3DFX INTERACTIVE INC, S-1/A, 1997-06-04

3DFX INTERACTIVE INC
S-1/A, 1997-06-04
SEMICONDUCTORS & RELATED DEVICES

Previous: PAYLESS SHOESOURCE INC, S-8, 1997-06-04

Next: 3DFX INTERACTIVE INC, 8-A12G, 1997-06-04

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1997

REGISTRATION NO. 333-25365
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

3DFX INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
------------------------

<TABLE>
<S> <C> <C>
CALIFORNIA 3674 77-0390421
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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

3DFX INTERACTIVE, INC.
4435 FORTRAN DRIVE
SAN JOSE, CALIFORNIA 95134
(408) 935-4400
(Address and telephone number of Registrant's principal executive offices)
------------------------

GARY P. MARTIN
VICE PRESIDENT, ADMINISTRATION AND
CHIEF FINANCIAL OFFICER
3DFX INTERACTIVE, INC.
4435 FORTRAN DRIVE
SAN JOSE, CALIFORNIA 95134
(408) 935-4400
(Name, address and telephone number of agent for service of process)
------------------------

Copies to:

<TABLE>
<S> <C>
ROBERT P. LATTA, ESQ. THOMAS A. BEVILACQUA, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE
650 PAGE MILL ROAD 2200 GENG ROAD
PALO ALTO, CA 94304 PALO ALTO, CA 94303
(415) 493-9300 (415) 424-0160
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Common Stock, no par value.............................. $41,055,000 $12,441(2)
==============================================================================================
</TABLE>

(1) Estimated solely for the purpose of computing the amount of the registration
fee. The estimate is made pursuant to Rule 457(o) of the Securities Act of
1933, as amended.

(2) Previously paid.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED JUNE 4, 1997

LOGO

3,000,000 SHARES

COMMON STOCK

All of the 3,000,000 shares of Common Stock offered hereby are being sold
by 3Dfx Interactive, Inc. ("3Dfx" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently anticipated that Electronic Arts Inc. ("Electronic Arts") will
purchase from the Underwriters $3.0 million of the shares of Common Stock
offered hereby at a price per share of $ (the Price to Public less the
Underwriting Discounts and Commissions). See "Investment By Electronic Arts." It
is currently estimated that the initial public offering price will be between
$9.00 and $11.00 per share. See "Underwriting" for information relating to the
method of determining the initial public offering price.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Per Share.................................... $ $ $
- ------------------------------------------------------------------------------------------------
Total(2)..................................... $ $ $
================================================================================================
</TABLE>

(1) Before deducting expenses payable by the Company, estimated at $700,000.

(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
-------------------------

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1997.

ROBERTSON, STEPHENS & COMPANY
MONTGOMERY SECURITIES
UBS SECURITIES

The date of this Prospectus is , 1997
<PAGE> 3

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET AND MAY
IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."

Image courtesy of GameFx(C) 1997 GameFx.
<PAGE> 4

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary........................................................................... 4
Risk Factors...................................................................... 6
Investment by Electronic Arts..................................................... 20
Use of Proceeds................................................................... 20
Dividend Policy................................................................... 20
Capitalization.................................................................... 21
Dilution.......................................................................... 22
Selected Financial Data........................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 24
Business.......................................................................... 32
Management........................................................................ 50
Certain Transactions.............................................................. 59
Principal Shareholders............................................................ 60
Description of Capital Stock...................................................... 62
Shares Eligible for Future Sale................................................... 64
Underwriting...................................................................... 66
Legal Matters..................................................................... 68
Experts........................................................................... 68
Additional Information............................................................ 68
Index to Financial Statements..................................................... F-1
</TABLE>

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

The Company intends to furnish its shareholders with annual reports
containing audited financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each year
containing interim unaudited financial information. Upon completion of the
offering contemplated hereby, the Company will be subject to the informational
requirements of the Securities and Exchange Act of 1934, and in accordance
therewith, will be filing reports and other information with the Securities and
Exchange Commission.

Glide, Obsidian, Voodoo Graphics and Voodoo Rush and the 3Dfx logo are
trademarks of the Company. All other trademarks or tradenames referred to in
this Prospectus are the property of their respective owners.

The Company was incorporated in California in August 1994. The Company's
executive offices are located at 4435 Fortran Drive, San Jose, California 95134
and its telephone number at that address is (408) 935-4400.

3
<PAGE> 5

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Prospective investors should consider carefully the
information discussed under "Risk Factors." This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

3Dfx Interactive is a leading developer of high performance, cost-effective
3D media processors, software and related technology for the interactive
electronic entertainment market. The Company has developed 3D technology that
enables a highly immersive, interactive and realistic 3D experience across
multiple hardware entertainment platforms. Furthermore, the Company's technology
facilitates the virtually seamless portability of software content across the
three primary interactive electronic entertainment platforms: the PC, the home
game console and the coin-operated ("coin-op") arcade system. The Company's
strategy is to provide a 3D media processor solution comprised of hardware and
embedded software designed around a common architecture that will become the
standard graphics engine for the interactive electronic entertainment market.
The Company believes that the benefits of its technology, coupled with its
software content strategy, provide powerful incentives for the leading PC
original equipment manufacturers ("OEMs") and entertainment hardware
manufacturers to utilize the 3Dfx solution.

The growth of the interactive electronic entertainment market has been
constrained by the absence of a high performance, cost-effective 3D solution,
the lack of an architecture that facilitates virtually seamless porting across
the three primary platforms and the limited number of high quality 3D software
titles. The implementation of 3D graphics is extremely complex and
mathematically intensive and requires significant computing power. Consequently,
despite the desirability of 3D graphics, high quality 3D continues to remain a
niche technology not prevalent outside of high-end engineering workstation and
professional applications. To date, attempts to bring high quality, affordable
3D solutions to the entertainment market have required consumers to accept a
trade-off between visual realism, or fill rate, and gaming performance, or frame
rate. Today, the interactive electronic entertainment industry is demanding a
no-compromise 3D solution that will deliver both visual realism and performance
at a cost-effective price. The solution must also drive content development by
enabling developers to create a new generation of high quality 3D software that
delivers a realistic and immersive experience.

The Company's technology is optimized to alleviate the traditional consumer
trade-off between visual quality and gaming performance by providing a 3D
solution with both high fill rates and frame rates. To that end, the Company's
technology enables a highly immersive, interactive 3D experience with compelling
graphics, realistic motion and complex character and scene interaction at real
time frame rates. In addition, the Company's technology embodies a single
hardware/software architecture that can be deployed as the graphics engine for
each of the three primary interactive electronic entertainment platforms. To
promote the rapid adoption of its products, the Company's architecture supports
most industry standard 3D application programming interfaces ("APIs"), including
Apple Computer's Rave3D, Argonaut's BRender, Criterion's Renderware, Intel's
3DR, Microsoft's Direct3D and Silicon Graphics' OpenGL. Additionally, the
Company has developed Glide, its proprietary low-level 3D API, which facilitates
the virtually seamless portability of software content across multiple
entertainment platforms utilizing the Company's 3D media processor, thereby
leveraging the significant development and marketing expenses associated with a
given title.

Voodoo Graphics, the Company's first product, and subsequent 3D media
processors now under development are designed around a common architecture to be
utilized as the graphics engine for PCs and coin-op arcade systems. For PC
applications, Diamond Multimedia Systems, Inc. ("Diamond") and Orchid Technology
("Orchid") have each introduced consumer multimedia add-in cards incorporating
the Company's 3D media processor for sale in the retail channel and for
incorporation into PCs manufactured by, among others, Apricot/Mitsubishi, Falcon
Northwest, Hewlett-Packard and NEC. In the coin-op arcade market, the Voodoo
Graphics 3D media processor is being utilized by Acclaim, Kaneko, Midway Games
and Taito, among others. Voodoo Graphics technology is also the basis for the 3D
media processor chipset that the Company is developing for license to Sega
Enterprises, Ltd. ("Sega") for use in Sega's next generation consumer home game
console. The Company's second product, Voodoo Rush, is designed to incorporate a
3D/2D solution into a single personal computer interface ("PCI") board. Voodoo
Rush began sampling in November 1996 and limited commercial shipments are
expected in the second quarter of 1997. The Company has commenced development of
Banshee, which is intended to be a high performance, fully-featured single chip,
3D/2D media processor for the PC and coin-op arcade markets. The Company expects
to begin commercial shipments of Banshee in the first quarter of 1998. All of
the Company's products are manufactured, assembled, tested and packaged by
third-party suppliers.

4
<PAGE> 6

THE OFFERING

Common stock offered by the
Company............................. 3,000,000 shares

Common stock outstanding after the
offering.......................... 12,086,176 shares(1)

Use of proceeds..................... For working capital and other general
corporate purposes, including expansion
of sales and marketing and research and
product development efforts and
financing of accounts receivable and
inventories, and for capital
expenditures. See "Use of Proceeds."

Proposed Nasdaq National Market
symbol.............................. TDFX

SUMMARY FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
-------------------- -------------------
1995 1996 1996 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues(2).................................................... $ -- $ 6,390 $ -- $ 5,247
Loss from operations................................................. (5,106) (14,810) (2,687) (1,134)
Net loss............................................................. (5,039) (14,751) (2,652) (1,161)
Pro forma net loss per share(3)...................................... $ (1.53) $ (0.11)
Shares used in pro forma net loss per share calculations(3).......... 9,627 10,386
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------
ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 4,141 $ 4,193 $31,393
Working capital...................................................... 6,049 6,101 33,301
Total assets......................................................... 15,586 15,638 42,838
Capitalized lease obligations, less current portion.................. 468 468 468
Accumulated deficit.................................................. (20,951) (20,951) (20,951)
Total shareholders' equity........................................... 9,146 9,198 36,398
</TABLE>

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

(1) Based on shares outstanding as of March 31, 1997. Excludes (i) 1,875,461
shares of Common Stock issuable upon exercise of options outstanding as of
March 31, 1997, with a weighted average exercise price of $2.72 per share,
(ii) 77,159 shares of Common Stock issuable upon exercise of warrants
outstanding as of March 31, 1997, with a weighted average exercise price of
$3.24 per share and (iii) 1,124,307 shares of Common Stock reserved for
future issuance under the Company's stock plans. See "Management -- Stock
Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to
Financial Statements.

(2) Total revenues for the three months ended March 31, 1997 include $750,000 of
development contract revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."

(3) See Note 1 of Notes to Financial Statements for an explanation of shares
used in pro forma net loss per share calculations.

(4) Pro forma information gives effect to the issuance of 95,010 shares of
Common Stock upon the exercise of warrants that expire automatically upon
the closing of this offering.

(5) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.00 per share and the application of the estimated net proceeds therefrom
after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."
------------------------

Except as set forth in the financial statements or as otherwise indicated
herein, all information in this Prospectus (i) reflects an increase in the
authorized shares of Common Stock to 50,000,000 shares effected in April 1997,
(ii) reflects the May 1997 1-for-2 reverse stock split, (iii) reflects the
conversion of all of the Company's outstanding shares of Preferred Stock into
shares of Common Stock, which will occur automatically upon the closing of this
offering, (iv) reflects the filing, upon the closing of this offering, of
Restated Articles of Incorporation authorizing 5,000,000 shares of undesignated
Preferred Stock, (v) assumes the cash exercise of warrants to purchase 87,510
shares of Common Stock and the cashless exercise of warrants to purchase 7,500
shares of Common Stock and (vi) assumes that the Underwriters' over-allotment
option is not exercised. See "Description of Capital Stock," "Underwriting" and
Notes 1 and 5 of Notes to Financial Statements.

5
<PAGE> 7

RISK FACTORS

An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the Common Stock
offered hereby should carefully review the following risk factors as well as the
other information set forth in this Prospectus. This Prospectus contains
forward-looking statements based upon current expectations that involve risks
and uncertainties. The Company's actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; ANTICIPATION OF CONTINUED LOSSES

The Company has had a limited operating history, has been engaged primarily
in research and product development with only limited revenues to date and has
incurred net losses in every quarter. The Company was founded in August 1994 and
was a development stage company until its first commercial product shipments in
the third quarter of 1996. The Company has been primarily dependent on private
equity financings to provide cash for operations. The Company's limited
operating history makes the assessment of future operating results difficult.
The Company incurred net losses of approximately $5.0 million, $14.8 million and
$1.2 million in 1995, 1996 and for the three months ended March 31, 1997,
respectively, and had an accumulated deficit of $21.0 million at March 31, 1997.
These net losses were attributable to the lack of substantial revenue and
continuing significant costs incurred in the research and development of the
Company's 3D media processor products and product testing. The Company expects
to incur additional net losses at least in the near term as it continues to
incur substantial research and development and sales and marketing expenses to
commercialize its products. There can be no assurance that significant revenues
or profitability will ever be achieved or, if they are achieved, that they can
be sustained or increased on a quarterly or annual basis in the future. See
"-- Dependence on Emerging 3D Interactive Electronic Entertainment Market,"
"-- Future Capital Needs; Uncertainty of Additional Funding" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON RELATIONSHIP WITH SEGA

In March 1997, the Company entered into a Technology Development and
License Agreement with Sega (the "Sega Agreement"), under which the Company will
develop and license to Sega the technology for a 3D media processor chipset (the
"Sega/3Dfx Chipset") for use in Sega's next generation home game console product
(the "New Sega Game Console"). The Sega Agreement grants Sega the exclusive
right for three years to the Company's architecture solely for use in home game
consoles. Through the end of 1998, the Company expects to earn development
contract revenues and certain development bonuses provided that certain
milestones set forth in the Sega Agreement are met. The Company will derive
royalty revenue for each Sega/3Dfx Chipset incorporated into products sold by
Sega. Therefore, the timely development of the Sega/3Dfx Chipset by the Company
and the successful introduction and sale of the New Sega Game Console by Sega
will be critical factors affecting the Company's future business, financial
condition and results of operations. The Company has not yet completed
development of the Sega/3Dfx Chipset, and there can be no assurance that the
Company will successfully complete such development or, if such development is
completed, that the Sega/3Dfx Chipset will perform as expected. Despite
pre-release testing of the Sega/3Dfx chipset by the Company, there can be no
assurance that, once the Sega/3Dfx Chipset is made available to Sega,
performance errors and deficiencies will not be found, or if discovered, that
the Company will be able to successfully correct such performance errors and
deficiencies in a timely manner, if at all. If the Company is unable to complete
the development of the Sega/3Dfx Chipset or successfully deliver it to Sega, the
Company's business, financial condition and results of operations would be
materially adversely affected.

There can be no assurance that Sega will ever introduce the New Sega Game
Console. Published reports in the financial press have indicated that Sega may
discontinue the manufacture and marketing

6
<PAGE> 8

of its home game console hardware. The Company's business, financial condition
and results of operations would be materially adversely affected if Sega does
not introduce the New Sega Game Console. If introduced, there can be no
assurance that the New Sega Game Console will achieve market acceptance. The
home game console industry has been characterized by unpredictable and sometimes
rapid shifts in the popularity of products, by severe price competition and by
frequent introductions of new technology and new products. Only a small number
of products have achieved broad market acceptance. Such market acceptance has
often followed intense competition between competing formats, such as those of
Nintendo Company, Ltd. ("Nintendo") and Sony Corporation ("Sony"). Any
competitive, technological or other factor adversely affecting the introduction
or sales of the New Sega Game Console or related software titles would have a
material adverse effect on the Company. Further, there can be no assurance that
Sega will successfully manage the introduction of the New Sega Game Console. As
is typical with any new product introduction, quality and reliability problems
may arise and any such problems may result in reduced orders, manufacturing
rework costs, delays in collecting accounts receivable, additional service and
warranty costs and a decline in Sega's competitive position. Further, Sega will
not manufacture all major subassemblies and will be dependent on several vendors
as manufacturers of such subassemblies. There can be no assurance that such
vendors will manufacture such subassemblies on a timely basis and with
acceptable quality, or, if demand for the New Sega Game Console increases, that
such vendors will be able to accelerate production of the subassemblies to meet
demand for such increases. Even if the New Sega Game Console is successfully
introduced and does gain initial market acceptance, competitive products with
comparable price and performance characteristics are likely to be introduced by
competitors. This competition may reduce future market acceptance for the New
Sega Game Console and result in decreased royalty revenues arising from the
Sega/3Dfx Chipset. The failure of the Company to successfully develop and
deliver the Sega/3Dfx Chipset or Sega's failure to successfully introduce and
market the New Sega Game Console or its failure to achieve market acceptance
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Result of Operations -- Overview" and
"Business -- Products, Products Under Development and Technology
License -- Strategic Relationship with Sega."

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS

The Company believes that, even if it does achieve significant sales of its
products, quarterly and annual results of operations will be affected by a
variety of factors that could materially adversely affect revenues, gross profit
and income from operations. These factors include, among others, demand and
market acceptance for the Company's products; changes in the relative volume of
sales of the Company's various products; changes in the relative volume of sales
to the Company's various direct and indirect customers; the successful
development of the Sega/3Dfx Chipset; the success of the New Sega Game Console;
unanticipated delays or problems in the introduction or performance of the
Company's next generation of products; unanticipated delays or problems
experienced by the Company's product development partners; fluctuations in the
level and timing of royalty revenues and development contract revenues under the
Sega Agreement; market acceptance of the products of the Company's customers;
new product announcements or product introductions by the Company's competitors;
the Company's ability to introduce new products in accordance with OEM design
requirements and design cycles; changes in the timing of product orders due to
unexpected delays in the introduction of products of the Company's customers or
due to the life cycles of such customers' products ending earlier than
anticipated; fluctuations in manufacturing capacity; competitive pressures
resulting in lower average selling prices; the volume of orders that are
received and can be fulfilled in a quarter; the rescheduling or cancellation of
customer orders; supply constraints for the other components incorporated into
its customers' products; the unanticipated loss of any strategic relationship;
seasonal fluctuations associated with the tendency of PC sales to increase in
the second half of each calendar year; seasonal fluctuations associated with
sales of home game consoles; the level of expenditures for research and
development and sales, general and administrative functions of the

7
<PAGE> 9

Company; costs associated with protecting the Company's intellectual property;
and foreign exchange rate fluctuations. Any one or more of these factors could
result in the Company failing to achieve its expectations as to future revenues.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially adversely
affect quarterly results of operations. The Company may be required to reduce
prices or increase spending in response to competition or to pursue new market
opportunities which could result in inventory write-offs. If new competitors,
technological advances by existing competitors or other competitive factors
require the Company to invest significantly greater resources in research and
development efforts, the Company's results of operations in the future could be
materially adversely affected. Accordingly, the Company believes that
period-to-period comparisons of its results of operations should not be relied
upon as an indication of future performance. In addition, the results of any
quarterly period are not indicative of results to be expected for a full fiscal
year. In certain future quarters, the Company's results of operations may be
below the expectations of public market analysts or investors. In such event,
the market price of the Common Stock could be materially adversely affected.

COMPETITION

The Company's strategy of targeting the interactive electronic
entertainment market across the PC, coin-op arcade systems and home game console
platforms requires the Company to compete against different companies in each of
these market segments, all of which are intensely competitive. The interactive
electronic entertainment market is comprised of interactive games played on PCs,
coin-op arcade systems and home game consoles, educational software and location
based entertainment ("LBE"). See "Business -- Competition."

Within the entertainment segment of the PC market, the Company competes
primarily against companies that typically have operated in the PC 2D graphics
market and that now offer 3D capability as an enhancement to their 2D solutions,
such as ATI Technologies, Inc. ("ATI"), Cirrus Logic, Inc. ("Cirrus"), Oak
Technology Inc. ("Oak Technology"), S3 Incorporated ("S3") and Trident. Many of
these competitors have introduced 3D functionality on new iterations of existing
graphics chips. The Company also competes with companies that have recently
entered the market with an integrated 3D/2D solution but which have not
traditionally manufactured 2D solutions, such as Chromatic Research, Inc.
("Chromatic"), nVidia Corporation ("nVidia") and Rendition Inc. ("Rendition").
In addition, the Company competes with Videologic Group Plc which has partnered
with NEC ("NEC/Videologic") to focus exclusively on developing a 3D solution for
the interactive electronic entertainment market.

Furthermore, a substantial number of companies including Intel and
Microsoft have announced plans to release 3D graphics chips in 1997 and 1998
that promise to provide low cost 3D functionality for PCs and workstations. If
successful, products based on any of these initiatives would be directly
competitive with the Company's 3D media processors and could materially
adversely affect the Company's competitive position and results of operations.

The market for interactive electronic arcade entertainment is comprised of
a small number of companies, including Acclaim Entertainment Inc. ("Acclaim"),
Namco, Ltd. ("Namco"), Sega, Taito

8
<PAGE> 10

Corporation, Ltd. ("Taito") and WMS Industries Inc. ("Williams"), and its
subsidiary Midway Games, Inc. ("Midway"). The home game console segment is
dominated by three companies, Nintendo, Sega and Sony. In each of the coin-op
arcade and home game console segments, the Company primarily faces competition
from in-house divisions of the companies which currently comprise such markets.
In addition, there can be no assurance that any of the companies which currently
compete in the 3D PC markets, will not enter the coin-op arcade market, or if
they do, that the Company will be able to compete against them successfully.

Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since they maintain their
own semiconductor foundries and may therefore benefit from certain capacity,
cost and technical advantages. The Company's ability to compete successfully in
the rapidly evolving market for 3D interactive electronic entertainment will
depend upon certain factors, many of which are beyond the Company's control,
including, but not limited to, success in designing and subcontracting the
manufacture of new products; implementing new technologies; access to adequate
sources of raw materials and foundry capacity; the price, quality and timing of
new product introductions by the Company and its competitors; the emergence of
new multimedia and PC standards, the widespread development of 3D applications
by ISVs; the ability of the Company to protect its intellectual property; market
acceptance of the Company's 3D solution and API; success of the competitors'
products; and industry and general economic conditions. There can be no
assurance that the Company will be able to compete successfully in the emerging
3D interactive electronic entertainment market.

DEPENDENCE ON EMERGING 3D INTERACTIVE ELECTRONIC ENTERTAINMENT MARKET

The market for 3D interactive electronic entertainment for use in PCs, home
game consoles and coin-op arcade systems has only recently begun to emerge. The
Company's ability to achieve sustained revenue growth and profitability in the
future will depend to a large extent upon the demand for 3D multimedia
functionality in PCs, home game consoles and coin-op arcade systems. There can
be no assurance that the market for 3D interactive electronic entertainment will
continue to develop or grow at a rate sufficient to support the Company's
business. If the market for 3D interactive electronic entertainment fails to
develop, or develops more slowly than expected, or if the Company's products do
not achieve market acceptance, even if such market does develop, the Company's
business, financial condition and results of operations could be materially
adversely affected. Demand for the Company's products is also dependent upon the
widespread development of 3D interactive electronic entertainment applications
by independent software vendors ("ISVs"), the success of the Company's customers
in effectively implementing the Company's technology and developing a market for
the

9
<PAGE> 11

Company's products and the willingness of end users to pay for full function 3D
capabilities in PCs, home game consoles and coin-op arcade systems. Currently,
there is not a sufficient quantity or breadth of software game applications that
support or take advantage of 3D functionality in PCs, home game consoles and
coin-op arcade systems. There can be no assurance that such a base of software
game applications will develop in the near term or at all. Consequently, there
can be no assurance that a broad market for 3D multimedia functionality in PCs,
home game consoles and coin-op arcade systems will develop, or that the Company
will successfully sell 3D media processor products if such a market does
develop.

DEPENDENCE ON THE PC MARKET

For 1996 and the three months ended March 31, 1997, the Company derived 82%
and 76%, respectively, of its revenues from products sold for use in PCs. The
Company expects to continue to derive a significant portion of revenues from the
sale of its products for use in PCs. The PC market is characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and significant price competition, resulting in short product life
cycles and regular reductions of average selling prices over the life of a
specific product. Although the PC market has grown substantially in recent
years, there can be no assurance that such growth will continue. A reduction in
sales of PCs, or a reduction in the growth rate of such sales, would likely
reduce demand for the Company's products. Moreover, such changes in demand could
be large and sudden. Since PC manufacturers often build inventories during
periods of anticipated growth, they may be left with excess inventories if
growth slows or if they have incorrectly forecast product transitions. In such
cases, the PC manufacturers may abruptly suspend substantially all purchases of
additional inventory from suppliers such as the Company until the excess
inventory has been absorbed. Any reduction in the demand for PCs generally, or
for a particular product that incorporates the Company's 3D media processors,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's ability to compete in the future will depend on its ability
to identify and ensure compliance with evolving industry standards.
Unanticipated changes in industry standards could render the Company's products
incompatible with products developed by major hardware manufacturers and
software developers, including Intel Corporation ("Intel") and Microsoft
Corporation ("Microsoft"). The Company could be required, as a result, to invest
significant time and resources to redesign the Company's products to ensure
compliance with relevant standards. If the Company's products are not in
compliance with prevailing industry standards for a significant period of time,
the Company could miss opportunities to have its products specified as standard
3D media processors for new hardware components or subassemblies designed by PC
manufacturers and OEMs (a "design win"). The failure to achieve any such design
win would result in the loss of any potential sales volume that could be
generated by such newly designed hardware component or subassembly and would
also competitively advantage the 3D media processor manufacturer that achieves
such design win, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations. To the extent
that future developments in other PC components or subassemblies incorporate one
or more of the advantages offered by the Company's products, the market demand
for the Company's products may be negatively impacted, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

ACCEPTANCE OF THE COMPANY'S 3D/2D SOLUTION FOR THE PC MARKET;
DEPENDENCE ON DEVELOPMENT OF A SINGLE CHIP SOLUTION

The Company's success depends upon market acceptance of its 3D media
processor products as a broadly accepted standard for high performance 3D
interactive electronic entertainment in PC applications. Currently, the majority
of multimedia PCs incorporate only 2D graphics acceleration technology. As a
result, the majority of entertainment titles currently available for play on PCs
are written for 2D acceleration technology. Because of the substantial installed
base of 2D acceleration

10
<PAGE> 12

technology and related game content, the Company believes that for its 3D media
processor products to gain wide market acceptance, such products must also offer
2D performance comparable or superior to existing 2D technology. To address this
demand, the Company is working with Alliance Semiconductor Corporation
("Alliance"), Macronix International Co., Ltd ("Macronix"), Media Reality
Technology, Inc. ("MRT") and Trident Semiconductor, Inc. ("Trident") to offer a
3D/2D chipset branded as the Company's Voodoo Rush product. Voodoo Rush will
function with a partner's companion 2D or 2D/3D accelerator within a single PCI
solution. There can be no assurance, however, that the Company's 3D/2D chipset
will perform the desired functions, offer significant price/performance benefits
or meet the technical or other requirements of potential buyers to realize
market acceptance. Despite pre-release testing of the Company's 3D/2D product,
there can be no assurance that performance errors and deficiencies will not be
found, or if found, that the Company will be able to successfully correct such
performance errors and deficiencies in a timely manner, if at all. Further,
there can be no assurance that the Company's partners will manufacture their
respective 2D or 2D/3D accelerators for use in the Company's 3D/2D chipset on a
timely basis and with acceptable quality, or that, if demand for the Company's
products increases, such vendors will be able to accelerate production of their
respective chipsets to meet demand for such increases.

