3DFX INTERACTIVE INC, 424B2, 1998-03-06

3DFX INTERACTIVE INC
424B2, 1998-03-06
PREPACKAGED SOFTWARE

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<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-46119

LOGO

2,900,000 SHARES
COMMON STOCK

Of the 2,900,000 shares of Common Stock offered hereby 2,028,140 are being
sold by 3Dfx Interactive, Inc. ("3Dfx" or the "Company") and 871,860 are being
sold by the Selling Shareholders. See "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "TDFX." On March 5, 1998, the last reported
sale price for the Common Stock, as reported on the Nasdaq National Market, was
$23.875 per share.
------------------------

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 SECURITIES
AND EXCHANGE 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>
<S> <C> <C> <C> <C>
======================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------------------
Per Share..................... $23.75 $1.33 $22.42 $22.42
- ----------------------------------------------------------------------------------------------------------------------
Total(2)...................... $68,875,000 $3,857,000 $45,470,899 $19,547,101
======================================================================================================================
</TABLE>

(1) Before deducting expenses payable by the Company, estimated at $450,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 435,000 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 $79,206,250, $4,435,550 and $55,223,599
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 BancAmerica Robertson Stephens, San Francisco,
California, on or about March 11, 1998.

BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS SECURITIES

THE DATE OF THIS PROSPECTUS IS MARCH 6, 1998
<PAGE> 2

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."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE> 3

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, THE SELLING SHAREHOLDERS 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.
------------------------

TABLE OF CONTENTS

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<CAPTION>
PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 6
Use of Proceeds............................................. 20
Price Range of Common Stock................................. 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.................................................. 49
Certain Transactions........................................ 59
Principal and Selling Shareholders.......................... 61
Description of Capital Stock................................ 63
Shares Eligible for Future Sale............................. 65
Underwriting................................................ 66
Legal Matters............................................... 68
Experts..................................................... 68
Additional Information...................................... 68
Index to Financial Statements............................... F-1
</TABLE>

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Glide, Voodoo Graphics, Voodoo2, 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.
------------------------

FORWARD LOOKING STATEMENTS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. When used in this Prospectus, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, fluctuations in the Company's quarterly and
annual operating results, intense competition, the Company's dependence on the
PC and emerging 3D interactive electronic entertainment markets, the Company's
dependence on the retail distribution channel, acceptance of the Company's 3D/2D
solution for the PC market, the Company's ability to manage growth, the
Company's dependence on third party developers and publishers, rapid
technological change in the Company's markets, the Company's customer and
product concentration, continued acceptance and adoption of Glide, the Company's
proprietary, low-level 3D API, the Company's dependence on independent
manufacturers and other third parties, and the Company's dependence on achieving
acceptable semiconductor manufacturing yields, as well as those discussed in
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Prospectus.

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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."

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
interactive electronic entertainment platforms, specifically the personal
computer ("PC") 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. To
date, the Company's efforts have been largely focused on the multimedia add-in
card market. The Company believes that its high profile brand image in the
retail channel and its success in forging strong relationships with software
content developers, combined with the benefits of its technology, provide
powerful incentives for the leading PC 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
different 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 a
number of 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, 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 and Voodoo Rush, the Company's first products, 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, Elitetron and Orchid, among
others, have introduced consumer multimedia add-in cards incorporating the
Company's Voodoo Graphics 3D media processor for sale in the retail channel and
for incorporation into PCs manufactured primarily by systems integrators. In the
coin-op arcade market, the Voodoo Graphics 3D media processor is being utilized
by Acclaim, Atari, Kaneko, Midway and Taito, among others. Voodoo Rush
incorporates a 3D/2D solution into a single personal computer interface ("PCI")
board. The Company has also developed Voodoo2, which is expected to be
commercially available in the first quarter of 1998. The Company's next product,
Banshee, 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 second quarter of 1998. All of the
Company's products are manufactured, tested and packaged by third-parties.

