by
Gemstar.

                  Representations, Warranties and Covenants 

         Under the Merger  Agreement,  Gemstar and the Company  made a number of
representations  regarding  their  respective  capital  structures,  operations,
financial  condition and other  matters.  Each party agreed as to itself and its
subsidiaries that, until  consummation of the Merger or the earlier

                                       57
<PAGE>

termination of the Merger Agreement,  it will, among other things,  maintain its
business,  conduct its operations in the ordinary course, provide the other with
reasonable  access to its financial , operating and other  information,  and use
all reasonable efforts to consummate the Merger.

                  Conditions to the Merger

         In addition to the requirements that the Company's shareholders approve
the Merger and Gemstar's shareholders approve the issuance of Ordinary Shares in
connection  with the  Merger,  the  obligations  of Gemstar  and the  Company to
consummate  the Merger  are  subject  to the  satisfaction  of a number of other
conditions, including (i) the approval for listing on The Nasdaq National Market
of the shares of Gemstar Ordinary Shares issuable to the Company's  shareholders
and option and  warrant  holders  pursuant  to the  Merger  Agreement;  (ii) the
absence of any litigation or proceedings  brought by a governmental entity which
seeks  to  enjoin  or  prohibit  the  consummation  of  the  Merger;  (iii)  the
declaration by the Commission  that the  Registration  Statement on Form F-4 for
the  Ordinary  Shares  is  effective;  (iv) the  absence  of any stop  orders or
proceedings  initiated or  threatened  by the  Commission  for that purpose with
respect to the  Registration  Statement on Form F-4; (v) the  expiration  of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"); and (vi) the receipt of all authorizations,
permits,  consents,  waivers,  orders  or  approvals  that  may be  required  by
regulatory authorities.

         Each  party's  obligations  under  the  Merger  Agreement  will also be
conditioned upon the accuracy in every material  respect of the  representations
and warranties made by the other party,  and upon the other party's  performance
or  compliance  in all  material  respects  with all  agreements  and  covenants
required  by  the  Merger  Agreement.   Each  party's  obligations  are  further
conditioned upon (i) each of Gemstar and the Company receiving an opinion letter
from their respective  counsel to the effect that the Merger will be treated for
federal income tax purposes as a reorganization  qualifying under the provisions
of Section 368(a) of the Code; (ii) each of Gemstar and the Company receiving an
opinion letter from their  respective  accounting  firms,  in form and substance
reasonably acceptable to Gemstar and the Company,  regarding the appropriateness
of "pooling of  interests"  accounting  treatment  for the Merger by Gemstar for
purposes of its  consolidated  financial  statements  under  generally  accepted
accounting principles and applicable Commission rules and regulations; (iii) the
absence of certain  changes in  condition  of Gemstar or the Company as the case
may be; and (iv) the receipt by Gemstar or the  Company,  as the case may be, of
consents  and/or  approvals from third parties  required in connection  with the
Merger.

                  Regulatory Approvals and Filings 

         Under the HSR Act, and the rules promulgated  thereunder by the Federal
Trade   Commission  (the  "FTC"),   the  Merger  cannot  be  consummated   until
notifications have been given and certain  information has been furnished to the
FTC and the  Antitrust  Division of the  Department  of Justice (the  "Antitrust
Division") and specific waiting period requirements have been satisfied.

         In connection  with the issuance of the Gemstar  Ordinary shares to the
Company's  shareholders,  Gemstar will file a Registration Statement on Form F-4
with the  Commission  pursuant to the  Securities  Act and provide a Joint Proxy
Statement/Prospectus  to the holders of its shares pursuant to Section 14 of the
Exchange  Act and the  rules  promulgated  thereunder.  In  connection  with the
StarSight  Special  Meeting,  the  Company  will file the Joint  Proxy/Statement
Prospectus with the Commission and provide the Joint Proxy  Statement/Prospectus
to its  shareholders  pursuant to Section 14 of the  Exchange  Act and

                                       58
<PAGE>

the rules  promulgated  thereunder.  The Merger cannot be consummated until such
time as the Commission has declared effective the Registration Statement on Form
F-4 filed by Gemstar.

                  Termination

         The Merger Agreement may be terminated by the mutual written  agreement
of the parties.  The Merger  Agreement may also be terminated by either party if
(i) any  governmental  entity enjoins or prohibits  consummation  of the Merger;
(ii) the Merger has not occurred by June 30, 1997,  provided  that if the Merger
shall not have been  consummated due to the waiting period under the HSR Act not
having  expired,  or due to an action  having been  instituted  by the Antitrust
Division or FTC challenging or seeking to enjoin the consummation of the Merger,
then  such date  shall be  extended  to August  31,  1997;  (iii) any  requisite
shareholder  approval  is not  obtained;  (iv)  the  other  party  breaches  any
representation,  warranty,  covenant or other  agreement set forth in the Merger
Agreement;  (v) prior to the consummation of the Merger,  the Company accepts or
recommends to its  shareholders  a Company  Superior  Proposal,  as that term is
defined  in  Section  4.2(b)  of the  Merger  Agreement;  or (vi)  prior  to the
consummation of the Merger,  Gemstar accepts or recommends to its shareholders a
Parent  Superior  Proposal,  as that term is defined  in  Section  4.3(b) of the
Merger  Agreement.  The Merger  Agreement  may be  terminated  by Gemstar if the
Company's  Board  fails  to  recommend,  withdraws  or  modifies  adversely  its
recommendation of the Merger or the Company fails to comply with its obligations
under Section 5.1 of the Merger Agreement following a Company Takeover Proposal,
as that term is defined in Section  4.2(a) of the Merger  Agreement.  The Merger
Agreement  may be  terminated  by the  Company  if the  Gemstar  Board  fails to
recommend or withdraws or modifies adversely its recommendation of the Merger or
Gemstar  fails to comply with its  obligations  under  Section 5.1 of the Merger
Agreement  following  a Parent  Takeover  Proposal,  as that term is  defined in
Section 4.3(a) of the Merger Agreement.

                  Amendment

         The Merger  Agreement may be amended prior to the Effective Time by the
parties at any time  before or after  approval  by the  Company's  shareholders,
except that, after such approval,  no amendment may be made that by law requires
the further approval of the  shareholders of the Company or Gemstar.  The Merger
Agreement may not be amended except by an instrument in writing signed on behalf
of Gemstar and the Company.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         THOMSON  beneficially owned 5,333,333 shares of StarSight Common Stock,
representing  approximately  19.3% of the outstanding shares of StarSight Common
Stock, and Messrs. Meyer and Thibon, Directors of the Company, are the Executive
Vice President,  Marketing and  Sales-Americas of Thomson Consumer  Electronics,
Inc.,  a  wholly-owned  subsidiary  of THOMSON,  and Vice  President,  Corporate
Business Development for THOMSON, respectively.

         As of December 31, 1996,  Viacom  owned  5,684,158  shares of StarSight
Common Stock,  representing  approximately  22.2% of the  outstanding  shares of
StarSight Common Stock, and Messrs. Goddard,  Horowitz and Dooley,  Directors of
the Company,  are the former President and Chief Executive  Officer of the cable
division of Viacom,  Executive Vice President-Advanced  Development of Citicorp,
formerly  Senior  Vice  President-Technology  at  Viacom  Inc.,  and the  Deputy
Chairman  and  Executive  Vice  President-Finance,   Corporate  Development  and
Communications of Viacom Inc., respectively.

                                       59
<PAGE>

         As of December 31, 1996, The Providence  Journal  Company  beneficially
owned 791,897 shares of StarSight Common Stock, representing  approximately 3.1%
of the  outstanding  shares of StarSight  Common Stock,  and until  February 28,
1997, Mr. Clifford,  Director of the Company,  was the Executive Vice President,
Broadcasting and Telecommunications of The Providence Journal Company. Effective
February 19, 1997,  The  Providence  Journal  Company was purchased by A.H. Belo
Corporation.

         As of December 31, 1996,  Tribune Company  beneficially owned 1,122,518
shares of the StarSight  Common Stock,  representing  approximately  4.4% of the
outstanding  shares of StarSight  Common Stock,  and Mr. Davis,  Director of the
Company, is the President of Tribune Ventures.

         As of December 31, 1996, CCI  beneficially  owned  2,166,647  shares of
StarSight  Common  Stock,  representing  approximately  8.5% of the  outstanding
shares of StarSight Common Stock, and Mr. Dalvi, Director of the Company, is the
Senior Vice President of Marketing and Programming for CCI.


                                       60

<PAGE>

                                     PART IV

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

         (a)(1)   Financial Statements

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

                                                                         Page
                                                                         ----
 Index to Financial Statements                                            F-1
 Independent Auditors' Report                                             F-2
 Balance Sheets, December 31, 1996 and 1995                               F-3
 Statements of Operations for the twelve months 
  ended December 31, 1996 and 1995,
  six months ended  December 31, 1994, 
  and twelve months ended June 30, 1994                                   F-4
 Statements of  Shareholders'  Equity for the
  twelve  months ended  December 31, 1996 and
  1995,  six months ended  December 31, 1994,  
  and twelve  months ended June 30, 1994                                  F-5 
 Statements of Cash Flows for the
  twelve months ended December 31, 1996 and 1995, six
  months ended December 31, 1994, and twelve
  months ended June 30, 1994                                              F-7
 Notes to Financial Statements                                            F-8


         (a)(2)   Financial Statement Schedules

                  All financial statement schedules are omitted because they are
not applicable or the required  information is shown in the Financial Statements
or Notes thereto.


 (a)(3)   Exhibits

         2(13)             Agreement and Plan of Merger dated as of December 23,
                           1996 by and among Registrant,  Gemstar  International
                           Group Limited and G/S Acquisition Subsidiary.
         3.1(1)            Restated  Articles of  Incorporation  of  Registrant.
         3.2(2)            Bylaws of Registrant, as amended.
         4.1(13)           Company  Option  Agreement  dated as of December  23,
                           1996   by  and   between   Registrant   and   Gemstar
                           International Group Limited.
         4.2(13)           Company Significant Shareholder Agreement dated as of
                           December  23,  1996  between  Registrant  and Gemstar
                           International Group Limited, THOMSON multimedia S.A.,
                           PVI  Transmission  Inc.,  Tribune  Company,  Spelling
                           Entertainment, Inc., Cox Communications, Inc. and The
                           Providence Journal Company.
         4.3(14)           Parent Option Agreement dated as of December 23, 1996
                           by and between  Registrant and Gemstar  International
                           Group Limited.
         4.4(14)           Parent Significant  Shareholder Agreement dated as of
                           December 23, 1996 between Gemstar International Group
                           Limited,   the  Registrant,   Dynamic  Core  Holdings
                           Limited, Creative Assets Limited and Henry Yuen.

                                       61
<PAGE>

         10.1(3,12)        1989 Stock Incentive Program,  as amended,  and forms
                           of agreements thereunder.
         10.2(2)           Employee  Stock Purchase Plan and forms of agreements
                           thereunder.
         10.3(2)           Lease  Agreement   between   Registrant  and  Shapell
                           Industries of Northern California dated as of January
                           8, 1992.
         10.4(2)           Form of Indemnification Agreements between Registrant
                           and its officers and directors.
         10.5(2)           Corporate Partnership Agreement dated as of September
                           12, 1991, as amended,  between  Registrant and Viacom
                           International Inc.
         10.6**(2)         Agreement  dated  as of  January  31,  1991,  between
                           Registrant  and  Tribune  Media  Services,  Inc.,  as
                           amended.
         10.7**(2)         Memorandum  of  Understanding   dated  May  28,  1993
                           between    Registrant   and    Mitsubishi    Electric
                           Corporation.
         10.8**(2)         Manufacturing  Agreement  dated  as of June  1,  1991
                           between    Registrant    and    Zenith    Electronics
                           Corporation.
         10.9**(2)         Network Service and Joint Development Agreement dated
                           as  of  October  11,   1989,   as  amended,   between
                           Registrant and National Datacast, Inc.
         10.10**(2)        License  Agreement  dated as of March 5, 1993 between
                           Registrant and TV/COM International.
         10.11**(2)        Terms of  Affiliation  Agreement  dated as of January
                           24, 1993 between Registrant and KBLCOM Incorporated.
         10.12**(2)        License and Technical  Assistance  Agreement dated as
                           of March 1, 1991 between Registrant and Video Control
                           Technology, Inc.
         10.13**(2)        License and Technical  Assistance  Agreement dated as
                           of   October   1,   1992   between   Registrant   and
                           Scientific-Atlanta, Inc.
         10.14**(2)        License and Technical  Assistance  Agreement dated as
                           of October 1, 1992  between  Registrant  and  General
                           Instrument Corp.
         10.15**(2)        License and Technical  Assistance  Agreement dated as
                           of December 1, 1992 between  Registrant  and GoldStar
                           Co., Ltd.
         10.16**(2)        Subscriber  Billing  Service  Agreement  dated  as of
                           December 23, 1992 between  Registrant  and First Data
                           Resources, Inc.
         10.17**(2)        HTVRO  Distribution  Agreement  dated as of April 30,
                           1993  between   Registrant  and  Showtime   Satellite
                           Networks, Inc.
         10.18**(2)        Letter  Agreement  dated as of May 27,  1993  between
                           Registrant and Lifetime Television.
         10.19**(2)        Agreement  dated  as  of  October  30,  1992  between
                           Registrant and TV Data Technologies, Inc.
         10.20(2)          Terms   of   Warrant   Issuance   Agreement   between
                           Registrant and Providence Journal Company.
         10.21(2)          Terms of Warrant  Issuance  Agreement dated as of May
                           18, 1993  between  Registrant  and Times Mirror Cable
                           Television Inc.
         10.22(2)          Manufacturing  Agreement  dated  as of May  28,  1993
                           between Registrant and PCI Limited.
         10.23(2)          Assignment  Agreement dated as of May 9, 1989 between
                           Registrant and Patrick Young.
         10.24(8)          Employment  Agreement between  Registrant and Michael
                           W. Faber dated as of December 1, 1994.
         10.25(8)          Employment  Agreement between  Registrant and John H.
                           Roop dated as of December 1, 1993.


