<PAGE>

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

                                  FORM 10-Q

            (Mark One)

            (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF THE SECURITIES EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 1999

                                       or

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

                For the transition period from ______to______

                Commission File Number 0-23107
                                       -------

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

                DELAWARE                               77-0444978
     (State or other jurisdiction of                 (I.R.S. employer
     incorporation or organization)                  identification number)

                     750 PALOMAR AVENUE, SUNNYVALE, CA 94086
          (Address of Principal Executive Offices, including zip code)

                                  (408) 735-1492
             (Registrant's telephone number, including area code)



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   .
                                                     ---    ---

As of November  11,  1999,  there were  12,310,556  shares of Common  Stock
($.001 par value per share) outstanding.

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<PAGE>

TABLE OF CONTENTS

<TABLE>
<S>                                                                                                                   <C>
PART I         FINANCIAL INFORMATION.................................................................................. 1

     ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)....................................................................... 1

     CONDENSED CONSOLIDATED BALANCE SHEETS............................................................................ 1

     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS.................................................................. 2

     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................. 3

     NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............................................................. 4

     ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 7

     ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..............................................13

PART II.       OTHER INFORMATION......................................................................................14

     ITEM 1.   LEGAL PROCEEDINGS......................................................................................14

     ITEM 2.   CHANGES IN SECURITIES..................................................................................14

     ITEM 3.   DEFAULTS UPON SENIOR SECURITIES........................................................................14

     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................14

     ITEM 5.   OTHER INFORMATION......................................................................................14

     ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.......................................................................14

     SIGNATURES.......................................................................................................14
</TABLE>

<PAGE>

PART I    FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                          FAROUDJA, INC.
             CONDENSED CONSOLIDATED BALANCE SHEETS
            (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              September 30,             December 31,
                                                                  1999                      1998
                                                              (Unaudited)                  (Note)
                                                           -----------------          ---------------
<S>                                                        <C>                        <C>
Assets
Current assets:
  Cash, cash equivalents                                            $19,063                  $20,419
  Accounts receivable, net                                            3,036                    1,764
  Inventories                                                         2,826                    3,348
  Income taxes receivable                                                 -                      738
  Prepaid expenses and other current assets                             341                      441
                                                           -----------------          ---------------
Total current assets                                                 25,266                   26,710

Property and equipment, net                                           1,291                    1,778
Investment                                                            2,925                        -
Other assets                                                            194                      233
                                                           -----------------          ---------------
Total assets                                                        $29,676                  $28,721
                                                           =================          ===============

Liabilities and stockholders' equity
Current liabilities:
  Accounts payable                                                     $662                   $1,125
  Accrued compensation and benefits                                     394                      587
  Income tax payable                                                    559                        -
  Other current liabilities                                           1,026                      511
  Deferred revenue                                                    2,425                        -
                                                           -----------------          ---------------
Total current liabilities                                             5,066                    2,223

Commitments
Stockholders' equity
  Preferred Stock, par value $0.001 per share:
    Authorized - 5,000 shares; none issued and
    outstanding                                                            -                       -
  Common Stock, par value $0.001 per share:
    Authorized - 50,000 shares;
    Issued and outstanding - 12,311 shares at
    September 30, 1999 and 12,205 shares at
    December 31, 1998                                                     12                      12
  Additional paid-in capital                                          30,279                  30,027
  Deferred compensation                                                 (137)                   (173)
  Retained earnings (accumulated deficit)                             (5,544)                 (3,368)
                                                           -----------------          ---------------
Total stockholders' equity                                            24,610                  26,498
                                                            -----------------         ---------------
Total liabilities and stockholders' equity                           $29,676                 $28,721
                                                            =================         ===============
</TABLE>

Note - The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.