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THE OFFERING

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<S> <C>
Common stock offered by the Company.......... 2,028,140 shares
Common stock offered by the Selling
Shareholders............................... 871,860 shares
Common stock outstanding after the
offering................................... 14,594,770 shares(1)
Use of proceeds.............................. For capital expenditures and 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. See "Use of Proceeds."
Nasdaq National Market symbol................ TDFX
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ -- $ 6,390 $ 44,069(2)
Loss from operations........................................ (5,106) (14,810) (2,344)
Net loss.................................................... (5,039) (14,751) (1,714)
Basic net loss per share(3)................................. $ (0.82) $ (1.74) $ (0.16)
Diluted net loss per share(3)............................... $ (0.82) $ (1.74) $ (0.16)
Shares used in basic net loss per share calculations(3)..... 6,173 8,467 10,767
Shares used in diluted net loss per share calculations(3)... 6,173 8,467 10,767
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 34,921 $ 79,942
Working capital............................................. 37,456 82,477
Total assets................................................ 61,917 106,938
Accumulated deficit......................................... (21,504) (21,504)
Total shareholders' equity.................................. 44,274 89,295
</TABLE>

- ---------------
(1) Based on shares outstanding as of December 31, 1997. Excludes (i) 2,505,984
shares of Common Stock issuable upon exercise of options outstanding as of
December 31, 1997, with a weighted average exercise price of $6.38 per
share, (ii) 93,636 shares of Common Stock issuable upon exercise of warrants
outstanding as of December 31, 1997, with a weighted average exercise price
of $5.97 per share, (iii) 881,308 shares of Common Stock reserved for future
issuance as of December 31, 1997 under the Company's stock plans, and (iv)
500,000 shares of Common Stock reserved for issuance subsequent to December
31, 1997 under the Company's stock plans. In addition, the Company intends
to seek shareholder approval at the 1998 Annual Meeting of Shareholders
currently scheduled for May 1998 for (i) a 1,700,000 share increase in the
number of shares reserved for issuance under the 1995 Stock Option Plan and
(ii) an increase in the number of shares available for purchase under the
1997 Employee Stock Purchase Plan on the date of each annual meeting of
shareholders commencing in 1999 of the lesser of 200,000 shares or 1% of the
outstanding capitalization of the Company. See "Management -- Stock Plans,"
"Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial
Statements.
(2) Includes $1.8 million of development contract revenues recognized under the
Sega Agreement. No future revenues will be recognized under the Sega
Agreement. See "Risk Factors -- Pending Litigation."
(3) See Note 1 of Notes to Financial Statements for an explanation of shares
used in basic and diluted net loss per share calculations.
(4) Adjusted to give effect to the sale of 2,028,140 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."

Except as otherwise indicated herein, all information in this Prospectus
assumes that the Underwriters' overallotment option is not exercised. See
"Underwriting."

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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. When used in this Prospectus, the words "anticipate,"
"believe," "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. 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.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS

The Company's quarterly and annual results of operations have in the past
varied significantly and are expected to vary significantly in the future as a
result of 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;
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; market acceptance of
the products of the Company's customers; an adverse effect on consumers'
attraction to the Company's acceleration technology in the retail channel; new
product announcements or product introductions by the Company's competitors; the
Company's ability to introduce on a timely basis new products in accordance with
OEM design requirements and design cycles; the ability of the Company's products
to perform favorably relative to competitive benchmarks; 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; expenditures in connection with enforcing
contractual and other rights, including the cost of litigation in connection
therewith; 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; the level of expenditures for research
and development and sales, general and administrative functions of the 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
and profitability. 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. 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. Finally, the Company's results of operations in any
given quarter may be below the expectations of public market analysts or
investors, in which case the market price of the Common Stock could be
materially adversely affected.

LIMITED OPERATING HISTORY

The Company has a limited operating history, has been engaged primarily in
research and product development and has incurred net losses in every quarter
except the quarter ended December 31, 1997. The Company was a development stage
company until its first commercial product shipments in the third quarter of
1996. The Company's limited operating history makes the assessment of future

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operating results difficult. The Company incurred net losses of approximately
$5.0 million, $14.8 million and $1.7 million in 1995, 1996 and 1997,
respectively, and had an accumulated deficit of $21.5 million at December 31,
1997. These net losses were attributable to the lack of substantial revenue and
continuing significant costs incurred in the research, development and testing
of the Company's products. Although the Company has experienced revenue growth
in recent periods, historical growth rates will not be sustained and are not
indicative of future operating results. In addition, approximately 4.1% of the
Company's revenues for 1997 were attributable to development contract revenues
recognized under the Technology Development and License Agreement dated as of
February 28, 1997 (the "Sega Agreement") between the Company and Sega
Enterprises, Ltd. ("Sega"). No future revenues will be recognized under the Sega
Agreement. See "-- Pending Litigation." There can be no assurance that
significant revenues or profitability will be sustained or increased on a
quarterly or annual basis in the future.