                                       62
<PAGE>

         10.26(2)          Employment   and   Consulting    Agreement    between
                           Registrant  and  Patrick  Young dated as of August 1,
                           1992.
         10.27(2)          Warrants  issued by  Registrant  to Tribune  Company,
                           dated January 22, 1992.
         10.28(2)          Warrants  issued by Registrant to KBL Ventures,  Inc.
                           dated February 3, 1993.
         10.29(2)          Warrants  issued by Registrant to Providence  Journal
                           Company dated May 7, 1993.
         10.30(2)          Warrants  issued by  Registrant to Times Mirror Cable
                           Television dated May 18, 1993.
         10.31(6)          Consulting  Agreement between  Registrant and Willard
                           Block dated December 1, 1993.
         10.32(6)          Consulting  Agreement between  Registrant and John F.
                           Doyle dated December 1, 1993.
         10.33(4)          License and Technical  Assistance  Agreement dated as
                           of November 26, 1993 between  Registrant  and Samsung
                           Electronics Co. Ltd.
         10.34**(2)        Network Service  Agreement dated as of April 30, 1993
                           between Registrant and Viacom International Inc.
         10.35(2)          Terms of Warrant Issuance  Agreement dated as of June
                           18, 1993 between  Registrant and Cox  Communications,
                           Inc.
         10.36**(2)        Terms of Affiliation  Agreement  dated as of June 18,
                           1993 between Registrant and Cox Communications, Inc.
         10.37(2)          Warrants issued by Registrant to Cox  Communications,
                           Inc. dated June 18, 1993.
         10.38(8)          Employment  Agreement between the Registrant and John
                           B. Burns III dated as of December 1, 1993.
         10.39(8)          Employment Agreement between Registrant and Martin W.
                           Henkel dated as of December 1, 1994.
         10.40**(4)        License and Technical  Assistance  Agreement dated as
                           of October 28,  1993  between  Registrant  and Uniden
                           American Corporation.
         10.41**(4)        License and Technical  Assistance  Agreement dated as
                           of November 5, 1993  between  Registrant  and Philips
                           Consumer Electronics Company.
         10.42**(5)        License and Technical  Assistance  Agreement dated as
                           of January 31, 1994 between Registrant and Mitsubishi
                           Electric Corporation.
         10.43**(6)        License and Technical  Assistance  Agreement dated as
                           of  May  12,  1994  between  Registrant  and  THOMSON
                           Consumer Electronics.
         10.44**(7)        License and Technical  Assistance  Agreement dated as
                           of  August  12,  1994  between  Registrant  and  Sony
                           Corporation.
         10.45**(7)        License and Technical  Assistance  Agreement dated as
                           of  September   23,  1994  between   Registrant   and
                           Matsushita Electric Corporation of America.
         10.46(7)          Strategic  Agreement  dated  October 28, 1994 between
                           Registrant and Bell Atlantic Video Services Company.
         10.47**(8)        License and Technical  Assistance  Agreement dated as
                           of December  7, 1994  between  Registrant  and Daewoo
                           Electronics Company, Ltd.
         10.48**(8)        License and Technical  Assistance  Agreement dated as
                           of February  13, 1995  between  Registrant  and Sharp
                           Corporation.
         10.49**(8)        License and Technical  Assistance  Agreement dated as
                           of February 26, 1995 between  Registrant and GoldStar
                           Co., Limited.
         10.50(8)          Network  Service  Agreement  between  Registrant  and
                           Trinity Broadcasting Network dated August 16, 1994.


                                       63
<PAGE>

         10.51(8)          License and Technical  Assistance  Agreement  between
                           Registrant  and NextWave  Communications  Corporation
                           dated March 15, 1995.
         10.52(9)          Employment  Agreement between Registrant and Larry W.
                           Wangberg dated February 2, 1995.
         10.53(9)          Employment  Agreement between  Registrant and John R.
                           Roop dated December 1, 1994.
         10.54**(9)        Service Agreement between Registrant and Viacom Cable
                           dated November 10, 1994.
         10.55**(9)        Agreement  between  Registrant  and Philips  Consumer
                           Electronics Company dated October 27, 1994.
         10.56**(10)       Agreement  between  Registrant  and  Toshiba  America
                           Consumer Products Inc. dated May 23, 1995.
         10.57**(11)       Strategic  Cooperation  Agreement  dated February 21,
                           1996,  between StarSight  Telecast,  Inc. and THOMSON
                           multimedia S.A.
         10.58(11)         Securities  Purchase  Agreement  dated as of February
                           19,  1996  between   THOMSON   multimedia   S.A.  and
                           StarSight Telecast, Inc.
         10.59(11)         StarSight   Telecast,   Inc.  Common  Stock  Purchase
                           Warrant to Purchase  2,000,000 Plus a Variable Amount
                           of  Shares  of  Common  Stock,   granted  to  THOMSON
                           multimedia S.A.
         10.60(11)         Shareholders  Agreement dated February 19, 1996 among
                           THOMSON multimedia S.A.,  StarSight  Telecast,  Inc.,
                           and PVI Transmission, Inc.
         10.61(11)         Right of First Refusal  Agreement  dated February 19,
                           1996  between  StarSight  Telecast,  Inc. and THOMSON
                           multimedia S.A.
         10.62(11)         Amendment No. Two To Corporate Partnership Agreement,
                           dated  November  20, 1995 among  StarSight  Telecast,
                           Inc., Michael W. Faber, Patrick Young, Milbank Wilson
                           Capital  Partners,  and  PVI  Transmission  Inc.  (as
                           successor to Viacom International, Inc.)
         10.63(11)         Amendment   No.   Three  to   Corporate   Partnership
                           Agreement,   dated   February   19,  1996  among  PVI
                           Transmission    Inc.   (as    successor   to   Viacom
                           International, Inc.), StarSight Telecast, Inc., Scott
                           Wilson,  Jeremiah  Milbank,   Michael  W  Faber,  and
                           Patrick Young.
         10.64**           Agreement  dated  as of  December  20,  1996  between
                           Registrant and Microsoft Corporation.
         10.65             Letter  Agreement,  dated December 23, 1996,  between
                           Registrant   and   Larry  W.   Wangberg.
         10.66             Letter  Agreement,  dated December 23, 1996,  between
                           Registrant   and   Brian L. Klosterman.
         10.67             Employment  Agreement  between  Registrant and  Larry
                           W. Wangberg dated as of December 23, 1996.
         10.68             Employment  Agreement  between  Registrant and  Brian
                           L. Klosterman dated as of December 23, 1996.
         10.69             Employment  Agreement  between  Registrant and Martin
                           W. Henkel dated as of December 23, 1996.
         10.70             Employment Agreement between Registrant and   Kenneth
                           A. Milnes dated as of December 23, 1996.
         10.71             Employment    Agreement    between   Registrant   and
                           Jonathan Orlick dated as of December 23, 1996.
         11.1              Computation of net loss per share.
         23.1              Independent Auditors' Consent.
         24.1              Power of Attorney.
         27.1              Financial Data Schedule.

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

**          Confidential treatment has been granted or requested with respect to
            certain  portions of this exhibit.  Omitted portions have been filed
            separately with the Securities and Exchange Commission.
(1)         Incorporated by reference to Item 14 "Exhibits,  Financial Statement
            Schedules and Reports on Form 8-K" of the Company's Annual Report on
            Form 10-K for the fiscal year ended June 30, 1993.
(2)         Incorporated by reference to the Registration  Statement on Form S-1
            (File No.  33-64138)  as declared  effective by the  Securities  and
            Exchange Commission July 29, 1993.
(3)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended September 30, 1993.

                                       64
<PAGE>

(4)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended December 31, 1993.
(5)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended March 31, 1994.
(6)         Incorporated by reference to Item 14 "Exhibits,  Financial Statement
            Schedules and Reports on Form 8-K" of the Company's Annual Report on
            Form 10-K for the fiscal year ended June 30, 1994.
(7)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K "of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended September 30, 1994.
(8)         Incorporated by reference to Item 14 "Exhibits,  Financial Statement
            Schedules  and  Reports  on Form  8-K" of the  Company's  Transition
            Report on Form 10-K for the  transition  period from July 1, 1994 to
            December 31, 1994.
(9)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended March 31, 1995.
(10)        Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended June 30, 1995.
(11)        Incorporated by reference to Item 14 "Exhibits, Financial Statements
            Schedules  and  Reports  on Form  8-K"  for the  fiscal  year  ended
            December 31, 1995.
(12)        Incorporated by reference to the Company's Registration Statement on
            Form  S-8  (File  No.  333-04075)  as  declared   effective  by  the
            Commission on May 20, 1996.
(13)        Incorporated  by  reference  to  Item 7  "Material  to be  Filed  as
            Exhibit" of Schedule 13D as filed with the  Commission on January 2,
            1997 by Gemstar  International  Group Limited  (Commission  File No.
            0-26878).
(14)        Incorporated  by  reference  to  Item 7  "Material  to be  Filed  as
            Exhibit" of the Company's  Schedule 13D filed with the Commission on
            January 2, 1997.

         (b)  Reports on Form 8-K.  The Company did not file any reports on Form
8-K during the last quarter of the fiscal year ended December 31, 1996.

         (c)  Exhibits.  See Item 14(a)(3) above.

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


                                       65
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                           STARSIGHT TELECAST, INC.


                                           By:   /s/ Larry W. Wangberg
                                             -----------------------------------
                                                Chairman of the Board and
                                                Chief Executive Officer
Date: March 11, 1997


                                POWER OF ATTORNEY

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

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

         Signature                         Title                       Date
-------------------------   ----------------------------------    --------------



 /s/ Larry W. Wangberg      Chairman of the Board of Directors    March 11, 1997
------------------------    and Chief Executive Officer
    Larry W. Wangberg       (Principal Executive Officer)

 /s/ Brian L. Klosterman    President and Chief Operating         March 11, 1997
------------------------    Officer
  Brian L. Klosterman

 /s/ Martin W. Henkel       Executive Vice President, Chief       March 11, 1997
------------------------    Financial Officer and Director
    Martin W. Henkel 
        


                                       66
<PAGE>


 /s/ Donn M. Davis                                                March 11, 1997
------------------------    Director
    Donn M. Davis 

 /s/ James E. Meyer                                               March 11, 1997
------------------------    Director
    James E. Meyer

 /s/ Jack C. Clifford                                             March 11, 1997
------------------------    Director
    Jack C. Clifford

 /s/  Ajit M. Dalvi                                               March 11, 1997
------------------------    Director
     Ajit M. Dalvi

 /s/  John F. Doyle                                               March 11, 1997
------------------------    Director
     John F. Doyle

 /s/ John W. Goddard                                              March 11, 1997
------------------------    Director
    John W. Goddard 

 /s/ Edward D. Horowitz                                           March 11, 1997
------------------------    Director
    Edward D. Horowitz 

 /s/ Thomas E. Dooley                                             March 11, 1997
------------------------    Director
    Thomas E. Dooley

 /s/ Jacques Thibon                                               March 11, 1997
------------------------    Director
     Jacques Thibon



                                       67
<PAGE>

                                INDEX TO EXHIBITS


Exhibits                                                            Sequentially
                                                                   Numbered Page


2(13)       Agreement and Plan of Merger dated as of December 23,
            1996 by and among Registrant,  Gemstar  International
            Group Limited and G/S Acquisition Subsidiary.
3.1(1)      Restated  Articles of  Incorporation  of  Registrant.
3.2(2)      Bylaws of Registrant, as amended.
4.1(13)     Company  Option  Agreement  dated as of December  23,
            1996   by  and   between   Registrant   and   Gemstar
            International Group Limited.
4.2(13)     Company Significant Shareholder Agreement dated as of
            December  23,  1996  between  Registrant  and Gemstar
            International Group Limited, THOMSON multimedia S.A.,
            PVI  Transmission  Inc.,  Tribune  Company,  Spelling
            Entertainment, Inc., Cox Communications, Inc. and The
            Providence Journal Company.
4.3(14)     Parent Option Agreement dated as of December 23, 1996
            by and between  Registrant and Gemstar  International
            Group Limited
4.4(14)     Parent Significant  Shareholder Agreement dated as of
            December 23, 1996 between Gemstar International Group
            Limited,   the  Registrant,   Dynamic  Core  Holdings
            Limited, Creative Assets Limited and Henry Yuen
10.1(3,12)  1989 Stock Incentive Program,  as amended,  and forms
            of agreements thereunder.
10.2(2)     Employee  Stock Purchase Plan and forms of agreements
            thereunder.  
10.3(2)     Lease  Agreement   between   Registrant  and  Shapell
            Industries of Northern California dated as of January
            8, 1992.
10.4(2)     Form of Indemnification Agreements between Registrant
            and its officers and directors.
10.5(2)     Corporate Partnership Agreement dated as of September
            12, 1991, as amended,  between  Registrant and Viacom
            International Inc.
10.6**(2)   Agreement  dated  as of  January  31,  1991,  between
            Registrant  and  Tribune  Media  Services,  Inc.,  as
            amended.
10.7**(2)   Memorandum  of  Understanding   dated  May  28,  1993
            between    Registrant   and    Mitsubishi    Electric
            Corporation.
10.8**(2)   Manufacturing  Agreement  dated  as of June  1,  1991
            between    Registrant    and    Zenith    Electronics
            Corporation.
10.9**(2)   Network Service and Joint Development Agreement dated
            as  of  October  11,   1989,   as  amended,   between
            Registrant and National Datacast, Inc.
10.10**(2)  License  Agreement  dated as of March 5, 1993 between
            Registrant and TV/COM International.