                                      1
<PAGE>

                                FAROUDJA, INC.
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                     Three Months Ended                          Nine Months Ended
                                                         September 30,                              September 30,
                                                  1999                  1998                  1999                1998
                                            ----------------       -------------          ------------       -------------
<S>                                         <C>                    <C>                    <C>                <C>
Revenues:
  Product sales                                      $3,856              $3,005                $9,599              $8,966
  License and royalty revenues                            -                   -                     -                 750
                                            ----------------       -------------          ------------       -------------
Total revenues                                        3,856               3,005                 9,599               9,716
Cost of product sales                                 1,474               1,643                 4,597               4,160
                                            ----------------       -------------          ------------       -------------
Gross profit                                          2,382               1,362                 5,002               5,556

Operating expenses:
  Research and development                            1,022               1,338                 3,158               3,826
  Sales and marketing                                   888               1,051                 2,689               2,853
  General and administrative                            679               1,083                 2,011               2,780
                                            ----------------       -------------          ------------       -------------
  Total operating expenses                            2,589               3,472                 7,858               9,459
                                            ----------------       -------------          ------------       -------------

Operating loss                                         (207)             (2,110)               (2,856)             (3,903)

Other income (expense), net                             230                 289                   680                 879
                                            ----------------       -------------          ------------       -------------
Income (loss) before benefit from
    income taxes                                         23              (1,821)               (2,176)             (3,024)
Benefit from income taxes                                 -                   -                     -                 457
                                            ----------------       -------------          ------------       -------------
Net income (loss)                                       $23             $(1,821)              $(2,176)            $(2,567)
                                            ================       =============          ============       =============


Per share data:
  Net income (loss) per share
      Basic                                           $0.00              $(0.15)               $(0.18)             $(0.21)
      Diluted                                         $0.00              $(0.15)               $(0.18)             $(0.21)
  Shares used in per share
  computation
      Basic                                          12,291              12,173                12,253              12,126
      Diluted                                        12,509              12,173                12,253              12,126
</TABLE>

See notes to condensed consolidated financial statements.


                                      2

<PAGE>

                                FAROUDJA, INC.
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                (In thousands)

<TABLE>
<CAPTION>
                                                                   Nine Months Ended September 30,
                                                                   1999                      1998
                                                               --------------            --------------
<S>                                                            <C>                       <C>
Cash Flows from Operating Activities:
Net loss                                                           $  (2,176)               $   (2,567)
Adjustment to reconcile net loss to net cash
    used in operating activities:
  Depreciation and amortization                                          639                       619
  Amortization of deferred compensation                                   36                        51

Changes in operating assets and liabilities:
  Accounts receivable                                                 (1,272)                      723
  Inventories                                                            522                      (502)
  Income tax receivable                                                  738                         -
  Prepaid expenses and other current assets                               89                       237
  Accounts payable                                                      (463)                     (259)
  Accrued compensation and benefits                                     (193)                     (156)
  Income tax payable                                                     559                      (671)
  Other accrued liabilities                                              515                      (210)
                                                               --------------            --------------
Net cash used in operating activities                                 (1,006)                   (2,735)

Cash Flows from Investing Activities
  Purchases of equipment                                                (102)                     (417)
  Maturities of short-term investments                                     -                       277
  Investments                                                           (500)                        -
                                                               --------------            --------------
Net cash used in investing activities                                   (602)                     (140)

Cash Flows from Financing Activities:
  Issuance of Common Stock                                               252                       551
                                                               --------------            --------------
Net cash provided by financing activities                                252                       551

Decrease in cash and cash equivalents                                 (1,356)                   (2,324)
Cash and cash equivalents at beginning of period                      20,419                    23,272
                                                               --------------            --------------
Cash and cash equivalents at end of period                         $  19,063                $   20,948
                                                               ==============            ==============

Supplemental disclosures of noncash financing activities
License of company technology                                      $   2,425                $        -
                                                               ==============            ==============
</TABLE>

See notes to condensed consolidated financial statements.


                                      3
<PAGE>

                             FAROUDJA, INC.
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                           SEPTEMBER 30, 1999

NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
         ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. For further information,
reference is made to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998 and other filings by the Company with the Securities and Exchange
Commission.