The Company's 3D media processors for use in PC applications are currently
designed as a two or three chip solution. Typically, as the functionality of a
given semiconductor becomes technologically stable and widely accepted by users,
the cost of providing the functionality is reduced by means of large scale
integration of such functionality onto a single semiconductor chip. The Company
expects that such integration onto a single chip will occur with respect to the
functionality provided by the Company's current products used in PC
applications. Therefore, the Company's success will be largely dependent on its
ability to develop products on a timely basis that integrate the Company's 3D
technology along with superior performance 2D technology. The Company is
currently developing Banshee, a proprietary 3D/2D single chip solution which the
Company expects will be available for commercial shipment in the first quarter
of 1998. There can be no assurance that the Company will successfully complete
such development on a timely basis or, if such development is completed, that
the resulting single chip 3D/2D solution will perform the desired functions,
offer sufficient price/ performance benefits or meet the technical or other
requirements of potential buyers to realize market acceptance. Furthermore, most
PC OEMs have a lengthy evaluation process, and, in order for the Company's
single chip product to be designed into the OEM's system, the Company must
complete the development of its product to meet the deadline for the start of
the OEM's evaluation cycle. If the Company is unable to complete the timely
development of, and successfully manufacture and deliver, a single chip 3D/2D
solution, the Company's business, financial condition and results of operations
would be materially adversely affected.

If successfully introduced, there can be no assurance that the Company's
single chip 3D/2D solution will achieve market acceptance. The market for PC
media processors has been characterized by unpredictable and sometimes rapid
shifts in the popularity of products, by severe price competition and by
frequent new technology and product introductions. Only a small number of
products have achieved broad market acceptance. Such market acceptance has often
been followed by intense competition between alternative solutions. Any
competitive, technological or other factor adversely affecting the introduction
or sales of the Company's single chip 3D/2D solution for PC applications would
have a material adverse effect on the Company's business, financial condition
and results of operations. Even if the Company's single chip 3D/2D solution is
successfully introduced and does gain initial market acceptance, competitors are
likely to introduce products with comparable price and performance
characteristics. This competition may reduce future market acceptance for the
Company's product and result in decreasing sales and lower gross margins. The
failure of the Company to successfully develop and deliver a single chip 3D/2D
solution for PC applications or its failure to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations.

11
<PAGE> 13

DEPENDENCE ON THIRD PARTY DEVELOPERS AND PUBLISHERS

The Company believes that the availability of a sufficient number of high
quality, commercially successful software entertainment titles and applications
will be a significant competitive factor in the sales of multimedia hardware for
the interactive electronic entertainment market. The Company depends on third
party software developers and publishers to create, produce and market software
titles that will operate with the Company's 3D media processor products. Only a
limited number of software developers are capable of creating high quality
entertainment software. Competition for these resources is intense and is
expected to increase. There can be no assurance that the Company will be able to
attract the number and quality of software developers and publishers necessary
to develop a sufficient number of high quality, commercially successful software
titles compatible with the Company's 3D media processor products. Further, there
can be no assurance that these third parties will publish a substantial number
of software entertainment titles or, if software entertainment titles are
available, that they will be of high quality or that they will achieve market
acceptance. Further, the development and marketing of game titles that do not
fully demonstrate the technical capabilities of the Company's 3D media processor
products could create the impression that the Company's technology offers only
marginal, if any, performance improvements over competing 3D media processors.
Because the Company has no control over the content of the entertainment titles
produced by software developers and publishers, the software entertainment
titles developed may represent only a limited number of game categories and are
likely to be of varying quality. See "Business -- Sales and Marketing."

DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE

The Company's business, financial condition and results of operations will
depend to a significant extent on its ability to successfully develop new
products for the 3D interactive electronic entertainment market. As a result,
the Company believes that significant expenditures for research and development
will continue to be required in the future. The PC, home game console and
coin-op arcade system markets for which the Company's products are designed are
intensely competitive and are characterized by rapidly changing technology,
evolving industry standards and declining average selling prices. The Company
must anticipate the features and functionality that consumers will demand,
incorporate those features and functionality into products that meet the
exacting design requirements of the PC, home game console and coin-op arcade
system manufacturers, price its products competitively and introduce the
products to the market within the limited window for OEM design cycles. The
success of new product introductions is dependent on several factors, including
proper new product definition, timely completion and introduction of new product
designs, the ability of Taiwan Semiconductor Manufacturing Corporation ("TSMC")
and any additional manufacturers to effectively design and implement the
manufacture of new products, quality of new products, differentiation of new
products from those of the Company's competitors and market acceptance of the
Company's and its customers' products. There can be no assurance that the
products the Company expects to introduce will incorporate the features and
functionality demanded by PC, home game console and coin-op arcade system
manufacturers and consumers of interactive electronic entertainment, will be
successfully developed or will be introduced within the appropriate window of
market demand. The failure of the Company to successfully develop and introduce
new products and achieve market acceptance for such products would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Because of the complexity of its technology, the Company has experienced
delays from time to time in completing development and introduction of new
products. In the event that there are delays in the completion of development of
future products, including the products currently expected to be announced over
the next year, the Company's business, financial condition and results of
operations would be materially adversely affected. The time required for
competitors to develop and introduce competing products may be shorter and
manufacturing yields may be better than those experienced by the Company.

12
<PAGE> 14

As the markets for the Company's products continue to develop and
competition increases, the Company anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average selling
prices and, in some cases, gross margin for each of the Company's products will
decline as such products mature. Thus, the Company will need to introduce new
products to maintain average selling prices and gross margins. There can be no
assurance that the Company will successfully identify new product opportunities
or develop and bring new products to market in a timely manner, that products or
technologies developed by others will not render the Company's products or
technologies obsolete or uncompetitive, or that the Company's products will be
selected for design into the products of its targeted customers. The failure of
the Company's new product development efforts would have a material adverse
effect on the Company's business, financial condition and results of operations.

CUSTOMER CONCENTRATION

Because of the Company's limited operating history and early stage of
development, it has only a limited number of customers. For these reasons, the
Company's sales are highly concentrated. Revenues derived from sales to Orchid,
Diamond and Williams accounted for 44%, 33% and 11%, respectively, of product
revenues for 1996. All such sales were made pursuant to purchase orders.
Revenues derived from sales to Diamond and Williams accounted for 59% and 15%,
respectively, of product revenues for the three months ended March 31, 1997.
Development contract revenues recognized under the Sega Agreement represented
14.3% of total revenues during the three months ended March 31, 1997. The
Company expects that a small number of customers will continue to account for a
substantial portion of its revenues for the foreseeable future. Furthermore,
substantially all of the Company's sales are made on the basis of purchase
orders rather than long-term agreements. As a result, the Company's business,
financial condition and results of operations could be materially adversely
affected by the decision of a single customer to cease using the Company's
products or by a decline in the number of PCs, home game consoles or coin-op
arcade systems sold by a single customer or by a small number of customers. In
addition, there can be no assurance that revenues from customers that have
accounted for significant revenues in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
future period.

PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS

The Company's revenues are dependent on the markets for 3D media processors
for PCs, coin-op arcade systems and home game consoles and on the Company's
ability to compete in those markets. Since the Company has no other products,
the Company's revenues and results of operations would be materially adversely
affected if for any reason it were unsuccessful in selling 3D media processors.
The PC, home game console and coin-op arcade system markets frequently undergo
transitions in which products rapidly incorporate new features and performance
standards on an industry-wide basis. If the Company's products are unable at the
beginning of each such transition to support the new feature sets or performance
levels being required by PC, home game console and coin-op arcade system
manufacturers, the Company would be likely to lose design wins and, moreover,
not have the opportunity to compete for new design wins until the next product
transition occurred. Thus, a failure to develop products with required feature
sets or performance standards or a delay as short as a few months in bringing a
new product to market could significantly reduce the Company's revenues for a
substantial period, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

ADOPTION OF GLIDE

The Company's success will be substantially affected by the adoption by
software developers of Glide, its proprietary, low-level 3D API. Although the
Company's products support game titles developed for most industry standard
APIs, the Company believes that Glide currently allows developers to fully
exploit the technical capabilities of the Company's 3D media processor products.
Glide competes with APIs developed or to be developed by other companies having
significantly greater financial resources, marketing power, name recognition and
experience than the Company. For

13
<PAGE> 15

example, certain industry standard APIs, such as Direct3D ("D3D") developed by
Microsoft and OpenGL developed by SGI, have a much larger installed customer
base and a much larger base of existing software titles. Developers may face
additional costs to port games developed on other standard APIs to Glide for
play on the Company's architecture. There can be no assurance that Glide will be
adopted by a sufficient number of software developers or that developers who
have utilized Glide will continue to do so in the future.

Intel has entered into an agreement with the Company to license an early
version of Glide. Intel also has an option to license future versions of Glide
on terms no less favorable than licenses of Glide to other third party graphics
hardware manufacturers. Intel has not implemented Glide nor has it announced any
intention to do so. However, because of Intel's significant market penetration,
marketing power and financial resources, if Intel were to implement this early
version of Glide as a standard development tool for current or future Intel 3D
chipsets, it could substantially reduce or even eliminate any competitive
advantages that the Company's products may have.

DEPENDENCE ON INDEPENDENT MANUFACTURERS AND OTHER THIRD PARTIES;
ABSENCE OF MANUFACTURING CAPACITY; MANUFACTURING RISKS

The Company does not manufacture the semiconductor wafers used for its
products and does not own or operate a wafer fabrication facility. The Company's
products require wafers manufactured with state-of-the-art fabrication equipment
and techniques. All of the Company's products are currently manufactured by TSMC
in Taiwan. The Company obtains manufacturing services from TSMC on a purchase
order basis. Because the lead time needed to establish a strategic relationship
with a new manufacturing partner could be several months, there is no readily
available alternative source of supply for any specific product. A manufacturing
disruption experienced by TSMC would impact the production of the Company's
products for a substantial period of time, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that long-term market acceptance for the Company's products
will depend on reliable relationships between the Company and TSMC (and any
other independent foundries qualified by the Company) to ensure adequate product
supply responsive to customer demand. The Company's relationship with TSMC has
only recently been established, and there can be no assurance that this
relationship will meet the business objectives of the Company. In addition, TSMC
fabricates wafers for other companies and could choose to prioritize capacity
for other uses or reduce or eliminate deliveries to the Company on short notice.

There are many other risks associated with the Company's dependence upon
third party manufacturers, including: reduced control over delivery schedules,
quality assurance, manufacturing yields and cost; the potential lack of adequate
capacity during periods of excess demand; limited warranties on wafers supplied
to the Company; and potential misappropriation of the Company's intellectual
property. The Company is dependent on TSMC, and expects in the future to be
dependent upon TSMC, to produce wafers of acceptable quality and with acceptable
manufacturing yields, to deliver those wafers to the Company and its independent
assembly and testing subcontractors on a timely basis and to allocate to the
Company a portion of their manufacturing capacity sufficient to meet the
Company's needs. The Company's wafer requirements represent a very small portion
of the total production of TSMC. Although the Company's products are designed
using TSMC's process design rules, there can be no assurance that TSMC will be
able to achieve or maintain acceptable yields or deliver sufficient quantities
of wafers on a timely basis or at an acceptable cost. Additionally, there can be
no assurance that TSMC will continue to devote resources to the production of
the Company's products or continue to advance the process design technologies on
which the manufacturing of the Company's products are based. Any such
difficulties would have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company's products are assembled and tested by a third party
subcontractor, Advanced Semiconductor Engineering Group ("ASE"). Such assembly
and testing is conducted on a purchase order basis rather than under a long-term
agreement. As a result of its reliance on ASE to assemble and

14
<PAGE> 16

test its products, the Company cannot directly control product delivery
schedules, which could lead to product shortages or quality assurance problems
that could increase the costs of manufacturing or assembly of the Company's
products. Due to the amount of time normally required to qualify assembly and
test subcontractors, product shipments could be delayed significantly if the
Company is required to find alternative subcontractors. Any problems associated
with the delivery, quality or cost of the assembly and test of the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Manufacturing."

MANUFACTURING YIELDS

The fabrication of semiconductors is a complex and precise process. Minute
levels of contaminants in the manufacturing environment, defects in masks used
to print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial percentage of wafers to be rejected or a
significant number of die on each wafer to be nonfunctional. Many of these
problems are difficult to diagnose and time consuming or expensive to remedy. As
a result, semiconductor companies often experience problems in achieving
acceptable wafer manufacturing yields, which are represented by the number of
good die as a proportion of the total number of die on any particular wafer.
Once production yield for a particular product stabilizes, the Company pays an
agreed price for wafers meeting certain acceptance criteria pursuant to a "good
die" only pricing structure for that particular product. Until production yield
for a particular product stabilizes, however, the Company must pay an agreed
price for wafers regardless of yield. Accordingly, in this circumstance, the
Company bears the risk of final yield of good die. Poor yields would materially
adversely affect the Company's revenues, gross profit and results of operations.

Semiconductor manufacturing yields are a function both of product design,
which is developed largely by the Company, and process technology, which is
typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be
analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process, and resolution of yield problems would require
cooperation by and communication between the Company and the manufacturer. This
risk is compounded by the offshore location of the Company's manufacturer,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems. As the Company's relationships with TSMC and any
additional manufacturing partners develop, yields could be adversely affected
due to difficulties associated with adapting the Company's technology and
product design to the proprietary process technology and design rules of each
manufacturer. Because of the Company's potentially limited access to wafer
fabrication capacity from its manufacturers, any decrease in manufacturing
yields could result in an increase in the Company's per unit costs and force the
Company to allocate its available product supply among its customers, thus
potentially adversely impacting customer relationships as well as revenues and
gross profit. There can be no assurance that the Company's manufacturers will
achieve or maintain acceptable manufacturing yields in the future. The inability
of the Company to achieve planned yields from its manufacturers could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the Company also faces the risk of product
recalls resulting from design or manufacturing defects which are not discovered
during the manufacturing and testing process. In the event of a significant
number of product returns due to a defect or recall, the Company's revenues and
gross profit could be materially adversely affected.

MANAGEMENT OF GROWTH

The ability of the Company to successfully offer services and products and
implement its business plan in a rapidly evolving market requires an effective
planning and management process. The Company's rapid growth has placed, and is
expected to continue to place, a significant strain on the Company's managerial,
operational and financial resources. As of March 31, 1997, the Company had

15
<PAGE> 17

grown to 87 employees from 35 employees as of December 31, 1995. If the
Company's products achieve market acceptance, the Company expects that the
number of its employees will increase substantially over the next 12 months. The
Company's financial and management controls, reporting systems and procedures
are also very limited. Although some new controls, systems and procedures have
been implemented, the Company's future growth, if any, will depend on its
ability to continue to implement and improve operational, financial and
management information and control systems on a timely basis, together with
maintaining effective cost controls, and any failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, the Company will be required to manage multiple
relationships with various customers and other third parties. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company's management will be able
to achieve the rapid execution necessary to successfully offer its services and
products and implement its business plan. The Company's inability to effectively
manage any future growth would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Employees" and "Management".

DEPENDENCE ON KEY PERSONNEL

The Company's performance will be substantially dependent on the
performance of its executive officers and key employees, most of whom have
worked together for only a short period of time. None of the Company's officers
or employees are bound by an employment agreement, and the relationships of such
officers and employees with the Company are, therefore, at will. Given the
Company's early stage of development, the Company will be dependent on its
ability to attract, retain and motivate high quality personnel, especially its
management and development teams. The Company does not have "key person" life
insurance policies on any of its employees. The loss of the services of any of
its executive officers, technical personnel or other key employees would have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company's success depends on its ability to
identify, hire, train and retain highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to identify, attract, assimilate or
retain highly qualified technical and managerial personnel in the future. The
inability to attract and retain the necessary technical and managerial personnel
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Employees" and
"Management."

CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY

The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
fluctuating inventory levels, alternating periods of over-capacity and capacity
constraints, variations in manufacturing costs and yields and significant
expenditures for capital equipment and product development. In addition, the
industry has experienced significant economic downturns at various times,
characterized by diminished product demand and accelerated erosion of product
prices. The Company may experience substantial period-to-period fluctuations in
results of operations due to general semiconductor industry conditions.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

As the Company begins commercial production of its products in increasing
volumes, it will be required to invest significant working capital in inventory
and accounts receivable. The Company intends also to continue to invest heavily
in research and development for its existing products and for new product
development. The Company's future liquidity and capital requirements will depend
upon numerous factors, including the costs and timing of expansion of research
and product development efforts and the success of these development efforts,
the costs and timing of expansion of sales and marketing activities, the extent
to which the Company's existing and new products gain market acceptance,
competing technological and market developments, the costs involved in
maintaining and

16
<PAGE> 18

enforcing patent claims and other intellectual property rights, the level and
timing of development contract revenues, royalty revenues associated with the
Sega Agreement, available borrowings under line of credit arrangements and other
factors. The Company believes that the proceeds from this offering together with
the Company's current cash balances and cash generated from operations and from
available or future debt financing will be sufficient to meet the Company's
operating and capital requirements through December 1998. However, there can be
no assurance that the Company will not require additional financing within this
time frame. The Company's forecast of the period of time through which its
financial resources will be adequate to support its operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described earlier in this paragraph will impact
the Company's future capital requirements and the adequacy of its available
funds. The Company may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies or products. The failure of the Company to raise capital when
needed could have a material adverse effect on the Company's business, financial
condition and results of operations. See " -- Limited Operating History;
Anticipation of Continued Losses," "-- Potential Fluctuations in Quarterly
Results," "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

RISKS RELATING TO INTELLECTUAL PROPERTY

The Company relies primarily on a combination of patent, mask work
protection, trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. The Company has five patent applications pending in the United States
Patent and Trademark Office ("PTO"). There can be no assurance that the
Company's pending patent applications or any future applications will be
approved, or that any issued patents will provide the Company with competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the Company's ability to do business.
In addition, there can be no assurance that others will not independently
develop substantially equivalent intellectual property or otherwise gain access
to the Company's trade secrets or intellectual property, or disclose such
intellectual property or trade secrets, or that the Company can meaningfully
protect its intellectual property. A failure by the Company to meaningfully
protect its intellectual property could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Patents and Proprietary Rights."

The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There can be no
assurance that infringement claims by third parties or claims for
indemnification by other customers or end users of the Company's products
resulting from infringement claims will not be asserted in the future or that
such assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. Any
limitations on the Company's ability to market its products, or delays and costs
associated with redesigning its products or payments of license fees to third
parties, or any failure by the Company to develop or license a substitute
technology on commercially reasonable terms could have a material adverse effect
on the Company's business, financial condition and results of operations.
Litigation by or against the Company could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a favorable determination
for the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses for the infringing technology.

17
<PAGE> 19

INTERNATIONAL OPERATIONS

The Company's reliance on foreign third-party manufacturing, assembly and
testing operations, all of which are located in Asia, and the Company's
expectation of international sales subject it to a number of risks associated
with conducting business outside of the United States. These risks include
unexpected changes in, or impositions of, legislative or regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs, quotas and other trade barriers and restrictions,
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. The Company is also subject
to general political risks in connection with its international trade
relationships. Although the Company has not to date experienced any material
adverse effect on its business, financial condition or results of operations as
a result of such regulatory, political and other factors, there can be no
assurance that such factors will not have a material adverse effect on the
Company's business, financial condition and results of operations in the future
or require the Company to modify its current business practices. In addition,
the laws of certain foreign countries in which the Company's products are or may
be manufactured or sold, including various countries in Asia, may not protect
the Company's products or intellectual property rights to the same extent as do
the laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely. See "-- Risks Relating to
Intellectual Property." Currently, all of the Company's product sales and its
arrangements with its foundry and assembly and test vendor provide for pricing
and payment in U.S. dollars. Although currency fluctuations have been
insignificant to date, there can be no assurance that fluctuations in currency
exchange rates will not have a material adverse effect on the Company's
business, financial condition and results of operations in the future. In
addition, to date the Company has not engaged in any currency hedging
activities, although the Company may do so in the future. Further, there can be
no assurance that one or more of the foregoing factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations or require the Company to modify its current business practices. See
"Business -- Sales and Marketing."

NO PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or, if one does develop, that it will be maintained. The initial public offering
price, which will be determined through negotiations between the Company and the
Underwriters, may not be indicative of prices that will prevail in the trading
market. In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market prices of the common stock of
many publicly held semiconductor companies have in the past been, and can in the
future be expected to be, especially volatile. The market price of the Company's
Common Stock is likely to be highly volatile and may be subject to wide
fluctuations in response to announcements of technological innovations or new
products by the Company, its customers or its competitors, release of reports by
securities analysts, developments or disputes concerning patents or proprietary
rights, economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results. See "Underwriting."

CONTROL BY EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES

The Company anticipates that the officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately 49%
of the Company's outstanding Common Stock following the completion of this
offering (48% if the Underwriters' over-allotment option is exercised). These
shareholders, if acting together, would be able to elect a majority of the
Company's board of directors and would have the ability to control the Company
and influence its affairs and the conduct of its business. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Principal Shareholders."

18
<PAGE> 20

EFFECT OF CERTAIN CHARTER PROVISIONS ON PRICE OF COMMON STOCK

The Board of Directors of the Company has the authority to issue shares of
Preferred Stock and to determine the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The possible issuance of Preferred Stock could
have the effect of delaying, deferring or preventing a change in control of the
Company. These provisions could also limit the price that investors might be
willing to pay in the future for shares of the Company's Common Stock. See
"Description of Capital Stock -- Preferred Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock prevailing from time to time. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act of 1933, as amended (the "Securities Act"), and lock-up
agreements executed by certain of the security holders of the Company under
which such security holders have agreed not to sell or otherwise dispose of any
of their shares until the later of 180 days after the date of this Prospectus or
the open of market on the third trading day following the date of public
disclosure of the Company's financial results for the fiscal year ending
December 31, 1997, without the prior written consent of Robertson, Stephens &
Company. In addition to the 3,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), there will be
9,086,176 shares of Common Stock outstanding as of the date of this Prospectus,
all of which are "restricted" shares under the Securities Act. As a result of
the lock-up agreements described above and the provisions of Rules 144(k), 144
and 701, the restricted shares will be available for sale in the public market
as follows: (i) no shares will be eligible for immediate sale on the date of
this Prospectus, (ii) no shares will be eligible for sale 90 days after the date
of this Prospectus, (iii) approximately 21,250 shares will be eligible for sale
120 days after the date of this Prospectus upon expiration of lock-up agreements
and (iv) approximately 8,977,416 shares will be eligible for sale on the later
of 180 days after the date of this Prospectus or the open of market on the third
trading day following the date of public disclosure of the Company's financial
results for the fiscal year ending December 31, 1997 and (v) approximately
87,510 shares will be eligible for sale approximately one year from the date of
this Prospectus. After this offering, the holders of approximately 7,021,859
shares of Common Stock and rights to acquire 72,159 shares of Common Stock will
be entitled to certain demand and piggyback rights with respect to registration
of such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights." If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the Company's Common Stock. If the Company were to initiate a
registration and include shares held by such holders pursuant to the exercise of
their piggyback registration rights, such sales may have an adverse effect on
the Company's ability to raise capital. See "Shares Eligible for Future Sale"
and "Underwriting."

ABSENCE OF DIVIDENDS; DILUTION

The Company does not anticipate paying any dividends in the foreseeable
future. See "Dividend Policy." The initial public offering price will be
substantially higher than the net tangible book value per share of Common Stock.
Investors purchasing shares of Common Stock in this Offering will therefore
incur immediate and substantial net tangible book value dilution. See
"Dilution."

19
<PAGE> 21

INVESTMENT BY ELECTRONIC ARTS

It is currently anticipated that Electronic Arts will purchase from the
Underwriters a portion of the shares of Common Stock offered hereby upon the
same terms and conditions as the other investors in this offering, except that
the per share purchase price paid by Electronic Arts will equal $ (the
Price to Public less the Underwriting Discounts and Commissions indicated on the
cover page of this Prospectus). The total investment by Electronic Arts will be
$3.0 million if Electronic Arts completes the purchase. Assuming an initial
public offering price of $10.00 per share, Electronic Arts would purchase
approximately 300,000 shares. The sale to Electronic Arts is expected to be
consummated simultaneously with the sale of all other shares offered hereby. In
the event Electronic Arts does not purchase any shares, or purchases fewer
shares than anticipated, the underwriters will purchase those shares not
purchased by Electronic Arts.

Electronic Arts currently owns none of the Company's capital stock and is
not an affiliate of the Company.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby, are estimated to be approximately
$27,200,000 (approximately $31,385,000 if the Underwriters' over-allotment
option is exercised in full) at an assumed initial public offering price of
$10.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company.

The Company expects to use approximately $6.5 million of the net proceeds
for capital expenditures through the end of 1998, primarily for the purchase of
computer equipment and related software tools, furniture, fixtures and leasehold
improvements. The Company also expects to use up to $1.0 million of the net
proceeds for consumer marketing. The Company intends to use the remaining net
proceeds of the offering for working capital and other general corporate
purposes, including expansion of sales and marketing and research and product
development efforts and financing of accounts receivable and inventories. The
foregoing represent estimates only, and the actual amounts expended by the
Company for these purposes and the timing of such expenditures will depend on
numerous factors, including the status of the Company's product development
efforts, the extent to which the Company's products gain market acceptance and
the competition the Company and its products encounter in the marketplace. The
Company may also use a portion of the net proceeds for the acquisition of
technologies, businesses or products that are complementary to those of the
Company, although no such acquisitions are planned or are being negotiated as of
the date of this Prospectus, and no portion of the net proceeds has been
allocated for any specific acquisition. Pending such uses, the net proceeds of
this offering will be invested in short-term, interest bearing, investment grade
securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain any future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.

20
<PAGE> 22

CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
as of March 31, 1997, (ii) the capitalization of the Company on a pro forma
basis giving effect to an increase in the authorized shares of Common Stock to
50,000,000 shares effected in April 1997, the conversion of all outstanding
Preferred Stock into Common Stock and the authorization of 5,000,000 shares of
undesignated Preferred Stock upon the closing of this offering, and the issuance
of 87,510 shares of Common Stock upon the exercise of warrants that expire
automatically upon the closing of this offering and the application of the net
proceeds therefrom, (iii) the cashless exercise of warrants to purchase 7,500
shares of Common Stock for which the Company will receive no proceeds and (iv)
the pro forma capitalization of the Company as adjusted to give effect to the
sale of the 3,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $10.00 per share and the application of
the estimated net proceeds therefrom after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company. The
capitalization information set forth below should be read in conjunction with
Financial Statements and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PRO
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized lease obligations, less current portion(1)........ $ 468 $ 468 $ 468
-------- -------- ----
Shareholders' equity:
Preferred Stock, no par value; 7,269,018 shares authorized,
7,021,859 shares issued and outstanding actual; 5,000,000
shares authorized, none issued and outstanding pro forma
and as adjusted.......................................... 29,222 -- --
Common Stock, no par value; 25,033,000 shares authorized,
1,969,307 shares issued and outstanding actual;
50,000,000 shares authorized, 9,086,176 shares issued and
outstanding pro forma and 12,086,176 shares issued and
outstanding as adjusted(2)............................... 2,078 31,685 58,885
Warrants.................................................... 353 20 20
Notes receivable............................................ (12) (12) (12)
Deferred compensation....................................... (1,544) (1,544) (1,544)
Accumulated deficit......................................... (20,951) (20,951) (20,951)
-------- -------- ----
Total shareholders' equity............................. 9,146 9,198 36,398
-------- -------- ----
Total capitalization................................ $ 9,614 $ 9,666 $ 36,866
======== ======== ====
</TABLE>

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

(1) See Note 8 of Notes to Financial Statements.

(2) Excludes (i) 1,875,461 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1997, with a weighted average exercise
price of $2.72 per share, (ii) 77,159 shares of Common Stock issuable upon
exercise of warrants outstanding as of March 31, 1997, with a weighted
average exercise price of $3.24 per share and (iii) 1,124,307 shares of
Common Stock reserved for future issuance under the Company's stock plans.
See "Management -- Stock Plans," "Description of Capital Stock" and Notes 5
and 6 of Notes to Financial Statements.

