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

                            ___________________

                                 FORM 10-Q

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

               For the Quarterly Period Ended June 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 No. 0-23596
                            ___________________

                         C-CUBE MICROSYSTEMS INC.
          (Exact name of registrant as specified in its charter)

               Delaware                       77-0192108
   (State or other jurisdiction of         (I.R.S. Employer
    incorporation or organization)          Identification No.)

                         1778 McCarthy Boulevard
                       Milpitas, California  95035
          (Address and zip code of principal executive offices)

Registrant's telephone number, including area code:    (408) 490-8000

Former name, former address and former fiscal year, if changed since last
year:     N/A

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.

                         [X]  Yes         [ ]  No

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

As of July 31, 1999, 39,938,533 shares of the registrant's Common Stock
were outstanding.

===============================================================================
<PAGE>
                          C-CUBE MICROSYSTEMS INC.

                             TABLE OF CONTENTS


                                                                          Page
Part I.  Financial Information

Item 1.   Financial Statements:
          Condensed Consolidated Balance Sheets
          June 30, 1999 and December 31, 1998.............................. 2

          Condensed Consolidated Statements of Income
          Quarters and six months ended June 30, 1999 and 1998............. 3

          Condensed Consolidated Statements of Cash Flows
          Six months ended June 30, 1999 and 1998.......................... 4

          Notes to Condensed Consolidated Financial Statements............. 5

Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations.............................  8

Item 3.   Quantitative and Qualitative Disclosures about Market Risk...... 17


Part II. Other Information

Item 1.   Legal Proceedings............................................... 18

Item 2.   Changes in Securities and Use of Proceeds....................... 18

Item 3.   Defaults Upon Senior Securities................................. 18

Item 4.   Submission of Matters to a Vote of Security Holders............. 18

Item 5.   Other Information............................................... 18

Item 6.   Exhibits and Reports on Form 8-K................................ 18

Signatures................................................................ 19


<PAGE>


                      PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

<TABLE>
<CAPTION>
                         C-CUBE MICROSYSTEMS INC.
                   CONDENSED CONSOLIDATED BALANCE SHEETS
                 (In thousands, except par value amounts)
                                (Unaudited)

                                                  JUNE 30,         DECEMBER 31,
                                                    1999              1998 (1)
                                                  ---------        -----------
<S>                                               <C>              <C>
                                       ASSETS
Current assets:
  Cash and equivalents                            $ 139,982         $ 108,224
  Short-term investments                             99,239            99,603
  Accounts receivable - net                          65,679            36,980
  Inventories                                        12,014            16,073
  Deferred income taxes                              10,356            11,170
  Other current assets                               20,612            19,977
                                                  ---------         ---------
          Total current assets                      347,882           292,027
Property and equipment - net                         30,751            29,622
Production capacity rights                            3,375            12,600
Distribution rights - net                             1,400             1,483
Purchased technology - net                            6,084             5,921
Other assets                                          1,309             1,518
                                                  ---------         ---------
          Total                                   $ 390,801         $ 343,171
                                                  =========         =========

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                $  25,534         $  19,942
  Accrued liabilities                                28,846            29,007
  Income taxes payable                               12,497            15,551
  Deferred contract revenue                           5,324             6,706
  Current portion of long-term obligations              366               355
                                                  ---------         ---------
          Total current liabilities                  72,567            71,561
Long-term obligations                                20,038            23,557
Deferred income taxes                                 4,535             4,650
                                                  ---------         ---------
          Total liabilities                          97,140            99,768
                                                  ---------         ---------
Minority interest in subsidiary                         261                28
Stockholders' equity:
  Common stock, $0.001 par value, 150,000
    shares authorized; shares outstanding:
    1999 - 39,668; 1998 - 38,261                    251,107           225,265
  Accumulated other comprehensive loss               (2,294)           (1,852)
  Retained earnings                                  44,587            19,962
                                                  ---------         ---------
          Total stockholders' equity                293,400           243,375
                                                  ---------         ---------
          Total                                   $ 390,801         $ 343,171
                                                  =========         =========
</TABLE>
_________

 (1)  Derived from the December 31, 1998 audited balance sheet included in
      the 1998 Annual Report on Form 10-K of C-Cube Microsystems Inc.

         See notes to condensed consolidated financial statements.

<PAGE>                               -2-

<TABLE>
<CAPTION>
                                   C-CUBE MICROSYSTEMS INC.
                         CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                           (In thousands, except per share amounts)
                                         (Unaudited)