NOTE B - INVENTORIES

Raw materials, work-in-process and finished goods inventories are stated at the
lower of standard cost (which approximates actual cost) or market value. The
components of inventory consist of the following (in thousands):

<TABLE>
<CAPTION>
                           September 30,        December 31,
                               1999                 1998
                          ----------------    ----------------
<S>                       <C>                 <C>
Raw materials                  $  935              $1,072
Work-in-process                   866               1,048
Finished goods                  1,025               1,228
                          ----------------    ----------------
                               $2,826              $3,348
                          ================    ================
</TABLE>


                                      4
<PAGE>

NOTE C - NET INCOME (LOSS) PER SHARE

Basic net income per share is computed using the weighted average number of
shares of Common Stock outstanding during the period. Diluted net income per
share also gives effect to the dilutive effect of stock options and warrants
(using the treasury stock method). Options and warrants to purchase 1,399,726
and 2,121,711 shares of the Company's common stock would have been anti-dilutive
for the three and nine month periods ended September 30, 1999, respectively, and
were, therefore, excluded from the diluted calculation in those periods.

NOTE D - INCOME TAXES

The Company did not recognize an income tax benefit on its pre-tax loss for the
nine months ended September 30, 1999 due to the uncertainties related to the
utilization of the resulting net operating loss. FAS 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based on the weight of available evidence, the Company has provided a
full valuation allowance against its deferred tax assets. The Company will
continue to evaluate the realization of the deferred tax assets on a quarterly
basis.

NOTE E - SIGNIFICANT CUSTOMERS

Total revenues from two customers accounted for 12% and 16% of revenues for the
nine months ended September 30, 1999 and 1998, respectively. One of the two
customers was the same in both periods. Additionally, royalty revenues from S3
Incorporated ("S3") represented 8% of revenues in the first nine months of 1998.
There were no revenues from S3 for the first nine months of 1999.

NOTE F - COMPREHENSIVE INCOME

Comprehensive loss approximated net loss for the three and nine month periods
ended September 30, 1999.

NOTE G - LICENSE AGREEMENT

On July 27, 1999, the Company entered into a joint development and license
agreement with Sage, Inc. ("Sage") pursuant to which the Company licensed
certain video processing and image enhancement technologies to Sage for
incorporation into Sage chips. The Company and Sage concurrently entered into
a stock purchase agreement. In exchange for the license and a $500,000 cash
payment, Faroudja received 375,000 shares of Sage common stock, which shares
were determined to have a fair value of $7.80 per share on the transaction
date. The Company may not sell its Sage shares until October 2000. On
November 11, 1999 Sage completed the initial public offering of its common
stock. The closing price of the stock on that date was $21.75 per share. The
value attributed to the license was included in deferred revenue because the
Company has certain delivery and performance obligations that had not been
completed by September 30, 1999. The


                                      5
<PAGE>

Company is entitled to receive royalties on sales of future Sage products
incorporating the Company's technology.

NOTE H - SUBSEQUENT EVENTS

On October 4, 1999 the Company entered into a letter of intent for the merger
of FOCUS Enhancements, Inc. ("FOCUS") into the Company.

On November 11, the companies mutually agreed to terminate their merger
discussions.


                                      6
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 CONCERNING THE COMPANY'S
PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE COMPANY'S
PLANS AND STRATEGIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON CURRENT
EXPECTATIONS. THE COMPANY'S ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS COULD
DIFFER MATERIALLY FROM THE DESCRIPTIONS IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH BELOW. PLEASE REFER TO THE
COMPANY'S SEC REPORTS, INCLUDING THE COMPANY'S REPORT ON FORM 10-Q FOR THE
QUARTERS ENDED MARCH 31, 1999 AND JUNE 30, 1999, THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND OTHER SEC FILINGS. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE.

RESULTS OF OPERATIONS

The following table sets forth certain items from the Company's consolidated
statements of income expressed as a percentage of total revenues for the periods
indicated.