21
<PAGE> 23

DILUTION

The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $9,198,000, or $1.01 per share of Common Stock. "Pro forma net
tangible book value" per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding (assuming the conversion of all then outstanding Preferred Stock
into Common Stock). After giving effect to the receipt of the net proceeds from
the sale of the 3,000,000 shares of Common Stock offered by the Company hereby
(after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company) at an assumed initial public offering price of
$10.00 per share, the Company's net tangible book value as of March 31, 1997
would have been $36,398,000, or $3.01 per share of Common Stock. This represents
an immediate increase in net tangible book value of $2.00 per share to existing
shareholders and an immediate dilution of $6.99 per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $10.00
Pro forma net tangible book value as of March 31, 1997............ $1.01
Increase attributable to new investors............................ 2.00
-----
Pro forma net tangible book value after offering.................... 3.01
-----
Dilution to new investors........................................... 6.99
=====
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing shareholders and by new public investors purchasing shares in this
offering at an assumed initial public offering price of $10.00 per share (before
deducting estimated underwriting discounts and commissions and offering expenses
payable by the Company).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)......... 9,086,176 75.2% $31,957,000 51.6% $ 3.52
New investors............. 3,000,000 24.8% 30,000,000 48.4% 10.00
---------- ----- ----------- -----
Total........... 12,086,176 100.0% $61,957,000 100.0%
========== ===== =========== =====
</TABLE>

The foregoing computations assume no exercise of stock options or warrants
after March 31, 1997. As of March 31, 1997, there were outstanding options to
purchase 1,875,461 shares of Common Stock, with a weighted average exercise
price of $2.72 per share, and outstanding warrants to purchase 77,159 shares of
Common Stock, with a weighted average exercise price of $3.24 per share. In
addition, as of March 31, 1997, 1,124,307 shares of Common Stock were reserved
for future issuance under the Company's stock plans. To the extent that any
shares available for issuance upon exercise of outstanding options, warrants or
reserved for future issuance under the Company's stock plans are issued, there
will be further dilution to new public investors. See "Management -- Stock
Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to Financial
Statements.

22
<PAGE> 24

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1995 and 1996 and the three month period ended March 31, 1997
and the balance sheet data as of December 31, 1995 and 1996 and March 31, 1997
are derived from financial statements of the Company that have been audited by
Price Waterhouse LLP, independent accountants, and are included elsewhere in
this Prospectus. The statement of operations data for the three month period
ended March 31, 1996 is derived from unaudited financial statements included
elsewhere in this Prospectus. The unaudited financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
operating results for such period. The operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results to be
expected for any other interim period or any future fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product.................................................. $ -- $ 6,390 $ -- $ 4,497
Development contract..................................... -- -- -- 750
------- -------- ------- --------
Total revenues................................... -- 6,390 -- 5,247
Cost of product revenues................................... -- 5,123 -- 2,582
------- -------- ------- --------
Gross profit............................................... -- 1,267 -- 2,665
------- -------- ------- --------
Operating expenses:
Research and development(1).............................. 2,940 9,435 1,659 1,953
Selling, general and administrative(1)................... 2,166 6,642 1,028 1,846
------- -------- ------- --------
Total operating expenses......................... 5,106 16,077 2,687 3,799
------- -------- ------- --------
Loss from operations....................................... (5,106) (14,810) (2,687) (1,134)
Interest and other income (expense), net................... 67 59 35 (27)
------- -------- ------- --------
Net loss................................................... $(5,039) $(14,751) $(2,652) $ (1,161)
======= ======== ======= ========
Pro forma net loss per share(2)............................ $ (1.53) $ (0.11)
======== ========
Shares used in pro forma net loss per share
calculations(2).......................................... 9,627 10,386
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 865 $ 5,291 $ 4,141
Working capital (deficit).................................. (307) 6,637 6,049
Total assets............................................... 2,440 15,581 15,586
Capitalized lease obligations, less current portion(3)..... 544 632 468
Accumulated deficit........................................ (5,039) (19,790) (20,951)
Total shareholders' equity................................. 552 9,621 9,146
</TABLE>

- ------------
(1) Research and development expenses include amortization of deferred
compensation of $22,000, $50,000, $6,000 and $48,000 for 1995, 1996 and the
three month periods ended March 31, 1996 and 1997, respectively. Selling,
general and administrative expenses include amortization of deferred
compensation of $34,000, $146,000, $8,000 and $73,000 for 1995, 1996 and the
three month periods ended March 31, 1996 and 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(2) See Note 1 of Notes to Financial Statements for an explanation of shares
used in pro forma net loss per share calculations.
(3) See Note 8 of Notes to Financial Statements.

23
<PAGE> 25

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. The Company's actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Prospectus.

OVERVIEW

The Company was founded in August 1994 to design, develop, market and
support 3D media processors, subsystems and API software for the interactive
electronic entertainment market. The Company had no operations during the period
from inception (August 24, 1994) through December 31, 1994. The Company was
considered a development stage enterprise and was primarily engaged in product
development and product testing until its first commercial product shipments in
the third quarter of 1996. The Company incurred losses in 1995, 1996 and the
three months ended March 31, 1997 and as of March 31, 1997 had an accumulated
deficit of $21.0 million. These net losses were attributable to the lack of
substantial revenue and continuing significant costs incurred in the research
and development of the Company's 3D media processor products and product
testing. The Company expects to incur additional net losses at least in the near
term as it continues to incur substantial research and development and sales and
marketing expenses to commercialize its products. There can be no assurance that
significant revenues or profitability will ever be achieved or, if they are
achieved, that they can be sustained or increased on a quarterly or annual basis
in the future

The Company derives revenue from the sale of 3D media processors and
subsystems and from its development contract with Sega pursuant to the Sega
Agreement. The Company's products are designed for use in PCs, home game
consoles and coin-op arcade systems. The Company began commercial shipments of
its first 3D graphics product, the Voodoo Graphics chipset, in September 1996.
The Company's second product, the Voodoo Rush chipset, is currently in the later
stages of development, with limited commercial shipments expected to begin in
the second quarter of 1997. The Company has also commenced development of
Banshee, which is intended to be a high performance, full-featured single chip
3D/2D media processor for the PC and coin-op arcade markets. Historically, the
Company has also marketed and sold limited quantities of its Obsidian products,
a line of Voodoo Graphics-based 3D processor boards. The Company currently
intends to sell the Obsidian product on an opportunistic basis in the future. As
a result of the Company's limited operating history and early stage of
development, it has only a limited number of customers. Revenues derived from
sales to Orchid, Diamond and Williams accounted for 44%, 33% and 11%,
respectively, of product revenues in 1996. Revenues derived from sales to
Diamond and Williams accounted for 59% and 15%, respectively, of product
revenues for the three months ended March 31, 1997. The Company expects that a
small number of customers will continue to account for a substantial portion of
its total revenues for the foreseeable future.

The Company is developing a 3D media processor chipset for Sega's next
generation home game console pursuant to the Sega Agreement. During the three
months ended March 31, 1997, the Company recognized development contract
revenues of $750,000 under the Sega Agreement representing a non-refundable
amount due for the delivery of certain engineering designs to Sega. Future
development contract revenues under the Sega Agreement will be recognized by the
Company under the percentage of completion method of accounting based upon costs
incurred relative to total contract costs. Development contract revenues
recognized under the Sega Agreement represented 14.3% of total revenues during
the three months ended March 31, 1997. The Company may earn additional
development contract revenue and certain development bonuses provided that
milestones set forth in the Sega Agreement are met. Under the Sega Agreement,
the Company will also derive royalty revenue for each Sega/3Dfx Chipset
incorporated into products sold by Sega. The timely development and availability
for shipment of the Sega/3Dfx Chipset by the Company and the

24
<PAGE> 26

successful introduction and sale of the New Sega Game Console will be critical
factors affecting the Company's future results of operations and financial
condition. Although published reports in the financial press have indicated that
Sega may discontinue the manufacture and marketing of its home game console
hardware, based on the Company's dealings with Sega in connection with the
negotiation, execution and performance to date of the Sega Agreement, the
Company has no reason to believe that Sega intends to withdraw from its
commitment to develop, manufacture and market the New Sega Game Console. See
"Risk Factors -- Dependence on Relationship with Sega" and
"Business -- Products, Products Under Development and Technology
License -- Strategic Relationship with Sega" for a description of the Sega
Agreement.

As part of its manufacturing strategy, the Company leverages the expertise
of third party suppliers in the areas of wafer fabrication, assembly, quality
control and assurance, reliability and testing. This strategy allows the Company
to devote its resources to research and development and sales and marketing
activities while avoiding the significant costs and risks associated with owning
and operating a wafer fabrication facility and related operations. The Company
does not manufacture the semiconductor wafers used for its products and does not
own or operate a wafer fabrication facility. All of the Company's semiconductor
products are currently manufactured by TSMC in Taiwan. The Company obtains
manufacturing services from TSMC on a purchase order basis. The Company provides
TSMC with a rolling six month forecast of its supply needs and TSMC builds to
the Company's forecast. The Company purchases wafers and die from TSMC. Once
production yield for a particular product stabilizes, the Company pays an agreed
price for wafers meeting certain acceptance criteria pursuant to a "good die"
only pricing structure for that particular product. Until production yield for a
particular product stabilizes, however, the Company must pay an agreed price for
wafers regardless of yield. Such wafer and die purchases constitute a
substantial portion of cost of products revenues once products are sold. TSMC is
responsible for procurement of raw materials used in the production of the
Company's products. The Company believes that raw materials required are readily
available. See "Risk Factors -- Dependence on Independent Manufacturers and
Other Third Parties; Absence of Manufacturing Capacity; Manufacturing Risks."

In connection with the grant of stock options to employees since inception
(August 1994), the Company recorded aggregate deferred compensation of
approximately $1.9 million, representing the difference between the deemed fair
value of the Common Stock for accounting purposes and the option exercise price
at the date of grant. This amount is presented as a reduction of shareholders'
equity and is amortized ratably over the vesting period of the applicable
options. These valuations resulted in charges to operations of $56,000 ($22,000
of which was recorded in research and development expenses and $34,000 of which
was recorded in selling, general and administrative expenses), $196,000 (of
which $50,000 and $146,000 were recorded in research and development expenses
and selling, general and administrative expenses, respectively) and $121,000 (of
which $48,000 and $73,000 were recorded in research and development expenses and
selling, general and administrative expenses, respectively) in 1995, 1996 and
the three months ended March 31, 1997, respectively, and will result in charges
over the next 15 quarters aggregating approximately $121,000 per quarter (of
which $48,000 and $73,000 will be recorded in research and development expenses
and selling, general and administrative expenses, respectively).

RESULTS OF OPERATIONS

Three Months Ended March 31, 1997 and 1996

Revenues. Revenues from product sales are recognized upon product
shipment. Revenue resulting from development contracts is recognized by the
Company under the percentage of completion method of accounting based upon costs
incurred relative to total contract costs. The Company's total revenues were
$5.2 million in the three months ended March 31, 1997. No revenues were
generated in the three months ended March 31, 1996.

25
<PAGE> 27

Product revenues were $4.5 million in the three months ended March 31,
1997. Product revenues in the three months ended March 31, 1997 were principally
attributable to sales of the Company's Voodoo Graphics chipset and, to a lesser
extent, sales of the Company's Obsidian graphics subsystems. The Company
currently plans to sell the Obsidian product on an opportunistic basis in the
future.

Development contract revenues of $750,000 were recognized in the three
months ended March 31, 1997 representing a non-refundable amount due for the
delivery of certain engineering designs to Sega. Development contract revenues
are billable by the Company to Sega based on a schedule of set forth in the Sega
Agreement. Development contract revenues in future quarters will be recognized
under the percentage of completion method of accounting as costs are incurred
relative to total contract costs and will fluctuate from quarter to quarter.
These fluctuations in development contract revenues will cause fluctuations in
the Company's total revenues, gross margins and results of operations. See "Risk
Factors -- Potential Fluctuations in Operating Results," "-- Overview" and
"Business -- Products, Products Under Development and Technology
License -- Strategic Relationship with Sega."

Gross Profit. Gross profit consists of total revenues less cost of product
revenues. Cost of product revenues consists primarily of costs associated with
the purchase of components, the procurement of semiconductors and printed
circuit board assemblies from the Company's contract manufacturers, labor and
overhead associated with such procurement and warehousing, shipping and warranty
costs. Cost of product revenues does not include expenses related to development
contract revenues. Gross profit was $2.7 million in the three months ended March
31, 1997. Cost of product revenues was $2.6 million in the three months ended
March 31, 1997. Gross profit as a percentage of total revenues was 50.8% in the
three months ended March 31, 1997. However, given the Company's limited
operating history and limited history of product shipments, the Company believes
that analysis of gross profit as a percentage of total revenues is not
meaningful. The Company's future gross profit will be affected by the overall
level of sales; the mix of products sold in a period; the mix of revenues
between product revenues, development contract revenues associated with the Sega
Agreement and licensing revenues in a period; manufacturing yields; and the
Company's ability to reduce product procurement costs.

Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
the Company's foundries in connection with manufacturing start-up of new
products. In addition, costs associated with development contracts are included
in research and development. Research and development expenses increased 17.7%
from $1.7 million in the three months ended March 31, 1996 to $2.0 million in
the three months ended March 31, 1997. Research and development expenses include
costs associated with development contract revenues of approximately $80,000.
The increase reflects increased personnel costs associated with the general
expansion of the Company's research and development activities and increased
nonrecurring engineering costs incurred in connection with the commencement of
manufacturing of the Voodoo Rush chipset. The market for the Company's products
is characterized by frequent new product introductions and rapidly changing
technology and industry standards. As a result, the Company's success will
depend to a substantial degree upon its ability to rapidly develop and introduce
new products and enhancements to existing products that meet changing customer
requirements and emerging industry standards. Accordingly, the Company expects
to continue to make substantial investments in research and development and
anticipates that research and development expenses will increase in absolute
dollars in future periods, although such expenses as a percentage of total
revenues will fluctuate.

Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 79.6% from $1.0 million
in the three months ended March 31, 1996 to $1.8 million in the three months
ended March 31, 1997. The increase resulted from the addition of personnel in
sales, marketing, finance and administration as the

26
<PAGE> 28

Company expanded operations, and increased commission expenses associated with
the commencement of commercial sales. The Company expects that selling, general
and administrative expenses will increase in absolute dollars in future periods,
although such expenses as a percentage of total revenues will fluctuate.

Interest and Other Income (Expense), Net. Interest and other income
(expense), net decreased from net interest and other income of $35,000 in the
three months ended March 31, 1996 to net interest and other expense of $27,000
in the three months ended March 31, 1997. The decrease resulted from higher
interest expense as a result of outstanding balances under the equipment line of
credit and capitalized lease obligations, partially offset by interest income
earned on outstanding cash balances.

Provision For Income Taxes. The Company recorded no provision for income
taxes in the three months ended March 31, 1996 and 1997 as it incurred losses
during such periods. As of March 31, 1997, the Company had net operating loss
carryforwards of approximately $19.1 million for federal income tax purposes. If
not utilized, the net operating loss carryforwards will begin to expire in 2010.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances, including for example, a cumulative ownership change of more than
50% over a three-year period. As of March 31, 1997, the Company's net operating
loss carryforwards were not subject to any material annual limitations on
utilization. The offering will result in an annual limitation of the Company's
ability to utilize net operating losses (from the effective date of this
offering).

At March 31, 1997, the Company had approximately $8.2 million of deferred
tax assets, comprised primarily of net operating loss and expenses not currently
deductible for tax purposes. The Company believes that available objective
evidence creates sufficient uncertainty regarding the realizability of such
deferred tax assets; therefore a full valuation allowance has been recorded. The
factors considered include the Company's history of losses, the lack of
carryback capacity to realize deferred tax assets, the uncertainty of the
development of the products and markets in which the Company competes and the
fact that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology. The Company believes that based on
the currently available evidence, it is more likely than not that the Company
will not generate sufficient taxable income to realize the Company's deferred
tax assets.

Years Ended December 31, 1996 and 1995

Revenues. The Company's total revenues were $6.4 million in 1996. In 1995
the Company was still in the development stage and did not generate any
revenues. Substantially all of the revenues in 1996 were derived from sale of
the Company's Voodoo Graphic chipset, which began commercial shipments in
September 1996 and, to a lesser extent, sale of Obsidian graphics subsystems.
There were no development contract revenues in 1996.

Gross Profit. Gross profit and cost of product revenues were $1.3 million
and $5.1 million, respectively, in 1996. Gross profit as a percentage of total
revenues was 19.8% in 1996. Cost of product revenues in 1996 reflected
significant prototype and manufacturing start-up expenses incurred in connection
with the initial commercial shipment of the Voodoo Graphics chipset.

Research and Development. Research and development expenses increased
220.9% from $2.9 million in 1995 to $9.4 million in 1996, as the Company
significantly increased research and product development activities and incurred
increased nonrecurring engineering costs in connection with beginning
manufacturing of the Voodoo Graphics chipset. The increased research and
development expenditures primarily related to compensation and related personnel
expenditures as the Company expanded its research and development operations.

Selling, General and Administrative. Selling, general and administrative
expenses increased 206.6% from $2.2 million in 1995 to $6.6 million in 1996, as
the Company (i) increased finance and administration staffing and related costs
necessary to support higher levels of operations,

27
<PAGE> 29

(ii) established sales and marketing operations to support the commencement of
commercial product shipments and (iii) incurred commission expenses associated
with product sales.

Interest and Other Income (Expense), Net. Interest and other income
(expense), net decreased from $67,000 in 1995 to $59,000 in 1996. The decrease
resulted from higher levels of interest expense as a result of higher
outstanding balances of capitalized lease obligations partially offset by higher
interest income as a result of higher outstanding cash balances.

Provision for Income Taxes. The Company recorded no provision for income
taxes in 1995 and 1996 as it incurred losses during such periods.

Quarterly Results of Operations

The following table sets forth unaudited quarterly results of operations
data for each quarter during the year ended December 31, 1996 and for the three
months ended March 31, 1997. This unaudited information has been prepared by the
Company on a basis consistent with the Company's audited financial statements
appearing elsewhere in this Prospectus and includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The unaudited quarterly information
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Prospectus. In light of the Company's limited
operating history, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Product................................ $ -- $ -- $ 1,887 $ 4,503 $ 4,497
Development contract................... -- -- -- -- 750
------- ------- ------- ------- -------
Total revenues................. -- -- 1,887 4,503 5,247
Cost of product revenues................. -- -- 1,719 3,404 2,582
------- ------- ------- ------- -------
Gross profit............................. -- -- 168 1,099 2,665
------- ------- ------- ------- -------
Operating expenses:
Research and development............... 1,659 2,864 2,626 2,286 1,953
Selling, general and administrative.... 1,028 1,529 1,661 2,424 1,846
------- ------- ------- ------- -------
Total operating expenses....... 2,687 4,393 4,287 4,710 3,799
------- ------- ------- ------- -------
Loss from operations..................... (2,687) (4,393) (4,119) (3,611) (1,134)
Interest and other income (expense),
net.................................... 35 3 8 13 (27)
------- ------- ------- ------- -------
Net loss................................. $(2,652) $(4,390) $(4,111) $(3,598) $(1,161)
======= ======= ======= ======= =======
</TABLE>

The Company was founded in August 1994 and was a development stage company
until it began commercial shipments of its first product, Voodoo Graphics, in
the third quarter of 1996. Product revenues were derived primarily from the sale
of the Voodoo Graphics chipset in the three month periods ended September 30,
1996, December 31, 1996 and March 31, 1997. The Company's product revenues
remained relatively flat in the three months ended March 31, 1997 as compared to
the three months ended December 31, 1996 due to seasonality in the PC market.
During the three months ended March 31, 1997, the Company recognized development
contract revenues of $750,000 under the Sega Agreement representing a
non-refundable amount due for delivery of certain engineering designs to Sega.
Development contract revenues in future quarters derived pursuant to the Sega
Agreement will fluctuate from quarter to quarter. See "-- Overview." The
increase in cost of product revenues during the three months ended December 31,
1996 was primarily attributable to increased product revenues and manufacturing
inefficiencies as the Company increased commercial product sales. Total
operating expenses fluctuated from quarter to quarter as the Company expanded
research and development and

28
<PAGE> 30

sales and marketing activities in 1996 to support the manufacture, development
and marketing of Voodoo Graphics and Voodoo Rush, respectively. Operating
expenses in the three month period ended March 31, 1997 decreased from the prior
periods as the Company began cost containment measures and incurred lower
manufacturing start-up expenses.

Impact of Adoption of New Accounting Standards

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. In January 1996, the Company adopted the disclosure requirements of
FAS 123. The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The adoption of the disclosure requirements of FAS 123 did not have
a material impact on the Company's financial condition or results of operations.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121")
which requires the Company to review for impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In certain situations, an impairment loss would be
recognized. Effective January 1, 1996, the Company adopted FAS 121. The adoption
of FAS 121 did not have a material impact on the Company's financial condition
or results of operations.

In February 1997, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which adjusts the calculation of earnings per share under generally accepted
accounting principles. FAS 128 is effective for the Company's fiscal year ending
December 31, 1997. See Note 1 of Notes to Financial Statements for the effect of
FAS 128 on the Company's pro forma net loss per share presentation.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
private placements of equity securities yielding approximately $31.3 million. As
of March 31, 1997, the Company had approximately $1.6 million of equipment line
financing in place. As of March 31, 1997, the Company had approximately $4.1
million in cash and cash equivalents.

Net cash used in operating activities was approximately $3.9 million, $17.2
million and $1.8 million in 1995, 1996 and the three months ended March 31,
1997, respectively. For 1995, net cash used in operating activities was due
primarily to the net loss of $5.0 million, partially offset by increases in
accounts payable and accrued liabilities. Net cash used in operating activities
in 1996 was due primarily to the net loss of $14.8 million, a $4.9 million and
$1.5 million increase in inventory and accounts receivable, respectively,
associated with the generation of revenues which was partially offset by a $2.6
million increase in accounts payable and accrued liabilities. For the three
months ended March 31, 1997, net cash used in operating activities was due
primarily to the net loss of $1.2 million, a $2.6

29
<PAGE> 31

million increase in accounts receivable, increases in other assets and decreases
in accounts payable partially offset by a $2.0 million decrease in inventory and
an $800,000 increase in deferred revenue.

Net cash used in investing activities was approximately $589,000, $2.2
million and $334,000 in 1995, 1996 and the three months ended March 31, 1997,
respectively, and was due, in each period, to the purchase of property and
equipment. The Company does not have any significant capital spending or
purchase commitments other than normal purchase commitments and commitments
under leases. As of March 31, 1997, the Company had capital equipment of $5.1
million less accumulated depreciation of $1.6 million to support its research
and development and administrative activities. The Company has financed
approximately $1.9 million from capital lease obligations through March 31,
1997. The Company has an equipment line of credit, which provided initially for
the purchase of up to $2.0 million of property and equipment, of which
approximately $1.6 million had been utilized as of March 31, 1997. No remaining
borrowing capacity is available under this equipment line of credit. Borrowings
under this line are secured by all of the Company's owned assets and bear
interest at the bank's prime rate plus 1.50% per annum (10.0% as of March 31,
1997). The agreement requires that the Company maintain certain financial ratios
and levels of tangible net worth profitability and liquidity. The Company was in
compliance with its covenants as of March 31, 1997. The lease line of credit
expires in August 1998. The Company expects to use approximately $6.5 million of
the net proceeds of this offering for capital expenditures through the end of
1998, primarily for the purchase of computer equipment and related software
tools, furniture, fixtures and leasehold improvements. The Company expects
capital expenditures to increase over the next several years as it expands
facilities and acquires equipment to support the planned expansion of its
operations.

Net cash provided by financing activities was approximately $5.4 million,
$23.8 million and $988,000 in 1995, 1996 and the three months ended March 31,
1997, respectively, due primarily to proceeds from the issuance of Preferred
Stock.

The Company has a line of credit agreement with Silicon Valley Bank, which
provides for maximum borrowings in an amount up to the lesser of 75% of eligible
accounts receivable plus 100% of cash and cash equivalents or $4.0 million.
Borrowings under the line are secured by all of the Company's owned assets and
bear interest at the bank's prime rate plus 1.50% per annum. The agreement
requires that the Company maintain certain financial ratios and levels of
tangible net worth, profitability and liquidity. The Company is in compliance
with its covenants as of March 31, 1997. The line of credit expires in August
1997. At March 31, 1997, there were no borrowings outstanding under this line of
credit. The Company has the ability to obtain and is actively considering
obtaining an additional $1.0 million term loan with Silicon Valley Bank for
software, equipment and leasehold improvements. In addition, the Company is
considering entering into a $500,000 lease line with a different lender for
equipment.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including the costs and timing of expansion of research and
product development efforts and the success of these development efforts, the
costs and timing of expansion of sales and marketing activities, the extent to
which the Company's existing and new products gain market acceptance, competing
technological and market developments, the costs involved in maintaining and
enforcing patent claims and other intellectual property rights, the level and
timing of development contract revenues and royalty revenues associated with the
Sega Agreement and available borrowings under line of credit arrangements and
other factors. The Company believes that the proceeds from this offering
together with the Company's current cash balances and cash generated from
operations and from available or future debt financing will be sufficient to
meet the Company's operating and capital requirements through December 1998.
However, there can be no assurance that the Company will not require additional
financing within this time frame. The Company's forecast of the period of time
through which its financial resources will be adequate to support its operations
is a forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described earlier in this paragraph will impact
the Company's future capital requirements and the adequacy of its available
funds. The Company may be required to raise additional funds through public or
private

30
<PAGE> 32

financing, strategic relationships or other arrangements. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies or products. The failure of the Company to raise capital when
needed could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Possible Future
Capital Requirements."

31
<PAGE> 33

BUSINESS

3Dfx Interactive is a leading developer of high performance, cost-effective
3D media processors, software and related technology for the interactive
electronic entertainment market. The Company has developed 3D technology that
enables a highly immersive, interactive and realistic 3D experience across
multiple hardware entertainment platforms. Furthermore, the Company's technology
facilitates virtually "seamless portability", or the transfer of game titles or
other software content from one hardware platform to another, such as from an
arcade system to a PC, without significant rewriting of the code for such game
titles or other software content. The Company's strategy is to provide a 3D
media processor solution comprised of hardware and embedded software designed
around a common architecture that will become the standard graphics engine for
the interactive electronic entertainment market. The Company believes that the
benefits of its technology, coupled with its software content strategy, provide
powerful incentives for the leading PC OEMs and entertainment hardware
manufacturers to utilize the 3Dfx solution.

Voodoo Graphics, the Company's first product, and subsequent 3D media
processors now under development are designed around a common architecture to be
utilized as the graphics engine for PCs and coin-op arcade systems. For PC
applications, Diamond and Orchid have each introduced consumer multimedia add-in
cards incorporating the Company's 3D media processor for sale in the retail
channel and for incorporation into PCs manufactured by, among others,
Apricot/Mitsubishi Electronic PC Division ("Apricot/Mitsubishi"), Falcon
Northwest Computer Systems ("Falcon Northwest"), Hewlett-Packard Company
("Hewlett-Packard") and NEC Corp. ("NEC"). In the coin-op arcade market, the
Voodoo Graphics 3D media processor is being utilized by Acclaim, Kaneko, Ltd.,
Midway and Taito, among others. Voodoo Graphics technology is also the graphics
architecture for the Sega/3Dfx Chipset that the Company is developing for
license to Sega for use in the New Sega Game Console. The Company's second
product, Voodoo Rush, is designed to incorporate a 3D/2D solution into a single
PCI board. Voodoo Rush began sampling in November 1996 and limited commercial
shipments are expected in the second quarter of 1997. The Company has commenced
development of Banshee, which is intended to be a high performance,
fully-featured single chip, 3D/2D media processor for the PC and coin-op arcade
markets. The Company expects to begin commercial shipments of Banshee in the
first quarter of 1998. All of the Company's products are manufactured,
assembled, tested and packaged by third-party suppliers.