<PAGE>

10.11**(2)  Terms of  Affiliation  Agreement  dated as of January
            24, 1993 between Registrant and KBLCOM Incorporated.
10.12**(2)  License and Technical  Assistance  Agreement dated as
            of March 1, 1991 between Registrant and Video Control
            Technology, Inc.
10.13**(2)  License and Technical  Assistance  Agreement dated as
            of   October   1,   1992   between   Registrant   and
            Scientific-Atlanta, Inc.
10.14**(2)  License and Technical  Assistance  Agreement dated as
            of October 1, 1992  between  Registrant  and  General
            Instrument  Corp.   
10.15**(2)  License and Technical  Assistance  Agreement dated as
            of December 1, 1992 between  Registrant  and GoldStar
            Co., Ltd.
10.16**(2)  Subscriber  Billing  Service  Agreement  dated  as of
            December 23, 1992 between  Registrant  and First Data
            Resources, Inc.
10.17**(2)  HTVRO  Distribution  Agreement  dated as of April 30,
            1993  between   Registrant  and  Showtime   Satellite
            Networks, Inc.
10.18**(2)  Letter  Agreement  dated as of May 27,  1993  between
            Registrant and Lifetime Television.
10.19**(2)  Agreement  dated  as  of  October  30,  1992  between
            Registrant and TV Data Technologies, Inc.
10.20(2)    Terms   of   Warrant   Issuance   Agreement   between
            Registrant and Providence Journal Company.
10.21(2)    Terms of Warrant  Issuance  Agreement dated as of May
            18, 1993  between  Registrant  and Times Mirror Cable
            Television Inc.
10.22(2)    Manufacturing  Agreement  dated  as of May  28,  1993
            between Registrant and PCI Limited.
10.23(2)    Assignment  Agreement dated as of May 9, 1989 between
            Registrant and Patrick Young.
10.24(8)    Employment  Agreement between  Registrant and Michael
            W. Faber dated as of December 1, 1994.
10.25(8)    Employment  Agreement between  Registrant and John H.
            Roop dated as of December 1, 1993.
10.26(2)    Employment   and   Consulting    Agreement    between
            Registrant  and  Patrick  Young dated as of August 1,
            1992.
10.27(2)    Warrants  issued by  Registrant  to Tribune  Company,
            dated  January 22, 1992.  
10.28(2)    Warrants  issued by Registrant to KBL Ventures,  Inc.
            dated February 3, 1993.
10.29(2)    Warrants  issued by Registrant to Providence  Journal
            Company dated May 7, 1993.
10.30(2)    Warrants  issued by  Registrant to Times Mirror Cable
            Television dated May 18, 1993.
10.31(6)    Consulting  Agreement between  Registrant and Willard
            Block dated December 1, 1993.


<PAGE>

10.32(6)    Consulting  Agreement between  Registrant and John F.
            Doyle dated December 1, 1993.
10.33(4)    License and Technical  Assistance  Agreement dated as
            of November 26, 1993 between  Registrant  and Samsung
            Electronics Co. Ltd.
10.34**(2)  Network Service  Agreement dated as of April 30, 1993
            between Registrant and Viacom International Inc.
10.35(2)    Terms of Warrant Issuance  Agreement dated as of June
            18, 1993 between  Registrant and Cox  Communications,
            Inc.
10.36**(2)  Terms of Affiliation  Agreement  dated as of June 18,
            1993 between Registrant and Cox Communications, Inc.
10.37(2)    Warrants issued by Registrant to Cox  Communications,
            Inc. dated June 18, 1993.
10.38(8)    Employment  Agreement between the Registrant and John
            B. Burns III dated as of December 1, 1993.
10.39(8)    Employment Agreement between Registrant and Martin W.
            Henkel dated as of December 1, 1994.
10.40**(4)  License and Technical  Assistance  Agreement dated as
            of October 28,  1993  between  Registrant  and Uniden
            American Corporation.
10.41**(4)  License and Technical  Assistance  Agreement dated as
            of November 5, 1993  between  Registrant  and Philips
            Consumer Electronics Company.
10.42**(5)  License and Technical  Assistance  Agreement dated as
            of January 31, 1994 between Registrant and Mitsubishi
            Electric Corporation.
10.43**(6)  License and Technical  Assistance  Agreement dated as
            of  May  12,  1994  between  Registrant  and  THOMSON
            Consumer Electronics.
10.44**(7)  License and Technical  Assistance  Agreement dated as
            of  August  12,  1994  between  Registrant  and  Sony
            Corporation.
10.45**(7)  License and Technical  Assistance  Agreement dated as
            of  September   23,  1994  between   Registrant   and
            Matsushita Electric Corporation of America.
10.46(7)    Strategic  Agreement  dated  October 28, 1994 between
            Registrant and Bell Atlantic Video Services Company.
10.47**(8)  License and Technical  Assistance  Agreement dated as
            of December  7, 1994  between  Registrant  and Daewoo
            Electronics Company, Ltd.
10.48**(8)  License and Technical  Assistance  Agreement dated as
            of February  13, 1995  between  Registrant  and Sharp
            Corporation.
10.49**(8)  License and Technical  Assistance  Agreement dated as
            of February 26, 1995 between  Registrant and GoldStar
            Co., Limited.
10.50(8)    Network  Service  Agreement  between  Registrant  and
            Trinity Broadcasting Network dated August 16, 1994.


<PAGE>

10.51(8)    License and Technical  Assistance  Agreement  between
            Registrant  and NextWave  Communications  Corporation
            dated March 15, 1995. 
10.52(9)    Employment  Agreement between Registrant and Larry W.
            Wangberg dated February 2, 1995.  
10.53(9)    Employment  Agreement between  Registrant and John R.
            Roop  dated  December  1,  1994.  
10.54**(9)  Service Agreement between Registrant and Viacom Cable
            dated November 10, 1994 
10.55**(9)  Agreement  between  Registrant  and Philips  Consumer
            Electronics   Company   dated   October   27,   1994.
10.56**(10) Agreement  between  Registrant  and  Toshiba  America
            Consumer   Products   Inc.   dated   May  23,   1995.
10.57**(11) Strategic  Cooperation  Agreement  dated February 21,
            1996  between  StarSight  Telecast,  Inc. and THOMSON
            multimedia S.A. 
10.58(11)   Securities  Purchase  Agreement  dated as of February
            19,  1996  between   THOMSON   multimedia   S.A.  and
            StarSight   Telecast,    Inc.   
10.59(11)   StarSight   Telecast,   Inc.  Common  Stock  Purchase
            Warrant to Purchase  2,000,000 Plus a Variable Amount
            of  Shares  of  Common  Stock,   granted  to  THOMSON
            multimedia S.A. 
10.60(11)   Shareholders  Agreement dated February 19, 1996 among
            THOMSON multimedia S.A.,  StarSight  Telecast,  Inc.,
            and PVI Transmission,  Inc.  
10.61(11)   Right of First Refusal  Agreement  dated February 19,
            1996  between  StarSight  Telecast,  Inc. and THOMSON
            multimedia  S.A.  
10.62(11)   Amendment No. Two To Corporate Partnership Agreement,
            dated  November  20, 1995 among  StarSight  Telecast,
            Inc., Michael W. Faber, Patrick Young, Milbank Wilson
            Capital  Partners,  and  PVI  Transmission  Inc.  (as
            successor to Viacom International, Inc.).
10.63(11)   Amendment   No.   Three  to   Corporate   Partnership
            Agreement,   dated   February   19,  1996  among  PVI
            Transmission    Inc.   (as    successor   to   Viacom
            International, Inc.), StarSight Telecast, Inc., Scott
            Wilson,  Jeremiah  Milbank,  Michael  W.  Faber,  and
            Patrick Young. 
10.64**     Agreement  dated  as of  December  20,  1996  between
            Registrant and Microsoft Corporation
10.65       Letter  Agreement,  dated December 23, 1996,  between
            Registrant and Larry W. Wangberg.
10.66       Letter  Agreement,  dated December 23, 1996,  between
            Registrant and Brian L. Klosterman.
10.67       Employment  Agreement  between  Registrant  and Larry
            W. Wangberg dated as of December 23, 1996.
10.68       Employment  Agreement  between  Registrant  and Brian
            L. Klosterman dated as of December 23, 1996.
10.69       Employment Agreement between Registrant and    Martin
            W. Henkel dated as of December 23, 1996.
10.70       Employment  Agreement  between Registrant and Kenneth
            A. Milnes dated as of December 23, 1996.
10.71       Employment    Agreement   between    Registrant   and
            Jonathan Orlick dated as of December 23, 1996.
11.1        Computation of net loss per share.
23.1        Independent Auditors' Consent.
24.1        Power of Attorney.
27.1        Financial Data Schedule.
------------------
**          Confidential treatment has been granted or requested with respect to
            certain  portions of this exhibit.  Omitted portions have been filed
            separately with the Securities and Exchange Commission.
(1)         Incorporated by reference to Item 14 "Exhibits,  Financial Statement
            Schedules and Reports on Form 8-K" of the Company's Annual Report on
            Form 10-K for the fiscal year ended June 30, 1993.
(2)         Incorporated by reference to the Registration  Statement on Form S-1
            (File No.  33-64138)  as declared  effective by the  Securities  and
            Exchange Commission July 29, 1993.


<PAGE>

(3)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended September 30, 1993.
(4)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended December 31, 1993.
(5)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended March 31, 1994.
(6)         Incorporated by reference to Item 14 "Exhibits,  Financial Statement
            Schedules and Reports on Form 8-K" of the Company's Annual Report on
            Form 10-K for the fiscal year ended June 30, 1994.
(7)         Incorporated  by reference to Item 6 "Exhibits,  and Reports on Form
            8-K "of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended September 30, 1994.
(8)         Incorporated by reference to Item 14 "Exhibits,  Financial Statement
            Schedules  and  Reports  on Form  8-K" of the  Company's  Transition
            Report on Form 10-K for the  transition  period from July 1, 1994 to
            December 31, 1994.
(9)         Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended March 31, 1995.
(10)        Incorporated  by reference  to Item 6 "Exhibits  and Reports on Form
            8-K" of the Company's  Quarterly  Report on Form 10-Q for the fiscal
            quarter ended June 30, 1995.
(11)        Incorporated by reference to Item 14 "Exhibits, Financial Statements
            Schedules  and  Reports  on Form  8-K"  for the  fiscal  year  ended
            December 31, 1995.
(12)        Incorporated by reference to the Company's Registration Statement on
            Form  S-8  (File  No.  333-04075)  as  declared   effective  by  the
            Commission on May 20, 1996.
(13)        Incorporated  by  reference  to  Item 7  "Material  to be  Filed  as
            Exhibit" of Schedule 13D as filed with the  Commission on January 2,
            1997 by Gemstar  International  Group Limited  (Commission  File No.
            0-26878).
(14)        Incorporated  by  reference  to  Item 7  "Material  to be  Filed  as
            Exhibit" of the Company's  Schedule 13D filed with the Commission on
            January 2, 1997.



<PAGE>

<TABLE>

STARSIGHT TELECAST, INC.