                                       QUARTER ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                                      -----------------------     -------------------------
                                        1999           1998          1999          1998
                                      --------       --------     ---------     ---------
<S>                                   <C>            <C>          <C>           <C>
Net revenues                          $ 94,095       $ 82,518     $ 190,554     $ 169,835
                                      --------       --------     ---------     ---------
Costs and expenses:
  Cost of revenues                      41,852         36,997        85,737        78,011
  Research and development              20,661         18,596        40,565        36,267
  Selling, general and administrative   16,855         13,963        33,215        28,549
                                      --------       --------     ---------     ---------
     Total                              79,368         69,556       159,517       142,827
                                      --------       --------     ---------     ---------
Income from operations                  14,727         12,962        31,037        27,008
Other income, net                        2,310            638         4,427           911
                                      --------       --------     ---------     ---------
Income before income taxes, minority
  interest and extraordinary item       17,037         13,600        35,464        27,919
Income tax expense                       5,111          4,083        10,639         8,379
                                      --------       --------     ---------     ---------
Income before minority interest
  and extraordinary item                11,926          9,517        24,825        19,540
Minority interest in net income
  (loss) of subsidiary                     261            (28)          233          (169)
                                      --------       --------     ---------     ---------
Income before extraordinary item        11,665          9,545        24,592        19,709
Extraordinary gain on repurchase
  of convertible notes (net of tax)          -          1,138            33         1,138
                                      --------       --------     ---------     ---------
Net income                            $ 11,665       $ 10,683     $  24,625     $  20,847
                                      ========       ========     =========     =========
Basic earnings per share:
  Income before extraordinary item    $   0.30       $   0.26     $    0.63     $    0.53
  Extraordinary item (net of tax)            -           0.03             -          0.03
                                      --------       --------     ---------     ---------
  Net income                          $   0.30       $   0.29     $    0.63     $    0.56
                                      ========       ========     =========     =========

Diluted earnings per share:
  Income before extraordinary item    $   0.28       $   0.25     $    0.59     $    0.52
  Extraordinary item (net of  tax)           -           0.03             -          0.03
                                      --------       --------     ---------     ---------
  Net income                          $   0.28       $   0.28     $    0.59     $    0.54
                                      ========       ========     =========     =========
Shares:
  Basic                                 39,338         37,238        39,003        37,110
                                      ========       ========     =========     =========
  Diluted                               42,925         41,485        42,144        41,311
                                      ========       ========     =========     =========
</TABLE>

         See notes to condensed consolidated financial statements.

<PAGE>                               -3-

<TABLE>
<CAPTION>

                          C-CUBE MICROSYSTEMS INC.
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (In thousands)
                                (Unaudited)

                                                       SIX MONTHS ENDED JUNE 30,
                                                       -------------------------
                                                         1999           1998
                                                       ---------      ---------
<S>                                                    <C>            <C>
Cash flows from operating activities:
  Net income                                           $  24,625      $  20,847
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Extraordinary gain on repurchase of
       convertible notes, net of taxes                       (33)        (1,138)
     Minority interest in subsidiary                         233           (169)
     Depreciation and amortization                         8,971          8,528
     Deferred income taxes                                   699           (281)
     Changes in assets and liabilities:
        Receivables                                      (28,960)         6,489
        Inventories                                        3,939         (5,179)
        Other current assets                              (3,194)          (107)
        Accounts payable                                   5,901         12,559
        Accrued liabilities                                5,044            452
        Income taxes payable                              (3,077)         7,552
        Production capacity rights                        11,700              -
        Deferred revenue                                  (1,382)         1,287
                                                       ---------      ---------
  Net cash provided by operating activities               24,466         50,840
                                                       ---------      ---------
Cash flows from investing activities:
  Sales and maturities of short-term investments         129,288         24,646
  Purchases of short-term investments                   (127,617)        (5,408)
  Capital expenditures                                    (9,672)        (9,382)
  Other assets                                            (2,085)           241
                                                       ---------      ---------
  Net cash provided by (used in) investing activities    (10,086)        10,097
                                                       ---------      ---------
Cash flows from financing activities:
  Repayments of capital lease obligations                   (117)          (491)
  Sale of common stock                                    20,785          6,537
  Repurchase of convertible subordinated notes            (3,271)       (17,468)
                                                       ---------      ---------
  Net cash provided by (used in) financing activities     17,397        (11,422)
                                                       ---------      ---------
Exchange rate impact on cash and equivalents                 (19)           (51)
                                                       ---------      ---------
Net increase in cash and equivalents                      31,758         49,464
Cash and equivalents, beginning of period                108,224        145,034
                                                       ---------      ---------
Cash and equivalents, end of period                    $ 139,982      $ 194,498
                                                       =========      =========
</TABLE>

         See notes to condensed consolidated financial statements.


<PAGE>                               -4-

                           C-CUBE MICROSYSTEMS INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1. Basis of presentation

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

2. Inventories

     Inventories are stated at the lower of cost (first-in, first-out)
  or market. Cost is computed on a currently adjusted standard basis
  (which approximates actual cost on a current average or first-in, first-
  out basis). Inventories consist of:

                                JUNE 30,     DECEMBER 31,
                                  1999          1998
                                --------      --------
                                     (in thousands)

          Finished goods        $  4,906      $  3,566
          Work-in-process          5,202         6,281
          Raw materials            1,906         6,226
                                --------      --------
                    Total       $ 12,014      $ 16,073
                                ========      ========

3. Production capacity rights

     In the second quarter of 1996, the Company expanded and formalized its
  relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC")
  to provide additional wafer production capacity in the years 1996 to
  2001. The agreement with TSMC provided that TSMC would produce and ship
  wafers to C-Cube at specified prices and required C-Cube to make two
  advance payments totaling $49 million. An advance payment of $24.5
  million was made in June 1996. In May 1997, the Company amended its
  agreement with TSMC which resulted in a reduction of the Company's
  future wafer purchase commitments and the forgiveness of the second
  advance payment of $24.5 million. In January 1999, TSMC refunded $11.7
  million of the advance payment to the Company. TSMC will apply the
  remaining prepayment against a portion of the wafer cost as product is
  delivered to C-Cube. Accordingly, the prepaid amount, which has been
  allocated between current and long-term assets, will be amortized to
  inventory as wafers are received.