INDUSTRY BACKGROUND

The goal of interactive electronic entertainment is to create a realistic
and immersive environment in which users can actively participate. Interactive
electronic entertainment began in the 1970s with Atari's introduction of Pong, a
simplistic, 2D, black and white, coin-op arcade game resembling ping pong, and
has evolved to realistic and engaging 3D action games such as Quake and Tomb
Raider.

While interactive electronic entertainment started in the arcade, it was
brought to the mass market through the advent of inexpensive, dedicated home
game consoles that attached to televisions. Over the past 15 years, Nintendo,
Sega, Sony and other OEMs have introduced successive generations of these
consoles that, combined with better quality games, have provided increasing
realism and enhanced game play. The overall entertainment experience on these
platforms has been improving as a result of the recent introduction of first
generation 3D hardware and software in the arcade and console markets. Despite
its desirability, high performance 3D technology continues to be prevalent only
in high-end engineering workstations that typically cost tens of thousands of
dollars.

The ultimate goal of the use of 3D for entertainment applications is to
create an interactive experience with video quality comparable to that of motion
pictures. Interactive electronic entertainment applications employing 3D
graphics create plausible illusions of reality and thus provide more engaging
presentations of complex action and scenery than traditional 2D graphics. The
Company believes that once consumers experience high quality 3D technology on
any entertainment platform, they will demand it from all interactive
entertainment experiences.

32
<PAGE> 34

Interactive electronic entertainment products today are generally played on
three hardware platforms -- the coin-op arcade system, the home game console and
increasingly the PC. Coin-op arcade games have traditionally offered the most
compelling and immersive experience for game players and, as a result, 3D gaming
was first introduced in this high-end market. However, coin-op arcade games are
based on high cost, proprietary hardware and, consequently, the coin-op arcade
market has remained a relatively small segment of the overall 3D market. Like
coin-op arcade systems, home game console hardware is typically proprietary.
However, the attractive price point, traditionally $300 or less, continual
technological improvements and convenience of home play that home game consoles
offer have fueled the platform's substantial consumer adoption even though
performance still trails that of the arcade.

Although 3D interactive electronic entertainment has enjoyed success on
both the coin-op arcade and home game console platforms, which are optimized for
game play, to date 3D entertainment has had limited success in the PC market. In
fact, in 1996, PC games accounted for less than 20% of the total video game
market. Several recent developments, however, are enabling the PC to become a
more suitable platform for interactive electronic entertainment. First, the
emergence of more powerful microprocessors and dedicated graphics processors
have provided the necessary computing power to handle the computationally
intensive processing of 3D graphics at acceptable costs. Second, the PC industry
has adopted wider data buses in the PC architecture that are capable of
transmitting the vast streams of data needed for high quality 3D graphics.
Third, cost reductions in memory and other components have allowed PC OEMs to
offer lower cost, general purpose computing platforms that are ideal for 3D
interactive electronic entertainment. Finally, the industry has developed and
adopted industry standard 3D APIs, like Microsoft's D3D and SGI's OpenGL, which
serve as software bridges between applications and the 3D graphics processor.

In addition to the performance capabilities of the hardware, the success of
any game platform ultimately depends on the quality and quantity of software
titles developed for the platform and the ease with which developers can create
new software for, or port existing software to, a platform. Porting is the
adaptation of software code written for one platform for use on another. For
example, software written for a coin-op arcade system must be ported so that it
can be played on PCs or home game consoles. Historically, porting has been
technically challenging, costly and time consuming. Even though the coin-op
arcade market is the proving ground for new game titles with hits in the arcade
market virtually guaranteeing success in the PC and home game console markets,
software developers often opt not to pursue these opportunities because of the
significant engineering effort required to port a title from one platform to
another. As a result, game developers and publishers have not been able to fully
capitalize on their investment in software content. Consumers have been
frustrated by the long delays between their first experience with a game in an
arcade and the availability of the game for home use and by the significant
decrease in game quality typically experienced when software titles migrate from
the arcade platform. Thus, content developers are demanding an entertainment
solution that facilitates virtually seamless porting across platforms and
consumers are demanding a cost-effective solution that enables a high quality
gaming experience on their choice of platform.

The 3D Dilemma

33
<PAGE> 35

visual realism and performance at a cost-effective price. The solution must also
drive content development by enabling developers to create a new generation of
high quality 3D software that delivers a realistic and immersive experience.

THE 3DFX SOLUTION

3Dfx has developed hardware and software technology designed to deliver
superior 3D performance across multiple interactive electronic entertainment
platforms in a cost-effective manner. The Company's technology is optimized to
alleviate the traditional consumer trade-off between visual quality and gaming
performance by providing a 3D solution with both high fill rates and frame
rates. To that end, the Company's technology enables a highly immersive,
interactive 3D experience with compelling visual quality, realistic motion and
complex character and scene interaction at real time frame rates. Voodoo
Graphics, the Company's first product, and subsequent 3D media processors now
under development, are designed around a common architecture to be utilized as
the graphics engine for PCs and coin-op arcade systems. Voodoo Graphics
technology is also the graphics architecture for the Sega/3Dfx Chipset that the
Company is developing for license to Sega for use in the New Sega Game Console.

To promote the rapid adoption of its products, the Company's architecture
supports most industry standard APIs, including: Apple Computer Inc.'s Rave3D,
Argonaut Technologies Incorporated's BRender, Criterion Software Ltd.'s
Renderware, Intel's 3DR, Microsoft's D3D and SGI's OpenGL. The Company believes
that game titles using any of these APIs in conjunction with its 3D media
processor products offer compelling performance when compared to performance
achieved by competing hardware solutions. Additionally, the Company has
developed Glide, its proprietary, low-level 3D API. Glide was designed to
optimize the performance of software designed for any entertainment platform
powered by the Company's 3D media processors, and affords virtually seamless
portability of game content across multiple entertainment platforms. The content
provider's ability to rapidly port software titles to all three platforms
reduces the developer's time to market from the arcade to the high volume
platforms, significantly reduces the costs of porting across multiple platforms,
provides a successful title with enormous exposure and allows both the game
developer and the publisher to more effectively leverage their investment in a
given title. The Company believes that these are powerful incentives for the
leading PC OEMs, arcade and console hardware manufacturers, software content
developers and publishers to utilize and design applications for the 3Dfx
graphics engine.

STRATEGY

The Company's objective is to establish its products as the standard 3D
media processors in the interactive electronic entertainment market. Key
elements of the Company's business strategy include:

Focus on Interactive Electronic Entertainment Market. The interactive
electronic entertainment market is currently a multi-billion dollar industry
that is growing rapidly. The Company believes that the compelling visual quality
and high performance graphics enabled by its 3D media processors make its 3D
solution ideal for use in this market where users demand a high quality 3D
experience. The Company's strategy is to develop and introduce products that
cost-effectively deliver 3D performance levels that meet the demanding
requirements of the three major interactive electronic entertainment platforms.
Moreover, given the technical challenge of offering a high quality 3D solution
the Company believes that this market offers significant potential for continued
innovation of cost-effective, high performance 3D media processors.

Leverage Multi-Platform Architecture. The Company's 3D technology embodies
a single hardware/software architecture that can be deployed in each of the
three interactive electronic entertainment platforms. For PC applications,
Diamond and Orchid have each introduced consumer multimedia add-in cards
incorporating the Company's 3D media processor for sale in the retail channel
and for incorporation into PCs manufactured by Apricot/Mitsubishi, Falcon
Northwest, Hewlett-Packard and NEC, among others. In the coin-op arcade system
market, Voodoo Graphics is being utilized by Acclaim, Kaneko, Midway, and Taito,
among others. Voodoo Graphics technology is also the basis for

34
<PAGE> 36

the Sega/3Dfx Chipset that the Company is developing for license to Sega for use
in the New Sega Game Console.

Promote Content Development. The Company believes that the availability of
a sufficient number of high quality, commercially successful software game
titles and applications drives hardware sales. Therefore, to become the standard
in the 3D interactive electronic entertainment arena, the Company is
collaborating with content developers to create software entertainment titles
designed to work with the Company's hardware. The Company attracts these
developers by providing the opportunity to differentiate their software products
with high quality 3D graphics, feature rich special effects and real time frame
rates. With a solution that enables game content to be easily ported across the
major interactive entertainment platforms, the Company offers its software
partners easy access to multiple outlets for their products. To encourage
developers and publishers to develop content based on the Company's technology,
the Company has devoted significant resources to its developer relations program
which currently includes over 500 content developers, game publishers and ISVs.

Pursue Branding Strategy. The Company continues to devote substantial
marketing resources towards establishing 3Dfx as a recognizable brand. The
Company is initially focusing on establishing its brand identity in the coin-op
arcade market by promoting the use of a spinning version of the 3Dfx logo at the
start of games utilizing the Company's hardware. In addition, the Company has
been working with both software developers and publishers in the PC market to
prominently display the 3Dfx logo on their software product boxes to indicate
that the software is compatible with the Company's products. To further identify
the Company in the marketplace, several software products display a spinning
version of the 3Dfx logo on the screen while loading. The Company believes that
this strategy creates market awareness because publishers first release games to
arcades where consumers will first encounter the 3Dfx logo, and then port
successful games to PCs and home game consoles. The Company further believes
that consumer awareness of its products will speed adoption of the Company's
architecture in the mass market, lead to increasing availability of 3Dfx enabled
software content and help establish the Company as the standard 3D solution for
the interactive electronic entertainment market.

Extend Technical Leadership. The Company offers superior performance 3D
media processors targeted toward the high-end of the interactive electronic
entertainment market. The Company intends to continue to leverage its technology
at the high-end of the 3D interactive electronic entertainment market in order
to optimize and cost-reduce such solutions for applications in the volume
market. The Company believes this strategy will create an effective barrier to
entry to potential competitors.

Leverage Core Technology to Address New Market Opportunities. The Company
believes it can leverage its 3D processor technology in a variety of other 3D
multimedia applications. Within the electronic entertainment market, the Company
intends to extend its technology to location based entertainment ("LBE")
applications, which would be enhanced by the Company's technology. LBE sites are
typically dedicated to one type of game or experience and the environment
includes mechanical or other environmental elements that add significantly to
the immersion of the experience. The Company is investigating opportunities to
apply its 3D technology to other product applications such as Internet/intranet
exploration, including virtual reality mark-up language ("VRML") browsers, 3D
graphical user interface ("GUI"), visual simulation, education and training
applications and other 3D visualization applications.

PRODUCTS, PRODUCTS UNDER DEVELOPMENT AND TECHNOLOGY LICENSE

The Company's product strategy is to offer a 3D media processor solution
comprised of hardware and embedded software designed around a common
architecture that will become the standard graphics engine for the interactive
electronic entertainment market. Voodoo Graphics, the Company's first product,
began commercial shipment in September 1996. Voodoo Rush, the Company's second
product, began sampling in November 1996 and limited commercial shipment is
expected for the second quarter of 1997. Both Voodoo Graphics and Voodoo Rush
are being targeted at price and

35
<PAGE> 37

performance points for the PC and coin-op arcade markets. Voodoo Graphics and
subsequent 3D media processors under development are based on a common
architecture which offers developers a clear, compatible upgrade path. This
architecture is designed to scale with the PC's microprocessor. As a result, as
the processing power of the CPU increases, the Company's products will use that
additional processing power to improve the overall quality of the 3D. In
addition, Voodoo Graphics technology is the graphics architecture for the
Sega/3Dfx Chipset that the Company is developing for license to Sega for use in
the New Sega Game Console.

Voodoo Graphics. The Company believes that Voodoo Graphics offers a
cost-effective, high performance solution for 3D interactive electronic
entertainment applications. Voodoo Graphics is a stand-alone 3D media processor
designed to function as the primary display device in embedded applications,
such as coin-op arcade systems, or to work in conjunction with most standard 2D
processors in PC applications. Voodoo Graphics has seen initial acceptance in
both the PC and coin-op arcade markets. Diamond and Orchid have each introduced
multimedia add-in boards for PCs, Monster 3D and Righteous 3D, respectively,
that are currently supplied through retail, OEM and mail order channels in the
US, Europe and Asia. See "-- Sales and Marketing." Voodoo Graphics is being
utilized by Acclaim, Kaneko, Midway and Taito among others for coin-op arcade
systems and game applications. In addition, Voodoo Graphics is the basis for the
technology that the Company is developing and has licensed to Sega for use in
Sega's new home game console. See "-- Strategic Relationship with Sega." The
technological features found in the existing Voodoo Graphics product will be
incorporated into the Sega/3Dfx Chipset. There can be no assurance that the
Sega/3Dfx Chipset will be developed as anticipated, perform as required or be
incorporated into Sega's New Sega Game Console as planned. See "Risk
Factors -- Dependence on Relationship with Sega" and "-- Strategic Relationship
with Sega."

Voodoo Graphics is a two chip solution and has a 128-bit "dedicated texture
memory" architecture that provides over 800 megabytes per second of memory
bandwidth to deliver both the interactivity and the visual realism necessary for
the new generation of 3D games. Because Voodoo Graphics dedicates at least one
megabyte of memory to texture maps, interactive 3D games can now attain a level
of realism that was previously limited to pre-rendered games with limited
interactivity. Voodoo Graphics has scalable performance of 45 megapixels per
second sustained fill rate for bilinear or advanced filtered textures and one
million textured triangles per second polygon performance for filtered, level of
detail ("LOD") MIP-mapped, Z-buffered, alpha-blended, fogged, textured 50-pixel
triangles rendered on a Pentium-200 MMX system.

Voodoo Rush. Voodoo Rush began sampling in November 1996 and limited
commercial shipment is expected for the second quarter of 1997. There can be no
assurance that Voodoo Rush will be commercially shipped or will be accepted by
the market. Voodoo Rush is designed to offer a cost-effective solution for
implementing 3D graphics with 3D performance similar to that of Voodoo Graphics.
Based on the core 3D technology in Voodoo Graphics, Voodoo Rush was designed to
function with a partner's companion 2D or 2D/3D accelerator. Unlike Voodoo
Graphics, however, which requires independent 2D and 3D solutions, Voodoo Rush
is designed to incorporate a 3D/2D solution into a single PCI board. Alliance,
Macronix, MRT and Trident are the Company's partners for this program. The
Voodoo Rush solution is designed to increase system flexibility for the OEM, to
require less memory and to reduce the graphics system cost when compared to
Voodoo Graphics and stand-alone 2D graphics.

Voodoo Rush is designed to provide both full screen rendering and 3D in a
window, which permits the user to move easily between the 3D enabled
application, the desktop and other applications. Voodoo Rush has a sustained
fill rate of 45 megapixels per second for bilinear filtered textures with LOD
MIP-mapping, Z-buffering, alpha-blending and fogging enabled. The triangle rate
is one million triangles per second for filtered, LOD MIP-mapped, Z-buffered,
alpha-blended, fogged, textured triangles on a Pentium-200 MMX system.

Future Product Development. In connection with the Company's strategy of
developing a single-chip solution, the Company has commenced development of
Banshee, which is intended to be a high

36
<PAGE> 38

performance, fully-featured single chip 3D/2D media processor for the PC and
coin-op arcade markets. See "-- Strategy." The Company expects to begin
commercial shipment of Banshee by the first quarter of 1998. The Company is
developing Banshee with the intent of delivering quality 3D/2D to a broader
portion of the interactive electronic entertainment market. In addition, Banshee
is designed to reduce graphics system costs and to be compatible with
applications designed for use with Voodoo Graphics and Voodoo Rush. There can be
no assurance that the Company will be able to introduce Banshee as scheduled or,
that if introduced, it will perform as intended or be accepted by OEMs, coin-op
board manufacturers and coin-op arcade system manufacturers. In addition, the
Company is in the early stages of development of the second generation of its
existing product. There can be no assurance, however, that these second
generation solutions will be developed, or, if developed, that they will perform
as expected or be accepted by the market. See "Risk Factors -- Acceptance of the
Company's 3D/2D Solution for the PC Market; Dependence on the Development of a
Single-Chip Solution" and "-- Dependence on New Product Development; Rapid
Technological Change."

Strategic Relationship with Sega

In March 1997, the Company entered into the Sega Agreement, under which the
Company will develop and license to Sega the Sega/3Dfx Chipset for use in the
New Sega Game Console. During the three months ended March 31, 1997, the Company
recognized development contract revenues of $750,000 under the Sega Agreement
representing a non-refundable amount due for the delivery of certain engineering
designs to Sega. Development contract revenues recognized under the Sega
Agreement represented 14.3% of total revenues, during the three months ended
March 31, 1997. Through the end of 1998, the Company may earn additional
development contract revenues and certain development bonuses provided that
certain milestones set forth in the Sega Agreement are met. The Company will
also derive royalty revenue for each Sega/3Dfx Chipset incorporated into
products sold by Sega.

Pursuant to the Sega Agreement, the Company shall maintain ownership of the
Sega/3Dfx Chipset intellectual property. The Company granted Sega a
royalty-bearing, worldwide license (i) to use the technology covered by the Sega
Agreement for the manufacture of the Sega/3Dfx Chipset, to perform engineering,
development, testing and integration of the Sega/3Dfx Chipset within the console
and to distribute the Sega/3Dfx Chipset as integrated into such console; and
(ii) to use the Sega/3Dfx Chipset solely for Sega's internal engineering,
development, testing, support and other purposes in connection with the
incorporation of the Sega/3Dfx Chipset into other potential Sega products. The
license rights to manufacture and distribute the Sega/3Dfx Chipset are exclusive
to Sega, solely with respect to home game consoles, for a period of three years
commencing on Sega's acceptance of the version of the Sega/3Dfx Chipset intended
for production in commercial volume. In addition to the chipset license, the
Company granted Sega a royalty-free license for certain software, including
Glide, subject to limitation.

The Sega Agreement will remain in full force and effect unless terminated
in accordance with its terms. Sega may terminate the Sega Agreement during the
development phase, if the Company defaults on the development schedule. Either
party may terminate the Sega Agreement, with limitations, upon the material
breach by the other party or in the event of the other party's bankruptcy,
dissolution or liquidation, assignment for the benefit of creditors, or the
appointment of a receiver or trustee or custodian for all or part of the assets
of such party.

37
<PAGE> 39

<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
3DFX PRODUCT DEVELOPMENT
- ----------------------------------------------------------------------------------------------------------
PRODUCT/LICENSE COMMERCIAL AVAILABILITY TARGET MARKET KEY FEATURES(1)
- ----------------------------------------------------------------------------------------------------------
Voodoo Graphics September 1996 PCs, coin-op arcade Add-on 3D solution;
systems scalability; consistent
sustained performance with
all features enabled; fill
rate of 45 Mpixel/sec; fully
featured triangle rate of
1.0M/sec; texture streaming;
fully featured architecture
- ----------------------------------------------------------------------------------------------------------
Voodoo Rush Expected second PCs Single-board 3D/2D solution;
quarter 1997 consistent sustained
performance with all features
enabled; fill rate of 45
Mpixel/sec; fully featured
triangle rate of 1.0M/sec;
texture streaming; fully
featured architecture; 3D in
a window
- ----------------------------------------------------------------------------------------------------------
Banshee Expected first PCs, coin-op arcade Single chip 3D/2D solution;
quarter 1998 systems large feature set; fully
integrated architecture; high
sustained fill rate and
triangle rate with all
features enabled; compatible
3D architecture with Voodoo
Graphics
- ----------------------------------------------------------------------------------------------------------
Sega/3Dfx Chipset To be announced Home game Key features based on Voodoo
License consoles Graphics architecture
- ----------------------------------------------------------------------------------------------------------
</TABLE>

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

(1) "Fully featured" means textured, bilinear filtered with LOD MIP-mapping,
Z-buffered and fogged.

Graphics Subsystems and Development Boards. To address the coin-op arcade
market and to offer PC OEM customers development boards, the Company commenced
the design and manufacture of graphics boards immediately upon availability of
Voodoo Graphics. Branded "Obsidian," the Company also targeted these products to
address opportunities in the visual simulation, digital content creation and LBE
markets.

Because many of the Company's coin-op arcade OEM customers have implemented
embedded coin-op arcade systems as opposed to PC-based coin-op systems, the
principal demand for the Company's products in the coin-op arcade market is in
the form of components, rather than graphics boards or subsystems. Because the
graphics board business for the visual simulation, digital content creation and
LBE markets collectively comprise a significantly smaller volume market than the
embedded coin-op market, the Company does not intend to devote significant
resources to support the Obsidian product line. To maintain a presence in these
markets, while minimizing the associated support burdens, the Company has
recently entered into an agreement with Quantum3D, Inc. ("Quantum3D") pursuant
to which the Company will supply Obsidian graphics boards to Quantum3D for
resale into these and other markets. The Company anticipates that Quantum3D will
transition into a component customer in late 1997, and intends to support the
Obsidian product line on an opportunistic basis after such time.

CUSTOMERS

The Company markets its products to PC and graphics board OEMs and
manufacturers of coin-op arcade systems and home game consoles. The Company
works closely with its customers and software developers during the design
process of entertainment platforms and the development phase of

38
<PAGE> 40

software titles and applications. The Company believes that this close technical
collaboration facilitates the integration of the Company's products into its
customers' entertainment platforms. There can be no assurance, however, that
design wins will ultimately result in orders or that the Company will retain
such customers through the ongoing and recurring design-in process. The
following is a list of the companies which are either direct or indirect
customers of the Company or companies with which the Company has design wins:

<TABLE>
<CAPTION>
PCS COIN-OP ARCADE SYSTEMS
---------------------------------------- ----------------------------------------
<S> <C>
Apricot/Mitsubishi Electric PC
Division(1) Acclaim Entertainment Inc.(3)
Deltron Precision, Inc. Eolith Co., Ltd.(3)
Diamond Multimedia Systems, Inc. IGS Taiwan(3)
Falcon Northwest Computer Systems(1) Interactive Light
Hercules Computer Technology, Inc.(2) Kaneko Ltd.(3)
Hewlett-Packard Company(1) Konami Co. Ltd.(2)
Intel Corporation LBE Technologies, Inc.
Micron Technology, Inc.(1) RealVision Corporation(3)
NEC Corp.(1) Taito Corporation(3)
Orchid Technology WMS Industries, Inc. (Williams)
Quantum3D, Inc.
</TABLE>

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

(1) Indirect customer that purchases products from the Company's board level
customers.

(2) Indicates design win with limited or nominal commercial shipments of the
Company's product to date.

(3) Indicates design win only; such companies have not yet purchased commercial
quantities of the Company's products.

In addition to the design wins above, the Company has a design win with
Sega for the Sega/3Dfx Chipset which is being developed for use in the New Sega
Game Console. See "-- Products, Products Under Development and Technology
License -- Strategic Relationship with Sega."

SALES AND MARKETING

The Company sells its products to manufacturers of graphics and multimedia
accelerator subsystems for PCs and coin-op arcade systems and to PC OEMs through
a network of domestic and international independent sales representatives and
distributors. In the United States and Canada, the Company has 11 sales
representatives. The Company also sells its products directly to certain OEM
customers in each of the Company's target markets. Outside the United States and
Canada, primarily in the Far East and Europe, the Company's products are sold
through nine sales representatives. Sales outside of the United States were
insignificant during 1996 and the three months ended March 31, 1997. The Company
maintains a sales management organization which is primarily responsible for
supporting independent sales representatives and distributors and making direct
sales to customers that prefer to transact directly with the Company. As of
March 31, 1997, the Company employed 18 individuals in its sales, marketing and
customer support organization.

To meet customer requirements and achieve design wins, the Company's sales
and marketing personnel work closely with customers, potential customers and
leading industry software and

39
<PAGE> 41

hardware developers to define product features, performance, price and market
timing of new products. The Company provides customers with early access to
technical design information and specifications, documentation, in-house
engineering support, first chip product samples and product development plans.
This effort is coordinated by the Company's sales management organization and is
supported by in-house applications engineers and marketing personnel. The
Company's applications engineers frequently work with existing and potential
customers to assist them with their design projects. The Company believes that
these efforts contribute to the Company's understanding of customer needs and
assist the Company in developing products that meet customer requirements.

To encourage software title developers and publishers to develop games
optimized for platforms utilizing the Company's products, the Company seeks to
establish and maintain strong relationships in the software development
community. The Company has branded a marketing effort named the "Buddy Program"
that employs the Company's expertise in software development to assist
developers through an on-site assistance program, sample source code and
electronic communication. As part of the Buddy Program, the Company has assigned
a software engineer to each strategic developer to assist with product
development. Generally the Company's assigned software engineer interacts with
the developer both remotely and through on-site visits and, by working closely
with the development team, attempts to ensure that the developer fully exploits
the 3D graphics capabilities of the Company's products. Another key element of
the Company's sales and marketing strategy has been the development of
manufacturing qualified reference design kits for the Company's 3D media
processors. The Company uses the reference design kits to seed important
developers before the commercial introduction of the Company's products to
ensure early software availability, and after commercial introduction to
encourage on-going support of the Company's products. The Company believes that
its close relationships with and attention to content developers encourages the
development of software for the Company's hardware, provides the Company with
information regarding the needs and concerns of the development community and
enables the Company to continually assess opportunities for future software
projects.

40
<PAGE> 42

The following table lists game titles for use with platforms utilizing the
Company's hardware that were commercially available as of March 31, 1997:

<TABLE>
<CAPTION>
TITLE PUBLISHER DEVELOPER API PLATFORM
- --------------------- ----------------------- ----------------------------- ---------- ---------------
<S> <C> <C> <C> <C>
Agile Warrior Virgin Interactive Black Ops Entertainment Inc. D3D PC
Entertainment Inc.
Cyberdome Microleague Above the Garage Production D3D PC
Multimedia, Inc.
CyberGladiators Sierra On-Line, Inc. Dynamix Inc. Glide/D3D PC
Descent 2: Interplay Productions Parallax Software Glide PC
The Infinite Abyss Corporation
Die Hard Trilogy Fox Interactive, Inc. Probe Entertainment D3D PC
The Divide Virgin Interactive Radical Entertainment D3D PC
Entertainment, Inc.
EF2000 Ocean Entertainment, Digital Image Design Glide PC
Inc.
Hellbender Microsoft Terminal Reality, Inc. D3D PC
Hyperblade Activision, Inc. Wizbang! Software D3D PC
Productions
Independence Day Fox Interactive, Inc. Radical Entertainment D3D PC
Mech Warrior 2 Activision, Inc. Activision, Inc. Glide PC
Monster Truck Madness Microsoft Terminal Reality D3D PC
pod UbiSoft Entertainment UbiSoft Entertainment Glide PC
Quake id Software, Inc. id Software OpenGL PC
Scorched Planet Virgin Interactive Criterion Studios Glide PC
Entertainment, Inc.
Scourge of Armagon Activision, Inc. Hypnotic OpenGL PC
(Quake Add On)
Shrak (Quake Add On) Quantum Access Quantum Access OpenGL PC
Starfighter The 3DO Company Krisalis Software Ltd. Glide PC
Terracide Eidos Interactive Simis D3D PC
TigerShark GT Interactive N-Space Glide PC
Software
Corporation
Tomb Raider Eidos Interactive Core Design Glide PC
Toshinden Playmates Interactive Digital Dialect Glide PC
Entertainment
Incorporated
VR Soccer '96 Interplay Productions Gremlin Glide PC
Whiplash Interplay Productions Gremlin Glide PC
Home Run Derby Interactive Light Interactive Light Glide Coin-Op Arcade
Mace Williams Atari Games Glide Coin-Op Arcade
Entertainment, Inc.
SF Rush Williams Atari Games Glide Coin-Op Arcade
Entertainment, Inc.
Wayne Gretzky Hockey Williams Atari Games Glide Coin-Op Arcade
Entertainment, Inc.
</TABLE>

To enhance awareness of the Company's 3D graphics solutions, the Company
has created several proprietary demonstrations that showcase the performance and
features made possible by the Company's products. These demonstrations, which
are often bundled with an OEM's product, are shown to software developers, OEMs,
VARs and tradeshow audiences. The Company believes that these demonstrations
effectively demonstrate the immediate potential for high quality 3D graphics in
interactive electronic entertainment and effectively differentiate the Company's
product offerings from competing products. The Company continues to devote
substantial marketing resources towards establishing 3Dfx as a recognizable
brand. The Company is initially focusing on establishing its brand

41
<PAGE> 43

identity in the coin-op arcade market by promoting the use of a spinning version
of the 3Dfx logo at the start of games utilizing the Company's hardware. In
addition, the Company has been working with both software developers and
publishers in the PC market to prominently display the 3Dfx logo on their
software product boxes to indicate that the software is compatible with the
Company's products. To further identify the Company in the marketplace, several
software products display a spinning version of the 3Dfx logo on the screen
while loading. The Company believes that this strategy creates market awareness
because publishers first release games to arcades where consumers will first
encounter the 3Dfx logo, and then port successful games to PCs and home game
consoles. The Company further believes that consumer awareness of its products
will speed adoption of the Company's architecture in the mass market, lead to
increasing availability of 3Dfx enabled software content and help establish the
Company as the standard 3D solution for the interactive electronic entertainment
market.