COMPETITION

The Company's strategy of targeting the interactive electronic
entertainment market across multiple platforms requires the Company to compete
against different companies in several 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 as well as 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
Microsystems, Inc. ("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 3Dlabs, Inc., Ltd. ("3Dlabs"), 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.

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 engineering market, such as 3Dlabs, Intergraph
Corporation ("Intergraph"), Real 3D, Inc. ("Real 3D"), which is owned by
Lockheed Martin Corp. ("Lockheed") and Intel Corporation ("Intel"), and Silicon
Graphics, Inc. ("SGI"). These companies are developing lower cost versions of
their 3D technology to bring workstation-like 3D graphics to mainstream
applications. There can be no assurance that these companies will not enter the
interactive electronics entertainment market or that the Company would be able
to compete successfully against them if they did.

Furthermore, a substantial number of companies including Intel have
announced plans to release 3D graphics chips in 1998 that promise to provide low
cost 3D functionality for PCs and workstations. The Company believes that Intel
will introduce a single chip 2D/3D graphics accelerator in the near future.
Intel has been very active in the graphics market, having previously invested in
3Dlabs and having recently signed a development agreement with 3Dlabs in late
1997 targeting the high end workstation market. In early 1998, Intel acquired
Chips and Technologies, Inc. ("CHIPS") a leading graphics semicondutor supplier.
To the extent that Intel's initiatives in the graphics sector are successful, it
could materially adversely affect the Company's financial position and results
of operations. The Company has had a relationship with Intel since November
1996, when, in conjunction with Intel's investment in the Company, 3Dfx and
Intel entered into an agreement to license an early version of Glide, the
Company's proprietary low level 3D API. 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
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<PAGE> 8

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. Intel plans to sell all of its
shares of Common Stock in connection with this offering. See "Principal and
Selling Shareholders."

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 Corporation, Ltd. ("Taito") and WMS
Industries Inc. ("Williams"), and its subsidiaries Atari Corporation ("Atari")
and Midway Games, Inc. ("Midway"). In the coin-op arcade 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. The home game console segment is dominated by
three companies, Nintendo, Sega and Sony. As a result of the termination of the
Company's contract with Sega and the related litigation, the Company currently
does not participate in the home game console market.

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 independent software vendors ("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,
coin-op arcade systems and home game consoles 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
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multimedia functionality in PCs, coin-op arcade systems and home game consoles.
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 ISVs, the success of the Company's customers in
effectively implementing the Company's technology and developing a market for
the Company's products and the willingness of end users to pay for full function
3D capabilities in PCs, coin-op arcade systems and home game consoles.

DEPENDENCE ON THE PC MARKET

For 1996 and 1997, 82% and 93%, respectively, of the Company's revenues
were derived 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 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.

In July 1997, the Company learned from Sega that Sega will not use the
Company's chipset for the next generation Sega home game console. As a result,
the Company currently has no arrangements for developing, marketing and selling
a product for the home game console market. There can be no assurance that the
Company will be able to find a strategic partner that will produce a home game
console incorporating a chipset developed by the Company. The failure to access
the home game

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console market may limit the Company's ability to diversify its product
offerings and may have the effect of increasing the Company's dependency on the
PC market. See "-- Pending Litigation."