<PAGE>                               -5-

4. Earnings per share

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

<TABLE>
<CAPTION>
                                          QUARTER ENDED JUNE 30,  SIX MONTHS ENDED JUNE 30,
                                          ----------------------  -------------------------
                                             1999        1998         1999       1998
                                           --------    --------     --------   --------
 <S>                                       <C>         <C>          <C>        <C>
  Numerator:
   Income before extraordinary item        $ 11,665    $  9,545     $ 24,592   $ 19,709
   Extraordinary item                             -       1,138           33      1,138
                                           --------    --------     --------   --------
   Numerator for basic earnings per share    11,665      10,683       24,625     20,847
   Addback interest income after tax
     related to convertible shares              186         761          391      1,608
                                           --------    --------     --------   --------
   Numerator for diluted earnings
     per share                             $ 11,851    $ 11,444     $ 25,016   $ 22,455
                                           ========    ========     ========   ========

  Denominator:
   Weighted-average shares - denominator
     for basic earnings per share            39,338      37,238       39,003     37,110
   Convertible shares                           633       2,714          675      2,762
   Dilutive common stock equivalents,
     using treasury stock method              2,954       1,533        2,466      1,439
                                           --------    --------     --------   --------
   Denominator for diluted earnings
     per share                               42,925      41,485       42,144     41,311
                                           ========    ========     ========   ========

  Basic earnings per share                 $   0.30    $   0.29     $   0.63   $   0.56
                                           ========    ========     ========   ========
  Diluted earnings per share               $   0.28    $   0.28     $   0.59   $   0.54
                                           ========    ========     ========   ========

</TABLE>

5. Comprehensive income

     For the quarters ended June 30, 1999 and 1998, comprehensive
  income, which was comprised of the Company's net income for the periods,
  changes in accumulated translation adjustments and unrealized gains
  (losses) on investments, was $11.5 million and $10.7 million,
  respectively. For the six months ended June 30, 1999 and 1998,
  comprehensive income was $24.2 million and $20.9 million, respectively.

6. Extraordinary item

     During the first quarter of 1999, the Company repurchased
  $3.4 million of the face value of the Company's 5-7/8% Convertible
  Subordinated Notes (the "Notes") due 2005 at 95.5% of the principal
  amount, with related accrued interest to the date of repurchase, and
  recognized an extraordinary gain of approximately $33,000 (zero effect
  per diluted share), net of related income taxes of approximately
  $23,000. During the second quarter of 1998, the Company repurchased
  $20.7 million of the face value of the Notes at 88.4% of the principal
  amount, with related accrued interest to the date of repurchase, and
  recognized an extraordinary gain of $1.1 million, or $0.03 per diluted
  share, net of related income taxes of $0.8 million.

<PAGE>                               -6-

7. Segment information

     On December 31, 1998, the Company adopted Statement of Financial
  Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
  Enterprise and Related Information." Readers are referenced to "Item 8,
  Note 17. Segment Information" in the Company's most recent Annual Report
  on Form 10-K, filed with the Securities and Exchange Commission on March 23,
  1999, for further discussion.

  Segment information is as follows (in thousands):

<TABLE>
<CAPTION>
                                  QUARTER ENDED JUNE 30,  SIX MONTHS ENDED JUNE 30,
                                  ---------------------   ------------------------
                                    1999        1998          1999         1998
                                  --------    --------     ---------     ---------
 <S>                              <C>         <C>          <C>           <C>
  Revenues:
    Semiconductor                 $ 47,507    $ 49,010     $ 105,794     $ 105,833
    DiviCom                         46,588      33,508        84,760        64,002
                                  --------    --------     ---------     ---------
  Consolidated net revenues       $ 94,095    $ 82,518     $ 190,554     $ 169,835
                                  ========    ========     =========     =========
  Income from operations:
    Semiconductor                 $  6,653    $  7,859     $  18,619     $  18,348
    DiviCom                          8,074       5,103        12,418         8,660
                                  --------    --------     ---------     ---------
  Consolidated income from
    operations                    $ 14,727    $ 12,962     $  31,037     $  27,008
                                  ========    ========     =========     =========
</TABLE>

8. Recently issued accounting standards

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

<PAGE>                               -7-

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

   This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those projected
in the forward-looking statements as a result of certain factors, including
those set forth in this Item 2, those described elsewhere in this report
and those described in the Company's Form 10-K for the year ended December
31, 1998, other Form 10-Qs and other reports under the Securities Exchange
Act of 1934. Such forward-looking statements include, but are not limited
to, those statements marked with an asterisk (*) in this report. The
Company assumes no obligation to update any forward-looking statements.