The Company's marketing activities also consist of sponsorship of and
participation in industry tradeshows, marketing communications and market
development activities designed to generate awareness of the Company and its
products. Such activities include ongoing contact with industry press and
analysts and selective advertising in entertainment and game industry
publications. The Company is also active in the promotion of its products
through 3D graphics news groups on the Internet. The Company intends to promote
the 3Dfx name and trademarks to create a recognizable industry standard for high
quality 3D entertainment.

The Company has implemented a customer support program that enables end
users to contact the Company directly with questions or comments. The Company
offers free telephone customer support during normal business hours. The Company
also provides customer support via the Internet and maintains a page on the
World Wide Web to provide technical information to customers.

TECHNOLOGY

3D Technology

The technology necessary to create interactive, realistic and visually
engaging 3D at high frame rates is extremely compute intensive, complex and
technically challenging. Historically, such technology has been extremely
expensive and thus 3D has been prevalent only in high-end 3D workstations.
Today, 3D graphics companies face the challenge of designing affordable products
that offer realistic 3D graphics with full screen resolution in real time for
the mainstream PC market. The substantial complexity and technical demands of
achieving this level of 3D graphic performance requires compute and pixel
processing power and memory bandwidths well beyond what is available in typical
general purpose CPUs, such as Intel's Pentium Pro. Specialized 3D graphics
processors address this limitation by implementing all or part of what is
referred to as the "3D Pipeline" by providing dedicated 3D graphics processing
capability.

The 3D Pipeline is a sequence of operations, which, starting with three
dimensional model data, position and desired lighting models, results in 2D
pixels displayed on a computer monitor or television display. The creation of a
single 3D image from the numerical mode is comprised of three primary steps:
tessellation, geometry and rendering.

- Tessellation. Tessellation is the creation of a numerical description
(the "three dimensional model data") of an object and the conversion of
this model into a set of polygons. Polygons are often defined to be
triangles because triangles are simple geometric shapes which can be
easily defined by only a few data points and can be quickly modified by
mathematical operations. Each triangle requires a separate set of
calculations, which means that the more complex an object is, the more
compute intensive it is. As a result, triangles-per-second is one of the
essential performance metrics of 3D graphics.

- Geometry. The geometry phase of the 3D Pipeline includes three stages:
transformation, lighting and triangle setup, although triangle setup is
often considered a separate stage. The

42
<PAGE> 44

transformation stage converts the native three dimensional model data
from its native numerical representation into a viewer-dependent model
space by using 4x4 matrix operations. The triangle setup operation takes
in the transformed, lighted triangles and calculates the edge and slope
information required to paint each individual triangle on the screen.

- Rendering or Rasterization. The third primary phase of the 3D Pipeline,
called triangle rendering or triangle rasterization, is the most
important phase for creating a quality 3D image. During this phase, a
two-dimensional image, capable of being displayed on a PC monitor or
television set, is created from the discrete, three-dimensional model
that emerges from the geometry phase. Within each particular triangle,
pixels are computed, rendered and displayed according to a complex set of
rules. Final image quality depends on the number and types of techniques
applied to each particular pixel. Various techniques are applied in the
rendering phase to achieve photo-realistic images, including scan
conversion, shading, texture-mapping and various perspective
enhancements. More advanced techniques in rendering include MIP mapping,
texture filtering, anti-aliasing, subpixel correction, fogging,
alpha-blending, and depth cueing.

The rasterization stage of the 3D Pipeline permits a significant level of
quality improvements, which can be achieved by the application of many
techniques. While these techniques can make a qualitative difference in the
realism that a 3D image conveys to the viewer, many of these techniques are
highly compute intensive. As a result, if performance is not sufficient given
the number and type of techniques used, the overall experience of the user will
diminish. In order for a 3D image to achieve realistic animation on a monitor
screen in real-time and with excellent visual quality, as many as twenty billion
operations per second might be necessary, a performance level which is roughly
80-100 times that of Intel's high-end microprocessor, the Pentium Pro. Most PC
systems that are equipped with 3D hardware accelerators perform the
tessellation, transformation, lighting, and clipping operations on the CPU and
pass the results to the 3D acceleration hardware for triangle setup and
rendering to complete the 3D pipeline. As a result, the rasterization stages of
the 3D Pipeline is almost always handled by a graphics processor, which has a
focused range of operation.

3Dfx Architecture and Technology

The primary goal of Voodoo Graphics and the Company's subsequent 3D media
processsors under development is to provide workstation-quality 3D performance
at affordable price points. Furthermore, the scaleable nature of the 3Dfx
solution is applicable across different markets and different price targets
without re-engineering the core logic. The block diagram below is an outline of
the Company's Voodoo Graphics product:

[DIAGRAM]

In the above diagram, the pixelfx chip is responsible for managing the
frame buffer, while the texelfx chip accesses dedicated texture memory. The
pixelfx chip performs triangle setup, Gouraud

43
<PAGE> 45

shading, texture, fogging, alpha-blending and Z-buffering. The pixelfx chip is
also responsible for sending information to a low-cost external digital to
analog converter ("DAC") for display on a computer monitor or television set.
The texelfx chip is responsible for triangle setup of the texture coordinates,
texture address calculations, perspective-correction of the texture coordinates,
MIP Mapping calculations to properly select the appropriate texture map and
texture lookup. Subsequent to texture lookup, the texelfx chip formats the
incoming texture and decompresses the texture element if the texture map is
stored in a proprietary compressed format and performs bilinear blending.
Finally, the processed texel is sent to the pixelfx chip for final storage into
the frame buffer.

The performance benefits of having separate, dedicated frame buffer memory
distinct from texture memory is dramatic. While traditional consumer-oriented 3D
media processors have utilized a common pool of memory for both frame buffer and
texture storage, the 3Dfx solution allows for Z-buffering and alpha-blending
operations, performed in the frame buffer memory, to operate independently from
texture map lookup, performed in the dedicated texture memory. The result is an
architecture which maintains full performance when all of the advanced 3D
rendering features are enabled. And, since the memory technology utilized for
both the frame buffer and the dedicated texture memory is standard extended data
out dynamic random access memory instead of expensive video random access memory
solutions, OEMs realize significant cost savings by utilizing the Company's 3D
solution.

Due to the design's scaleability, multiple texelfx chips may be chained
together to form a "texture streaming" architecture, where multiple texture maps
may be accessed independently and blended together, a technique known as
"texture compositing" with no degradation in quality. In addition, multiple
complete pixelfx/texelfx subsystems may be chained together to double the raw
rendering capability for the high performance solutions.

To further reduce the solution cost of its products and to specifically
address PC motherboard designs, the Company has commenced development of
Banshee, which is designed to be a high performance, fully-featured single chip,
3D/2D media processor for the PC and coin-op arcade markets. In addition, the
Company offers Glide, its proprietary API, as a development tool to enable the
optimal performance and easy, low cost cross platform portability of software
content developed for the Company's 3D media processor products.

Research and development expenses were $2.9 million, $9.4 million and $2.0
million in 1995, 1996 and the three months ended March 31, 1997, respectively.

MANUFACTURING

The Company has adopted a "fabless" manufacturing strategy for both
semiconductors and printed circuit board assemblies ("PCBA") whereby the Company
employs world class suppliers for all phases of the manufacturing process,
including, manufacturing, assembly, testing, and packaging. This strategy
leverages the expertise of its industry leading, ISO Certified, suppliers in
such areas as fabrication, assembly, quality control and assurance, reliability,
and testing, and allows the Company to avoid the significant costs and risks
associated with owning and operating such operations. The Company's
semiconductor and system products are manufactured by third party suppliers.
These suppliers are responsible for procurement of raw materials used in the
production of these products. The Company believes that raw materials required
are readily available. As a result, the Company can focus its resources on
product design, quality assurance, marketing and customer support.

The Company's Voodoo Graphics and Voodoo Rush semiconductor products are
currently fabricated for the Company by TSMC, which is the largest independent
foundry in the world. TSMC currently produces the semiconductor die for the
Company using standard 0.5 micron Application Specific Integrated Circuit
("ASIC") Complimentary-symmetry Metal-Oxide Semiconductor ("CMOS") process
technology. The Company expects that, commencing in the second half of 1997,
TSMC will move to a 0.35 micron ASIC, CMOS process technology in connection with
production for the Company. After the wafer production process is completed, the
semiconductor die is shipped to

44
<PAGE> 46

ASE, which assembles and packages the semiconductor die, tests the finished
product, and ships the finished product to the Company. Both suppliers have
their manufacturing operations located in Taiwan, R.O.C. The fabrication of
semiconductors is a complex and precise process. Minute levels of contaminants
in the manufacturing environment, defects in masks used to print circuits on a
wafer, difficulties in the fabrication process or other factors can cause a
substantial percentage of wafers to be rejected or a significant number of die
on each wafer to be nonfunctional. Many of these problems are difficult to
diagnose and time consuming or expensive to remedy. As a result, semiconductor
companies often experience problems in achieving acceptable wafer manufacturing
yields, which are represented by the number of good die as a proportion of the
total number of die on any particular wafer. Once production yield for a
particular product stabilizes, the Company pays an agreed price for wafers
meeting certain acceptance criteria pursuant to a "good die" only pricing
structure for that particular product. Until production yield for a particular
product stabilizes, the Company must pay an agreed price for wafers regardless
of yield. Accordingly, in this circumstance, the Company bears the risk of final
yield of good die. Poor yields would materially adversely affect the Company's
revenues, gross margin and results of operations. As the Company's relationships
with TSMC and any additional manufacturing partners develop, yields could be
adversely affected due to difficulties associated with adapting the Company's
technology and product design to the proprietary process technology and design
rules of each manufacturer. Because of the Company's potentially limited access
to wafer fabrication capacity from its manufacturers, any decrease in
manufacturing yields could result in an increase in the Company's per unit costs
and force the Company to allocate its available product supply among its
customers, thus potentially adversely impacting customer relationships as well
as revenues and gross profit.

In April 1996, the Company entered into a Warrant Purchase Agreement with
TSMC pursuant to which TSMC purchased two warrants to purchase 50,000 and 90,000
shares of the Company's Series B Preferred Stock at $4.40 per share of which the
warrant to purchase 50,000 shares is fully exercisable. The purchase right
represented by the warrants was exercisable at a rate of 10 shares of Series B
Preferred Stock for each wafer above 2,000 wafers delivered to the Company
during 1996. TSMC delivered a total of 5,751 wafers in 1996, and consequently
the warrant to purchase 50,000 shares of the Company's Series B Preferred Stock
became exercisable with respect to 37,510 of such shares of Series B Preferred
Stock.

The Company's Obsidian PCBA products are assembled locally by ISIS Surface
Mounting ("ISIS"), an ISO 9002 certified assembler. The Company consigns kits of
the materials required for assembly of the PCBAs to ISIS, which performs all
assembly and test operations and returns the board product to the Company.

The Company receives both semiconductor and PCBA products from its
subcontractors, performs incoming quality assurance, packages the products, and
ships them to its customers from its location in San Jose.

With the exception of the TSMC warrant discussed above, all of the
Company's commerce is performed through purchase orders without additional or
supplementary agreements. Whereas there can be no assurance that the Company
will be able to secure sufficient manufacturing capacity to meet product demand
in the future, which could have material adverse effects on the Company's
business, the Company believes that it has developed strong relationships with
its suppliers, and has experienced no material manufacturing concerns to date.
Although the Company is confident in its suppliers' abilities to fulfill product
requirements, the Company has been in active contact with other semiconductor
fabrication foundries in an effort to further diversify its supplier
manufacturing base. The Company has held discussions with certain potential
suppliers and, in some cases, has reviewed the technology and facilities of such
suppliers. However, the Company has not yet selected a second source of supply.
The Company does have a domestic second source for assembly. However, the
capacity at this domestic second source for assembly is limited and is therefore
not appropriate for full production.

45
<PAGE> 47

In the event of production difficulties, shortages, or delays experienced
by any one of its suppliers, the Company's business, financial condition, or
results of operation may be adversely impacted. Furthermore, although quality
assurance measures have been taken, there can be no guarantee against defects
affecting the quality, performance or reliability of the Company's products. Any
such defects could require costly product recalls or cessation of shipments,
adversely affecting the Company's business, financial condition and results of
operations, and resulting in a decline of revenues, increased costs (associated
with return, repair, replacement and shrinkage associated with such defects),
cancellations or reschedulings of customer orders and shipments. See "Risk
Factors -- Dependence on Independent Manufacturers and Other Third Parties,
Absence of Manufacturing Capacity; Manufacturing Risks."

COMPETITION

The Company's strategy of targeting the electronic entertainment market
across the PC, coin-op arcade and home game console platforms requires the
Company to compete against different companies in each of these market segments,
all of which are intensely competitive.

PC Segment. The largest area of competition for the Company is in the PC
market. Within the entertainment segment of this market, the Company competes
primarily against companies that typically have operated in the PC 2D graphics
market and that now offer 3D capability as an enhancement to their 2D solutions,
such as ATI, Cirrus, Oak Technology, S3 and Trident. Many of these competitors
have introduced 3D functionality on new iterations of existing graphics chips.
The Company also competes with companies that have recently entered the market
with an integrated 3D/2D solution, but which have not traditionally manufactured
2D solutions such as Chromatic, nVidia and Rendition. In addition, the Company
competes with NEC/Videologic which has focused exclusively on developing a 3D
solution for the 3D interactive electronic entertainment market.

In addition to competition from companies in the entertainment segment of
the PC market, the Company also faces potential competition from companies that
have focused on the high-end of the 3D market and the production of 3D systems
targeted for the professional market, such as 3Dlabs, Integraph, Real 3D and
SGI. While these companies produce high-performance 3D systems, they do so at a
significantly higher price point than the Company and have historically focused
on the professional and engineering market. These companies are developing lower
cost versions of their 3D technology to bring workstation-like 3D graphics to
mainstream applications, but the Company believes that these companies are not
focused on interactive electronic entertainment applications. There can be no
assurance that these companies will not enter the interactive electronics
entertainment market. The Company believes that it would have a strong
competitive position against such high-end competitors due to the favorable
price/performance ratio of its Voodoo Graphics architecture and its proprietary
Glide API. However, there can be no assurance that the Company would be able to
compete successfully against them.

Recently, a substantial number of companies have announced plans to release
3D graphics chips in 1997 and 1998 that promise to provide low cost 3D
functionality for PCs and workstations. Intel and Lockheed have recently formed
a licensing and development arrangement under which Intel has indicated that it
will exploit certain 3D technologies originally developed by Lockheed for use in
flight simulators to provide 3D graphics functionality on the PC. In August
1996, Microsoft announced that it was developing Talisman, a reference
architecture with an alternative method of providing high performance 3D
functionality on the PC. Microsoft is working with certain third parties
including Cirrus, Fujitsu, Inc., Philips N.V. and Samsung Electronics Co., Ltd.,
to implement this architecture. If successful, products based on either the
Microsoft or Intel initiatives would be directly competitive with the Company's
processors and could materially adversely affect the Company's competitive
position and results of operations.

Coin-op Arcade and Console Segments. The market for electronic arcade
entertainment is comprised of a small number of companies, including Acclaim,
Midway, Namco, Sega, Taito and

46
<PAGE> 48

Williams. The home game console segment is dominated by three companies,
Nintendo, Sega and Sony. In each of the coin-op and home game console segments,
the Company primarily faces competition from in-house divisions of the companies
which currently comprise such markets. The Company has formed a strategic
relationship with Sega in order to compete effectively in the console segment
but there can be no assurance that Sega will manufacture its next generation of
home game consoles or, that if it does, that it will be able to compete against
Nintendo and Sony successfully. See "Products, Products Under Development and
Technology License -- Strategic Relationship with Sega." In addition, there can
be no assurance that any of the companies which currently compete in the 3D PC
market will not enter the coin-op arcade market, or if they do, that the Company
will be able to compete against them successfully.

The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less costly
than the Company's 3D media processors accelerators or provide better
performance or additional features not currently provided by the Company. The
Company believes that the principal competitive factors for 3D graphics
solutions are product performance measured in terms of both processing power and
image quality, conformity to industry standard APIs, software support, access to
customers and distribution channels, manufacturing capabilities and price. The
Company believes that it competes most favorably with respect to product
performance, both in processing power and image quality, support of and
conformity to industry standard APIs and software expertise. In addition, the
Company believes that it competes favorably on price at certain product
performance levels. The Company faces a competitive disadvantage as a result of
its small size, particularly with respect to the development of a broad retail
distribution channel. The Company seeks to use strategic relationships to
augment its capabilities, but there can be no assurance that the benefits of
these relationships will be realized or be sufficient to overcome the entrenched
positions of the Company's largest competitors as incumbent suppliers to the
large PC OEMs. Regardless of the relative qualities of the Company's products,
the market power, product breadth and customer relationships of its larger
competitors, including Intel and Microsoft, can be expected to provide such
competitors with substantial competitive advantages. The Company does not seek
to compete on the basis of price alone.

Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since they maintain their
own semiconductor foundries and may therefore benefit from certain capacity,
cost and technical advantages. The Company's ability to compete successfully in
the rapidly evolving market for 3D media processors will depend upon certain
factors, many of which are beyond the Company's control, including, but not
limited to, success in designing and subcontracting the manufacture of new
products, implementing new technologies, access to adequate sources of raw
materials and foundry capacity, the price, quality and timing of new product
introductions by the Company and its competitors, the emergence of new
multimedia and PC standards, the widespread development of 3D applications by
ISVs, the ability of the Company to protect its intellectual property, market
acceptance of the Company's 3D solution and API, success of the competitors'
products and industry and general economic conditions. There can be no assurance
that the Company will be able to compete successfully in the emerging 3D
graphics market. See "Risk Factors -- Competition."

PATENTS AND PROPRIETARY RIGHTS

47
<PAGE> 49

pending patent application or any future applications will be approved, that any
issued patents will provide the Company with competitive advantages or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. In addition, there can
be no assurance that others will not independently develop substantially
equivalent intellectual property or otherwise gain access to the Company's trade
secrets or intellectual property, or disclose such intellectual property or
trade secrets, or that the Company can meaningfully protect its intellectual
property. A failure by the Company to meaningfully protect its intellectual
property could have a material adverse effect on the Company's business,
financial condition and results of operations.

The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There is currently no
pending intellectual property litigation against the Company. However, the
Company may from time to time receive notice of claims that the Company has
infringed patents or other intellectual property rights owned by others. The
Company may seek licenses under such patents or other intellectual property
rights. However, there can be no assurance that licenses will be offered or that
the terms of any offered licenses will be acceptable to the Company. The failure
to obtain a license from a third party for technology used by the Company could
cause the Company to incur substantial liabilities and to suspend the
manufacture of products. Furthermore, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation by or against the Company could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a favorable determination
for the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses for the infringing technology. There can be no assurance that the
Company would be successful in such development or that such licenses would be
available on reasonable terms, or at all, and any such development or license
could require expenditures by the Company of substantial time and other
resources. Although patent disputes in the semiconductor industry have often
been settled through cross-licensing arrangements, there can be no assurance
that, in the event that any third party makes a successful claim against the
Company or its customers, a cross-licensing arrangement could be reached. If a
license is not made available to the Company on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. See "Risk Factors -- Risks Relating to
Intellectual Property."

There can be no assurance that infringement claims by third parties or
claims for indemnification by other customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition and results of operations.
Any limitations on the Company's ability to market its products, or delays and
costs associated with redesigning its products or payments of license fees to
third parties, or any failure by the Company to develop or license a substitute
technology on commercially reasonable terms could have a material adverse effect
on the Company's business, financial condition and results of operations.

EMPLOYEES

As of March 31, 1997, the Company had 87 employees, 47 of whom were engaged
in engineering, and 40 of whom were engaged in marketing, sales, operations and
administrative positions. As of March 31, 1997, all of the Company's employees
were located in the United States. No employee of the Company is covered by
collective bargaining agreements, and the Company believes that its relationship
with its employees is good.

The Company's ability to operate successfully depends in significant part
upon the continued service of certain key technical and managerial personnel,
and its continuing ability to attract and

48
<PAGE> 50

retain additional highly qualified technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain such personnel or that it can attract or retain other
highly qualified technical and managerial personnel in the future, including key
sales and marketing personnel. The loss of key personnel or the inability to
hire and retain qualified personnel could have a material adverse effect upon
the Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence Upon Key Personnel."

FACILITIES

The Company sub-leases approximately 31,572 square feet in one building in
San Jose, California pursuant to a lease that expires on April 30, 1997.
Effective May 1, 1997, the Company will assume another additional 46,233 square
feet in the same building under a lease that expires in 2007, with an option to
extend the lease for an additional five-year term. Of the total 77,805 square
feet subject to such new lease, the Company initially intends to sub-lease
37,261 square feet. The Company also leases approximately 900 square feet in
Dresher, Pennsylvania for its regional sales office. The Company believes that
in general its facilities are adequate for its current needs and that additional
space will be available as needed. The Company believes that these facilities
will be adequate to meet its needs for the foreseeable future.

LEGAL PROCEEDINGS

There are no material pending or threatened legal proceedings against the
Company.

49
<PAGE> 51

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information concerning the Company's
executive officers and directors as of the date of this Prospectus:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- --------------------------------------------
<S> <C> <C>
L. Gregory Ballard........................ 43 President, Chief Executive Officer and
Director
Gordon A. Campbell(1)..................... 53 Chairman of the Board of Directors
Gary P. Martin............................ 49 Chief Financial Officer and Vice President,
Administration
David Bowman.............................. 53 Vice President, Sales
Karl Chicca............................... 39 Vice President, Operations
Andy Keane................................ 35 Vice President, Marketing
Scott D. Sellers.......................... 28 Vice President, Research and Development and
Director
Gary Tarolli.............................. 40 Vice President and Chief Scientist
George J. Still, Jr.(2)................... 39 Director
Anthony Sun(1)............................ 44 Director
Philip M. Young(1)........................ 57 Director
James Whims(2)............................ 42 Director
</TABLE>

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

(1) Member of Audit Committee

(2) Member of Compensation Committee.

L. Gregory Ballard has served as President, Chief Executive Officer and a
director of the Company since December 1996. Prior to joining the Company, Mr.
Ballard was President at Capcom Entertainment, Inc., a video game and multimedia
entertainment company, from June 1995 through November 1996. Prior to that, Mr.
Ballard served as Chief Operating Officer and Chief Financial Officer of Digital
Pictures, Inc., a video game company, from May 1994 to June 1995. Mr. Ballard
was President and Chief Executive Officer of Warner Custom Music Corporation, a
multimedia marketing division of Time Warner, Inc., from October 1992 to May
1994, and he was President and Chief Operating Officer of Personics Corporation,
a predecessor to Warner Music, from January 1991 to October 1992. Mr. Ballard
also worked for Boston Consulting Group and as a practicing attorney in
Washington, D.C. Mr. Ballard received his BA in Political Science from the
University of Redlands and his JD from Harvard Law School.

Gordon A. Campbell has served as the Chairman of the Board of Directors of
the Company since August 1994 when he co-founded the Company. Mr. Campbell also
served as President and Chief Executive Officer of the Company from January 1995
to December 1996. Prior to joining the Company, Mr. Campbell founded Techfarm,
Inc., a venture capital investment firm, and has served as President since
September 1993. In 1985, Mr. Campbell founded Chips and Technologies, Inc.
("CHIPS"), a semiconductor and related device company, and served as Chairman,
Chief Executive Officer and President of CHIPS until July 1993. Mr. Campbell
founded SEEQ Technology, Inc. ("SEEQ"), a semiconductor and related device
company, in 1981. He served as President and Chief Executive Officer of SEEQ
from 1981 to 1985. Mr. Campbell currently serves as a director of 3Com
Corporation and Bell Microproducts, Inc. He is also a director of several
private companies.

Gary P. Martin has served as Chief Financial Officer and Vice President,
Administration of the Company since June 1995. Prior to joining the Company, Mr.
Martin was Vice President, Finance and Corporate Secretary of MiniStor
Peripherals International, Limited ("MiniStor"), a disk drive company, from
October 1993 until May 1995. MiniStor filed a petition for relief under Chapter
11 of the Federal bankruptcy laws on April 14, 1995. From 1985 to April 1993,
Mr. Martin served as Senior Vice

50
<PAGE> 52

President of Finance and Administration and Corporate Secretary of CHIPS from
1985 to April 1993. Mr. Martin is a director of Essex Property Trust, Inc. Mr.
Martin received a BS in Accounting from San Jose State University.

David M. Bowman has served as Vice President, Sales of the Company since
March 1996. Prior to joining the Company, he was Vice President of Worldwide
Sales at CHIPS from September 1985 to March 1995. He was a director of North
American Sales for Apple from October 1979 to September 1985.

Karl Chicca has served as Vice President, Operations of the Company since
June 1996. Prior to joining the Company, Mr. Chicca was Vice President of
Strategic Commodity Management of Maxtor Corporation, a disk drive company, from
May 1995 to May 1996. He was Vice President, Materials at MiniStor from March
1994 to April 1995. MiniStor filed a petition for relief under Chapter 11 of the
Federal bankruptcy laws on April 14, 1995. From 1979 to March 1994, Mr. Chicca
held various materials and manufacturing positions with International Business
Machine Corporation ("IBM"), most recently as Manager of Worldwide Procurement
of IBM's Storage Systems Division. Mr. Chicca received a BS in Business
Administration from San Jose State University.

Andy Keane has served as Vice President, Marketing of the Company since
March 1996. Prior to joining the Company, he was Marketing Manager of
Microprocessor Marketing for MIPS Computer Systems, Inc., subsequently SGI, each
of which is a computer system and workstation company, from 1990 to September
1994. Mr. Keane was a Design Engineer at Intel from 1986 to 1988. He received
his BS in Physics from Rensselaer Polytechnic Institute and an MBA from the
University of California at Berkeley.