<TABLE>
<CAPTION>
                                                        Three Months Ended
                                             September 30,               September 30,
                                                 1999                        1998
                                                 ----                        ----
<S>                                        <C>                         <C>
Revenues:
  Product sales                                       100%                        100%
  License and royalty revenues                          -                           -
                                           ----------------            ----------------
Total revenues                                        100                         100
Cost of product sales                                  38                          55
                                           ----------------            ----------------
Gross profit                                           62                          45

Operating expenses:
  Research and development                             26                          45
  Sales and marketing                                  23                          35
  General and administrative                           18                          36
                                           ----------------            ----------------
  Total operating expenses                             67                         116
                                           ----------------            ----------------

Operating loss                                         (5)                        (71)

Other income (expense), net                             6                          10
                                           ----------------            ----------------
Income (loss) before provision for
    income taxes                                        1                         (61)
Benefit from income taxes                               -                           -
                                           ----------------            ----------------
Net income (loss)                                       1%                        (61)%
                                           ================            ================
</TABLE>


                                      7
<PAGE>

Total revenues for the third quarter of 1999 were approximately $3.9 million, an
increase of approximately 28%, from total revenues of approximately $3.0 million
for the third quarter of 1998. The increase in revenue was primarily
attributable to three factors: higher sales of the line multiplier products
introduced in the second quarter of 1999, increase in demand for the Digital
Format Translator Broadcast products to support TV stations' roll out of digital
TV services, and continuing sales of Application Specific Integrated Circuit
("ASIC") products. Revenues for the first nine months of 1999 decreased by
approximately $117,000 or 1% from the first nine months of 1998. The shortfall
resulted from lower sales of the line multipliers in the first six months of
this year and the absence of royalties, offset by higher sales of ASICs and a
significant increase in sales of Broadcast products.

Both units shipped and revenues from line multiplier products for the third
quarter of 1999 represented a significant increase over the second quarter of
1999. The Company expects sales of line multiplier products to remain at the
third quarter level or decrease slightly in the fourth quarter of 1999.

Broadcast sales of Digital Format Translator(TM) products increased
significantly in the third quarter of 1999 over the third quarter of 1998 and
over the second quarter of 1999. This resulted in part from Federal
Communication Commission rules requiring the major TV stations in the top 30
television markets to begin broadcasting digital TV by November 1, 1999. The
Company anticipates that sales of Broadcast products will decrease slightly in
the fourth quarter of 1999 due to seasonality and the absence of regulatory
deadlines.

Sales of the Company's ASIC products rose in the third quarter of 1999 over the
third quarter of 1998 due to scheduled shipments of ASIC chip sets for use by a
customer in Asia. The Company continues its efforts to develop its ASIC
business, but it cannot predict when other significant ASIC sales will occur.

In July 1999, the Company signed a license agreement whereby certain of the
Company's intellectual property was licensed to Sage, Inc. for incorporation into
Sage's ASIC products. The agreement provides that the Company will receive
royalties on the sale of any ASICs containing the Company's intellectual
property. Shipments of these ASICs are not expected to begin until the second
half of 2000.

The Company continues to pursue other new licensing opportunities, but there can
be no assurance that the Company will enter into additional license agreements.

In summary, the Company anticipates that revenues from product sales in the
fourth quarter of 1999 will be slightly lower than revenues in the third quarter
of 1999.

Sales outside the United States accounted for approximately 20% of net product
sales for the third quarter of 1999 and 18% for the first nine months of 1999.
These percentages compare to 20% for the third quarter of 1998, and 21% for the
first nine months of 1998. The Company intends to pursue efforts to increase its
export sales in the future, however,


                                      8
<PAGE>

there can be no assurance that any growth in export sales will be achieved.
All sales are denominated in U.S. dollars. However, the Company's export
sales are subject to risk in the event of changes in currency exchange rates,
which may result in the Company's products being less price competitive.

The Company's gross margin as a percentage of net sales increased to 62% of
sales for the third quarter of 1999 from 45% for the third quarter of 1998. The
improvement resulted from increased sales of the line multiplier products
introduced in the second quarter of 1999, which had higher gross margins than
the products they replaced and from a significant increase in sales of Broadcast
products with attractive margins. The Company expects its gross margins to
remain at approximately the same level over the next quarter.