INDEX TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------------------


<CAPTION>
                                                                                                             Page

<S>                                                                                                           <C>
Independent Auditors' Report                                                                                  F-2

Balance Sheets, December 31, 1996 and 1995                                                                    F-3

Statements of Operations for the Twelve Months Ended December 31, 1996 and 1995,
   Six Months Ended December 31, 1994 and Twelve Months Ended June 30, 1994                                   F-4

Statements of Shareholders' Equity for the Twelve Months Ended December 31, 1996 and 1995,
   Six Months Ended December 31, 1994 and Twelve Months Ended June 30, 1994                                   F-5

Statements of Cash Flows for the Twelve Months Ended December 31, 1996 and 1995,
   Six Months Ended December 31, 1994 and Twelve Months Ended June 30, 1994                                   F-7

Notes to Financial Statements                                                                                 F-8

</TABLE>


                                      F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT


To the Shareholders and Board of Directors
StarSight Telecast, Inc.:

We have audited the accompanying balance sheets of StarSight Telecast, Inc. (the
"Company")  as of December  31, 1996 and 1995,  and the  related  statements  of
operations,  shareholders'  equity and cash flows for the  twelve  months  ended
December  31, 1996 and 1995,  six months ended  December  31,  1994,  and twelve
months ended June 30, 1994. These financial statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the  financial  position of the  Company as of December  31, 1996 and
1995, and the results of its operations and its cash flows for the twelve months
ended  December 31, 1996 and 1995,  the six months ended  December 31, 1994, and
the twelve  months ended June 30, 1994 in  conformity  with  generally  accepted
accounting principles.

As discussed in Note 6 to the financial  statements,  effective July 1, 1994 the
Company  changed its method of accounting for legal costs incurred in connection
with patent infringement litigation.



DELOITTE & TOUCHE LLP
San Francisco, California
March 7, 1997


                                      F-2
<PAGE>

<TABLE>

STARSIGHT TELECAST, INC.

BALANCE SHEETS, DECEMBER 31, 1996 and 1995
(in thousands, except share data)
------------------------------------------------------------------------------------------------------

<CAPTION>

ASSETS
                                                                            1996            1995
                                                                        ------------    -------------
<S>                                                                         <C>               <C>   
CURRENT ASSETS:

Cash and cash equivalents                                                   $25,708           $8,787
Short-term investments available for sale                                     1,989
Accounts receivable                                                           3,047            2,192
Inventories                                                                                      441
Other                                                                           352              410
                                                                        ------------    -------------

Total current assets                                                         31,096           11,830

FURNITURE, FIXTURES AND EQUIPMENT, Net                                        1,074            1,637

PATENTS AND LICENSES, net of accumulated
  amortization of $853 and $595                                               2,861            2,866
                                                                        ------------    -------------

TOTAL ASSETS                                                                $35,031          $16,333
                                                                        ============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable                                                             $1,530           $1,570
Accrued liabilities                                                           2,719            3,068
Deferred revenue                                                             11,170            2,992
License fee payable                                                              74              286
                                                                        ------------    -------------

Total current liabilities                                                    15,493            7,916
                                                                        ------------    -------------

LONG-TERM DEFERRED REVENUE                                                    9,700
                                                                        ------------

LONG-TERM LICENSE FEE PAYABLE                                                                     74
                                                                                        -------------

COMMITMENTS AND CONTINGENCIES (Notes 7 and 12)

SHAREHOLDERS' EQUITY:
Common Stock, no par value: authorized 50,000,000 shares; issued
  and outstanding, 25,556,304 and 21,902,018 shares, respectively           125,972           99,400
  Unearned compensation                                                        (399)            (371)
  Accumulated deficit                                                      (115,735)         (90,686)
                                                                        ------------    -------------

Total shareholders' equity                                                    9,838            8,343
                                                                        ------------    -------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                  $35,031          $16,333
                                                                        ============    =============

<FN>
See notes to financial statements.
</FN>
</TABLE>


                                      F-3
<PAGE>

<TABLE>

STARSIGHT TELECAST, INC.

STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED  DECEMBER 31, 1996 AND 1995,  SIX MONTHS ENDED  DECEMBER 31, 1994 AND 
TWELVE MONTHS ENDED JUNE 30, 1994 (in  thousands,  except share and per share data)
-----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>

                                               Twelve Months       Twelve Months       Six Months       Twelve Months
                                                   Ended               Ended              Ended             Ended
                                                December 31,        December 31,       December 31,       June 30,
                                                    1996               1995               1994              1994
                                                ----------         -----------        -----------        -----------
<S>                                            <C>                 <C>                <C>                <C>       
REVENUES:                                                                                               
  License                                          $6,853                $749                           
  Subscription and other                            1,845               1,164                $70        
                                               -----------         -----------        -----------       
    Total revenues                                  8,698               1,913                 70        
                                               -----------         -----------        -----------       
                                                                                                        
COST OF GOODS SOLD                                  1,544                 676                           
                                                                                                        
INVENTORY RESERVES AND WRITE-OFFS                     801               4,931              1,450        
                                               -----------         -----------        -----------       
                                                                                                        
GROSS PROFIT (LOSS)                                 6,353              (3,694)            (1,380)       
                                               -----------         -----------        -----------       
                                                                                                        
COSTS AND EXPENSES:                                                                                     
  General and administrative                       10,311               9,848              8,302             $8,228
  Litigation costs                                  4,776               2,880              1,644        
  Engineering and development                       3,420               3,539              2,128              6,843
  Marketing                                         7,480               6,823              4,325              4,478
  Network services and other expenses               6,127               5,570              3,292              2,682
                                               -----------         -----------        -----------        -----------
                                                                                                        
    Total costs and expenses                       32,114              28,660             19,691             22,231
                                               -----------         -----------        -----------        -----------
                                                                                                        
OPERATING LOSS                                    (25,761)            (32,354)           (21,071)           (22,231)
                                               -----------         -----------        -----------        -----------
                                                                                                        
INTEREST EXPENSE                                      (14)                (33)               (23)               (19)
                                                                                                        
INTEREST INCOME                                       726                 607                833              1,695
                                               -----------         -----------        -----------        -----------
                                                                                                        
LOSS BEFORE CUMULATIVE EFFECT                                                                           
  OF ACCOUNTING CHANGE                            (25,049)            (31,780)           (20,261)           (20,555)
                                                                                                        
CUMULATIVE EFFECT OF                                                                                    
  ACCOUNTING CHANGE                                                                       (1,172)       
                                               -----------         -----------        -----------        -----------
                                                                                                        
NET LOSS                                         $(25,049)           $(31,780)          $(21,433)          $(20,555)
                                               ===========         ===========        ===========        ===========
                                                                                                        
LOSS PER COMMON SHARE:                                                                                  
                                                                                                        
LOSS BEFORE CUMULATIVE EFFECT                                                                           
  OF ACCOUNTING CHANGE                             $(1.01)             $(1.50)            $(0.97)            $(1.08)
                                                                                                        
CUMULATIVE EFFECT OF                                                                                    
  ACCOUNTING CHANGE                                                                        (0.06)       
                                               -----------         -----------        -----------        -----------
                                                                                                        
NET LOSS                                           $(1.01)             $(1.50)            $(1.03)            $(1.08)
                                               ===========         ===========        ===========        ===========
                                                                                                        
NUMBER OF SHARES USED FOR                                                                               
  CALCULATION OF NET LOSS                                                                               
  PER COMMON SHARE                             24,783,159          21,163,768         20,799,445         19,082,759
                                               ===========         ===========        ===========        ===========
                                                                                                     
<FN>
See notes to financial statements.
</FN>
</TABLE>


                                      F-4
<PAGE>

<TABLE>

STARSIGHT TELECAST, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
TWELVE MONTHS ENDED  DECEMBER 31, 1996 AND 1995,  SIX MONTHS ENDED  DECEMBER 31, 1994 AND 
TWELVE MONTHS ENDED JUNE 30, 1994 (in thousands, except share data)
------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                         Convertible
                                                       Preferred Stock           Common Stock
                                                    -----------------------  -------------------
                                                                                                   Unearned   Accumulated
                                                      Shares      Amount     Shares      Amount  Compensation    Deficit    Total

<S>                                                  <C>         <C>        <C>          <C>        <C>         <C>        <C>    
BALANCE, JUNE 30, 1993                               8,158,820   $41,073    7,805,674    $3,099     $(1,888)    $(16,918)  $25,366
                                                                                                               
Issuance of common stock for cash -                                                                            
  Initial Public Offering - Net ($15.00 per share)                          3,105,000    42,334                             42,334
Conversion of convertible preferred stock                                                                      
  into common stock                                 (8,158,820)  (41,073)   8,158,820    41,073                
Exercise of warrant for cash ($5.625 per share)                               833,333     4,688                              4,688
Amortization of unearned compensation                                                                   273                    273
Exercise of stock options for cash                                            574,578       479                                479
Issuance of common stock for cash                                              15,219       183                                183
Net loss                                                                                                         (20,555)  (20,555)
                                                    -----------  --------  ----------- ---------    --------    ---------  --------
                                                                                                               
BALANCE, JUNE 30, 1994                                                     20,492,624    91,856      (1,615)     (37,473)   52,768
                                                                                                               
Exercise of warrant for cash ($7.50 per share)                                229,624     1,722                              1,722
Exercise of stock options for cash                                            266,288       377                                377
Issuance of common stock for cash                                              17,250       114                                114
Amortization of unearned compensation                                                                   631                    631
Net loss                                                                                                         (21,433)  (21,433)
                                                    -----------  --------  ----------- ---------    --------    ---------  --------
                                                                                                               
BALANCE, DECEMBER 31, 1994                               --      $  --     21,005,786   $94,069       $(984)    $(58,906)  $34,179
                                                                                                                 
                                                                                                                         (Continued)
                                                                                                                     

                                      F-5
<PAGE>

STARSIGHT TELECAST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
TWELVE MONTHS ENDED  DECEMBER 31, 1996 AND 1995,  SIX MONTHS ENDED  DECEMBER 31, 1994 AND 
TWELVE MONTHS ENDED JUNE 30, 1994 (in thousands, except share data)
------------------------------------------------------------------------------------------------------------------------------------

                                                        Convertible
                                                      Preferred Stock         Common Stock
                                                    --------------------  ---------------------
                                                                                                   Unearned   Accumulated
                                                    Shares      Amount       Shares      Amount  Compensation    Deficit    Total
                                                                       
BALANCE, DECEMBER 31, 1994                             --    $    --      21,005,786     $94,069   $(984)      $(58,906)   $34,179
                                                                                                                           
Issuance of common stock for cash ($7.50 per share)                          666,668       5,000                             5,000
Exercise of stock options for cash                                           218,929         243                               243
Issuance of common stock for cash                                             20,635          88                                88
Amortization of unearned compensation                                                                613                       613
Net loss                                                                                                        (31,780)   (31,780)
                                                     ------  --------   -------------   ---------  ------      ---------   --------
                                                                                                                           
BALANCE, DECEMBER 31, 1995                                                21,912,018      99,400    (371)       (90,686)     8,343
                                                                                                                           
Issuance of common stock and warrants for cash - net                       3,333,333      24,625                            24,625
Exercise of stock options for cash                                           309,336         694                               694
Issuance of common stock for cash                                             11,617          61                                61
Compensatory repricing of stock option grant                                               1,027  (1,027)                 
Compensatory stock option grants                                                             165    (165)                  
Amortization of unearned compensation                                                              1,164                     1,164
Net loss                                                                                                        (25,049)   (25,049)
                                                     ------  --------   -------------   ---------  ------      ---------   --------
                                                                                                                           
BALANCE, DECEMBER 31, 1996                             --    $    --      25,566,304    $125,972   $(399)      $(115,735)    $9,838
                                                     ======  ========   =============   =========  ======      =========   ========
                                                                                                                        
<FN>
                                                                                                                         (Concluded)
See notes to financial statements.                                                                                         
</FN>
</TABLE>

                                      F-6
<PAGE>

<TABLE>

STARSIGHT TELECAST, INC.

STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995, SIX MONTHS ENDED DECEMBER 31, 1994 AND
TWELVE MONTHS ENDED JUNE 30, 1994 (in thousands)
---------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                           Twelve Months      Twelve Months     Six Months      Twelve Months
                                                               Ended              Ended             Ended            Ended
                                                            December 31,      December 31,       December 31,       June 30,
                                                                1996              1995               1994             1994
                                                          ----------------- ------------------  --------------- -----------------
<S>                                                           <C>               <C>                 <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                      $(25,049)         $(31,780)           $(21,433)     $(20,555)
Adjustments to reconcile net loss to net                                                                         
  cash used in operating activities:                                                                             
  Cumulative effect of accounting change                                                               1,172     
  Amortization of unearned compensation                          1,164               613                 631           273
  Depreciation and amortization                                  1,246             1,823                 936         1,016
  Inventory valuation reserve                                      801             3,649               1,450     
  Changes in assets and liabilities:                                                                             
    Accounts payable and accrued liabilities                      (389)           (1,164)              2,872           537
    Deferred revenue                                            17,878             2,796                         
    Accounts receivable, inventories and other assets           (1,157)           (3,545)             (2,720)         (988)
                                                              ---------         ---------           ---------     ---------
                                                                                                                 
    Net cash used in operating activities                       (5,506)          (27,608)            (17,092)      (19,717)
                                                              ---------         ---------           ---------     ---------
                                                                                                                 
CASH FLOWS  FROM INVESTING ACTIVITIES:                                                                           
  Acquisitions of furniture, fixtures and equipment               (425)             (585)               (849)       (2,528)
  Purchases of long-term investments                                                                               (10,024)
  Maturities of long-term investments                                                                  5,020     
  Sales of long-term investments held to maturity                                  5,004                         
  Purchases of short-term investments                          (15,701)                              (11,868)      (19,712)
  Maturities of short-term investments                          13,712            16,940               8,811         5,829
  Additions to patents and licenses                               (253)             (142)                (34)       (3,854)
                                                              ---------         ---------           ---------     ---------
                                                                                                                 
  Net cash provided by (used in) investing activities           (2,667)           21,217               1,080       (30,289)
                                                              ---------         ---------           ---------     ---------
                                                                                                                 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                            
  Proceeds from the issuance of common stock, net               24,625             5,000                            42,334
  Proceeds from exercise of warrants and options                                                                 
      for common stock                                             755               331               2,213         5,350
  Proceeds from notes payable                                                                                          822
  Repayment of note payable                                       (286)             (294)               (147)         (103)
                                                              ---------         ---------           ---------     ---------
                                                                                                                 
     Net cash provided by financing activities                  25,094             5,037               2,066        48,403
                                                              ---------         ---------           ---------     ---------
                                                                                                                 
INCREASE (DECREASE) IN CASH AND CASH                            16,921            (1,354)            (13,946)       (1,603)
EQUIVALENTS                                                                                                      
                                                                                                                 
CASH AND CASH EQUIVALENTS:                                                                                       
  Beginning of period                                            8,787            10,141              24,087        25,690
                                                              ---------         ---------           ---------     ---------
                                                                                                                 
  End of period                                                $25,708            $8,787             $10,141       $24,087
                                                              =========         =========           =========     =========
                                                                                                                 
OTHER CASH FLOW INFORMATION -                                                                                    
  Interest paid                                                    $14               $33                 $23           $19
                                                              =========         =========           =========     =========
                                                                                                                 
NONCASH INVESTING  AND FINANCING                                                                                 
  ACTIVITIES -                                                                                                   
  Conversion of convertible preferred stock into                                                                 
   common stock                                                                                                    $41,703
                                                                                                                  =========
<FN>
See notes to financial statements.                                                                               
</FN>
</TABLE>

                                      F-7
<PAGE>

STARSIGHT TELECAST, INC.

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


1.    ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

      General - StarSight Telecast, Inc. (the "Company") was incorporated on May
      12, 1986 under the laws of the State of California.  The Company markets a
      patented  on-screen  interactive  television program guide and VCR control
      service under the StarSight  brand name into three  distinct  distribution
      channels: consumer electronics, service providers, such as cable or telco,
      and    licensing    the     Company's     intellectual     property    for
      non-StarSight-capable  products,  which  provide guide  features  based on
      StarSight's proprietary technology and patented inventions.

      Change in Fiscal Year - In September  1994, the Company changed its fiscal
      year  from  one  ending  on  June 30 to one  ending  on  December  31 and,
      accordingly,  the  Company  adopted a  December  31 or  calendar  year-end
      beginning on January 1, 1995. Accordingly,  the accompanying statements of
      operations,  shareholders'  equity and cash flows  include the  transition
      fiscal period for the six months from July 1, 1994 to December 31, 1994.

      Revenue Recognition - License revenues are recognized as earned based upon
      sales or installations of licensed products or services.  License revenues
      to two customers represented 31% and 30%, respectively,  of total revenues
      for  the  twelve  months  ended  December  31,  1996.  Also  see  Note  4.
      Subscription revenues are recognized as earned over the period of service.
      Activation  fees are recognized in the period in which a  subscription  is
      activated.  Revenues  from sales of stand alone  StarSight  receivers  are
      recognized when the related  subscription is activated.  Deferred  revenue
      results  from  cash  advances   (primarily  from  license   revenues)  and
      collections  and  billed  receivables  for  which  revenue  has  not  been
      recognized.

      Cash and Cash Equivalents - The Company  considers cash investments with a
      maturity  of  three  months  or less at the  time of  purchase  to be cash
      equivalents.

      Investments  - The  Company  holds  investments  in U.S.  Treasury  backed
      securities  with  maximum  maturities  of less  than  three  years.  Under
      Statement of Financial  Accounting  Standards ("SFAS") No. 115, Accounting
      for Certain  Investments and Debt and Equity Securities  through September
      6,  1995,  the  Company's   short-term  and  long-term   investments  were
      classified as held to maturity and reported at amortized  cost.  Effective
      September 7, 1995 the Company  reclassified  its  short-term and long-term
      investments as available for sale; such investments are reported at market
      value  with the net  unrealized  gain or loss  included  in  shareholders'
      equity.

      Fair Value of Financial  Instruments  - The Company  believes the carrying
      amount of its financial instruments,  which consists primarily of cash and
      investments,  receivables and payables, approximates fair value due to the
      short-term maturity of these instruments.

      Inventories  consist primarily of stand alone StarSight  receivers and raw
      materials  and  are  stated  at the  lower  of  cost  or  market.  Cost is
      determined principally by the first-in,  first-out method. Market is based
      on net realizable  value for raw materials,  work-in-process  and finished
      products inventories.


                                      F-8
<PAGE>

      Furniture,  Fixtures  and  Equipment  -  The  Company  records  furniture,
      fixtures  and  equipment  at  cost.   Depreciation   is  computed  on  the
      straight-line  method over estimated useful lives ranging from two to five
      years.

      Income  Taxes - The Company  accounts for income taxes under SFAS No. 109,
      Accounting  for  Income  Taxes,  which  requires  the use of the asset and
      liability method.

      Unearned  Compensation  - Unearned  compensation  related to the Company's
      stock option plan is calculated based on the difference between the market
      value of the  common  stock at the date the stock  option  was  granted or
      repriced (see Note 17) and the option exercise price. Generally,  employee
      stock  options  vest  ratably  over 48  months  from  the  date of  grant.
      Accordingly,  amortization of unearned compensation resulted in charges to
      operations of $1,164,000,  $613,000,  $631,000 and $273,000 for the twelve
      months ended December 31, 1996 and 1995, the six months ended December 31,
      1994 and the twelve months ended June 30, 1994, respectively.

      Net Loss Per Share - The net loss per share for all periods  presented  is
      based on the weighted average number of shares of common stock outstanding
      during the period.  No effect has been given to unexercised  stock options
      and warrants because the effect would be antidilutive.

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

      New Accounting  Standards - The Company  adopted SFAS No. 123,  Accounting
      for Stock-Based  Compensation in 1996. SFAS No. 123 establishes accounting
      and disclosure  requirements using a fair value based method of accounting
      for  stock  based  employee  compensation  plans.  As  allowed  under  the
      provisions  of SFAS No.  123,  the  Company  has  chosen to  continue  the
      intrinsic  value based method of option  valuation  ("APB 25") and provide
      pro  forma  disclosures  of net  loss  and net  loss  per  share as if the
      accounting provisions of SFAS No. 123 had been adopted.

      The  Black-Scholes  model used by the Company to calculate  option  values
      pursuant  to SFAS No.  123,  as well as other  currently  accepted  option
      valuation  models,  was  developed  to  estimate  the fair value of freely
      tradable,  fully transferable options without vesting restrictions,  which
      significantly  differ from the Company's stock option awards. These models
      also incorporate  highly  subjective  assumptions,  including future stock
      price  volatility and expected time until  exercise,  which greatly affect
      the calculated values. Under the Black-Scholes  pricing model, stocks with
      high volatility  provide option holders with a greater  economic  "upside"
      potential  and,  accordingly,  result in a higher option  valuation.  Thus
      management  believes  that the  Black-Scholes  model does not  necessarily
      provide a  reliable  single  measure  of the fair  value of the  Company's
      option awards.

      The  Company  adopted  SFAS No.  121,  Accounting  for the  Impairment  of
      Long-Lived  Assets and Long-Lived  Assets to be Disposed Of in 1996.  SFAS
      No. 121 establishes  recognition  and measurement  criteria for impairment
      losses  whenever  events or changes  in  circumstances  indicate  that the
      carrying value of assets may not be recoverable.  The adoption of SFAS No.
      121 did not have an effect on the Company's financial statements.


                                      F-9
<PAGE>

      Reclassifications  -  Certain  reclassifications  have  been made to prior
      period amounts to conform with the 1996 presentation.

2.    PROPOSED MERGER WITH GEMSTAR

      On December 23, 1996, the Company and Gemstar  International Group Limited
      ("Gemstar")  agreed  to merge  pursuant  to and  subject  to the terms and
      conditions of the  Agreement and Plan of Merger (the "Merger  Agreement").
      Pursuant to the Merger Agreement,  the Company's shareholders will receive
      0.6062  ordinary  shares of  Gemstar  for each share of  StarSight  common
      stock.  Consummation  of the  proposed  merger is subject to,  among other
      things,  approval by both companies'  shareholders and certain  government
      regulatory  approvals,  as well as the  satisfaction  or waiver of certain
      other customary conditions.

3.    RESULTS OF OPERATIONS  FOR THE TWELVE  MONTHS ENDED  DECEMBER 31, 1996 AND
      MANAGEMENT PLANS FOR 1997

      Revenues for the twelve months ended December 31, 1996 were $8,698,000. As
      a  result  of  incurring  significant  expenses  in  its  development  and
      operating activities without generating  significant revenues, the Company
      has incurred  significant  losses and negative  cash flows from  operating
      activities.  Net loss for the twelve  months  ended  December 31, 1996 and
      1995,  six months ended December 31, 1994 and the twelve months ended June
      30,  1994  was  $25,049,000,  $31,780,000,  $21,433,000  and  $20,555,000,
      respectively,  and net cash used in  operating  activities  for the twelve
      months ended December 31, 1996 and 1995, the six months ended December 31,
      1994  and  the  twelve   months  ended  June  30,  1994  was   $5,506,000,
      $27,608,000,  $17,092,000 and $19,717,000,  respectively.  At December 31,
      1996, the Company had an accumulated deficit of $115,735,000.

      There can be no  assurance  that the Company  will ever be able to achieve
      revenues in excess of expenses.  The Company expects to incur  substantial
      losses and  substantial  negative cash flows from operating  activities in
      the  foreseeable  future.  The  Company  is  dependent  on  licensing  and
      subscription  revenues  of  StarSight  products  and  services in order to
      minimize  negative  cash  flow from  operations.  Because  of its  limited
      commercial  operating history,  the Company is subject to all of the risks
      and expenses inherent in the  establishment of a new business  enterprise.
      To address these risks and expenses, the Company must, among other things,
      respond  to  competitive   developments,   attract,  retain  and  motivate
      qualified  personnel  and support  the expense of  marketing a new service
      based  upon  innovative   technology.   In  addition,   the  Company  must
      successfully  launch  the  commercial  distribution  of its  products  and
      services,  obtain  adequate  financing to fulfill its  marketing  plan and
      successfully market its products and services to potential subscribers and
      license its intellectual property for non-StarSight-capable products.

      In March 1996, pursuant to a series of strategic and financial  agreements
      with  THOMSON  (see Note 22),  the Company  sold  3,333,333  shares of the
      Company's Common Stock to THOMSON for $25,000,000  ($7.50 per share).  The
      net  proceeds  to  the  Company,  after  deducting  placement  fees,  were
      $24,625,000.  Such  placement  fees of $375,000 were paid to a shareholder
      pursuant to an investment advisor agreement with the shareholder.

      In December  1996,  the Company  received a  $20,000,000  lump sum royalty
      payment  under a  licensing  agreement  with  Microsoft  (see  Note 4). At
      December  31,  1996,  the  Company  had  cash  and  cash  equivalents  and
      short-term investments available for sale of $27,697,000. In January 1997,
      the Company  received  $7,715,000 as partial  payment under an arbitration
      settlement (see Note 5).


                                      F-10
<PAGE>

      The Company  believes  that its  existing  cash and cash  equivalents  and
      short-term  investments  available  for sale will be sufficient to sustain
      the  Company's   current  level  of  operations  and  meet  its  financial
      obligations through the end of 1997.