Scott D. Sellers has served as Vice President, Research and Development of
the Company since January 1995. He co-founded the Company in August 1994 and has
served as a director of the Company since March 1995. Mr. Sellers was Principal
Engineer at MediaVision Technology, Inc. ("MediaVision"), a multimedia computer
products company, from June 1993 to June 1994. Prior to that, Mr. Sellers was a
Microprocessor Engineer at Pellucid, Inc. ("Pellucid"), a developer of chip and
board products, from January 1993 to June 1993. Mr. Sellers was also a Member of
the Technical Staff at SGI from October 1990 to January 1993. Mr. Sellers
received a BSEE from Princeton University.

Gary Tarolli has served as Vice President and Chief Scientist of the
Company since January 1995. Prior to co-founding the Company in August 1994, Mr.
Tarolli was an Engineering Fellow at MediaVision from 1993 to 1994. Before
joining MediaVision, Mr. Tarolli was a self-employed consultant to the 3D
graphics industry from 1992 to 1993. Mr. Tarolli was a Principal Scientist at
SGI from 1983 to 1992. Prior to joining SGI, he was a Principal Engineer at
Digital Equipment Corp. for four years. Mr. Tarolli received a BS in Mathematics
from Rensselaer Polytechnic Institute and an MS in computer science from
California Institute of Technology.

George J. Still, Jr. has served as a director of the Company since February
1996. Mr. Still is Vice President and Managing Partner of Norwest Venture
Capital, Inc. ("Norwest"), a venture capital investment firm, where he has been
employed since 1989. Prior to joining Norwest, Mr. Still was General Partner of
The Centennial Funds, Ltd., a venture capital investment firm, from 1984 to
1989. He currently serves on the Board of Directors of PeopleSoft, Inc. Mr.
Still is also a director of several private companies. Mr. Still has a BA from
Pennsylvania State University and an MBA from the Amos Tuck School at Dartmouth
College.

Anthony Sun has served as a director of the Company since March 1995. Mr.
Sun has been a General Partner at Venrock Associates, a venture capital
investment firm, since 1979. He is currently director of Award Software
International, Inc., Centura Software Corporation, Cognex Corporation,
Conductus, Inc., Fractal Design Corporation, Inference Corporation, Komag, Inc.
and Worldtalk Communications Corporation. He is also a director of several
private companies. Mr. Sun received SBEE, SMEE and Engineering degrees from the
Massachusetts Institute of Technology and an MBA from Harvard University.

51
<PAGE> 53

Philip M. Young has served as a director of the Company since March 1995.
Mr. Young has been a general partner at U.S. Venture Partners, a venture capital
firm, since April 1990. He was a managing director of Dillon, Read and Co.,
Inc., and general partner of Dillon Read's Concord Partners venture capital
activity in Palo Alto from January 1986 to April 1990. He currently serves on
the Boards of Directors of Vical, Inc., CardioThoracic Systems, Inc., FemRx,
Inc., Immune Response Corporation and Zoran Corporation. Mr. Young is also a
director of several private companies. Mr. Young received a BME in nuclear
engineering from Cornell University, an MS in Engineering Physics from George
Washington University and an MBA from Harvard University.

James Whims has served as a director of the Company since November 1996.
Mr. Whims has been a Partner at Techfarm since December 1996. From November 1994
until March 1996, Mr. Whims was an Executive Vice President of Sony Computer
Entertainment, a video game software development company. From 1990 until
October 1994, Mr. Whims was Executive Vice President of the Computer Division of
The Software Toolworks, Inc., a diversified software company. From 1985 to 1990,
Mr. Whims served as Vice President of Sales of Worlds of Wonder, Inc., a toy
products company which he co-founded. Mr. Whims received a BA from Northwestern
University in Economics and Communications and an MBA in Finance and Marketing
from the University of Arizona.

The term of office for each director is one year. All directors are elected
at the annual meeting of shareholders and hold office until the election and
qualification of their successors at the next annual meeting of shareholders.
Officers of the Company serve at the discretion of the Board of Directors and,
therefore, the term of office for each officer is indefinite. There are no
family relationships among any of the directors or executive officers of the
Company.

DIRECTOR COMPENSATION

Members of the Company's Board of Directors do not receive compensation for
their services as directors. The Company's 1997 Director Option Plan provides
that options shall be granted to non-employee directors of the Company pursuant
to an automatic nondiscretionary grant mechanism.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of directors Still and Whims.
See "Certain Transactions -- Transactions with Executive Officers and
Directors".

52
<PAGE> 54

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during the year ended December 31, 1996, by the Company's Chief
Executive Officer and the Company's next four most highly compensated executive
officers whose salary and bonus for such fiscal year exceeded $100,000 (the
"Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION OPTIONS(#)(1)
- ------------------------------------------ -------- -------- ------------ -------------
<S> <C> <C> <C> <C>
L. Gregory Ballard(2)..................... $ 11,538 $ -- $ -- 350,000
President, Chief Executive Officer and
Director
Karl Chicca(3)............................ 75,385 -- 110,003 75,000
Vice President, Operations
Scott D. Sellers.......................... 116,667 1,400 -- 25,000
Vice President, Research and Development
and Director
Gary Tarolli.............................. 130,000 1,400 -- 25,000
Vice President and Chief Scientist
Ross Q. Smith(4).......................... 111,666 350 -- 25,000
Vice President and General Manager,
Systems Product Division
</TABLE>

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

(1) These shares are subject to exercise under stock options granted under the
Company's 1995 Employee Stock Plan.

(2) Mr. Ballard joined the Company in December 1996.

(3) Other annual compensation amount relates to relocation expenses paid.

(4) Mr. Smith resigned as a full time employee of the Company in April 1997, but
will serve as a part-time employee until July 1997. Mr. Smith has
subsequently founded Quantum3D, Inc., a supplier of advanced graphics
subsystems based on 3Dfx technology. See "Business -- Products, Products
Under Development and Technology License -- Graphics Subsystems and
Development Boards."

53
<PAGE> 55

STOCK OPTION GRANTS

The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended December 31, 1996.
All such options were awarded under the Company's 1995 Employee Stock Plan.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTIONS TERM(1)
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION --------------------
NAME GRANTED(1) IN FISCAL 1996 SHARE(2)(3) DATE(4) 5%($) 10%($)
- ------------------------- --------- -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard....... 350,000 26% $0.90 12/02/06 $198,102 $502,029
Karl Chicca.............. 75,000 5 0.44 06/27/06 20,754 52,594
Scott D. Sellers......... 25,000 2 0.44 07/25/06 6,918 17,531
Gary Tarolli............. 25,000 2 0.44 07/25/06 6,918 17,531
Ross Q. Smith............ 25,000 2 0.44 07/25/06 6,918 17,531
</TABLE>

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

(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the exercise price per share are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future
financial performance of the Company, overall market conditions and the
option holders' continued employment through the vesting period. This table
does not take into account any appreciation in the fair market value of the
Common Stock from the date of grant to the date of this Prospectus, other
than the columns reflecting assumed rates of appreciation of 5% and 10%.

(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock on the date of grant, as determined by the Board
of Directors.

(3) Exercise price may be paid in cash, check, promissory note, delivery of
already-owned shares of the Company's Common Stock subject to certain
conditions, authorization to the Company to retain from the total number of
shares for which the option is exercised that number of shares having a fair
market value on the date of exercise equal to the exercise price for the
total number of shares as to which the option is exercised, delivery of a
properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan
proceeds required to pay the exercise price, or any combination of the
foregoing methods of payment or such other consideration or method of
payment to the extent permitted under applicable law.

(4) Options become exercisable as to 25% of the option shares on the first
anniversary of the date of grant and as to 1/48th of the option shares each
month thereafter, with full vesting occurring on the fourth anniversary of
the date of grant.

54
<PAGE> 56

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

There were no exercises of stock options by Named Executive Officers during
the year ended December 31, 1996. The following table sets forth certain
information regarding stock options held as of December 31, 1996 by the Named
Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(#)(1) DECEMBER 31, 1996($)(2)
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
L. Gregory Ballard....... -- 350,000 -- --
Karl Chicca.............. -- 75,000 -- --
Scott D. Sellers......... -- 25,000 -- --
Gary Tarolli............. -- 25,000 -- --
Ross Q. Smith............ -- 25,000 -- --
</TABLE>

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

(1) Options granted under the Company's 1995 Employee Stock Plan may be
exercised by the holder thereof prior to vesting with the shares purchased
thereby subject to repurchase by the Company until fully vested. The table
presents options as exercisable according to the vesting schedule of the
option.

(2) Based upon an assumed initial public offering price of $10.00 per share
minus the exercise price.

STOCK PLANS

Stock Option Plan. The Company's 1995 Employee Stock Plan (the "1995
Plan") was adopted by the Board of Directors in May 1995 and approved by the
shareholders in June 1995. A total of 2,675,000 shares of Common Stock has been
reserved for issuance under the 1995 Plan. The 1995 Plan, as amended, provides
for grants of incentive stock options to employees (including officers and
employee directors) and nonstatutory stock options to consultants of the
Company. The purpose of the 1995 Plan is to attract and retain the best
available personnel for positions of substantial responsibility and to provide
additional incentive to employees and consultants to promote the success of the
Company's business. The 1995 Plan is presently being administered by the Board
of Directors, which determines the optionees and the terms of options granted,
including the exercise price, number of shares subject to the option and the
exercisability thereof.

The term of options granted under the 1995 Plan is stated in the option
agreement. However, the term of an incentive stock option may not exceed 10
years and, in the case of an option granted to an optionee who, at the time of
grant, owns stock representing more than 10% of the Company's outstanding
capital stock, the term of such option may not exceed five years. Options
granted under the 1995 Plan vest and become exercisable as set forth in each
option agreement. In general, no option may be transferred by the optionee other
than by will or the laws of descent or distribution, and each option may be
exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with the Company or any related corporation ceases
for any reason (other than by death or total and permanent disability) may
exercise options in the three-month period following such cessation, unless such
options terminate or expire sooner (or for nonstatutory stock options, later),
by their terms. The three-month period is extended to twelve months for
terminations due to death or permanent total disability. In the event of a
merger of the Company with or into another corporation, all outstanding options
may either by assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the options,
including shares as to which they would not otherwise be exercisable. In the
event that options become exercisable in lieu of assumption or substitution, the
Board of Directors shall notify optionees that all options shall be fully
exercisable for a period of 15 days, after which such options shall terminate.
The Board of Directors determines the

55
<PAGE> 57

exercise price of options granted under the 1995 Plan at the time of grant,
provided that the exercise price of all incentive stock options must be at least
equal to the fair market value of the shares on the date of grant unless the
grant is pursuant to a merger or other corporate transaction. With respect to
any participant who owns stock possessing more than 10% of the voting rights of
the Company's outstanding capital stock, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date. The consideration for exercising any incentive stock option or any
nonstatutory stock option may consist of cash, check, delivery of already-owned
shares of the Company's Common Stock subject to certain conditions,
authorization to the Company to retain from the total number of shares for which
the option is exercised that number of shares having a fair market value on the
date of exercise equal to the exercise price for the total number of shares as
to which the option is exercised, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to promptly deliver to
the Company the amount of sale or loan proceeds required to pay the exercise
price, or any combination of the foregoing methods of payment or such other
consideration or method of payment to the extent permitted under applicable law.
No incentive stock options may be granted to a participant, which, when
aggregated with all other incentive stock options granted to such participant,
would have an aggregate fair market value in excess of $100,000 becoming
exercisable in any calendar year. No employee may be granted, in any fiscal year
of the Company, options to purchase more than 150,000 shares (or 250,000 shares
in the case of a new employee's initial employment with the Company). The 1995
Plan will terminate in May 2005, unless sooner terminated by the Board of
Directors.

As of March 31, 1997, 375,232 shares of Common Stock, net of repurchases,
had been issued upon the exercise of options granted under the 1995 Plan,
options to purchase 1,875,461 shares of Common Stock at a weighted average
exercise price of $2.72 per share were outstanding and 424,307 shares remain
available for future option grants under the 1995 Plan.

Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase
Plan (the "Purchase Plan") was adopted by the Board of Directors in March 1997
and approved by the shareholders in April 1997. A total of 550,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended, is administered by the Board of Directors or
by a committee appointed by the Board. Employees (including officers and
employee directors of the Company) are eligible to participate if they are
customarily employed for at least 20 hours per week and for more than five
months in any calendar year, provided that no Employee shall be granted an
option (i) to the extent that immediately after the grant such Employee owns
more than 5% of the voting power of outstanding capital stock of the Company or
(ii) to the extent such Employee's rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds $25,000
worth of stock for each calendar year in which such option is outstanding at any
time. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 15% of an employee's
compensation. The Purchase Plan will be implemented in a series of overlapping
offering periods, each to be of approximately 24 months duration. The initial
offering period under the Purchase Plan will begin on the effective date of this
offering and subsequent offering periods will begin on the first trading day on
or after May 1 and November 1 of each year. Each participant will be granted an
option on the first day of the offering period and such option will be
automatically exercised on the last date of each semi-annual period throughout
the offering period. If the fair market value of the Common Stock on any
purchase date is lower than such fair market value on the start date of that
offering period, then all participants in that offering period will be
automatically withdrawn from such offering period and re-enrolled in the
immediately following offering period. The purchase price of the Common Stock
under the Purchase Plan will be equal to 85% of the lesser of the fair market
value per share of Common Stock on the start date of the offering period or on
the date on which the option is exercised. Employees may end their participation
in an offering period at any time during that period, and participation ends
automatically on termination of employment with the Company. In the event of a
proposed dissolution or liquidation of the Company, the offering periods then in
progress shall terminate immediately prior to the consummation of the

56
<PAGE> 58

proposed dissolution or liquidation, unless otherwise provided by the Board. In
the event of a proposed sale of all or substantially all of the Company's assets
or the merger of the Company with or into another corporation, each outstanding
option shall be assumed or an equivalent option substituted by the successor
corporation. In the event that the successor corporation refuses to assume or
substitute for the option, then the offering period in progress will be
shortened by setting a new exercise date that is before the sale or merger and
the offering period in progress shall end on the new exercise date. Each
participant shall be notified at least ten business days prior to the new
exercise date, and unless such participant ends his or her participation, the
option will be exercised automatically on the new exercise date. The Purchase
Plan will terminate in March 2007, unless sooner terminated by the Board of
Directors.

Director Option Plan. The Company's 1997 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors in March 1997 and
approved by the shareholders of the Company in April 1997. A total of 150,000
shares of Common Stock has been reserved for issuance under the Director Plan.
The option grants under the Director Plan are automatic and non-discretionary,
and the exercise price of the options is 100% of the fair market value of the
Common Stock on the grant date. The Director Plan provides for an initial grant
of options to purchase 5,000 shares of Common Stock to each non-employee
director of the Company upon the effective date of this offering at a per share
exercise price equal to the initial public offering; provided, that the grant to
the Chairman of the Board of Directors shall be 10,000 shares. The Director Plan
also provides for an initial grant of options to purchase 12,500 shares of
Common Stock to each new non-employee director of the Company who is neither
affiliated with or nominated by a shareholder that owns one percent or more of
the outstanding capital stock of the Company on the later of the effective date
of the Director Plan or the date he or she first becomes a director. In
addition, each non-employee director will automatically be granted an additional
option to purchase 5,000 shares of Common Stock at the next meeting of the Board
of Directors following the annual meeting of shareholders in each year beginning
with the 1998 annual meeting of shareholders, if on such date, such director has
served on the Board of Directors for at least six months; provided, however, if
such director is elected as Chairman of the Board of Directors, such option
grant shall be 10,000 shares. In addition to these grants, each director shall
automatically be granted an option to purchase 1,000 shares at the next meeting
of the Board of Directors following the annual meeting of shareholders in each
year beginning with the 1997 annual meeting of shareholders, if such director
serves on either the Audit Committee or Compensation Committee of the Board of
Directors. If such Director serves on both such Committees, this grant shall be
2,000 shares. The term of such options is ten years, provided that such options
shall terminate three months following the termination of the optionee's status
as a director (or twelve months if the termination is due to death or
disability). 12,500 share options granted to a director vest at a rate of
1/48th of the shares subject to the option per month following the date of
grant. 5,000 or 10,000 share options granted to a director vest at a rate of
1/12th of the shares subject to the option per month following the date of
grant. 1,000 share options granted to a director vest at a rate of 1/12th of the
shares subject to the option per month following the date of grant. In the event
of a merger of the Company with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the options,
including shares as to which they would not otherwise be exercisable. In the
event that options become exercisable in lieu of assumption or substitution, the
Board of Directors shall notify optionees that all options shall be fully
exercisable for a period of 30 days, after which such options shall terminate.
The Director Plan will terminate in March 2007, unless sooner terminated by the
Board of Directors.

401(k) Plan. Substantially all full-time employees of the Company
participate in the 3Dfx Interactive 401(k) Plan (the "401(k) Plan"), a plan
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended. Employees may begin to participate in the 401(k) Plan the first of the
month following their hire date provided they have reached the age of 18.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the lesser of 15% of eligible compensation or the
statutorily prescribed annual limit and have the amount of such

57
<PAGE> 59

reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not
require, additional matching contributions to the 401(k) Plan by the Company on
behalf of the participants. Contributions by employees or by the Company to the
401(k) Plan, and income earned on plan contributions, are generally not taxable
to employees until withdrawn, and contributions by the Company, if any, should
be deductible by the Company when made. The trustee under the 401(k) Plan, at
the direction of each participant, invests the assets of the 401(k) Plan in
selected investment options.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

Pursuant to letter agreements entered into with each of L. Gregory Ballard,
Karl Chicca, Scott Sellers and Gary Tarolli, in the event there is a change of
control of the Company and such executive is terminated other than for cause
within one year following the effective date of such change of control, (i) in
the case of Messrs. Ballard and Chicca, 25% (or, in the event that less than 25%
of such executive's options remain unvested, all) of such executive's options
will be accelerated and become fully vested and (ii) in the cases of Messrs.
Sellers and Tarolli, 25% of the executive's stock subject to the Company's
repurchase option under a restricted stock purchase agreement shall be released
from such repurchase option (or all of such stock if less than 25% of the
executive's stock remains subject to the Company's repurchase option). For
purposes of these letter agreements a "change of control" means the (i) the sale
of all or substantially all of the Company's assets, or (ii) a consolidation or
merger of the Company with or into any other corporation (other than a
wholly-owned subsidiary of the Company) or engagement in a transaction or series
of transactions in which more than 50% of the voting power of the Company is
disposed. Termination other than for cause includes constructive termination
resulting from (i) the reduction of such employee's rate of compensation, (ii)
the reduction of such employee's scope of engagement or (iii) the requirement
that such employee provide services at a location more than 50 miles from the
employee's office location as of the date of the letter agreement.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company has adopted provisions in its Articles of Incorporation that
eliminate to the fullest extent permissible under California law the liability
of its directors to the Company for monetary damages. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
California law, including in circumstances in which indemnification is otherwise
discretionary under California law. The Company has entered into indemnification
agreements with its officers and directors containing provisions which may
require the Company, among other things, to indemnify the officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.

At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.

58
<PAGE> 60

CERTAIN TRANSACTIONS
PRIVATE PLACEMENT OF SECURITIES

Between January 12 and May 18, 1995, the Company sold an aggregate of
1,646,250 shares of its Common Stock at prices ranging from $.025 to $.10 per
share. Between March 13, 1995 and January 17, 1997 the Company sold the
following shares of its Preferred Stock in private placement transactions:
2,750,990 shares of Series A Preferred Stock at a price of $2.00 per share;
2,650,000 shares of Series B Preferred Stock at a price of $4.40 per share and
1,620,864 shares of Series C Preferred Stock at a price of $7.50 per share. In
addition, the Company issued warrants to purchase the following shares of
Preferred Stock: 43,750 shares of Series A Preferred Stock at an exercise price
of $2.00 per share; 115,919 shares of Series B Preferred Stock at an exercise
price of $4.40 per share and 35,000 shares of Series C Preferred Stock at an
exercise price of $7.50 per share.

The purchasers of Common Stock and Preferred Stock described above
included, among others, the following officers, directors and holders of more
than five percent of the Company's voting securities:

<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK (1)
COMMON --------------------------------------
STOCK SERIES A SERIES B SERIES C
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OFFICERS
Scott D. Sellers............................ 300,000 -- -- --
Gary Tarolli................................ 300,000 -- -- --
Ross Q. Smith(2)............................ 300,000 -- -- --
DIRECTORS
Gordon A. Campbell.......................... 90,875 44,808 231,532 --
ENTITIES AFFILIATED WITH DIRECTORS
Venture capital funds affiliated with U.S.
Venture Partners (Philip M. Young)....... -- 975,000 340,900 133,334
Venture capital funds affiliated with
Venrock Associates (Anthony Sun)......... -- 975,000 340,900 133,334
Norwest Equity Partners V (George J. Still,
Jr.)..................................... -- 795,500 133,334
Techfarm, Inc. (Gordon A. Campbell)......... 462,500 -- -- --
OTHER 5% SHAREHOLDERS
Chase Capital Partners...................... -- -- 738,637 133,334
Intel Corporation........................... -- -- -- 666,667
</TABLE>

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

(1) The purchasers of these securities are entitled to registration rights. See
"Description of Capital Stock -- Registration Rights."

(2) Mr. Smith resigned as a full time employee of the Company in April 1997, but
will serve as a part-time employee until July 1997. Mr. Smith has
subsequently founded Quantum3D, Inc., a supplier of advanced graphics
subsystems based on 3Dfx technology.

TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS

Techfarm provides management services to the Company for which the Company
pays a fee of $5,000 per month. Gordon Campbell, the Chairman of the Board of
Directors of the Company, and James Whims, a director of the Company, are each
officers of Techfarm. The Company made total payments to Techfarm for such
management services during 1995 and 1996 of $45,000 and $60,000, respectively.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors, and will
continue to be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.

59
<PAGE> 61

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1997 and as adjusted to
reflect the sale of the 3,000,000 shares of Common Stock offered hereby: (i) by
each person or entity who is known by the Company to own beneficially more than
5% of the Common Stock; (ii) by each director of the Company, (iii) by the Named
Executive Officers, and (iv) by all directors and executive officers of the
Company as a group. Except as otherwise noted, the shareholders named in the
table have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to applicable community
property laws.

<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY OWNED(1)
BENEFICIALLY ----------------------------------
BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
Entities affiliated with U.S. Venture
Partners(2)................................... 1,449,235 15.9% 12.9%
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Entities affiliated with Venrock
Associates(3)................................. 1,449,236 15.9 12.9
755 Page Mill Road, A-230
Palo Alto, CA 94304
Norwest Equity Partners V(4).................... 928,834 10.2 8.3
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301-1426
Entities affiliated with Chase Capital
Partners(5)................................... 871,971 9.6 7.8
380 Madison Avenue, 12th Flr.
New York, NY 10017
Techfarm, Inc.(6)............................... 879,715 9.7 7.8
111 West Evelyn Avenue, #101
Sunnyvale, CA 94086
Intel Corporation............................... 666,667 7.3 6.0
SC-4-210
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Anthony Sun(3).................................. 1,449,236 15.9 12.9
Philip M. Young(2).............................. 1,449,235 15.9 12.9
George J. Still, Jr.(4)......................... 928,834 10.2 8.3
Gordon A. Campbell(6)........................... 879,715 9.7 7.8
L. Gregory Ballard.............................. 2,500 * *
James Whims..................................... -- -- --
Scott D. Sellers................................ 300,000 3.3 2.7
Gary Tarolli.................................... 300,000 3.3 2.7
Ross Q. Smith................................... 300,000 3.3 2.7
Karl Chicca..................................... 23,438 * *
All executive officers and directors as a group
(12 persons)(7)............................... 5,511,479 60.1 48.9
</TABLE>

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

* Less than 1%.

(1) Applicable percentage ownership is based on 9,086,176 shares of Common Stock
outstanding as of March 31, 1997, and 12,086,176 shares of Common Stock
outstanding after completion of this offering, in each case together with
applicable options for such shareholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission,
based on factors including voting and investment power with respect to
shares, subject to the applicable community property laws. Shares of Common
Stock subject to options or warrants currently exercisable, or exercisable
within 60 days after March 31, 1997, are deemed outstanding for the

60
<PAGE> 62

purpose of computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the
percentage ownership of any other person.

(2) Includes 152,170 shares held by Second Ventures, II, L.P., 43,477 shares
held by USVP Entrepreneur Partners II, L.P. and 1,253,588 shares held by
U.S. Venture Partners IV, L.P. Mr. Young, a director of the Company, is a
general partner of each of these limited partnerships. Mr. Young disclaims
beneficial ownership of the shares held by the limited partnerships except
to the extent of his proportionate partnership interest therein. In addition
to Mr. Young, the general partners of each of Second Ventures, II, L.P.,
USVP Entrepreneur Partners II, L.P. and U.S. Venture Partners IV, L.P. are
William K. Bowes, Jr., Irwin Federman, Steven M. Krausz and Dale J. Vogel.

(3) Includes 967,203 shares held by Venrock Associates, L.P. and 482,033 shares
held by Venrock Associates II, L.P. Mr. Sun, a director of the Company, is a
general partner of each of these limited partnerships. Mr. Sun disclaims
beneficial ownership of the shares held by the limited partnerships except
to the extent of his proportionate partnership interest therein. In addition
to Mr. Sun, the general partners of each of Venrock Associates, L.P. and
Venrock Associates II, L.P. are Patrick F. Latterell, Peter O. Crisp, Ted H.
McCourtney, Anthony B. Evnin, Ph.D., Kimberley A. Rummelsburg, David R.
Hathaway and Ray A. Rothrock.

(4) Includes 928,834 shares held by Norwest Equity Partners V, L.P. Mr. Still, a
director of the Company, is a managing general partner of Itasca Partners V,
L.L.P., the general partner of Norwest Equity Partners V, L.P. Mr. Still
disclaims beneficial ownership of the shares held by Norwest Equity Partners
V, L.P. except to the extent of his proportionate partnership interest
therein. In addition to Mr. Still, the managing general partners of Itasca
Partners V, L.L.P. Norwest Equity Partners V, L.P. are Daniel J. Haggerty
and John E. Lindahl.

(5) Includes 133,334 shares held by Chase Venture Capital Associates, L.P.
("Chase") and 738,637 shares held by Chemical Venture Capital Associates,
L.P. ("Chemical"). The general partner of each of Chase and Chemical is
Chase Capital Partners, Inc.

(6) Includes 462,500 shares held by Techfarm, Inc., 367,215 shares held by
Gordon A. Campbell and 50,000 shares issuable upon exercise of stock options
exercisable within 60 days of March 31, 1997 held by Gordon A. Campbell. Mr.
Campbell is President of Techfarm, Inc. Techfarm, Inc. disclaims beneficial
ownership of the shares held by Mr. Campbell, and Mr. Campbell disclaims
beneficial ownership of the shares held by Techfarm, Inc.

(7) Includes 69,531 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of March 31, 1997.

61
<PAGE> 63

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the completion of this offering, the Company will be authorized to
issue 50,000,000 shares of Common Stock, no par value, and 5,000,000 shares of
undesignated Preferred Stock, no par value.

COMMON STOCK

As of March 31, 1997, there were 9,086,176 shares of Common Stock
outstanding held of record by approximately 125 shareholders. As of March 31,
1997, options to purchase an aggregate of 1,875,461 shares of Common Stock were
also outstanding. See "Management -- Stock Plans".