QUARTER ENDED JUNE 30, 1999

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

<TABLE>
<CAPTION>
                                                  QUARTER ENDED JUNE 30,
                                                  ----------------------
                                                     1999        1998
                                                     -----       -----
    <S>                                             <C>         <C>
     Net revenues                                    100.0%      100.0%
                                                     -----       -----
     Costs and expenses:
       Cost of revenues                               44.5        44.8
       Research and development                       22.0        22.5
       Selling, general and administrative            17.9        16.9
                                                     -----       -----
               Total                                  84.3        84.3
                                                     -----       -----
     Income from operations                           15.7        15.7
     Other income, net                                 2.5         0.8
                                                     -----       -----
     Income before income taxes, minority
       interest and extraordinary item                18.1        16.5
     Income tax expense                                5.4         4.9
                                                     -----       -----
     Income before minority interest and
       extraordinary item                             12.7        11.5
     Minority interest in net income of subsidiary     0.3           -
                                                     -----       -----
     Income before extraordinary item                 12.4        11.6
     Extraordinary gain (net of tax)                     -         1.4
                                                     -----       -----
     Net income                                       12.4%       12.9%
                                                     =====       =====
</TABLE>

   NET REVENUES

   Net revenues in the second quarter of 1999 were $94.1 million, an
increase of 14.0% over the $82.5 million reported in the corresponding
quarter a year ago. This increase was led by growth in sales of DiviCom's
encoder products, attributable to design improvements and feature and
quality enhancements on next generation products, as well as significant
growth in DiviCom's international markets. The growth in revenues from
DiviCom was partially offset by a decrease in Semiconductor revenues,
primarily from VideoCD and Chaoji VCD decoder chips sold into the Chinese
market. This decline was due to a reduction in shipments and increased
price competition. The decrease in VideoCD and Chaoji VCD revenues was
partially offset by increased sales of DVD decoder chips used in consumer
applications and DVD-ROMs on PCs, resulting from wider acceptance of the
DVD format.

   International revenues accounted for 53% of net revenues for the second
quarter, compared to 61% for the same period last year. The Company expects
that international revenues will continue to represent a significant
portion of net revenues.* The Company's success will depend in part upon
its ability to manage international marketing and sales operations. In
addition, C-Cube purchases a substantial portion of its manufacturing
services from foreign suppliers. C-Cube's international manufacturing and

<PAGE>                               -8-

sales are subject to changes in foreign political and economic conditions
and to other risks including currency or export/import controls, changes in
tax laws, tariffs and freight rates and changes in the ownership and/or
leadership of international customers that may result in delayed or
canceled orders. For example, China is the primary market for VideoCD and
Chaoji VCD players utilizing the Company's decoder products. As a
consequence, any political or economic instability in China could
significantly reduce demand for the Company's products. The Company has
made an investment in additional foundry capacity in Taiwan and is subject
to the risk of political instability in Taiwan, including but not limited
to the potential for conflict between Taiwan and the People's Republic of
China. The Company sells products to customers in Korea and is subject to
the risk of economic and political instability in Korea, including the
potential for conflict between North and South Korea. In addition, the
Company sells certain of its products in international markets and buys
certain products from its foundries in currencies other than the U.S.
dollar and, as a result, currency fluctuations could have a material
adverse effect on the Company's business and results of operations. The
Company mitigates this risk through the use of foreign currency hedges for
transactions denominated in foreign currencies. However, with respect to
international sales that are denominated in U.S. dollars, increases in the
value of the U.S. dollar relative to foreign currencies can increase the
effective price of and reduce demand for the Company's products relative to
competitive products priced in the local currency. The United States has
considered trade sanctions against Japan and has had disputes with China
relating to trade and human rights issues. If trade sanctions were imposed,
Japan or China could enact trade sanctions in response. Because a number of
the Company's current and prospective customers and suppliers are located
in Japan and China, trade sanctions, if imposed, could have a material
adverse effect on C-Cube's business and results of operations. Similarly,
protectionist trade legislation in either the United States or foreign
countries could have a material adverse effect on the Company's ability to
manufacture or sell its products in foreign markets.

   The Asian markets accounted for approximately 37% of total Company
sales in the second quarter of 1999 and are expected to continue to account
for a substantial, though declining, percentage of sales in the future.* In
the second quarter of 1999, most of the Company's sales in Asia were of
decoder chips, with approximately an even split in revenues from DVD
decoders and VideoCD and Chaoji decoders. There can be no assurance that
the Company will not experience reduced sales of its semiconductor products
into Asia because of declining consumer spending or because of its
customers' increasing difficulty in obtaining letters of credit, which the
Company generally requires prior to shipment.

   GROSS MARGIN

   C-Cube's gross margin for the second quarter of 1999 was 55.5% compared
to a gross margin of 55.2% for the same period in the prior year. This
increase was primarily the result of a change in product mix, as sales of
products with higher gross margins, including DiviCom encoders, DVD
decoders and digital set-top boxes, contributed more to revenues in the
second quarter of 1999. The Company also realized operating efficiencies,
including reduced material costs for its Semiconductor and DiviCom
products, refinement of its semiconductor fabrication process and the
reduction of outside manufacturing costs, all of which led to improvements
in gross margin during the period. These operating efficiencies were
partially offset by higher product transition costs, higher employee-
related costs for headcount growth in technology integration and support
services and higher project materials costs. The improvements to gross
margin were additionally offset by reductions in the average selling prices
of many of the Company's semiconductor products during the current period.