4.    MICROSOFT LICENSING AGREEMENT

      On December 20, 1996, the Company entered into a licensing  agreement with
      Microsoft Corporation ("Microsoft") to license certain of its technologies
      with  Microsoft.  Under  the  agreement,  Microsoft  paid  the  Company  a
      non-refundable  "lump sum" royalty  payment of  $20,000,000  (the "Royalty
      Payment")  for  a  non-exclusive,  worldwide  license  for  the  Company's
      intellectual   property  related  to  electronic  program  guides,   which
      technology  will be used by  Microsoft  for future  software  products and
      services on the PC platform. Additionally,  Microsoft provided the Company
      with a royalty free license  under  certain of its  intellectual  property
      related to electronic  program  guides.  Microsoft  also agreed to pay the
      Company  certain  additional  per unit  royalties  related  to  additional
      features of StarSight  licensed  product and a percentage  of  advertising
      revenues derived from Microsoft licensed  products.  The Company agreed to
      pay Microsoft a percentage of subscription revenues derived from StarSight
      licensed  products.  The Company  will  recognize  revenue  related to the
      Royalty  Payment  ratably  during  the  initial  two  year  period  of the
      agreement  based on the projected  installed  units of Microsoft  licensed
      product. Accordingly,  $300,000 was recognized as license revenues in 1996
      and  $19,700,000  was  classified  as  deferred   revenues   (current  and
      long-term) at December 31, 1996.

5.    SCIENTIFIC-ATLANTA ARBITRATION SETTLEMENT

      On December 11, 1996, the U.S. District Court for the Northern District of
      California   confirmed  an  American   Arbitration   Association   ("AAA")
      arbitration panel award of $15,000,000, plus attorney fees and arbitration
      costs,  against  Scientific-Atlanta  for unlawful  use of certain  Company
      intellectual property,  breach of contract, breach of the implied covenant
      of good faith and fair  dealing and unfair trade  practices.  In addition,
      the   court   confirmed   the   AAA   panel's    injunction    prohibiting
      Scientific-Atlanta  for a period of three  years  from  shipping  to third
      parties any consumer product  incorporating an interactive  program guide,
      except for orders already committed to in writing as of July 23, 1996, the
      date of the AAA panel  ruling.  In January  1997,  the Company  received a
      partial settlement of $7,485,000,  plus $230,000 in accrued interest,  all
      of which will be recognized as 1997 revenues.  Remaining  amounts due will
      be  recognized  as  revenues  when  such  cash or other  consideration  is
      received.

6.    ACCOUNTING CHANGE

      Effective  July 1, 1994,  the Company  changed its method of accounting to
      expense  legal costs  incurred  in  connection  with  patent  infringement
      litigation. Previously all such legal costs were capitalized and amortized
      over the  remaining  useful  lives of the  related  patents.  The  Company
      believes  that this change in accounting  method is preferable  because it
      conforms to the predominant  industry  practice.  The cumulative effect at
      July 1, 1994 of  adopting  this  accounting  change was an increase in the
      Company's  net loss by  $1,172,000  ($0.06 per share).  The effect of this
      accounting  change for the six months ended December 31, 1994, in addition
      to the cumulative effect noted above, was an increase in the Company's net
      loss of $1,644,000 ($0.08 per share). See Note 7.


                                      F-11
<PAGE>

7.    PATENTS AND LICENSES AND PATENT INFRINGEMENT LITIGATION

      Patents and Licenses

      The Company holds several U.S. and foreign patents, encompassing processes
      as  well  as  systems  of  electronically  delivering  television  program
      schedule  information  to a storage  device for the control of  television
      tuners,  recording  devices  and the use of  on-screen  menus for  program
      guides and control of cable  decoding  devices by recording  devices.  The
      Company  has  filed  a  series  of  other  patent  applications   covering
      additional product features,  various  interfaces,  and new products which
      are directed  toward the area of  electronic  program  guide and recording
      device  products.  The costs  incurred in connection  with securing  these
      patents are capitalized and amortized over their estimated useful lives of
      13 to 17 years.

      In February 1994, the Company paid $2,500,000 in cash consideration for an
      amendment to a licensing  assignment  agreement.  The original  assignment
      agreement  assigned to the Company  all right,  title and  interest in two
      patents, the TV Schedule patent and the VCR Scheduling patent, in exchange
      for certain  royalty  payments.  The  amendment  eliminated  these royalty
      payments  in  exchange  for the cash  consideration.  The  $2,500,000  was
      capitalized  as  patents  and  licenses  and is being  amortized  over the
      average remaining useful lives of the two applicable patents.

      In March 1994,  the  Company  entered  into an  exclusive  patent  license
      agreement  with another  company for five  previously  issued  patents and
      several related  pending patents (the "PMC Patents"),  one which has since
      been granted. In consideration for the license agreement, the Company paid
      a license fee  consisting  of a one-time  payment of $500,000  and monthly
      installments of $25,000 over a three-year period  thereafter.  The Company
      expensed the total  license fee of  $1,322,000  in the twelve months ended
      June 30,  1994 as  additional  development  will be  required  to  achieve
      product feasibility.

      Patent Infringement Litigation

      The Company is a defendant in several  lawsuits  alleging  infringement of
      certain patent rights by the Company, as described below.

      Gemstar Litigation

      The Company and Gemstar are currently in  litigation  with each other over
      their  respective  intellectual  property  rights as described  more fully
      below. The Company and Gemstar, however, have agreed to cease ("stay") all
      activity  with  respect to the pending  litigation  between them until the
      earlier of the  consummation  of the Merger or  termination  of the Merger
      Agreement.

      In October  1993,  the Company  filed suit in the  District  Court for the
      Northern  District of California,  San Jose Division,  against Gemstar and
      Michael R. Levine  ("Levine")  seeking:  (1) a  preliminary  and permanent
      injunction and treble damages for Gemstar's willful infringement of one of
      the  Company's  patents  (United  States  Patent No.  5,151,789,  the "789
      patent");  (2) a declaration  that the Company does not infringe any claim
      of United States Patent No.  4,908,713 (the "713 patent")  and/or that any
      such  claim  is  invalid  and/or  unenforceable;  (3)  a  preliminary  and
      permanent injunction and treble damages for Gemstar's violation of certain
      antitrust  laws;  and (4) monetary  and  exemplary  damages for  Gemstar's
      tortious business activities. Gemstar and Levine counterclaimed on January
      4, 1994 for a preliminary and permanent  injunction and treble damages for
      the  Company's  alleged  infringement  of the `713 patent claims and for a
      declaration of noninfringement, invalidity, and/or unenforceability of 



                                      F-12
<PAGE>

      the claims of the Company's `789 patent. In addition,  on December 8, 1993
      Gemstar and Levine moved to dismiss the Company's  antitrust claim and the
      Company's  declaratory  relief claim to the extent it sought a declaration
      of the  unenforceability  of the  `713  patent  due  to  Levine's  alleged
      inequitable conduct during the prosecution of the `713 patent. Pursuant to
      a court order, the Company's antitrust claim was dismissed with prejudice.
      In addition, the case has been phased to permit resolution of validity and
      infringement  issues prior to resolving  all other  disputed  issues.  The
      court   conducted  trial  in  August  1996  regarding   Levine's   alleged
      unequitable  conduct.  A  decision  has not been  rendered  in view of the
      aforementioned stay.

      In  November  1993,  Gemstar  filed an action  against  the Company in the
      District  Court for the Central  District  of  California  seeking:  (1) a
      preliminary and permanent  injunction and treble damages for the Company's
      alleged  violation of certain  federal and state  antitrust  laws; (2) for
      monetary  and  exemplary  damages  for the  Company's  allegedly  tortious
      business  activities;  and (3) for a declaration  of the  noninfringement,
      invalidity,  and/or  unenforceability  of  the  claims  of  three  of  the
      Company's  patents (United States Patent Nos.  5,151,789,  4,706,121,  and
      4,977,455).  In May, 1994, the Central  District  action was ordered to be
      transferred to the Northern District of California,  San Jose Division, to
      be  consolidated  with the above  mentioned  litigation  for discovery and
      pre-trial  purposes.  In addition,  pursuant to a court  order,  Gemstar's
      declaratory  relief claims against the Company's United States Patent Nos.
      4,706,121  (the  "121  patent")  and  4,977,455  (the "455  patent")  were
      dismissed. A trial date has not yet been set and discovery has been stayed
      pursuant to the Merger Agreement.

      In October 1994, SuperGuide Corporation ("SuperGuide") and Gemstar filed a
      further lawsuit against the Company in the District Court for the Northern
      District of California,  San Jose Division. In this action, SuperGuide and
      Gemstar  are  seeking,  among  other  things,  preliminary  and  permanent
      injunctions and treble damages for the alleged willful infringement by the
      Company of one or more claims of United States Patent Nos.  4,751,578 (the
      "578 patent") and 5,038,211 (the "211  patent").  On December 8, 1994, the
      Company filed  counterclaims  seeking,  among other things,  a declaration
      that the Company  does not  infringe  any such claims of the `578 and `211
      patents, and/or that such claims are invalid and/or unenforceable.  On May
      5, 1995,  SuperGuide  amended its complaint to add a count  asserting that
      the  Company's  `121  patent is invalid  and/or  unenforceable  and is not
      infringed  upon by  SuperGuide.  The  Company  filed a motion  to  dismiss
      SuperGuide's  causes of action with respect to the `121 patent for lack of
      subject matter jurisdiction  (based on no case or controversy);  on August
      8, 1995,  the  Company's  motion was  granted.  This lawsuit also has been
      consolidated  with the above  mentioned  cases for discovery and pre-trial
      purposes.  A trial date has not yet been set and discovery has been stayed
      pursuant to the aforementioned Merger Agreement.

      United Video Litigation

      In October 1993,  United Video and its Trakker,  Inc.  subsidiary  brought
      suit  against  the  Company in the United  States  District  Court for the
      Northern  District of Oklahoma,  seeking a  declaratory  judgment that its
      interactive  program guide  products do not infringe the  Company's  `121,
      `455 or `789 patents. The Company counterclaimed  charging infringement of
      the `121  patent.  Through  subsequent  procedural  motions,  the  lawsuit
      expanded to include a total of ten patents to which the Company has rights
      to and federal antitrust claims.  The Court has deferred  consideration of
      all the other  claims and  counterclaims  pending  the  resolution  of the
      infringement,  validity and  enforceability  issues of the `121 patent.  A
      phased  bench trial began on May 8, 1996,  with United  Video  essentially
      presenting  its case in chief on the  validity and  enforceability  issues
      related to the `121 patent.  The Court has set the trial date for the next
      phase for May 5, 1997. The Company will present witnesses during this next
      phase relating to the validity,  enforceability  and  infringement  of the
      `121 patent.


                                      F-13
<PAGE>

      Scientific-Atlanta Arbitration and Litigation

      In   1995,   the   Company   brought   an   arbitration   action   against
      Scientific-Atlanta  concerning  Scientific-Atlanta's  alleged delay in the
      deployment of  StarSight-capable  set-top boxes and its  development  of a
      competing   electronic   program  guide   allegedly  using  the  Company's
      technology in violation of its licensing  agreement  with the Company.  In
      apparent response to the arbitration  action,  Scientific-Atlanta  filed a
      lawsuit in the United States  District Court for the Northern  District of
      Georgia  (the  "Atlanta  suit") in February  1996  against the Company and
      Philips  alleging  that  the  Company's  stand  alone  StarSight  receiver
      infringed on three U.S. patents owned by  Scientific-Atlanta.  The Company
      filed a demand on April 30, 1996 for  arbitration  on the issue of whether
      the  Company  is  licensed  to  use   Scientific-Atlanta's   patents.  The
      arbitrators  have been  selected,  but there has been no discovery  and no
      hearing  date has been  set.  The  judge in the  Atlanta  suit has  stayed
      proceedings pending the outcome of the April 30, 1996 arbitration. On July
      23, 1996, the American Arbitration Association ("AAA") awarded the Company
      $15,000,000 in monetary  damages plus attorney fees and arbitration  costs
      against Scientific-Atlanta. In addition to the monetary award, the Company
      was granted injunctive relief prohibiting Scientific-Atlanta, except under
      certain limited conditions, from accepting any new customer orders for any
      products  incorporating  an  interactive  electronic  program  guide  that
      utilizes any  information  derived either  directly or indirectly from the
      Company for a period of three years  beginning from the date of the award.
      On December 11, 1996, the U.S. District Court for the Northern District of
      California confirmed the AAA arbitration panel award of $15,000,000,  plus
      attorney fees and arbitration costs. In addition,  the court confirmed the
      AAA  panel's  injunction  prohibiting  Scientific-Atlanta  for a period of
      three  years  from  shipping  to  third   parties  any  consumer   product
      incorporating  an  interactive  program  guide,  except for orders already
      committed  to in  writing as of July 23,  1996,  the date of the AAA panel
      ruling. On December 24, 1996,  Scientific-Atlanta  appealed $10,000,000 of
      the award to the U.S. District Court of Appeals for the Ninth Circuit. The
      matter is currently pending and no briefs have been filed.

      In January  1997,  the  Company  received a payment  of  $7,715,000  for a
      portion of the award, consisting of $5,000,000 in damages,  $2,485,000 for
      attorney fees and arbitration costs and $230,000 in accrued interest.