DEPENDENCE ON RETAIL DISTRIBUTION CHANNEL

The Company's products are distributed primarily in the retail distribution
channel through graphics board manufacturers which in turn sell to consumers.
Accordingly, the Company is dependent upon these graphics board manufacturers to
assist in promoting market acceptance of its products. The graphics board
manufacturers which purchase the Company's products are generally not committed
to make future purchases of the Company's products and therefore could
discontinue incorporating the Company's products into their graphics boards in
favor of a competitor's product, or for any other reason. Because the Company
sells a significant portion of its products to such graphics board
manufacturers, it is difficult to ascertain current demand for existing products
and anticipated demand for newly introduced products, regardless of any such
manufacturers' level of inventory for the Company's products. Such manufacturers
have in the past been subject to product allocation by the Company. As a result,
such manufacturers may overstate their needs for the Company's products in order
to ensure an adequate supply. In addition, such manufacturers could overestimate
consumer demand for their graphics boards. In either case, the Company's
business, financial condition and results of operations could be materially
adversely affected. Moreover, initial orders for a new product may be caused by
the interest of graphics board manufacturers in integrating the latest
accelerator product for potential future sale to consumers. As a result, initial
orders for a new product, such as Voodoo2, may not be indicative of long-term
consumer demand. In addition, the Company is dependent upon the continued
viability and financial stability of these graphics board manufacturers, some of
which are small organizations with limited capital. The Company believes that
its future growth and success will continue to depend in large part upon its
sales into the retail channel through graphics board manufacturers. Accordingly,
if a significant number of graphics board manufacturers were to experience
financial difficulties, or otherwise become unable or unwilling to promote, sell
or pay for the Company's products, the Company's business, financial condition
and results of operations could be materially adversely affected.

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 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 works with
Alliance Semiconductor Corporation ("Alliance") and Macronix International Co.,
Ltd ("Macronix") to offer the 3D/2D chipset branded as the Company's Voodoo Rush
product. Voodoo Rush functions 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. 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

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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 second 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.

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 December 31, 1997, the Company had
grown to 123 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 "-- Dependence on
Key Personnel," "Business -- Employees" and "Management."
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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, coin-op arcade system and
home game console 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, coin-op arcade system and home game
console 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 the Company's subcontractors 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, coin-op arcade system and home
game console 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.

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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 a limited number of customers and the Company's sales are
highly concentrated. Revenues derived from sales to Diamond, Elitetron and
Orchid accounted for approximately 37%, 16% and 7%, respectively, of revenues
for 1997. Revenues derived from sales to Orchid, Diamond and Williams accounted
for approximately 44%, 33% and 11%, respectively, of revenues for 1996. All such
sales were made pursuant to purchase orders. Development contract revenues
recognized under the Sega Agreement represented approximately 4.1% of revenues
during 1997; no further revenues are expected under the Sega Agreement. The
Company expects that a small number of customers will continue to account for a
substantial portion of its revenues for the foreseeable future. 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, graphics
boards or coin-op arcade systems sold by a single customer or by a small number
of customers.

PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS

The Company's revenues are dependent on the markets for 3D media processors
for PCs and coin-op arcade systems 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 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 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 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

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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.

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 wafers 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 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 packaged 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 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."

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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.
For example, cost of revenues in the three months ended December 31, 1997
includes a $700,000 charge for the write-off of Voodoo2 inventory which was not
salable as a result of a manufacturing defect.

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.

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. In particular, the Company's
Chief Financial Officer and Vice President, Administration, David Zacarias,
joined the Company in February 1998. 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

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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 continues to increase the volume of commercial production of
its products, 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 enforcing patent claims and other intellectual property
rights, the level and timing of development contract revenues, 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," "-- 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

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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.

In addition, in connection with the Company's litigation against Sega (see
"-- Pending Litigation"), the Company was granted a preliminary injunction
enjoining Sega from using or providing to any other person or entity access to
the Company's confidential information and trade secrets that were provided to
them in connection with the Sega Agreement. Sega has been ordered by the court
to return to the Company all of the Company's confidential documents and/or
information now possessed by Sega. While to date, Sega has begun to return such
proprietary information to the Company, the Company has been unable to verify
whether all such information has been returned. There can be no assurance that
Sega will comply with the court order or that Sega has not used and will not use
the proprietary information to its competitive advantage.

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. While to date the Company
has not experienced an adverse impact associated with economic downturns in
Asia, there can be no assurance that the recent volatility in the Asian economy
will not adversely affect the Company's business, financial condition or results
of operations. 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

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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. 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."