   The markets into which C-Cube sells its Semiconductor products are
subject to extreme price competition. Thus, the Company expects to continue
to experience declines in the selling prices of its products over the life
cycle of each product.* In particular, C-Cube expects to continue to
experience significant price competition in the markets for decoder chips.*
In order to offset or partially offset declines in the selling prices of
its products, C-Cube must continue to reduce the costs of products through
product design changes, manufacturing process changes, volume discounts,

<PAGE>                               -9-

yield improvements and other savings negotiated with its manufacturing
subcontractors. Since the Company does not believe that it can continually
achieve cost reductions which fully offset the price declines of its
products, it expects gross margin percentages to decline for existing
products over their life cycles.*

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

   RESEARCH AND DEVELOPMENT EXPENSES

   In the second quarter of 1999, research and development expenses were
$20.7 million, or 22.0% of net revenues, compared with $18.6 million, or
22.5% of net revenues in the second quarter of 1998. The increase in
research and development expenses primarily represents additional employee-
related costs associated with increases in product engineering staff,
reflecting the Company's continuing efforts to provide industry leading
digital video solutions at the chip and systems levels.

   SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

   Selling, general and administrative expenses increased to
$16.9 million, or 17.9% of net revenues, in the second quarter of 1999,
compared to $14.0 million, or 16.9% of net revenues, for the same quarter
last year. The increase was primarily due to increased headcount and
related expenses, as the Company continues to increase its international
coverage in sales and marketing.

   OTHER INCOME (EXPENSE)

   Other income, net of other expense, increased to $2.3 million for the
second quarter of 1999, compared to $0.6 million for the second quarter of
1998. The increase over the prior year quarter is primarily due to higher
interest income earned on higher average cash and investment balances and
lower interest expense on lower average outstanding debt balances.

   INCOME TAX EXPENSE

   The Company's effective tax rate for the second quarters of 1999 and
1998 was 30%. The Company's effective tax rate is less than the combined
federal and state statutory rate primarily due to tax credits and lower
foreign tax rates.

   EXTRAORDINARY ITEM

   During the second quarter of 1999, the Company did not repurchase any
of the outstanding balance of its 5-7/8% Convertible Subordinated Notes
(the "Notes") due 2005. During the second quarter of 1998, the Company
repurchased $20.7 million of the face value of the Notes at 88.4% of
principal amount, with related accrued interest to the date of repurchase,
and recognized an extraordinary gain of $1.1 million, or $0.03 per diluted
share, net of related income taxes of $0.8 million.

<PAGE>                               -10-

SIX MONTHS ENDED JUNE 30, 1999

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

<TABLE>
<CAPTION>
                                          SIX MONTHS ENDED JUNE 30,
                                          ------------------------
                                             1999         1998
                                             -----        -----
    <S>                                     <C>          <C>
     Net revenues                            100.0%       100.0%
                                             -----        -----
     Costs and expenses:
       Cost of revenues                       45.0         45.9
       Research and development               21.3         21.4
       Selling, general and administrative    17.4         16.8
                                             -----        -----
               Total                          83.7         84.1
                                             -----        -----
     Income from operations                   16.3         15.9
     Other income (expense), net               2.3          0.5
                                             -----        -----
     Income before income taxes, minority
       interest and extraordinary item        18.6         16.4
     Income tax expense                        5.6          4.9
                                             -----        -----
     Income before minority interest
       and extraordinary item                 13.0         11.5
      Minority interest in net income (loss)
        of subsidiary                          0.1         (0.1)
                                             -----        -----
     Income before extraordinary item         12.9         11.6
     Extraordinary gain (net of tax)             -          0.7
                                             -----        -----
     Net income                               12.9%        12.3%
                                             =====        =====
</TABLE>

   PRODUCTION CAPACITY RIGHTS

   In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provided that TSMC would produce and ship wafers to
C-Cube at specified prices and required C-Cube to make two advance payments
totaling $49 million. An advance payment of $24.5 million was made in June
1996. In May 1997, the Company amended its agreement with TSMC which
resulted in a reduction of the Company's future wafer purchase commitments
and the forgiveness of the second advance payment of $24.5 million. In
January 1999, TSMC refunded $11.7 million of the advance payment to the
Company. TSMC will apply the remaining prepayment against a portion of the
wafer cost as product is delivered to C-Cube. Accordingly, the prepaid
amount, which has been allocated between current and long-term assets, will
be amortized to inventory as wafers are received.