The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and have cumulative voting rights with
respect to the election of directors. Subject to the prior rights of holders of
Preferred Stock, if any, the holders of Common Stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion from funds legally available therefor. Upon
liquidation or dissolution of the Company, the remainder of the assets of the
Company will be distributed ratably among the holders of Common Stock after
payment of liabilities and the liquidation preferences of any outstanding shares
of Preferred Stock. The Common Stock has no preemptive or other subscription
rights and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares. All of the outstanding shares of Common
Stock are, and the shares to be sold in this offering will be, fully paid and
nonassessable.

PREFERRED STOCK

Effective upon the closing of this offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by the Company's shareholders. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the shareholders and may adversely affect the market price of, and the
voting and other rights of, the holders of Common Stock. The Company has no
current plans to issue any shares of Preferred Stock.

WARRANTS

As of March 31, 1997, there were outstanding warrants to purchase an
aggregate of 43,750 shares of Common Stock at an exercise price of $2.00 per
share, an aggregate of 115,919 shares of Common Stock at an exercise price of
$4.40 per share and an aggregate of 35,000 shares of Common Stock at $7.50 per
share. Warrants to purchase 117,510 shares of Common Stock will expire
automatically upon the closing of this offering if not exercised. Certain of
such warrants contain "net exercise" provisions that enable the warrantholders
to exercise a portion of their warrant without paying the exercise price. To the
extent the warrantholders choose to "net exercise" their warrants, the Company
will not receive the proceeds from the exercise of such warrants. The remaining
warrants expire between December 31, 2001 and January 1, 2003.

REGISTRATION RIGHTS

The holders of approximately 7,021,859 shares of Common Stock and rights to
acquire 72,159 shares of Common Stock and their permitted transferees (the
"Holders") are entitled to certain rights with respect to the registration of
such shares ("Registrable Securities") under the Securities Act. Under the terms
of an agreement between the Company and the Holders, the holders of at least

62
<PAGE> 64

40% of the Registrable Securities may require, on two occasions after nine
months from the effective date of this offering, that the Company use its best
efforts to register the Registrable Securities for public resale. In addition,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders
exercising registration rights, the Holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
The holders of Registrable Securities may also require the Company on no more
than two occasions to register all or a portion of their Registrable Securities
on Form S-3 under the Securities Act when use of such form becomes available to
the Company. All such registration rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares to be included in such registration. In addition, the Company
need not effect a registration within six months following a previous
registration, or within six months following any offering of securities for the
account of the Company made subsequent to this offering, or after such time as
all Holders may sell under Rule 144 in a three month period all shares of Common
Stock to which such registration rights apply.

TRANSFER AGENT

The transfer agent for the Common Stock is First National Bank of Boston.
Its telephone number is (617) 575-3120.

63
<PAGE> 65

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of
the Company. Sales of a substantial number of shares of Common Stock in the
public market following this offering could adversely affect the market price of
the Common Stock prevailing from time to time.

Upon completion of this offering, the Company will have approximately
12,086,176 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option.) Of these shares, the 3,000,000 shares sold
in this offering will be freely transferable without restriction or registration
under the Securities Act, except for any shares purchased by an existing
"affiliate" of the Company, as that term is defined by the Securities Act (an
"Affiliate"), which shares will be subject to the resale limitations of Rule 144
adopted under the Act. On the date of this Prospectus, 9,086,176 "restricted
shares" as defined in Rule 144 promulgated under the Securities Act will be
outstanding.

All officers, directors and all other shareholders of the Company have
agreed not to offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of ownership of
the Common Stock, until the later of 180 days after the date of this Prospectus
or the open of market on the third trading day following the date of public
disclosure of the Company's financial results for the fiscal year ending
December 31, 1997, without the prior written consent of Robertson, Stephens &
Company. Robertson, Stephens & Company may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. Robertson, Stephens & Company currently has no plans to
release any portion of the securities subject to lock-up agreements. As a result
of these contractual restrictions and the provisions of Rules 144(k), 144 and
701, the restricted shares will be available for sale in the public market as
follows: (i) no shares will be eligible for immediate sale on the date of this
Prospectus, (ii) no shares will be eligible for sale 90 days after the date of
this Prospectus, (iii) approximately 21,250 shares will be eligible for sale 120
days after the date of this Prospectus, (iv) approximately 8,977,416 shares will
be eligible for sale on the later of 180 days after the date of this Prospectus
or the open of market on the third trading day following the date of public
disclosure of the Company's financial results for the fiscal year ending
December 31, 1997 upon expiration of lock-up agreements and (v) approximately
87,510 shares will be eligible for sale approximately one year from the date of
this Prospectus.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year
(including the holding period of any prior owner except an affiliate of the
Company) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately 224,000
shares immediately after this offering); or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an Affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Subject to the contractual restrictions described above, "144(k)
shares" may therefore be sold immediately upon the completion of this offering.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended

64
<PAGE> 66

(the "Exchange Act"), pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this Prospectus, may be sold by persons other than Affiliates
subject only to the manner of sale provisions of Rule 144 and by Affiliates
under Rule 144 without compliance with its two-year minimum holding period
requirements.

At March 31, 1997, options to purchase 1,875,461 shares of Common Stock
were outstanding, of which options to purchase approximately 185,127 shares were
then vested and exercisable. Shortly after this offering, the Company intends to
file a registration statement on Form S-8 under the Securities Act covering
shares of Common Stock reserved for issuance under the Company's stock plans.
See "Management -- Stock Plans." Shares of Common Stock issued upon exercise of
options under the Form S-8 will be available for sale in the public market,
subject to Rule 144 volume limitations applicable to Affiliates and subject to
the contractual restrictions described above. Beginning 180 days after the
Effective Date, approximately 518,583 shares issuable upon the exercise of
vested stock options will become eligible for sale in the public market, if such
options are exercised.

65
<PAGE> 67

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Montgomery Securities and UBS Securities LLC
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares, if any are
purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC......................................
Montgomery Securities..................................................
UBS Securities LLC.....................................................

---------
Total........................................................ 3,000,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 3,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
3,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,000,000
shares are being sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Each executive officer and director and certain other shareholders of the
Company have agreed with the Representatives until the later of 180 days after
the effective date of the Registration Statement or the open of market on the
third trading day following the date of public disclosure of the Company's
financial results for the fiscal year ending December 31, 1997 (the "Lock-Up
Period") not to offer to sell, contract to sell, or otherwise sell, dispose of,
loan, pledge or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock owned as of the date
of this Prospectus or thereafter acquired directly by such holders or with
respect to which they have or hereinafter acquire the power of disposition,
without the prior written consent of Robertson, Stephens & Company LLC. However,
Robertson, Stephens & Company LLC may, in its sole discretion at any time or
from time to time, without notice, release all or any portion of the securities
subject to the lock-up agreements. Approximately 8,979,462 of such shares will
be eligible for immediate public sale following expiration of the Lock-Up
Period, subject to the provisions of Rule 144. In addition, the Company has
agreed that during the Lock-Up Period, it will not, without the prior written
consent of Robertson, Stephens & Company LLC, issue, sell, contract to sell or
otherwise dispose of any shares of

66
<PAGE> 68

Common Stock, any options or warrants to purchase any shares of Common Stock or
any securities convertible into, exercisable for or exchangeable for shares of
Common Stock other than the issuance of Common Stock upon the exercise of
outstanding options and under the existing employee stock purchase plan and the
Company's issuance of options under existing stock option plans. See "Shares
Eligible For Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby was determined through negotiations among the
Company and the Representatives. Among the factors considered in such
negotiations were prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company; estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.

Of the 3,000,000 shares of Common Stock offered hereby, it is currently
anticipated that approximately 300,000 shares (assuming an initial public
offering price of $10.00) will be purchased from the Underwriters by Electronic
Arts at the price per share $ (the Price to Public less the Underwriting
Discounts and Commissions set forth on the cover of this Prospectus). See
"Investment by Electronic Arts."

The Representatives have advised the Company that, pursuant to rules
promulgated by the Commission, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
of the Common Stock originally sold by such Underwriter or syndicate member is
repurchased by the representatives in syndicate covering transactions, in
stabilizing transactions or otherwise. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.

67
<PAGE> 69

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1996
and March 31, 1997, and for each of the two years in the period ended December
31, 1996, and the three month period ended March 31, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete. In each instance, reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. Copies of the Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the Commission's principal
office in Washington, D.C., or obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a world wide web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov.

68
<PAGE> 70

3DFX INTERACTIVE, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.................................................... F-2
Balance Sheets as of December 31, 1995, December 31, 1996 and March 31, 1997......... F-3
Statements of Operations for the years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 (unaudited) and 1997............................. F-4
Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996 and
for the three months ended March 31, 1997.......................................... F-5
Statement of Cash Flows for the years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 (unaudited) and 1997............................. F-6
Notes to Financial Statements........................................................ F-7
</TABLE>

F-1
<PAGE> 71

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
3Dfx Interactive, Inc.

In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of 3Dfx Interactive, Inc. at December
31, 1995 and 1996 and March 31, 1997, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1996 and
the three month period ended March 31, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

San Jose, California
April 11, 1997, except as to
Note 9, which is as of May 21, 1997

F-2
<PAGE> 72

3DFX INTERACTIVE, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH MARCH 31,
------------------ 31, 1997
1995 1996 1997 (NOTE 1)
------ ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 865 $ 5,291 $ 4,141 $ 4,193
Accounts receivable less allowance for doubtful
accounts of $0, $78 and $128................ -- 1,393 3,985 3,985
Inventory...................................... 37 4,960 2,999 2,999
Other current assets........................... 135 321 896 896
------ ------- ------- -------
Total current assets................... 1,037 11,965 12,021 12,073
Property and equipment, net...................... 1,369 3,482 3,431 3,431
Other assets..................................... 34 134 134 134
------ ------- ------- -------
$2,440 $15,581 $15,586 $15,638
====== ======= ======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit................................. $ -- $ 1,076 $ 1,649 $ 1,649
Accounts payable............................... 471 2,236 1,394 1,394
Accrued liabilities............................ 440 1,061 937 937
Deferred revenue............................... -- -- 800 800
Accrued salaries, wages and benefits........... 124 354 577 577
Current portion of capitalized lease
obligations................................. 309 601 615 615
------ ------- ------- -------
Total current liabilities.............. 1,344 5,328 5,972 5,972
Capitalized lease obligations, less current
portion........................................ 544 632 468 468
------ ------- ------- -------
Commitments (Note 8)
Shareholders' equity:
Preferred Stock, no par value, 7,269,018 shares
authorized, 2,750,992, 6,951,692 and
7,021,859 shares issued and outstanding;
5,000,000 shares authorized pro forma, none
issued and outstanding pro forma............ 5,474 28,701 29,222 --
Common Stock, no par value, 25,033,000 shares
authorized; 50,000,000 shares authorized pro
forma; 1,771,250, 1,890,013 and 1,969,307
shares issued and outstanding and 9,086,176
shares issued and outstanding pro forma..... 310 1,626 2,078 31,685
Warrants....................................... -- 353 353 20
Notes receivable............................... (25) (19) (12) (12)
Deferred compensation.......................... (168) (1,250) (1,544) (1,544)
Accumulated deficit............................ (5,039) (19,790) (20,951) (20,951)
------ ------- ------- -------
Total shareholders' equity............. 552 9,621 9,146 9,198
------ ------- ------- -------
$2,440 $15,581 $15,586 $15,638
====== ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 73

3DFX INTERACTIVE, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- -----------------------
1995 1996 1996 1997
------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product....................................... $ -- $ 6,390 $ -- $ 4,497
Development contract.......................... -- -- -- 750
------- -------- ------- -------
Total revenues........................ -- 6,390 -- 5,247

Cost of product revenues........................ -- 5,123 -- 2,582
------- -------- ------- -------
Gross profit.................................... -- 1,267 -- 2,665
------- -------- ------- -------

Operating expenses:
Research and development...................... 2,940 9,435 1,659 1,953
Selling, general and administrative........... 2,166 6,642 1,028 1,846
------- -------- ------- -------
Total operating expenses.............. 5,106 16,077 2,687 3,799
------- -------- ------- -------

Loss from operations............................ (5,106) (14,810) (2,687) (1,134)
Interest and other income (expense), net........ 67 59 35 (27)
------- -------- ------- -------
Net loss........................................ $(5,039) $(14,751) $(2,652) $(1,161)
======= ======== ======= =======
Pro forma net loss per share (unaudited) (Note
1)............................................ $ (1.53) $ (0.11)
-------- -------
Shares used in pro forma net loss per share
calculations (unaudited) (Note 1)............. 9,627 10,386
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 74

3DFX INTERACTIVE, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- ------------------ NOTES DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION DEFICIT TOTAL
---------- ------- --------- ------ -------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock to founders,
investors and
employees at $0.025
per share........... -- $ -- 1,364,000 $ 34 $ -- $(19) $ -- $ -- $ 15
Issuance of Common
Stock to founders,
investors and
employees at $0.075
per share........... -- -- 73,000 6 -- (6) -- -- --
Issuance of Common
Stock to founders,
investors and
employees at $0.10
per share........... -- -- 209,250 21 -- (21) -- -- --
Issuance of Series A
Convertible
Preferred Stock in
March 1995 at $2.00
per share, net of
issuance costs...... 2,750,992 5,474 -- -- -- -- -- -- 5,474
Common Stock options
exercised........... -- -- 125,000 25 -- -- -- -- 25
Forgiveness of notes
receivable from
shareholders........ -- -- -- -- -- 21 -- -- 21
Deferred
compensation........ -- -- -- 224 -- -- (224) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 56 -- 56
Net loss.............. -- -- -- -- -- -- -- (5,039) (5,039)
---------- ------ --------- ----- --- --- ------ ------- -------
Balance at December
31, 1995............ 2,750,992 5,474 1,771,250 310 -- (25) (168) (5,039) 552
Issuance of Series B
Convertible
Preferred Stock in
March 1996 at $4.40
per share, net of
issuance costs...... 2,650,003 11,634 -- -- -- -- -- -- 11,634
Issuance of Series C
Convertible
Preferred Stock in
November 1996 at
$7.50 per share, net
of issuance costs... 1,550,697 11,593 -- -- -- -- -- -- 11,593
Common Stock options
exercised........... -- -- 185,209 42 -- -- -- -- 42
Forgiveness of notes
receivable from
shareholders........ -- -- -- -- -- 6 -- -- 6
Repurchased Common
Stock............... -- -- (66,446) (4) -- -- -- -- (4)
Issuance of Series B
and C Convertible
>Preferred Stock
warrants............ -- -- -- -- 353 -- -- -- 353
Deferred
compensation........ -- -- -- 1,278 -- -- (1,278) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 196 -- 196
Net loss.............. -- -- -- -- -- -- -- (14,751) (14,751)
---------- ------ --------- ----- --- --- ------ ------- -------
Balance at December
31, 1996............ 6,951,692 28,701 1,890,013 1,626 353 (19) (1,250) (19,790) 9,621
Issuance of Series C
Convertible
Preferred Stock in
January 1997 at
$7.50 per share, net
of issuance costs... 70,167 521 -- -- -- -- -- -- 521
Common Stock options
exercised........... -- -- 84,008 38 -- -- -- -- 38
Common Stock
repurchased......... -- -- (4,714) (1) -- -- -- -- (1)
Repayment of notes
receivable from
shareholders........ -- -- -- -- -- 7 -- -- 7
Deferred
compensation........ -- -- -- 415 -- -- (415) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 121 -- 121
Net loss.............. -- -- -- -- -- -- -- (1,161) (1,161)
---------- ------ --------- ----- --- --- ------ ------- -------
Balance at March 31,
1997................ 7,021,859 $29,222 1,969,307 $2,078 $353 $(12) $ (1,544) $ (20,951) $ 9,146
========== ====== ========= ===== === === ====== ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements

F-5
<PAGE> 75

3DFX INTERACTIVE, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------- ---------------------------
1995 1996 1996 1997
-------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (5,039) $ (14,751) $ (2,652) $ (1,161)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation......................... 227 1,017 146 385
Warrant valuation.................... -- 353 138 --
Stock compensation................... 56 196 14 121
Increase in allowance for doubtful
accounts.......................... -- 78 -- 50
Changes in assets and liabilities:
Accounts receivable............... -- (1,471) (92) (2,642)
Inventory......................... (37) (4,923) -- 1,961
Other assets...................... (169) (286) 21 (575)
Accounts payable.................. 471 1,765 533 (842)
Accrued liabilities............... 564 851 (205) 99
Deferred revenue.................. -- -- -- 800
-------- --------- -------- --------
Net cash used in operating
activities................... (3,927) (17,171) (2,097) (1,804)
-------- --------- -------- --------
Cash flows from investing activities for the
purchase of property and equipment........ (589) (2,210) (877) (334)
-------- --------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Convertible
Preferred Stock, net................... 5,474 23,227 11,650 521
Proceeds from issuance of Common
Stock, net............................. 61 44 18 44
Principal payments of capitalized lease
obligations............................ (154) (540) (228) (150)
Proceeds from drawdown on line of
credit................................. -- 1,076 152 573
-------- --------- -------- --------
Net cash provided by financing
activities................... 5,381 23,807 11,592 988
-------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... 865 4,426 8,618 (1,150)
Cash and cash equivalents at beginning
of period................................. -- 865 865 5,291
-------- --------- -------- --------
Cash and cash equivalents at end
of period.................... $ 865 $ 5,291 $ 9,483 $ 4,141
======== ========= ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for
interest............................... $ 45 $ 96 $ 26 $ 63
Acquisition of property and equipment
under capitalized lease obligations.... 1,007 920 160 --
</TABLE>

The accompanying notes are an integral part of these financial statements

F-6
<PAGE> 76

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:

3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in
California on August 24, 1994. The Company is engaged in the design, development
and marketing of 3D media processors specifically designed for interactive
electronic entertainment applications in the PC, home game console and coin-op
arcade markets. The Company did not incur any expenses from the period of
inception (August 24, 1994) through December 31, 1994.

Use of Estimates

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

Revenue Recognition

Revenue from product sales is recognized upon product shipment. Revenue
resulting from development contracts is recognized under the percentage of
completion method based upon costs incurred relative to total contract costs or
when the related contractual obligations have been fulfilled and fees are
billable. Costs associated with development contracts are included in research
and development. Royalty revenue is recognized upon the sale of products subject
to royalties.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. At December 31, 1996
and March 31, 1997, approximately $3,137,000 and $2,908,000, respectively, of
money market funds and commercial paper instruments, the fair value of which
approximate cost, are included in cash and cash equivalents.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
accounts receivable.

3Dfx invests primarily in money market accounts and commercial paper
instruments. Cash equivalents are maintained with high quality institutions and
their composition and maturities are regularly monitored by management.

The Company performs ongoing credit evaluations of its customers' financial
condition and maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of all accounts receivable. One customer
accounted for 21% of accounts receivable at December 31, 1996. Three customers
accounted for 38%, 31% and 13% of accounts receivable at March 31, 1997.

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Customers comprising 10% or more of the Company's
product revenues for the periods indicated:
A..................................................... 44% 4%
B..................................................... 33% 59%
C..................................................... 11% 15%
</TABLE>

F-7
<PAGE> 77

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Inventory

Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years or less. Assets held under
capital leases are amortized using the straight-line method over the term of the
lease or estimated useful lives, whichever is shorter.

Income Taxes

The Company accounts for income taxes using an asset and liability approach
and recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.

Research and Software Development Costs

Research and development costs are charged to operations as incurred.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development and are expensed as
incurred. Software development costs incurred subsequent to the establishment of
technological feasibility through the period of general market availability of
the product are capitalized, if material. To date, all software development
costs incurred subsequent to the establishment of technological feasibility have
been expensed as incurred due to their immateriality.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (see Note 6).

Interim Results (unaudited)

The accompanying statements of operations and cash flows for the three
month period ended March 31, 1996 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting solely of normal recurring
adjustments, necessary for the fair statement of results for the interim
periods. The results of operations and cash flows for the interim period are not
necessarily indicative of the results to be expected for any other interim
future period.

Pro Forma Balance Sheet (unaudited)

If the offering contemplated by this Prospectus (the "offering") is
consummated, all shares of Convertible Preferred Stock outstanding will
automatically convert into an aggregate of 7,021,859 shares of Common Stock. The
pro forma effect of this conversion has been reflected in the accompanying
unaudited balance sheet as of March 31, 1997. In addition, the pro forma balance
sheet gives effect to the assumed exercise of warrants to purchase 95,010 shares
of Common Stock that otherwise expire automatically upon the closing of this
offering.

F-8
<PAGE> 78

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Pro Forma Net Loss Per Share (unaudited)

Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the periods. Common
equivalent shares for the year ended December 31, 1996 and the three month
period ended March 31, 1997 consist of Common Stock issuable upon the conversion
of the Company's Series A, B, and C Convertible Preferred Stock using the
if-converted method. Pursuant to the requirements of the Securities and Exchange
Commission, common stock equivalent shares relating to the stock options and
warrants issued subsequent to April 15, 1996, using the treasury stock method
are included in the computation of pro forma net loss per share for all periods
presented, as if they were outstanding for the entire period. Prior period
earnings per share data have not been presented since such amounts are not
deemed meaningful.

Recent Accounting Pronouncements (unaudited)

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This statement
is effective for the Company's fiscal year ending December 31, 1997. The
Statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. If the Company had adopted this Statement for the
year ended December 31, 1996 and for the three month period ended March 31,
1997, the Company's loss per share would have been as follows:

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Basic loss per share............. $ (7.83) $(0.52)
Diluted loss per share........... $ (2.94) $(0.22)
</TABLE>

NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1995 1996 1997
------ ------- ---------
<S> <C> <C> <C>
Inventory:
Raw material............................... $ 37 $ 424 $ 428
Work in process............................ -- 231 260
Finished goods............................. -- 4,305 2,311
------ ------- -------
$ 37 $ 4,960 $ 2,999
====== ======= =======
Property and equipment:
Computer equipment......................... $ 995 $ 3,122 $ 3,328
Computer software.......................... 521 1,047 1,160
Furniture and equipment.................... 80 557 572
------ ------- -------
1,596 4,726 5,060
Less: accumulated depreciation and
amortization............................ (227) (1,244) (1,629)
------ ------- -------
$1,369 $ 3,482 $ 3,431
====== ======= =======
</TABLE>

Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $1,007,000, $1,927,000 and $1,927,000 with
related accumulated amortization of $181,000, $602,000 and $909,000 at December
31, 1995 and 1996 and March 31, 1997, respectively.

F-9
<PAGE> 79

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- DEBT:

The Company has a line of credit agreement with a bank, which provides for
maximum borrowings in an amount up to the lesser of 75% of eligible accounts
receivable plus 100% of cash and cash equivalents or $4,000,000. Borrowings
under the line are secured by all of the Company's owned assets and bear
interest at the bank's prime rate plus 1.50% per annum (10.0% as of March 31,
1997). The agreement requires that the Company maintain certain financial ratios
and levels of tangible net worth, profitability and liquidity. As of March 31,
1997, the Company was in compliance with its covenants. The line of credit
expires in August 1997. At March 31, 1997, there were no borrowings outstanding
under this line of credit.

The Company has an equipment line of credit with a bank, which provides for
the purchase of up to $2,000,000 of property and equipment. Borrowings under
this line are secured by all of the Company's owned assets and bear interest at
the bank's prime rate plus 1.50% per annum. The agreement requires that the
Company maintain certain financial ratios and levels of tangible net worth,
profitability and liquidity. As of March 31, 1997, the Company was in compliance
with its covenants. The equipment line of credit expires in August 1998. At
March 31, 1997, approximately $1,649,000 was outstanding under this equipment
line of credit.

NOTE 4 -- DEVELOPMENT CONTRACT:

In March 1997, the Company entered into a development and license agreement
with Sega Enterprises, Ltd., under which the Company is entitled to receive
development contract revenues and royalties based upon a cumulative volume of
units sold by Sega which include the Company's product. The Company recognized
development contract revenues of $750,000 in the three months ended March 31,
1997, representing a non-refundable amount due for the delivery of certain
engineering designs. The Company has no further obligations to Sega with regard
to the $750,000 of development contract revenue recognized. The Company deferred
development contract revenues of $800,000 in the three months ended March 31,
1997, as no significant activity occurred under the agreement. The Company did
not earn any royalty revenue in the three months ended March 31, 1997. Costs
incurred relating to this contract are included in research and development
expense.

NOTE 5 -- SHAREHOLDERS' EQUITY:

Common Stock

The Company has issued 1,646,250 shares of its Common Stock to founders and
investors. The shares either vested immediately or will vest on various dates
through 1999. The Company can buy back unvested shares at the original price
paid by the purchasers in the event the purchasers' employment with the Company
is terminated for any reason. During the year ended December 31, 1996 and the
three month period ended March 31, 1997, 49,570 and 2,604 shares, respectively,
of Common Stock were repurchased.

In addition, during the two year period ended December 31, 1996 and the
three month period ended March 31, 1997, certain employees exercised options to
purchase 310,209 and 84,008 shares, respectively, of Common Stock which are
subject to a right of repurchase by the Company at the original share issuance
price. The repurchase right lapses over a period generally ranging from two to
four years. During the year ended December 31, 1996 and the three month period
ended March 31, 1997, 16,875 and 2,110 shares, respectively, of Common Stock
were repurchased.

As of December 31, 1996 and March 31, 1997, approximately 835,130 and
744,721 shares, respectively, of Common Stock were subject to these repurchase
rights.

F-10
<PAGE> 80

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The holders of Common Stock, voting as a class, are entitled to elect three
members of the Board of Directors.

Convertible Preferred Stock

The aggregate authorized number of preferred shares is 7,269,018, of which
2,794,742, 2,818,412 and 1,655,864 are designated as Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible
Preferred Stock, respectively.

Each share of Series A, B and C Convertible Preferred Stock outstanding is
convertible at the option of the holder into one share of Common Stock, subject
to certain adjustments, and automatically converts upon the completion of an
underwritten public offering of Common Stock with gross proceeds of at least $15
million and a public offering price of not less than $6.60 per share or in the
event of the vote of a majority of each of the holders of Series A, B and C
Convertible Preferred Stock outstanding at the time of such a vote.

The holders of Series A, B and C Convertible Preferred Stock are entitled
to elect two members, one member, and one member, respectively, to the Board of
Directors and have voting rights equal to Common Stock on an if-converted basis.
Dividends at the rate of $0.20, $0.44 and $0.75 per share for Preferred Series
A, B and C Convertible Preferred Stock, respectively, as declared by the Board
of Directors, are payable to the preferred stockholders in preference to any
dividends for Common Stock declared by the Board of Directors. Dividends are
noncumulative. No dividends have been declared by the Board of Directors through
March 31, 1997.

The holders of the Series A, B and C Convertible Preferred Stock are
entitled to receive their original issuance prices of $2.00, $4.40 and $7.50 per
share, respectively, in liquidation, plus an amount equal to all declared but
unpaid dividends, prior and in preference to any distribution to the holders of
Common Stock. As of December 31, 1996 and March 31, 1997, the aggregate
liquidation preference of the Series A, B and C Convertible Preferred Stock was
approximately $28,795,000 and $29,319,000, respectively.

At December 31, 1996 and March 31, 1997, 6,951,692 and 7,021,859 shares,
respectively, of Common Stock were reserved for issuance upon conversion of the
preferred stock.

Warrants

In March 1995, the Company issued a warrant to a vendor to purchase 43,750
shares of Series A Convertible Preferred Stock at $2.00 per share. The warrant
expires on March 31, 2002. The warrant was deemed by management to have a
nominal value at the date of grant. The Company has reserved 43,750 shares of
Series A Convertible Preferred Stock for the exercise of this warrant.