Research and development expenses in the third quarter of 1999 decreased by
approximately $0.3 million, or 24%, as compared to the same quarter of 1998 and
by approximately $0.7 million, or 17%, from the nine months of 1999 as compared
to the same period of 1998. The decrease is mostly due to a reduction in
consulting fees in the third quarter of 1999. The Company expects that research
and development expenses will increase in absolute dollars during the fourth
quarter of 1999.

Sales and marketing expenses in the third quarter of 1999 decreased by
approximately $0.2 million, or 16%, as compared to the same quarter of 1998.
Expenses for the nine months of 1999 were approximately $0.2 million, or 6%,
less than expenses for the first nine months of 1998. The Company believes that
in absolute dollar terms, expenses for sales and marketing will remain at
approximately the same level for the fourth quarter of 1999.

General and administrative expenses in the third quarter of 1999 decreased by
approximately $0.4 million or 37%, as compared to the same quarter of 1998.
Expenses for the first nine months of 1999 decreased by approximately $0.8
million, or 28%, from expenses for the same period of 1998. The decrease was due
to the absence of non-recurring charges incurred in the third quarter of 1998
related to management changes. The Company believes that in absolute dollar
terms, general and administrative expenses will increase for the fourth quarter
of 1999.

Net interest and other income was $0.2 million in the third quarter of 1999,
down from the $0.3 million recorded in the third quarter of 1998. Net interest
and other income for the nine months of 1999 was approximately $0.2 million, or
23%, lower than in the same period of 1998. This decrease in interest income is
due to lower period over period cash, cash equivalents and short-term investment
balances. The original source of these cash and investment balances include the
$15.6 million net proceeds from the Company's initial public offering completed
in October 1997, and the $5 million investment in the Company by S3 in June
1997.

The Company did not book any tax  provisions in the third quarter of 1999 due
to the expected loss position for the full year of 1999.


                                      9
<PAGE>

FACTORS AFFECTING FUTURE OPERATING RESULTS

The Company designs and develops products that dramatically improve video image
quality, producing cinema quality images on a wide variety of displays. The
Company is recognized as a world leader in innovative high performance video
processing technologies for markets requiring superior image quality solutions.
These markets currently include HDTV broadcast and large screen home theater,
and are starting to expand into markets being created by new video display
devices such as digital televisions and flat panel displays, and markets
resulting from new applications such as PC/TV convergence. Due to the relative
size of the customers in some of these markets, particularly the broadcast and
PC/TV convergence markets, sales in any one market could fluctuate dramatically
on a quarter to quarter basis.

The Company's operating results have varied in the past and are likely to vary
significantly in the future from period to period as a result of a number of
factors, including the volume and timing of orders received during the period,
the amount and timing of license and royalty revenues, competitive products and
technologies, the timing of new product introductions by the Company and its
competitors, demand for, and market acceptance of, the Company's products,
product line maturation, the impact of price competition on the Company's
average selling prices, delays encountered by the Company's strategic partners,
the availability and pricing of components for the Company's products, changes
in product or distribution channel mix and product returns or price protection
charges from customers. Many of these factors are beyond the Company's control.
In addition, due to the short product life cycles that characterize the markets
for the Company's products, the Company's failure to introduce new, competitive
products consistently and in a timely manner, could materially adversely affect
operating results for one or more product cycles. The Company introduced its new
family of Digital Format Translators in April 1998. There is no assurance as to
the eventual demand for this product, the size of the digital broadcast market,
or that the digital broadcast market will develop in the timeframe currently
mandated by the Federal Communications Commission.

The Company expects that a significant portion of its annual revenues and
profits in the future will depend on strategic relationships. The Company
depends on companies like Vidikron of America, Inc. ("Vidikron") to buy, and In
Focus Systems, Inc. to manufacture, products which incorporate the Company's
technology and a failure by these companies to do so will adversely affect the
Company's total revenues in the future. Vidikron has recently undergone a change
in control and has experienced financial difficulties. The Company does not know
what effect, if any, this will have on sales to Vidikron, which represented
approximately 5% and 7%, respectively of sales for the three and nine months
ended September 30, 1999.