   NET REVENUES

   Net revenues for the six months ended June 30, 1999 were $190.6
million, a 12.2% increase from $169.8 million in revenues during the same
period in the prior year. This increase was led by growth in sales of
DiviCom's encoder products, attributable to design improvements and feature
and quality enhancements on next generation products, as well as
significant growth in DiviCom's international markets. During 1999, DiviCom
recognized additional revenue growth from large contract wins in the cable
and satellite markets. Semiconductor revenues were relatively consistent
with the six month period in the prior year; however, the product mix
changed significantly. Revenues from VideoCD and Chaoji VCD decoder chips
sold into the Chinese market declined due to a reduction in shipments and
increased price competition. This decrease was primarily offset by
increased volume shipments of DVD decoder chips used in consumer
applications and DVD-ROMs on PCs, resulting from wider acceptance of the
DVD format. Increases in volume shipments of interactive set-top box
decoders and non-linear editing encoders also helped offset the decrease.

<PAGE>                               -11-

   GROSS MARGIN

   C-Cube's gross margin percentage increased to 55.0% in the six months
ended June 30, 1999 from 54.1% in the same period in the prior year. This
increase was primarily the result of changes in product mix, as sales of
products with higher gross margins, including DiviCom encoders, DVD
decoders and digital set-top boxes, contributed more to revenues in the
second quarter of 1999. The Company also realized operating efficiencies,
including reduced material costs for its Semiconductor and DiviCom
products, refinement of its semiconductor fabrication process and the
reduction of outside manufacturing costs, all of which led to improvements
in gross margin during the period. These operating efficiencies were
partially offset by higher product transition costs, higher employee-
related costs for headcount growth in technology integration and support
services and higher project materials costs. The improvements to gross
margin were additionally offset by reductions in the average selling prices
of many of the Company's semiconductor products during the current period.

   RESEARCH AND DEVELOPMENT EXPENSES

   In the first six months of 1999, research and development expenses were
$40.6 million or 21.3% of net revenues, as compared to $36.3 million, or
21.4% of net revenues, for the same period in the prior year. The increase
in research and development expenses primarily represents additional
employee-related costs associated with increases in product engineering
staff, reflecting the Company's continuing efforts to provide digital video
solutions at the chip and systems levels.

   SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

   Selling, general and administrative expenses increased to $33.2
million, or 17.4% of net revenues in the first six months of 1999, as
compared to $28.5 million, or 16.8% of net revenues for the same period in
the prior year. The increase was primarily due to increased headcount and
related expenses.

   OTHER INCOME (EXPENSE)

   Other income, net of other expense, was $4.4 million for the first six
months of 1999, an increase from $0.9 million reported for the six months
ended June 30, 1998. The increase is primarily due to higher interest
income earned on higher average cash and investment balances and lower
interest expense on lower average outstanding debt balances during the
first six months of 1999 compared to the same period last year.

   INCOME TAX EXPENSE

   The Company's effective tax rate for the six months ended June 30, 1999
and 1998 was 30%. The Company's effective tax rate is less than the
combined federal and state statutory rate primarily due to tax credits and
lower foreign tax rates.

   EXTRAORDINARY ITEM

   During the six months ended June 30, 1999, the Company repurchased
$3.4 million of the face value of the Company's 5-7/8% Convertible
Subordinated Notes due 2005 at 95.5% of the principal amount, with related
accrued interest to the date of repurchase, and recognized an extraordinary
gain of approximately $33,000 (zero effect per diluted share), net of
related income taxes of approximately $23,000. During the six months ended
June 30, 1998, the Company repurchased $20.7 million of the face value of
the notes at 88.4% of the principal amount, with related accrued interest
to the date of repurchase, and recognized an extraordinary gain of $1.1
million, or $0.03 per diluted share, net of related taxes of $0.8 million.

<PAGE>                               -12-

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

   The Company's DiviCom segment integrates solutions for customers which
involve its own and third party products, with the integrations usually
occurring over a number of months. Difficulty in completing the stages of
these integrations on the expected schedule can adversely affect the timing
of revenue recognition. In addition, DiviCom's business involves
transactions which can vary substantially in the portions of DiviCom
manufactured products, third party products and services included. These
variations can cause substantial differences in gross margin from one
contract to another. DiviCom has a number of competitors which are
divisions of larger corporations. Such corporations may decide from time-to-
time to aggressively lower the prices of products that compete with DiviCom
in order to sell related products or achieve strategic goals. Such "strategic
pricing" by competitors can place strong pricing pressure on DiviCom
products in certain transactions, resulting in lower selling prices and
gross margins for those transactions.

   The Company's dependence on the Asian consumer electronics market has
started to decline, and the Company believes it will either remain stable
or continue to decline in the future, as growth in the encoder, digital
satellite broadcast, non-linear editing, digital cable and wireless cable
markets generate larger contributions to revenues.* Nevertheless, the
substantial seasonality of sales in the consumer electronics market could
impact the Company's revenues and net income. In particular, C-Cube
believes that there may be seasonality in the Asia-Pacific region related
to the Chinese New Year, which falls within the first calendar quarter,
which could result in relatively lower product demand during the second and
third quarters of each year.* If in the future the geographic mix of the

<PAGE>                               -13-

Company's sales shifts towards the U.S. and Europe, C-Cube would anticipate
higher revenues and net income in the third and fourth calendar quarters as
system manufacturers in these regions make purchases in preparation for the
holiday season, and comparatively less revenues and net income in the first
and second calendar quarters.*