      The  Company  intends to respond  and  vigorously  defend the  allegations
      against it and to actively  pursue its claims against each party.  Through
      December 31, 1996,  the Company  expensed  $10,472,000  in legal and other
      costs  in  connection  with  the  litigation  described  above,  of  which
      $4,776,000  and  $2,880,000  was  incurred  for the  twelve  months  ended
      December  31, 1996 and 1995,  respectively.  The Company  expects to incur
      additional legal costs in future periods related to the enforcement of the
      Company's  patents  involved in the current and potential future suits. No
      estimate of the total amount of such additional legal costs can be made at
      this time. The outcome of these lawsuits  cannot  presently be determined.
      The Company believes,  based upon the advice of counsel, that the ultimate
      resolution of these matters will not have a material adverse effect on the
      Company's financial statements taken as a whole.


                                      F-14
<PAGE>

8.    INVESTMENTS

      Short-term  investments  available  for sale of $1,989,000 at December 31,
      1996  consist of debt  instruments  issued by a Federal  Agency.  The fair
      value of these  instruments  approximated  amortized  cost at December 31,
      1996.


      In September  1995,  the Company sold its  long-term  investments  held to
      maturity to provide cash for operating requirements.

9.    INVENTORIES

      Inventories are summarized as follows (in thousands):

                                                      December 31,  December 31,
                                                          1996         1995
                                                                    
     Raw materials                                      $   801     $   441
     Finished products                                      680       5,099
                                                        -------     -------
                                                                    
         Total                                            1,481       5,540
                                                                    
     Less lower of cost-or-market valuation allowance    (1,481)     (5,099)
                                                        -------     -------
                                                                    
     Inventory, net                                     $  --       $   441
                                                        =======     =======
                                                                   

      Inventory reserves and write-offs were $801,000, $4,931,000 and $1,450,000
      for the twelve months ended  December 31, 1996 and 1995 and the six months
      ended December 31, 1994, respectively.

      The Company had entered into an agreement with a third party  manufacturer
      (the "Manufacturer") for the manufacture of as many as 100,000 stand alone
      StarSight  receivers  ("Receivers") on a subcontract  basis. In connection
      with this agreement,  the Company  provided the  Manufacturer  certain raw
      materials to complete the  manufacture of the  Receivers.  At December 31,
      1994,  the  Company had  recorded  an  inventory  valuation  allowance  of
      $1,450,000  related  to  this  agreement  covering   approximately  25,000
      Receivers  which the Company had  committed  to purchase.  Such  inventory
      valuation  allowance  represented the Company's  estimate of the excess of
      cost over net realizable value on  work-in-process  and finished  products
      inventories to reflect the anticipated  sales price of the Company's stand
      alone StarSight receiver at the time.

      During the first  quarter  of 1995,  the  Company  committed  to  purchase
      another 10,000  Receivers and recorded an additional  inventory  valuation
      allowance  of  $930,000.  In  September  1995  the  Company  canceled  its
      commitment  to  purchase  the   remaining   65,000   Receivers   from  the
      Manufacturer.  Such  cancellation did not result in any additional cost or
      liability to the Company.  However,  in September 1995, as a result of the
      completion  of this  agreement  with the  Manufacturer  and a  significant
      reduction in the  anticipated  sales price of the  Receivers,  the Company
      recorded  an  additional  lower  of cost  or  market  inventory  valuation
      allowance of $2,340,000.  In addition,  the Company  expensed  $960,000 of
      excess  work-in-process  inventories  originally  acquired  for use in the
      manufacture of the remaining  65,000  receivers.  In the fourth quarter of
      1995, the Company recorded an additional lower 


                                      F-15
<PAGE>

      of cost or market inventory valuation allowance of $701,000.  As a result,
      the total 1995 inventory reserve and write-off was $4,931,000.

      During  the  fourth  quarter  of  1996,  as a  result  of  delays  in  the
      manufacture  of  StarSight-capable   consumer  electronics  products,  the
      Company recorded an additional lower of cost or market inventory allowance
      of $801,000.

10.   FURNITURE, FIXTURES AND EQUIPMENT

      Furniture, fixtures and equipment consist of the following (in thousands):

                                                December 31,     December 31,
                                                   1996              1995

     Computer equipment and software              $ 2,229          $ 1,994
     Furniture and fixtures                           644              629
     Machines and equipment                         2,852            2,677
                                                  -------          -------
                                                                
       Total                                        5,725            5,300
                                                                
     Less accumulated depreciation                 (4,651)          (3,663)
                                                  -------          -------
                                                                
     Furniture, fixtures and equipment, net       $ 1,074          $ 1,637
                                                  =======          =======
                                                            

11.   THOMSON LICENSING AGREEMENT

      During the fourth  quarter of 1995,  the Company  entered into a licensing
      agreement  with  Thomson  Consumer  Electronics  for use of the  Company's
      intellectual   property  in  certain  Digital   Satellite  System  ("DSS")
      equipment manufactured by Thomson Consumer Electronics. In connection with
      this  agreement,  the Company  received a  prepayment  of  $2,000,000  for
      license  fees in October  1995 which was  recorded  as  deferred  revenue.
      Revenues are  recognized  when actual  shipments of DSS equipment with the
      Company's  intellectual property occur. The Company recorded approximately
      $2,612,000 in license  revenues under this agreement for the twelve months
      ended  December 31, 1996. No revenues were recorded  under this  agreement
      for the twelve months ended December 31, 1995.


                                      F-16
<PAGE>

12.   COMMITMENTS AND CONTINGENCIES

      The Company has entered  into a long-term  joint  development  and network
      service agreement for the transmission of television program schedule data
      which  originally  expired on June 30, 1996.  During 1996,  the expiration
      date was extended to December 31, 2001. Under this agreement,  the Company
      is committed to pay a monthly fee based on the number of designated market
      areas.  If services are provided  nationwide  and  subscriptions  exceed a
      certain level, these fees may increase to a maximum of $7,000,000 per year
      prior to adjustments for inflation.

      Future  minimum  payments under this agreement as of December 31, 1996 are
      as follows:

      Years ended December 31 (in thousands):
            1997                                $1,240
            1998                                 1,240
            1999                                 1,240
            2000                                 1,240
            2001                                 1,240
                                                ------
           
           Total                                $6,200
                                                ======
       

      Fees under this  agreement  were  $1,124,000,  $1,170,722,  $1,245,000 and
      $1,008,000 for the twelve months ended December 31, 1996 and 1995, the six
      months ended  December 31, 1994 and the twelve months ended June 30, 1994,
      respectively.

      The Company has entered  into a data  delivery  agreement  for  television
      programming schedule data and computer services. Fees under this agreement
      begin  with the  achievement  of an  agreed-upon  subscriber  base and are
      limited to a maximum of $1,600,000  per year through April 25, 2000.  Fees
      under this agreement were  $705,000,  $654,000,  $415,000 and $413,000 for
      the twelve months ended  December 31, 1996 and 1995,  the six months ended
      December 31, 1994 and the twelve months ended June 30, 1994, respectively.

      The Company  has  entered  into a product  development  and  manufacturing
      agreement for televisions  that utilize the Company's  television  program
      subscription  services.  Under this agreement,  the Company will reimburse
      certain design and engineering costs incurred by the manufacturer and will
      also pay certain incremental  manufacturing costs and royalties based upon
      units produced.  For the six months ended December 31, 1994 and the twelve
      months ended June 30, 1994,  the Company  incurred  expenses of $3,117,000
      and $997,000,  respectively,  under this agreement. Subsequent to December
      31,  1994,  the  Company   fulfilled  its  obligations  to  reimburse  the
      manufacturer  resulting in no further payments by the Company. The Company
      has entered into another similar agreement with the same manufacturer. For
      the  twelve  months  ended  December  31,  1996,   the  Company   expensed
      approximately $807,000 under this agreement.

13.   INCOME TAXES

      Deferred  income  taxes  reflect  the net  tax  effects  of (a)  temporary
      differences  between the carrying  amounts of assets and  liabilities  for
      financial reporting purposes and the amounts used for income tax 


                                      F-17
<PAGE>

      purposes,  and (b)  operating  loss  and  tax  credit  carryforwards.  The
      deferred tax balances consisted of the following (in thousands):

                                                      December 31,  December 31,
                                                         1996           1995
Deferred tax assets:
  Federal and state net operating loss carryforwards   $ 30,000      $ 29,257
  Patent litigation costs                                 4,000         2,629
  Inventory reserves                                        600         1,765
  Excess book over tax depreciation and amortization        400           341
  Unearned licensing revenue                              7,900          --
  Other                                                   1,500         1,512
                                                       --------      --------
                                                                   
           Total                                         44,400        35,504
                                                                   
Valuation allowance                                     (44,400)      (35,504)
                                                       --------      --------
                                                                   
Net deferred tax assets                                $   --        $   --
                                                       ========      ========
                                                               


      A valuation  allowance  is  provided  when it is more likely than not that
      some portion of the  deferred tax asset will not be realized.  The Company
      has established a valuation allowance of $44,400,000 and $35,504,000 as of
      December  31,  1996 and  1995,  respectively,  due to the  uncertainty  of
      realizing  future tax benefits from its net operating  loss  carryforwards
      and other deferred tax assets.

      As of December 31, 1996, the Company had net operating loss  carryforwards
      for federal  income tax  purposes of  approximately  $81,000,000,  and net
      operating  loss  carryforwards  for state tax  purposes  of  approximately
      $38,000,000,  which expire at various dates through 2011.  The  difference
      between  the net  operating  loss  carryforwards  for  federal  income tax
      purposes and for California income tax purposes results primarily from the
      capitalization of research and development costs and the 50% limitation on
      the California loss carryforwards.

      Internal  Revenue Code Section 382 places a limitation  (the  "Section 382
      Limitation")  on the amount of taxable  income  which can be offset by net
      operating loss ("NOL")  carryforwards after a change in control (generally
      greater than 50% change in  ownership) of a loss  corporation.  California
      has similar rules.  Generally,  after a control change, a loss corporation
      cannot deduct NOL  carryforwards  in excess of the Section 382 Limitation.
      As a  result  of  recent  equity  investments,  the  Company  has  not yet
      determined the amount,  if any, of limitations of NOL  carryforwards as of
      December 31, 1996.  Future ownership changes could limit the Company's use
      of its remaining NOL carryforwards.

14.   ISSUANCE OF COMMON STOCK IN 1996 AND 1995

      On March 8, 1996, the Company sold 3,333,333 shares of its Common Stock to
      THOMSON at a price of $7.50 per share for  $24,625,000,  net of  placement
      fees associated with the transaction of $375,000. See Note 22.

      On November  20,  1995,  the Company  completed a private  placement  with
      certain  existing  shareholders for 666,668 shares of the Company's common
      stock at a price of $7.50 per share or total net  proceeds of  $5,000,000.
      There were no  underwriting  commissions or placement fees associated with
      the transaction.

                                      F-18
<PAGE>


15.   INITIAL PUBLIC OFFERING OF COMMON STOCK IN 1993

      In July  1993,  the  Company  completed  an  underwritten  initial  public
      offering  ("IPO") of 3,105,000 shares of Common Stock, at an initial price
      to the public of $15.00 per share The net proceeds to the  Company,  after
      deducting underwriting commissions and discounts and other offering costs,
      was $42,334,000.  At the time of the IPO, all of the Convertible Preferred
      Stock  was  automatically  converted  into  Common  Stock on a one for one
      basis.  The  Series  A, B, C, D, E, F, G. H, and I  Convertible  Preferred
      Stock was  convertible  at any time into the same number of fully paid and
      nonassessable shares of Common Stock.

16.   STOCK WARRANTS

      As a result of the IPO, the Series C, D, E, F, G, H and I Warrants  became
      exercisable  for shares of Common  Stock.  In  September  1993,  a Warrant
      Holder  exercised its Warrant to purchase  833,333 shares of the Company's
      Common  Stock for  $4,687,498  ($5.63 per share).  In  September  1994,  a
      Warrant  Holder  exercised its Warrant to purchase  229,624  shares of the
      Company's Common Stock for $1,722,180 ($7.50 per share).

      On September 18, 1991, in connection with the sale of Series C Convertible
      Preferred Stock, the Company granted the holder,  in the event the Company
      or any  shareholder  of the  Company  engages or  proposes  to engage in a
      transaction  that would result in a new shareholder of the Company holding
      greater  than  25% of  the  Company's  outstanding  capital  stock,  on an
      as-defined fully diluted basis ("25% Shareholder"), the right to purchase,
      at the fair market value of the Common Stock as  determined by the average
      of the  closing  prices for a share of Common  Stock of the Company on the
      ten  consecutive  trading days preceding the date of exercise,  additional
      shares  of  Common  Stock to enable  it to  maintain  up to a 1.4:1  ratio
      between its percentage  ownership of the Company,  on an as-defined  fully
      diluted  basis,  and that of the new 25%  Shareholder,  provided  that the
      holder may not, pursuant to this right,  increase its percentage ownership
      to  greater  than 51% of the  Company's  outstanding  capital  stock on an
      as-defined  fully diluted basis (the "Top Up Right").  In connection  with
      the THOMSON  investment  of  $25,000,000  (see Note 22), the holder agreed
      that THOMSON could acquire  greater than 25% of the Company's  outstanding
      capital stock without  initiating the holder's Top Up Right. In connection
      with the  proposed  merger  with  Gemstar,  the  holder  agreed to certain
      modifications  of its Top Up Right,  solely as such  right  applies to the
      option  granted by the Company to Gemstar in connection  with the proposed
      merger.