PENDING LITIGATION

On July 22, 1997, Sega terminated the Sega Agreement. The Company filed a
lawsuit in California in the Superior Court for the County of Santa Clara on
August 29, 1997 and filed amended complaints on October 8, 1997 and February 19,
1998. The amended complaint names as defendants, Sega and its U.S. subsidiary,
Sega of America, Inc., NEC Corporation ("NEC"), and VideoLogic Group, Plc.
("VideoLogic") and includes claims for breach of contract, interference with
contract, misrepresentation, unfair competition, and threatened misappropriation
of trade secrets. Discovery in the case is currently being conducted. Although
NEC and VideoLogic have responded to the Company's complaint, Sega has not yet
responded to the Company's complaint by way of answer or counterclaim. The
Company expects to incur significant legal expenses in connection with this
litigation which could have a material adverse effect on the Company's financial
condition and results of operations. In addition, pursuing this litigation is
likely to result in the diversion of management's attention from the day-to-day
operations of the business. There can be no assurance that the litigation will
be resolved in the Company's favor or that the litigation will be resolved
quickly. Any prolonged litigation could have a material adverse effect on the
Company's business, financial condition and results of operations. An adverse
result could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Legal Proceedings."

POSSIBLE VOLATILITY OF STOCK PRICE

The trading price of the Company's Common Stock has in the past been and
could in the future be subject to significant fluctuations in response to
quarterly variations in the Company's results of operations, announcements
regarding the Company's product developments, announcements of technological
innovations or new products by the Company, its OEM customers or competitors,
changes in securities analysts' recommendations, or other events. The Company's
revenues and results of operations may be below the expectations of public
market securities analysts or investors, resulting in significant fluctuations
in the market price of the Company's Common Stock. It is likely that the
Company's future quarterly revenues or results of operations from time to time
will not meet the expectations of such analysts or investors, which could have
an adverse effect on the market price of the Company's Common Stock. Moreover,
stock markets have from time to time experienced extreme price and volume
fluctuations which have particularly affected the market prices for high
technology companies and which have often been unrelated to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political and market conditions, may adversely affect the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of the Company's Common stock. In the past,
following periods of volatility in the market price of a company's stock,
securities class action litigation has occurred against the issuing company.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and
would at a minimum
18
<PAGE> 19

divert management's attention and resources, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Any adverse determination in such litigation could also subject the Company to
significant liabilities. See "Price Range of Common Stock."

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
29.3% of the Company's outstanding Common Stock following the completion of this
offering (25.4% if the Underwriters' over-allotment option is exercised). These
shareholders, if acting together, would be able to significantly influence 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 and Selling
Shareholders."

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 substantial amounts of the Company's Common Stock in the public
market after this offering could adversely affect the market price of the
Company's Common Stock. Of the 14,594,770 shares of Common Stock to be
outstanding upon completion of the offering, the 2,900,000 shares offered
hereby, the 3,450,000 shares sold in the Company's initial public offering and
4,564,551 additional shares will be freely tradeable without restriction. An
additional 87,510 shares will become eligible for sale beginning on June 30,
1998 under Rule 144. An additional 3,564,569 shares will be eligible for sale
beginning on the opening of market on the third trading day following the date
of public disclosure of the Company's financial results for the three months
ended March 31, 1998, upon expiration of certain lock-up agreements and subject
to the provisions of Rules 144(k), 144 and 701 under the Securities Act of 1933,
as amended (the "Act"). In October 1997, the Company filed a Registration
Statement on Form S-8 registering 3,499,768 shares subject to outstanding
options or reserved for future issuance under the Company's stock plans. The
holders of approximately 3,106,181 shares of Common Stock to be outstanding upon
the closing of this offering are entitled to certain rights to registration for
sale to the public beginning 180 days after the effective date of the offering.
See "Management -- Stock Plans," "Description of Capital Stock," and "Shares
Eligible for Future Sale."

19
<PAGE> 20

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,028,140 shares of
Common Stock offered by the Company hereby, are estimated to be $45,020,899
($54,773,599 if the Underwriters' over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company.

Although the Company currently has no specific plan for substantially all
of the net proceeds of the offering, the Company believes that the availability
of substantial financial resources is important to the Company's ability to
compete. The principal reasons for the offering are to improve the Company's
financial position and to provide the Company with additional financial
flexibility. The Company expects to use approximately $8.0 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 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, or securing manufacturing capacity, although no such acquisitions or
projects 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. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol TDFX since the Company's initial public offering on June 25,
1997. Prior to such time there was no public market for the Common Stock of the
Company. The following table sets forth for the periods indicated the high and
low sale prices per share of the Common Stock as reported on the Nasdaq National
Market.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1997
Second Quarter (from June 25, 1997).................... $14.75 $ 12.50
Third Quarter.......................................... $18.625 $ 8.875
Fourth Quarter......................................... $23.00 $ 13.75
FISCAL YEAR 1998
First Quarter (through March 5, 1998).................. $27.75 $ 20.75
</TABLE>

On March 5, 1998, the reported last sale price of the Common Stock on the
Nasdaq National Market was $23.875 per share. As of December 31, 1997, there
were approximately 248 shareholders of record of the Common Stock.