In January 1996, the Company entered into a line of credit. To secure the
line , the Company issued to the lessor a warrant to purchase 19,886 shares of
Series B Convertible Preferred Stock at an exercise price of $4.40. The warrant
expires on January 1, 2003. The warrant was deemed by management to have a
nominal value at the date of grant. The Company has reserved 19,886 shares of
Series B Convertible Preferred Stock for the exercise of this warrant.

In February 1996, the Company issued to a financial institution in
accordance with a bridge loan agreement a warrant to purchase 8,523 shares of
Series B Convertible Preferred Stock at $4.40 per share. The warrant expires on
December 31, 2001. The warrant was deemed by management to have a nominal value
at the date of grant. The Company has reserved 8,523 shares of Series B
Convertible Preferred Stock for the exercise of this warrant.

In February 1996, the Company entered into an agreement to issue warrants
to TSMC to purchase 140,000 shares of Series B Convertible Preferred Stock at an
exercise price of $4.40 per share. The

F-11
<PAGE> 81

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

purchase right of 50,000 warrants is exercisable, in whole or in part, at any
time on or before December 31, 2001. These warrants will expire, if not
previously exercised, immediately upon the closing of an underwritten public
offering in which the proceeds received by the Company equal at least $7,500,000
and the public offering price is not less than $3.00 per share. The purchase
right of 90,000 warrants became exercisable at the rate of 10 shares of Series B
Convertible Preferred Stock for each wafer above 2,000 wafers purchased from
TSMC by the Company during fiscal 1996 and became exercisable for 75,020 shares
of Series B Convertible Preferred Stock in conjunction with wafer purchases in
1996. These warrants expire on December 31, 2001. The warrant was deemed to have
a total value of approximately $211,000 and was recognized as a cost of revenues
and research and development expense during 1996. The Company has reserved
175,020 shares of Series B Convertible Preferred Stock for the exercise of this
warrant.

In 1996, the Company issued to a university and consultants warrants to
purchase 5,000 and 30,000 shares, respectively, of Series C Convertible
Preferred Stock at an exercise price of $7.50 per share. These warrants were
deemed to have a total value of approximately $142,000 at the date of grant and
the related cost was recognized as other expense and research and development
expense, respectively, during 1996. The Company has reserved 35,000 shares of
Series C Convertible Preferred Stock for the exercise of these warrants.

At March 31, 1997, the Company had reserved 247,159 shares of Common Stock
for the exercise of warrants and the subsequent conversion to Common Stock.

NOTE 6 -- STOCK OPTION PLANS:

The Option Plan

In May 1995, the Company adopted a Stock Plan, (the Option Plan) which
provides for granting of incentive and nonqualified stock options to employees
and consultants and directors of the Company. Under the Option Plan, 2,299,768
shares of Common Stock have been reserved for issuance at March 31, 1997.

Options granted under the Option Plan are generally for periods not to
exceed ten years, and are granted at prices not less than 100% and 85%, for
incentive and nonqualified stock options, respectively, of the fair market value
of the stock determined by the Board of Directors on the date of grant.
Incentive stock options granted to shareholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years, and must be issued
at prices not less than 110% of the fair market value of the stock on the date
of grant. Options granted under the Option Plan generally vest 25% on the first
anniversary of the grant date and 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the grant
date.

F-12
<PAGE> 82

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following is a summary of activity under the Option Plan during the
years ended December 31, 1995 and 1996 and the three months ended March 31,
1997:

<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
----------- ----------- --------
<S> <C> <C> <C>
Balance at May 1, 1995 (date of plan
adoption)............................. 853,750 -- --
Granted................................. (640,750) 640,750 $ 0.20
Exercised............................... -- (125,000) $ 0.20
Canceled................................ 2,500 (2,500) $ 0.20
----------- ----------
Balance at December 31, 1995............ 215,500 513,250 $ 0.20

Additional shares authorized............ 1,196,250 -- --
Granted................................. (1,369,138) 1,369,138 $ 0.58
Exercised............................... -- (185,209) $ 0.23
Canceled................................ 158,670 (158,670) $ 0.41
Repurchased............................. 16,875 $ 0.20
----------- ----------
Balance at December 31, 1996............ 218,157 1,538,509 $ 0.54

Additional shares authorized............ 625,000 -- --
Granted................................. (450,419) 450,419 $ 9.62
Exercised............................... -- (84,008) $ 0.46
Canceled................................ 29,459 (29,459) $ 0.56
Repurchased............................. 2,110 -- $ 0.20
----------- ----------
Balance at March 31, 1997............... 424,307 1,875,461 $ 2.72
=========== ==========
</TABLE>

At December 31, 1996 and March 31, 1997, 186,172 and 185,127, respectively,
Common Stock options were vested.

During the years ended December 31, 1995 and 1996 and the three month
period ended March 31, 1997, the Company granted options for the purchase of
2,460,307 shares of Common Stock to employees at exercise prices ranging from
$0.20 to $12.00 per share. Management has calculated deferred compensation of
approximately $1,900,000 related to options granted during 1995 and 1996 and the
three month period ended March 31, 1997. Such deferred compensation will be
amortized over the vesting period relating to these options, of which $56,000,
$196,000 and $121,000 has been amortized during the years ended December 31,
1995 and 1996 and the three month period ended March 31, 1997.

Employee Stock Purchase Plan

In March 1997, the Company's Board of Directors approved an Employee Stock
Purchase Plan. Under this plan, employees of the Company can purchase Common
Stock through payroll deductions. A total of 550,000 shares have been reserved
for issuance under this plan. The plan was approved by the Company's
shareholders on April 1997.

Directors' Stock Option Plan

In March 1997, the Company adopted a 1997 Directors' Stock Option Plan.
Under this plan options to purchase 150,000 shares of Common Stock may be
granted. The plan provides that options may be

F-13
<PAGE> 83

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Granted at a price not less than fair value of a share at the date of grant. The
plan was approved by the Company's shareholders in April 1997.

Information relating to stock options outstanding under the Option Plan at
March 31, 1997 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------- ---------------- --------------
<S> <C> <C> <C>
Range of exercise prices:
$0.20 - $0.30................... 338,500 8.4 years $ 0.20
$0.44 - $0.75................... 680,042 9.3 years $ 0.48
$0.90........................... 448,250 9.7 years $ 0.90
$2.00 - $12.00.................. 408,669 10.0 years $10.50
</TABLE>

<TABLE>
<CAPTION>
OPTIONS VESTED
--------------------------
WEIGHTED
NUMBER AVERAGE
VESTED EXERCISE PRICE
------- --------------
<S> <C> <C>
Range of exercise prices:
$0.20 - $0.30...................................... 121,116 $ 0.20
$0.44 - $0.75...................................... 64,011 $ 0.44
$0.90.............................................. -- --
$2.00 - $12.00..................................... -- --
</TABLE>

Certain Pro Forma Disclosures

The Company accounts for its employee stock options plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25. In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation" which established a fair value based method of accounting for
employee stock option plans and shares issued to founders which are subject to
repurchase. To determine the fair value of each option on the date of grant the
following assumptions were used: dividend yield of 0.0%; a risk-free interest
rate of 6%; a weighted average expected option term of four years were used for
all periods presented. The weighted average fair value of stock options granted
in the years ended December 31, 1995 and 1996 and the three month period ended
March 31, 1997, was $0.18, $0.60 and $9.62, respectively.

Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by FAS 123, for awards granted under its stock
option plan, the Company's net loss and net loss per share would have been
reduced to the pro forma amounts below for the years ended December 31, 1995 and
1996 and the three months ended March 31, 1996 and 1997:

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- -------------------
1995 1996 1996 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Pro forma net loss................. $(5,045) $(14,801) $(2,657) $(1,235)
Pro forma net loss per share....... $ -- $ (1.54) $ -- $ (0.10)
</TABLE>

Because the determination of the fair value of all options granted after
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding paragraph and, because
options granted prior to 1995 are not taken into consideration, the above
results are not representative of future years.

F-14
<PAGE> 84

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Benefit Plan

Effective January 1, 1995, the Company adopted a 401(k) Savings Plan which
allows all employees to participate by making salary deferral contributions to
the 401(k) Savings Plan ranging from 1% to 20% of their eligible earnings. The
Company may make discretionary contributions to the 401(k) Savings Plan upon
approval by the Board of Directors. The Company has not contributed to the
401(k) Savings Plan to date.

NOTE 7 -- INCOME TAXES:

No provision for federal or state income taxes has been recorded for the
years ended December 31, 1995 and 1996 and the three months ended March 31, 1997
as the Company incurred net operating losses.

Deferred tax assets related to the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net operating loss and credit carryforwards... $ 1,994 $ 7,278 $ 7,665
Expenses not currently deductible............. -- 357 429
Capitalized research and development.......... 100 134 141
------- ------- -------
2,094 7,769 8,235
Less: valuation allowance..................... (2,094) (7,769) (8,235)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>

Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology, the lack
of carryback capacity to realize deferred tax assets, and the uncertainty
regarding market acceptance of the Company's products. The Company will continue
to assess the realizability of the deferred tax assets in future periods.

At December 31, 1995 and 1996 and March 31, 1997, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$5,100,000, $18,162,000 and $19,127,000, respectively, which expire beginning in
2010.

Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period. The issuance of Series A Convertible Preferred Stock
resulted in an annual limitation of the Company's ability to utilize net
operating losses incurred prior to that date. The limitation is insignificant.
Net operating losses incurred between the time of the Series A Convertible
Preferred Stock issuance and March 31, 1997, had not been subject to any annual
limitations through March 31, 1997.

NOTE 8 -- COMMITMENTS:

The Company is obligated under noncancelable operating leases for its
facilities and certain equipment and capital leases for certain equipment. Rent
expense on the operating leases for the year ended December 31, 1995 and 1996
and the three month period ended March 31, 1997, was approximately $192,000,
$305,000 and $74,000, respectively.

F-15
<PAGE> 85

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Future minimum lease payments under the operating and capitalized leases
are as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
April 1, 1997 through December 31, 1997............. $ 716 $ 548
1998................................................ 1,034 508
1999................................................ 1,033 119
2000................................................ 1,027 --
2001................................................ 1,027 --
Thereafter.......................................... 5,479 --
------- ------
Total minimum lease payments........................ $10,316 1,175
=======
Less: amount representing interest.................. (92)
------
Present value of minimum lease payments............. 1,083
Less: current portion............................... (615)
------
Noncurrent portion of capitalized lease
obligations....................................... $ 468
======
</TABLE>

Purchase Commitments

The Company's manufacturing relationship with Taiwan Semiconductor
Manufacturing Corporation ("TSMC") allows for the cancellation of all
outstanding purchase orders, but requires the repayment of all expenses incurred
to date. As of March 31, 1997, TSMC had incurred approximately $626,000 of
manufacturing expenses on the Company's outstanding purchase orders.

NOTE 9 -- SUBSEQUENT EVENT:

The Company effected on May 21, 1997, a one-for-two reverse stock split.
All share information has been retroactively adjusted to reflect the one-for-two
reverse stock split.

F-16
<PAGE> 86

APPENDIX -- DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER

Graphic: Illustration of 3D image from computer game containing starfighter and
planets.

Caption: The Company's technology enables a highly immersive, interactive 3D
experience with compelling graphics, realistic motion and complex character and
scene interaction at real time frame rates.

GATEFOLD

Graphic: Illustrations of characters and scenes from 3D video games and
software applications designed to or utilizing the Company's 3D hardware.

Caption: 3Dfx Technology is designed to perform on a variety of
platforms . . . . and support a multitude of third-party PC titles.

Credits: Images courtesy of Criterion Studios, Eidos Entertainment, Shiny
Entertainment and Ubisoft. All other trademarks are the property of their
respective owners. Copyright (C)1996 3Dfx Interactive, Inc.

INSIDE BACK COVER

Graphic: Depiction of the steps required to create a 3D image, starting with a
wireframe model and moving into shading, mapping and additional techniques, flat
shading (addition of color), texture mapping and final techniques to complete
the image in a realistic manner.

PHOTO:
Caption: ONE. A wireframe model is created that forms the basis of the three
dimensional objects. This image shows the vertices and the outline of the set
and characters before the coloring techniques have been applied.

PHOTO:
Caption: TWO. Flat shading has been added to the wireframe. One color is
assigned to all the pixels in a given triangle. This demonstrates the simplest
of the shading techniques available.

PHOTO:
Caption: THREE. Basic point-sampled texture mapping has been added to the
image. Texture mapping is said to have the greatest impact in adding realism to
a 3D image. A fixed pattern or texture is transferred to a polygon on the
surface of a 3D object. The texture is warped to simulate the perspective of a
3D object.

PHOTO:
Caption: FOUR. Bilinear filtering and MIP mapping added to the scene further
enhance the image quality -- a subtle improvement in a static image. These
techniques more accurately simulate smoothness of color changes and the behavior
of detail as the objects grow more distant.

PHOTO:
Caption: FIVE. The final enhancement comes from lighting effects added to the
characters and set. First pass texture maps on the set are made either lighter
or darker through shadow maps that simulate the effect of lights. The lighting
effect on character texture maps is produced with Gouraud color shading during
rendering.
<PAGE> 87

BACK OUTSIDE COVER

3Dfx Interactive, Inc. logo.
<PAGE> 88

LOGO
<PAGE> 89

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.

<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee..................................................... $ 12,441
NASD Filing Fee.......................................................... 4,606
The Nasdaq Stock Market Listing Fee...................................... 40,000
Blue Sky Qualification Fees and Expenses................................. 15,000
Printing and Engraving Expenses.......................................... 150,000
Legal Fees and Expenses.................................................. 300,000
Accounting Fees and Expenses............................................. 150,000
Transfer Agent and Registrar Fees........................................ 5,000
Miscellaneous............................................................ 22,953
--------
Total.......................................................... $700,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Articles of Incorporation eliminate a director's personal
liability for monetary damages to the Registrant and its shareholders arising
from a breach or alleged breach of the director's fiduciary duty, except for
liability arising under Sections 310 and 316 of the California General
Corporation Law or liability for (i) acts or omissions that involve intentional
misconduct or knowing and culpable violation of law, (ii) acts or omissions that
a director believes to be contrary to the best interests of the Registrant or
its shareholders or that involve the absence of good faith on the part of the
director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for the
director's duty to the Registrant or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the Registrant or
its shareholders, (v) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, (vi) interested transactions between the
corporation and a director in which a director has a material financial
interest, and (vii) liability for improper distributions, loans or guarantees.
This provision does not eliminate the directors' duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under California law.

Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Articles of Incorporation and Bylaws contain provisions covering indemnification
to the maximum extent permitted by the California General Corporation Law of
corporate directors, officers and other agents against certain liabilities and
expenses incurred as a result of proceedings involving such persons in their
capacities as directors, officers employees or agents, including proceedings
under the Securities Act or the Securities Exchange Act of 1934, as amended. The
Company has entered into Indemnification Agreements with its directors and
executive officers.

II-1
<PAGE> 90

In addition to the foregoing, the Underwriting Agreement provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the several Underwriters, against certain
liabilities, including liabilities arising under the Securities Act.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since August 24, 1994, the Registrant has issued and sold (without payment
of any selling commission to any person) the following unregistered securities
(as adjusted to reflect the one-for-two reverse stock split effected in May
1995).

1. On January 12, 1995, the Registrant issued and sold 1,364,000 shares of
Common Stock to investors at a price of $.025 per share.

2. From March 3, 1995 to May 18, 1995, the Registrant issued and sold
282,250 shares of Common Stock to employees at $.07 to $.10 price per
share.

3. From May 1995 to March 31, 1997, the Registrant issued and sold 394,217
shares of Common Stock to employees and consultants at prices ranging
from $.02 to $.90 per share, upon exercise of stock options and stock
purchase rights, pursuant to the Registrant's 1995 Employee Stock Plan.

4. On March 13, 1995, the Registrant issued and sold 2,750,992 shares of
Series A Preferred Stock to a total of 43 accredited investors for an
aggregate purchase price of $5,501,979.

5. On March 31, 1995, the Registrant issued a warrant to purchase an
aggregate of 43,750 shares of Series A Preferred Stock to one investor
with an exercise price of $2.00 per share.

6. From November 2, 1995 to December 31, 1996, the Registrant issued
warrants to purchase an aggregate of 168,409 shares of Series B
Preferred Stock to a total of 3 investors with an exercise price of
$4.40 per share.

7. From February 14, 1996 to February 28, 1996, the Registrant issued and
sold 2,650,003 shares of Series B Preferred Stock to a total of 33
investors for an aggregate purchase price of $11,660,000.

8. From September 12, 1996 to January 17, 1997, the Registrant issued and
sold 1,620,864 shares of Series C Preferred Stock to a total of 39
investors for an aggregate purchase price of $12,156,443.

9. From June 1, 1996 to September 1996, the Registrant issued warrants to
purchase an aggregate of 35,000 shares of Series C Preferred Stock to 1
university and 2 consultants with an exercise price of $7.50 per share.

The sales and issuances of securities in the transactions described in
paragraphs (1) through (3) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit plans
or pursuant to a written contract relating to compensation, as provided by Rule
701.

The sales and issuances of securities in the transactions described in
paragraphs (4) through (8) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) or Regulation D promulgated
thereunder. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof. Appropriate legends are affixed to the stock certificates issued in
such transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate

II-2
<PAGE> 91

information about the Registrant or had access, through employment or other
relationships, to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement (draft dated May 22, 1997).
3.1* Articles of Incorporation of the Registrant, as currently in effect.
3.2* Form of Restated Articles of Incorporation of the Registrant, to be filed prior to
the effective date of the offering made under this Registration Statement.
3.3* Form of Restated Articles of Incorporation of the Registrant, to be filed
immediately following the closing of the offering made under this Registration
Statement.
3.4* Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of its directors
and officers.
10.2* 1995 Employee Stock Plan and form of Stock Option Agreement thereunder.
10.3* 1997 Director Option Plan and form of Director Stock Option Agreement thereunder.
10.4* 1997 Employee Stock Purchase Plan and forms of agreement thereunder.
10.5* Lease Agreement dated August 7, 1996 between Registrant and South Bay/Fortran, and
Tenant Estoppel Certificate dated March 25, 1997 between Registrant and
CarrAmerica Realty Corporation for San Jose, California office.
10.6* Investors' Rights Agreement dated September 12, 1996, Amendment No. 1 to
Investors' Rights Agreement dated November 25, 1996, Amendment No. 2 to Investors'
Rights Agreement dated December 18, 1996 and Amendment No. 3 to Investors' Rights
Agreement dated March 27, 1997 by and among the Registrant and holders of the
Registrant's Series A, Series B and Series C Preferred Stock.
10.7.1* Warrant to purchase shares of Series A Preferred Stock issued to Lighthouse
Capital Partners.
10.7.2* Warrant to purchase shares of Series B Preferred Stock issued to MMC/GATX
Partnership No. 1.
10.7.3* Warrant to purchase shares of Series B Preferred Stock issued to Silicon Valley
Bank.
10.7.4* Warrant to purchase shares of Series B Preferred Stock issued to Taiwan
Semiconductor Manufacturing Company, Ltd.
10.7.5* Warrant to purchase shares of Series B Preferred Stock issued to Taiwan
Semiconductor Manufacturing Company, Ltd.
10.7.6* Warrant to purchase shares of Series C Preferred Stock issued to Goodin &
Associates.
10.7.7* Warrant to purchase shares of Series C Preferred Stock issued to Simon Szeto, an
individual doing business as Symtek.
10.7.8* Warrant to purchase shares of Series C Preferred Stock issued to Leland Stanford
Junior University.
10.8* Form of Restricted Stock Purchase Agreement between the Registrant and certain
shareholders.
10.9+* Technology Development and License Agreement dated as of February 28, 1997 by and
between Registrant and Sega Enterprises, Ltd.
10.10* Master Equipment Lease Agreement dated January 1, 1996 by and between the
Registrant and MMC/GATX Partnership No. 1.
</TABLE>

II-3
<PAGE> 92

<TABLE>
<S> <C>
10.11* Master Equipment Lease dated March 31, 1995 by and between the Registrant and
Lighthouse Capital Partners, L.P.
10.12* Loan Commitment Agreement dated July 1, 1996 by and between the Registrant and
Silicon Valley Bank.
10.13.1* Change of Control Letter Agreement between the Registrant and L. Gregory Ballard.
10.13.2* Change of Control Letter Agreement between the Registrant and Karl Chicca.
10.13.3* Change of Control Letter Agreement between the Registrant and Scott D. Sellers.
10.13.4* Change of Control Letter Agreement between the Registrant and Gary Tarolli.
11.1* Calculation of pro forma net loss per share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>

- ---------------
* Previously filed.

+ Confidential treatment requested for portions of these agreements.

(b) Financial Statement Schedules:

None.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the California General Corporation Law, the Articles of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer of controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 93

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Jose, State of California, on the 4th day of
June, 1997.

3DFX INTERACTIVE, INC.

By /s/ L. GREGORY BALLARD
------------------------------------
L. Gregory Ballard
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------- ---------------
<C> <S> <C>
/s/ L. GREGORY BALLARD President and Chief Executive Officer June 4, 1997
- ---------------------------------------- (Principal Executive Officer)
L. Gregory Ballard

/s/ GARY P. MARTIN Vice President, Administration and June 4, 1997
- ---------------------------------------- Chief Financial Officer (Principal
Gary P. Martin Financial and Accounting Officer)
/s/ GORDON A. CAMPBELL* Chairman of the Board of Directors June 4, 1997
- ----------------------------------------
Gordon A. Campbell

/s/ ANTHONY SUN* Director June 4, 1997
- ----------------------------------------
Anthony Sun

/s/ PHILIP M. YOUNG* Director June 4, 1997
- ----------------------------------------
Philip M. Young

/s/ SCOTT D. SELLERS* Director June 4, 1997
- ----------------------------------------
Scott D. Sellers

/s/ JAMES WHIMS* Director June 4, 1997
- ----------------------------------------
James Whims

/s/ GEORGE J. STILL, JR.* Director June 4, 1997
- ----------------------------------------
George J. Still, Jr.

*By: /s/ GARY P. MARTIN
- ----------------------------------------
Gary P. Martin
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 94

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ---------
<S> <C> <C>
1.1* Form of Underwriting Agreement (draft dated May 22, 1997).
3.1* Articles of Incorporation of the Registrant, as currently in effect.
3.2* Form of Restated Articles of Incorporation of the Registrant, to be
filed prior to the effective date of the offering made under this
Registration Statement.
3.3* Form of Restated Articles of Incorporation of the Registrant, to be
filed immediately following the closing of the offering made under
this Registration Statement.
3.4* Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2* 1995 Employee Stock Plan and form of Stock Option Agreement
thereunder.
10.3* 1997 Director Option Plan and form of Director Stock Option Agreement
thereunder.
10.4* 1997 Employee Stock Purchase Plan and forms of agreement thereunder.
10.5* Lease Agreement dated August 7, 1996 between Registrant and South Bay/
Fortran, and Tenant Estoppel Certificate dated March 25, 1997 between
Registrant and CarrAmerica Realty Corporation for San Jose, California
office.
10.6* Investors' Rights Agreement dated September 12, 1996, Amendment No. 1
to Investors' Rights Agreement dated November 25, 1996, Amendment No.
2 to Investors' Rights Agreement dated December 18, 1996 and Amendment
No. 3 to Investors' Rights Agreement dated March 27, 1997 by and among
the Registrant and holders of the Registrant's Series A, Series B and
Series C Preferred Stock.
10.7.1* Warrant to purchase shares of Series A Preferred Stock issued to
Lighthouse Capital Partners.
10.7.2* Warrant to purchase shares of Series B Preferred Stock issued to
MMC/GATX Partnership No. 1.
10.7.3* Warrant to purchase shares of Series B Preferred Stock issued to
Silicon Valley Bank.
10.7.4* Warrant to purchase shares of Series B Preferred Stock issued to
Taiwan Semiconductor Manufacturing Company, Ltd.
10.7.5* Warrant to purchase shares of Series B Preferred Stock issued to
Taiwan Semiconductor Manufacturing Company, Ltd.
10.7.6* Warrant to purchase shares of Series C Preferred Stock issued to
Goodin & Associates.
10.7.7* Warrant to purchase shares of Series C Preferred Stock issued to Simon
Szeto, an individual doing business as Symtek.
10.7.8* Warrant to purchase shares of Series C Preferred Stock issued to
Leland Stanford Junior University.
10.8* Form of Restricted Stock Purchase Agreement between the Registrant and
certain shareholders.
</TABLE>

<PAGE> 95

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ---------
<S> <C> <C>
10.9+* Technology Development and License Agreement dated as of February 28,
1997 by and between Registrant and Sega Enterprises, Ltd.
10.10* Master Equipment Lease Agreement dated January 1, 1996 by and between
the Registrant and MMC/GATX Partnership No. 1.
10.11* Master Equipment Lease dated March 31, 1995 by and between the
Registrant and Lighthouse Capital Partners, L.P.
10.12* Loan Commitment Agreement dated July 1, 1996 by and between the
Registrant and Silicon Valley Bank.
10.13.1* Change of Control Letter Agreement between the Registrant and L.
Gregory Ballard.
10.13.2* Change of Control Letter Agreement between the Registrant and Karl
Chicca.
10.13.3* Change of Control Letter Agreement between the Registrant and Scott D.
Sellers.
10.13.4* Change of Control Letter Agreement between the Registrant and Gary
Tarolli.
11.1* Calculation of pro forma net loss per share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>

- ---------------
* Previously filed.

+ Confidential treatment requested for portions of these agreements.

<PAGE> 1
EXHIBIT 4.1

[LOGO]
NUMBER SHARES
FX
3DFX INTERACTIVE, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA

THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR STATEMENTS
IN THE CITY OF BOSTON, MA. OR THE RELATING TO RIGHTS, PREFERENCES,
CITY OF NEW YORK, N.Y. PRIVILEGES AND RESTRICTIONS, IF ANY

CUSIP 88553X 10 3

THIS CERTIFIES THAT

[LOGO]

is the record holder of

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF
3Dfx Interactive, Inc.

transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.

Dated:

__________________ [SEAL] ____________________
Gary P. Martin L. Gregory Ballard
Secretary President & Chief Executive Officer

COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR,
BY _____________________
AUTHORIZED SIGNATURE

<PAGE> 2
BACK TEXT:

3DFX INTERACTIVE, INC.

A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and upon
the holders thereof as established, from time to time, by the Articles of
Incorporation of the Corporation and by any certificate of determination, and
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and without
charge from the Secretary of the Corporation at its corporate headquarters.

The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM -as tenants in common UNIF GIFT MIN ACT-________Custodian _______
TEN ENT -as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to Minors
JT TEN -as joint tenants with Act ___________________ (State)
the right of
survivorship and not as
tenants
in common

Additional abbreviations may also be used though not in the above list.

For Value Received, _____________ hereby sell(s), assign(s) and transfer(s) unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE(S)

________________________________________________________________________________

of the Shares of capital stock represented by the within Certificate and do(es)
hereby irrevocably constitute and appoint _________________________ Attorney to
transfer the said Stock on the books of the within named Corporation with full
power substitution in the premises.

Dated ____________ ____________________________________________

____________________________________________
NOTE: The signature to this assignment must
correspond with the name as written upon the
face of the certificate in every particular,
without alteration or enlargement or any
change whatever. Signature must be
guaranteed.

Signature(s) Guaranteed

By ________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad.15.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 11, 1997, relating
to the financial statements of 3Dfx Interactive, Inc., which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."

PRICE WATERHOUSE LLP

San Jose, California

June 3, 1997