The Company received quarterly prepaid license fees from S3 to maintain
exclusivity under its license agreement with the Company through March 31, 1998.
No prepayments have been or will be made by S3 with respect to any periods after
March 31, 1998. There can be no assurance as to the amount of royalties, if any,
the Company will receive in the future as the Company does not have any other
license agreements in effect pursuant to which it is currently receiving
substantial royalties.


                                      10
<PAGE>

The Company's success depends in part on its ability to enhance existing
products and introduce new high technology products. The Company must also bring
its products to market at competitive price levels. Unexpected changes in
technical standards, customer demand, pricing of competitive products and
bundling of competitive products as a part of a larger system sale (which is
increasingly common in the home theater and broadcast businesses) could
adversely affect the Company's operating results if the Company is unable to
effectively and timely respond to such changes. The industry is also dependent
to a large extent on proprietary intellectual property rights. From time to time
the Company is subject to legal proceedings and claims in the ordinary course of
business, including claims of alleged infringement of patents, trademarks and
other intellectual property rights. Consequently, from time to time, the Company
will be required to prosecute or defend against alleged infringements of such
rights.

The Company intends to increase both engineering and sales and marketing efforts
in the design, development and sale of board and chip level products while
continuing the sale of stand-alone products for the high-end home theater,
industrial and broadcast markets. Consequently, without a corresponding increase
in revenues, net income will be adversely impacted.

The Company's success also depends to a significant extent upon the
contributions of key executive, sales, marketing, engineering, manufacturing,
and administrative employees, and on the Company's ability to attract and retain
highly qualified personnel, who are in great demand. Unless personnel vacancies
are promptly filled, the loss of current key employees or the Company's
inability to attract and retain other qualified employees in the future could
have a material adverse effect on the Company's business, financial condition
and results of operations. The agreement pursuant to which Yves C. Faroudja, the
Company's founder, Chief Technical Officer and Co-Chairman, served as an advisor
to the Company, ended on June 30, 1999. The Company does not know how much time
Mr. Faroudja will continue to devote to the Company's affairs in the future.

YEAR 2000

Certain computers, software and equipment with embedded computing capability
recognize only the last two, rather than all four digits of the year in any
date. As a result they may fail to recognize and properly process date
information or otherwise malfunction unless they are reprogrammed or replaced at
the turn of the century (the "Year 2000 Problem"). The Company is dependent upon
computers, software and equipment with embedded computing capability for all
phases of its operations including production, distribution and accounting. The
Company has developed a plan to determine the impact of the Year 2000 Problem on
its operations. This plan covers an assessment of internal and external Year
2000 Problems, formal contacts with the Company's significant suppliers,
customers, financial organizations, service providers and others to determine
their Year 2000 readiness, remediation of problems where found, and a
contingency plan for problems which cannot be solved on a timely or
cost-effective basis.

The Company has completed an assessment of the products it designs, manufactures
and distributes and believes that the performance and functionality of such
products will not be affected by Year 2000 Problems.


                                      11
<PAGE>

With regard to internal risks associated with Year 2000 Problems, the Company
recently completed a major upgrade of its main business computer systems, which
replaced a majority of its existing systems. The system selected was represented
to be Year 2000 compliant and is expected to eliminate most of the Company's
internal Year 2000 Problems. The Company has tested its main operations computer
system and the system passed this initial Year 2000 test. The Company will
continue testing other internal systems, including engineering workstations and
desktop computers, for Year 2000 compliance. The Company intends to address any
problems identified immediately and to replace any deficient element of its
systems that cannot be made Year 2000 compliant by other means. The Company
believes that any significant Year 2000 Problems will be solved by the end of
the fourth quarter of 1999. The Company has developed a contingency plan for its
operations activities that involves a full detail paper backup for its
production, purchase order and inventory requirements for the first six months
of the year 2000. While it is not presently possible to precisely quantify the
overall cost of this work, the Company does not believe that the cost of
addressing the Year 2000 Problem, as it relates to the Company's internal
systems, will have a material adverse effect on the Company's financial
position, liquidity or results of operations. The Company has incurred total
costs to date of approximately $80,000 to address Year 2000 Problems and expects
that such costs will not exceed an additional $20,000 for the remainder of 1999.