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

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

   YEAR 2000

   The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 problem is pervasive and complex, as virtually every computer
operation will be affected by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause
a system to fail. C-Cube has initiated a Year 2000 project designed to
identify and assess the risks associated with its information systems,
products, operations and infrastructure, suppliers and customers that are
not Year 2000 compliant, and to develop, implement and test remediation and
contingency plans to mitigate these risks. C-Cube is replacing or upgrading
systems, equipment and facilities that are known to be Year 2000 non-
compliant. For the Year 2000 non-compliance issues identified to date, the
Company does not expect the cost of upgrade or remediation to exceed
$500,000, which is not expected to be material to the Company's operating
results.* If implementation of replacement systems is delayed, or if
significant new non-compliance issues are identified, the Company's results
of operations or financial condition could be materially adversely
affected.

   INFORMATION SYSTEMS. A review of the Company's information systems has
been completed and the Company has initiated the work necessary for the
existing systems to become Year 2000 compliant. Testing of all information
systems has been completed and all systems are believed to be Year 2000
compliant, with the exception of the Return Material Authorization ("RMA")
system. The RMA system is planned to be replaced during the fourth quarter
of 1999.* The Company has reviewed its hardware and systems infrastructure,
such as networks, in order to assess whether they are Year 2000 compliant.
Based on the current status of the assessments and remediation plans made
to date, the Company is on track to have all critical Year 2000 information
systems issues resolved by the fourth quarter of 1999.* The Company has not
incurred to date, nor does it expect to incur, material Year 2000 costs
pertaining to its information systems and hardware and systems
infrastructure.*

<PAGE>                               -14-

   PRODUCTS. The Company has assessed the capabilities of its
semiconductor products sold to customers and has not identified any
significant problems related to Year 2000 compliance. The Company has
identified and assessed the risks related to integrated systems sold by its
DiviCom segment. Products manufactured by DiviCom are either believed to be
Year 2000 compliant or have an available upgrade to bring them into
compliance. To be in compliance for the Year 2000, the Company has
suggested to customers that they obtain a full system upgrade. All
customers were sent a notification letter during the second quarter of 1999
describing the compliance status of the products purchased by the customer,
along with the procedures necessary to bring those products into compliance
for the Year 2000. Customers with service contracts and customers with whom
the Company has specific Year 2000 contractual obligations have been
offered upgrades at no charge. At present, 18 of the top 48 customers in
this category have completed the upgrade. It is up to the customer to
initiate the request for upgrade based on the offer extended by DiviCom.
Most of the remaining requested upgrades are expected to be completed
during the third quarter of 1999, with the rest to be completed in the
fourth quarter at the request of the customer.* The Company expects to
complete the upgrade process before the end of 1999.*

   DiviCom products are often installed with third party hardware and
software. The Company has tested the Year 2000 compliance of standard third
party hardware and software products included in its systems and has not
encountered any non-compliance issues. The Company does not comment as to
the Year 2000 compliance of non-standard third party hardware and software
products. Accordingly, DiviCom recommends that customers verify the Year
2000 compliance status of non-standard third party hardware and software
products and that customers schedule their own Year 2000 system validation
tests during 1999 after Year 2000 upgrades are performed. DiviCom has not
assessed all possible customer configurations, nor can it anticipate all
customer situations, particularly those involving third party products. As
a result, the Company may see an increase in warranty and other claims
resulting from the Year 2000 transition process. In addition, litigation
against the Company regarding Year 2000 compliance issues may occur in the
future. For these reasons, the impact of customer claims could have a
material adverse impact on the Company's results of operations or financial
condition.

   OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items
used in the operations and facilities of the Company have been inventoried
and assessed for Year 2000 compliance. This assessment determined that the
company's security systems were not Year 2000 compliant. The Company has
replaced the system with one believed to be Year 2000 compliant. A complete
test of the system will be completed during the third quarter of 1999.* All
servers and employee desktop computers are in the process of being
upgraded, with upgrades scheduled to be completed during the third quarter
of 1999.* No other material deficiencies were detected from our
assessments.

   SUPPLIERS. C-Cube has contacted its critical suppliers and shippers to
inquire whether their operations, products, and services are Year 2000
compliant. All suppliers have responded favorably as to their status of
Year 2000 compliance. Where practicable, C-Cube has attempted to mitigate
its risks with respect to the failure of primary suppliers to be Year 2000
compliant through contracting with secondary suppliers.* In the event that
suppliers are not Year 2000 compliant, the Company will seek alternative
sources of supplies if they have not already been established. However,
such failures remain a possibility and could have a material adverse impact
on the Company's results of operations or financial condition.

   CUSTOMERS. The Company is actively responding to all customer requests
for compliance and other general information related to its Year 2000
programs.