      In  connection  with a  strategic  and  affiliation  agreement  with  Bell
      Atlantic  Video  Services  Company  ("BVS")  dated  October 28, 1994,  the
      Company  granted BVS two  Warrants to purchase an  aggregate  of 1,000,000
      shares of the  Company's  common  stock.  One warrant to purchase  500,000
      shares can be exercised at predetermined prices increasing from $15 to $35
      over the four-year warrant term. The remaining warrant to purchase 500,000
      shares can be exercised at 85% of market price at the time of exercise.

      In connection  with a series of strategic and  financial  agreements  with
      THOMSON  dated  March 8, 1996,  the Company  granted  THOMSON a warrant to
      purchase 2,000,000 shares of the Company's Common Stock as follows:  up to
      1,000,000 shares at $7.50 per share on or prior to February 1, 1998 and up
      to the  balance of the shares at $10.00 per share on or prior to  February
      1, 1999.  The total  number of shares  purchasable  by  THOMSON  under the
      warrant is limited to 19.6% of the Company's issued and outstanding Common
      Stock.


                                      F-19
<PAGE>

17.   STOCK OPTIONS

      In November 1994, the Company amended the 1989 Stock Incentive  Program to
      increase the number of shares  reserved for stock  options from  2,666,667
      shares to  3,866,667  shares.  In May 1995,  the Company  amended the 1989
      Stock  Incentive  Program to increase  the number of shares  reserved  for
      stock options from 3,866,667  shares to 4,766,667  shares.  The 1989 Stock
      Incentive Program provides for two forms of option agreements:

      o     The  incentive  stock  option  plan is  intended  to  qualify  as an
            "incentive  stock  option" plan as defined in Section  422(A) of the
            Internal  Revenue  Code of 1986 and  provides  for the  granting  of
            options to  purchase  shares of the  Company's  Common  Stock to key
            officers and employees.

      o     The nonstatutory stock plan is not intended to be a qualified option
            plan and provides for the granting of options to purchase  shares of
            the Company's Common Stock to employees and consultants.

      Stock options become exercisable pursuant to individual written agreements
      between the Company and participants in the plans. Generally, the exercise
      price  is the  estimated  fair  market  value  at the  date of the  grant.
      Generally,  employee  stock  options  vest ratably over 48 months from the
      date of grant.  Unexercised options expire five to ten years from the date
      of the grant.


                                      F-20
<PAGE>

<TABLE>

      A summary of the options  outstanding in the Company's  stock option plans
follows:

<CAPTION>
                                                                                                 Weighted
                                                                                                  Average
                                                                                                 Exercise
                                                          Share                                    Price
                               --------------------------------------------------------        ------------
                                 Incentive            Nonstatutory             Total

<S>                              <C>                     <C>                 <C>                  <C>      
Balance at July 1, 1993          1,284,335               502,732             1,787,067            $ 2.78
                                                                                                  
Granted                            364,668               200,000               564,668            $18.83 
Exercised                         (459,827)             (129,334)             (589,161)           $ 1.31 
Canceled                            (4,860)               (5,833)              (10,693)           $19.64 
                                 ---------            ----------            ----------            

Balance at June 30, 1994         1,184,316               567,565             1,751,881            $ 8.35

Granted                            232,533               200,000               432,533            $11.91
Exercised                         (192,038)              (73,000)             (265,038)           $ 2.02
Canceled                          (195,231)              (47,499)             (242,730)           $18.71
                                 ---------            ----------            ----------

Balance at December 31, 1994     1,029,580               647,066             1,676,646            $ 9.10

Granted                          1,169,783                90,000             1,259,783            $ 5.67
Exercised                         (177,929)              (41,000)             (218,929)           $ 3.05
Canceled                          (216,805)             (116,733)             (333,538)           $11.85
                                 ---------            ----------            ----------

Balance at December 31, 1995     1,804,629               579,333             2,383,962            $ 6.66

Granted                            613,797               197,500               811,297            $ 6.84
Exercised                         (200,669)             (108,667)             (309,336)           $ 2.61
Canceled                          (441,242)             (100,000)             (541,242)           $10.55
                                 ---------            ----------            ----------

Balance at December 31, 1996     1,776,515               568,166             2,344,681            $ 6.85
                                 =========            ==========            ==========
</TABLE>


      In January 1996, the Company  repriced the exercise price of approximately
      300,000 options  (originally  granted from $15.00 to $3.75) to $3.50. As a
      result, the Company incurred $752,000 in compensation expense in 1996 (see
      Note 1) and  expects  to incur an  additional  $214,000  and  $107,000  in
      compensation expense in 1997 and 1998, respectively.

      At December 31, 1996, there were 993,872 shares available for the granting
      of  additional  options.  There were  1,277,632,  1,061,392,  981,139  and
      965,875 shares  exercisable at December 31, 1996,  1995, 1994 and June 30,
      1994, respectively, at a weighted average price of $7.30, $7.45, $7.95 and
      $5.09, respectively.


                                      F-21
<PAGE>

<TABLE>
      The  following  table  summarizes  information  about fixed stock  options
      outstanding at December 31, 1996:

<CAPTION>
                                      Outstanding                               Exercisable
                  ---------------------------------------------------- ------------------------------
                       Number            Weighted          Weighted       Number of       Weighted
    Range of       Outstanding at         Average          Average     Exercisable at      Average
    Exercise        December 31,      Remaining Life       Exercise     December 31,      Exercise
     Prices             1996            (in years)          Price           1996            Price
----------------- ----------------- -------------------- ------------- ----------------  ------------
<S>                   <C>                  <C>               <C>          <C>              <C>   
$2.75-$5.00             713,935            1.7                $3.43         443,212         $3.43
$5.01-$10.00          1,383,663            2.5                $7.02         599,525         $7.02
$10.01-$15.00           182,083             0                $12.29         173,333        $12.29
$15.01-$22.25            65,000             0                $22.25          61,562        $22.25
                      ----------                                          ---------
                                                                          
                      2,344,681                                           1,277,632
                      ==========                                          =========
                                                                          
                                                                      
</TABLE>


18.   SFAS NO. 123 PRO FORMA DISCLOSURES

      The  Company  applies  APB 25 in  accounting  for its stock  options.  Had
      compensation  cost  been  determined  consistent  with SFAS No.  123,  the
      Company's  net loss and net loss per share would have been  changed to the
      pro forma amounts indicated below:

                                                  Year Ended December 31,
                                                   1996            1995
                                                ----------     -----------

      Net loss (in thousands)
        As reported                            $  (25,049)     $  (31,780)
        Pro forma                                 (26,561)        (32,730)
      Primary net loss per share
        As reported                            $    (1.01)     $    (1.50)
        Pro forma                                   (1.07)          (1.55)


      The  weighted-average  grant date fair value of options granted during the
      year was $4.52 in 1996  ($4.44 for  options  granted  at market  price and
      $4.95 for options  granted at less than  market  price) and $4.36 in 1995.
      The weighted  average  exercise price of options granted in 1996 was $6.84
      for options  granted at market price and $3.50 for options granted at less
      than market price.


                                      F-22
<PAGE>

      The fair value of each  option  grant was  estimated  on the date of grant
      using  the   Black-Scholes   option   pricing  model  with  the  following
      weighted-average assumptions:
                                                       Year Ended December 31,
                                                          1996         1995
                                                       ---------    ----------

      Dividend Yield                                        0%          0%

      Volatility                                           95%         95%

      Risk free interest                                  5.7%        6.9%

      Expected terms (years)                              2.5         4


      The expected term  assumption in 1996 is lower than the vesting period due
      to the effect of repricing  existing options (see Note 17). This repricing
      of existing options has been included in the Black-Scholes  option pricing
      model.  The  incremental  fair value of the options between the fair value
      after and before the  repricing  has been  included  in the 1996 pro forma
      calculations above.

      The impact of outstanding unvested stock options granted prior to 1995 has
      been excluded from the pro forma calculations.  Accordingly,  the 1996 and
      1995 pro forma  adjustments  are not indicative of future period pro forma
      adjustments,  when the  calculation  will  apply to all  applicable  stock
      options.

19.   EMPLOYEE STOCK PURCHASE PLAN

      In May 1993 the Company's  Employee  Stock  Purchase  Plan (the  "Purchase
      Plan") was adopted by the Board of Directors and approved by the Company's
      shareholders.  The Purchase  Plan is intended to qualify under Section 423
      of the Internal Revenue Code of 1986, as amended. The Purchase Plan allows
      eligible  employees to purchase  Common Stock at not less than 85% of fair
      market value through payroll deductions not to exceed 15% of an employee's
      compensation  and not to exceed  $25,000 of stock in any calendar  year. A
      total of 100,000  shares of Common Stock are  reserved for issuance  under
      the Purchase  Plan.  During the twelve months ended  December 31, 1996 and
      1995,  the six months ended  December 31, 1994 and the twelve months ended
      June 30, 1994,  employees of the Company purchased 11,617 shares of Common
      Stock for  $61,000,  20,635  shares of Common  Stock for  $88,000,  17,250
      shares of Common Stock for $114,000 and 15,219  shares of Common Stock for
      $183,000, respectively, under the Purchase Plan.

20.   401(k) PLAN

      The Company  maintains a salary deferral 401(k) plan (the "Plan") covering
      all employees who have met certain eligibility requirements. Employees may
      elect to contribute up to 20% of their eligible  compensation to the Plan,
      not to exceed the dollar  limit set by law.  Under the Plan,  the  Company
      may, at its  discretion,  make  matching  contributions  to the Plan.  The
      Company has not made any  contributions  to the Plan through  December 31,
      1996.


                                      F-23
<PAGE>

21.   LEASES

      The Company leases office space under  operating  leases which are subject
      to certain rent  escalations and include renewal  provisions at the option
      of the Company.

      Future  minimum  payments under  operating  leases as of December 31, 1996
      were as follows:

      Years ended December 31 (in thousands):
         1997                                                        $812
         1998                                                         815
         1999                                                         824
         2000                                                         608
         2001                                                         526
       Thereafter                                                     658
                                                                   ------

       Total                                                       $4,243
                                                                   ======


      Rental  expense was  $754,000,  $644,000,  $330,000  and  $486,000 for the
      twelve  months  ended  December  31, 1996 and 1995,  the six months  ended
      December 31, 1994 and the twelve months ended June 30, 1994, respectively.

22.   MARCH 1996 AGREEMENTS WITH THOMSON

      On March 8, 1996, the Company and THOMSON  finalized  agreements to form a
      long-term strategic  relationship to aggressively  incorporate and promote
      StarSight  technology  and related  services in selected  THOMSON  product
      lines. The key terms and conditions of these agreements follow:

      o     The Company sold 3,333,333  shares of its Common Stock to THOMSON at
            $7.50 per share or $25,000,000 in total.

      o     The Company granted THOMSON a warrant to purchase  2,000,000  shares
            of the Company's Common Stock as follows:  up to 1,000,000 shares at
            $7.50  per  share  on or  prior to  February  1,  1998 and up to the
            balance of the shares at $10.00 per share on or prior to February 1,
            1999.  The total number of shares  purchasable  by THOMSON under the
            warrant is limited to 19.6% of the Company's  issued and outstanding
            Common Stock.

      o     THOMSON will put StarSight  capability into a significant portion of
            THOMSON's suitable consumer electronic products over the life of the
            ten year agreement.

      o     The  Company  will  pay  THOMSON  a  per   subscriber  fee  for  new
            subscribers using a THOMSON  StarSight-capable  product.  Fees under
            this  agreement are limited to certain annual  maximums  through the
            year 2000.

      o     The Company will pay THOMSON a percentage of all  subscription  fees
            derived from  THOMSON  StarSight-capable  products.  Fees under this
            agreement begin after the  achievement of an agreed-upon  minimum of
            THOMSON  StarSight-capable  products  manufactured  or  procured  by
            THOMSON.  In addition,  the Company will pay THOMSON a percentage of
            all revenues related to consumer electronics products whether or not
            the subscriber is using a THOMSON  StarSight-capable  product.  Such
            fees  under  this  agreement  begin  after  the  achievement  of  an
            agreed-upon   

                                      F-24
<PAGE>

            minimum  of  THOMSON  StarSight-capable   products  manufactured  or
            procured by THOMSON. This agreement expires in 2010.

      o     The  Company  and  THOMSON  each  agree  to  contribute  significant
            specific dollar  advertising  commitments in each year 1997 and 1998
            for advertising and promotion of THOMSON StarSight-capable products.

      The Company believes that as a result of significant  changing  conditions
      in the marketplace,  including  increased competition,  certain aspects of
      these strategic business agreements with THOMSON, such as THOMSON's volume
      commitments and the Company's  technology  transfer  commitments,  will be
      renegotiated  in the near  term as soon as  market  conditions  have  been
      clarified.


 



                                     ******





                                      F-25