In addition to the Company's own systems and equipment, the Company relies,
directly and indirectly, on the systems and equipment of its suppliers,
distributors, customers, creditors, financial organizations, utility companies,
telecommunication service companies and other service providers. Some of these
third parties may have Year 2000 Problems outside of the Company's control that
could adversely affect the Company.

There can be no assurance that the Company will identify all of its Year 2000
Problems, resolve its internal Year 2000 Problems on a timely or cost-effective
basis, or be successful in avoiding the impact of business disruptions which may
be experienced by the Company's suppliers, service providers and other third
parties as a result of Year 2000 Problems. Failure by the Company or third
parties doing business with the Company to identify and resolve Year 2000
problems on a timely basis could have a material adverse effect on the Company's
financial position, liquidity or results of operations.

In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including competition
in the markets for the Company's products, delays in new product introductions
by the Company, market acceptance of new products such as the Digital Format
Translator, changes in product pricing, the status of strategic relationships,
material costs or customer discounts, the size and timing of customer orders,
dealer and end-user purchasing cycles, variations in the mix of product sales,
manufacturing delays or disruptions in sources of supply, economic conditions
and seasonal purchasing patterns specific to the broadcast, display, PC and home
theater industries, and risk associated with year 2000 Problems. The Company's
future operating results will depend, to a large extent, on its ability to
anticipate and successfully react to these and other factors.


                                      12
<PAGE>

Successfully addressing the factors discussed above, which are subject to
various risks discussed in this report, the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, and other SEC filings, as well as other
factors which generally affect the market for stocks of high technology
companies, will affect the price of the Company's stock and could cause such
stock price to fluctuate over relatively short periods of time.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999, the Company had approximately $19.1 million of cash and
cash equivalents, and working capital of approximately $20.2 million. Working
capital includes deferred revenues of $2.4 million from the license of the
Company's technology to Sage, Inc.("Sage"). The Company will recognize the
deferred revenue when all significant technology transfer and joint development
obligations under the Company's license and joint development agreement with
Sage are completed.

The cash and cash equivalents are predominantly held in three types of cash
investments. These investments are obligations issued by U.S. federal agencies,
money market funds which subject the Company to limited interest rate or credit
risk, and commercial paper of U.S. corporations with A1/P1 credit ratings.

Cash, cash equivalents and short-term investments at September 30, 1999 declined
by $1.4 million or 7% from the balances at December 31, 1998. The cash outflow
resulted from the operating loss, the $0.5 million investment in Sage common
stock and changes in the Company's working capital, including an increase in
Accounts Receivable of $1.3 million. During the first quarter of 1999 the
Company collected an income tax refund of approximately $1 million due to the
1998 carry-back operating losses.

The Company had a bank line of credit, which expired in April 1999. The Company
expects to renew the line of credit in the fourth quarter of 1999. Covenants
under the Company's line of credit required the Company to maintain certain
minimum levels of liquidity, net worth, and financial ratios. No borrowings were
made under the line of credit in either 1999 or 1998.

The Company believes that current cash and cash equivalents are sufficient to
fund its operations and meet anticipated capital requirements for at least the
next twelve months.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There has been no material change in the Company's market risk since December
31, 1998.

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<PAGE>

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None

ITEM 2.  CHANGES IN SECURITIES

         None.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

         27.1 Financial Data Schedule

         (b)  Reports on Form 8-K.

         The Company filed a report on Form 8-K on August 6, 1999
    incorporating by reference a press release issued by the Company on
    August 2, 1999, describing the Company's entry into license, joint
    development and equity purchase agreements with Sage, Inc.

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934,
    the registrant has duly caused this report to be signed on its behalf
    by the undersigned thereunto duly authorized.

    FAROUDJA, INC.
    (Registrant)

    By: /s/ Ita Geva
        -----------------------------
        Ita Geva, Acting Chief Financial Officer
        (Duly Authorized Officer and Principal Financial Officer)

    Date: November 15, 1999
          ------------------


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