   GENERAL. The Company does not currently expect its costs associated
with the Year 2000 problem to exceed $500,000, and expects to be able to
fund these costs through operating cash flows.* While, the company expects
to complete its Year 2000 compliance program during the fourth quarter of
1999, the risks associated with the Year 2000 problem can be difficult to
identify and to address, and could result in material adverse consequences

<PAGE>                               -15-

to the Company.* Even when the Company completes all of its assessments,
identifies and tests remediation plans believed to be adequate, and
develops contingency plans believed to be adequate, some problems may not
be identified or corrected in time to prevent material adverse consequences
to the Company.

   As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test
remediation or contingency plans in a timely manner, or may find that the
costs of these activities exceed current expectations and become material.
In many cases, the Company is relying on assurances from suppliers and
customers that new and upgraded information systems and other products will
be Year 2000 compliant. The Company has tested certain third-party
products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed by the supplier in a timely
and satisfactory way.

   Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the
Company cannot be sure that all of its systems will work together in a
Year 2000-compliant fashion. Furthermore, the Company cannot be sure that
it will not suffer business interruptions, either because of its own
Year 2000 problems or those of its customers or suppliers whose Year 2000
problems may make it difficult or impossible for them to fulfill their
commitments to the Company. If the Company fails to satisfactorily resolve
Year 2000 issues related to its products in a timely manner, it could be
exposed to liability to third parties.

   The Company has not developed a "worst case" scenario with respect to
Year 2000 issues, but instead has focused its resources on identifying
material, remediable problems and reducing uncertainties generally, through
the Year 2000 project described above.

   If the Company or the third parties with which it has relationships
were to cease or not successfully complete its or their Year 2000
remediation efforts, the Company would encounter disruptions to its
business that could have a material adverse effect on its business,
financial position and results of operations. The Company could be
materially and adversely impacted by widespread economic or financial
market disruption or by Year 2000 computer system failures at third parties
with which it has relationships.

LIQUIDITY AND CAPITAL RESOURCES

   Cash, cash equivalents and short-term investments were $239.2 million
at June 30, 1999 compared to $207.8 million at the end of 1998. Working
capital increased to $275.3 million at June 30, 1999 from $220.5 million at
December 31, 1998.

   The Company's operating activities generated cash of $24.5 million in
the six months ended June 30, 1999, primarily from net income and a refund
of $11.7 million prepaid production capacity rights, partially offset by
increased accounts receivable. Receivable days outstanding increased from
35 days at December 31, 1998 to 63 days at June 30, 1999 primarily due to
DiviCom's growing contribution to consolidated revenues, as a substantial
portion of DiviCom's revenues are generated under long-term contracts which
generally have longer payment terms than the semiconductor business.

   C-Cube's investing activities, exclusive of sales and maturities of
$129.3 million and purchases of $127.6 million of short-term investments,
used cash of $11.8 million, primarily for $9.7 million capital
expenditures.

   Cash provided by financing activities was $17.4 million, primarily from
proceeds of $20.8 million from sales of stock pursuant to employee stock
plans, partially offset by $3.3 million used to repurchase a portion of the
Company's Convertible Subordinated Notes.

<PAGE>                               -16-

   At June 30, 1999, the Company had an available bank line of credit of
$30.0 million which expires in May 2001. Borrowings bear interest at LIBOR
plus 1.25% or the bank's prime rate (7.75% at June 30, 1999). The line of
credit agreement requires that the Company, among other things, maintain a
minimum tangible net worth, a minimum annual net income (no quarterly loss
exceeding $3 million) and certain financial ratios. In addition, this
agreement prohibits the payment of cash dividends. At June 30, 1999, the
Company was in compliance with these covenants, and there were no
outstanding balances under this line.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

<PAGE>                               -17-

                         C-CUBE MICROSYSTEMS INC.
                        PART II.  OTHER INFORMATION


Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

        None.

Item 3. Defaults Upon Senior Securities

        None.

Item 4. Submission of Matters to a Vote of Security Holders

        The Annual Meeting of Stockholders was held on April 27, 1999. At
        the meeting, the following actions were taken:
<TABLE>
<CAPTION>

                                                     Number of Common Shares Voted
                                                     -----------------------------
                                                                      Votes     Broker
                  Proposal                        For       Against  Withheld  Non-Votes
                  --------                      -------     -------  --------  ---------
         <S>                                   <C>          <C>      <C>       <C>
         1) Election of Class II directors
            for a three-year term:
              Donald T. Valentine              34,619,836     -       467,452     -
              Alexandre A. Balkanski, Ph.D.    34,635,583     -       451,705     -
              Gregorio Reyes                   34,652,098     -       435,190     -

         2) Ratification of Deloitte &
            Touche LLP as the Company's
            independent public accountants
            for fiscal year ended
            December 31, 1999.                 34,930,608   94,914     61,766     -

</TABLE>

Item 5. Other Information

        Not applicable.

Item 6. Exhibits and Reports on Form 8-K

        (a)  Exhibits

             None.

        (b)  Reports on Form 8-K

             None.

<PAGE>                               -18-

                                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.


                                              C-Cube Microsystems Inc.
                                                   (Registrant)


Dated:  August 12, 1999                    By:  /s/  Walt Walczykowski
        ---------------                         ----------------------
                                                  Walt Walczykowski
                                              Vice President of Finance
                                             and Chief Financial Officer

<PAGE>                               -19-