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> 21

CAPITALIZATION

The following table sets forth as of December 31, 1997 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale of the 2,028,140 shares of Common Stock
offered by the Company hereby and the application of the estimated net proceeds
therefrom after deducting underwriting discounts and commissions and estimated
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>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capitalized lease obligations, less current
portion(1)........................................... $ 546 $ 546
-------- --------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized, none issued and outstanding........... -- --
Common Stock, no par value; 50,000,000 shares
authorized, 12,566,630 shares issued and
outstanding and 14,594,770 issued and outstanding
as adjusted(2).................................... 66,717 111,738
Warrants............................................. 242 242
Deferred compensation................................ (1,181) (1,181)
Accumulated deficit.................................. (21,504) (21,504)
-------- --------
Total shareholders' equity........................ 44,274 89,295
-------- --------
Total capitalization......................... $ 44,820 $ 89,841
======== ========
</TABLE>

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

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

(2) Excludes (i) 2,505,984 shares of Common Stock issuable upon exercise of
options outstanding as of December 31, 1997, with a weighted average
exercise price of $6.38 per share, (ii) 93,636 shares of Common Stock
issuable upon exercise of warrants outstanding as of December 31, 1997, with
a weighted average exercise price of $5.97 per share, (iii) 881,308 shares
of Common Stock reserved for future issuance as of December 31, 1997 under
the Company's stock plans and (iv) 500,000 shares of Common Stock reserved
for issuance subsequent to December 31, 1997 under the Company's stock
plans. In addition, the Company intends to seek shareholder approval at the
1998 Annual Meeting of Shareholders currently scheduled for May 1998 for (i)
a 1,700,000 share increase in the number of shares reserved for issuance
under the 1995 Stock Option Plan and (ii) an increase in the number of
shares available for purchase under the 1997 Employee Stock Purchase Plan on
the date of each annual meeting of shareholders commencing in 1999 of the
lesser of 200,000 shares or 1% of the outstanding capitalization of the
Company. See "Management -- Stock Plans," "Description of Capital Stock" and
Notes 5, 6 and 10 of Notes to Financial Statements.

21
<PAGE> 22

DILUTION

The net tangible book value of the Company as of December 31, 1997 was
approximately $44,274,000, or $3.52 per share of Common Stock. "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. After
giving effect to the receipt of the net proceeds from the sale of the 2,028,140
shares of Common Stock offered by the Company hereby (after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company), the Company's net tangible book value as of December 31, 1997
would have been $89,294,899, or $6.12 per share of Common Stock. This represents
an immediate increase in net tangible book value of $2.60 per share to existing
shareholders and an immediate dilution of $17.63 per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price.................................. $ 23.75
Net tangible book value as of
December 31, 1997................................. $ 3.52
Increase attributable to new investors............... 2.60
--------
Net tangible book value after offering................. 6.12
--------
Dilution to new investors.............................. $ 17.63
========
</TABLE>

The foregoing computations assume no exercise of stock options or warrants
after December 31, 1997. As of December 31, 1997, there were outstanding options
to purchase 2,505,984 shares of Common Stock, with a weighted average exercise
price of $6.38 per share, and outstanding warrants to purchase 93,636 shares of
Common Stock, with a weighted average exercise price of $5.97 per share. In
addition, as of December 31, 1997, 881,308 shares of Common Stock were reserved
for future issuance under the Company's stock plans and subsequent to December
31, 1997, 500,000 additional shares of Common Stock were reserved for issuance
under the Company's stock plans. In addition, the Company intends to seek
shareholder approval at the 1998 Annual Meeting of Shareholders currently
scheduled for May 1998 for (i) a 1,700,000 share increase in the number of
shares reserved for issuance under the 1995 Stock Option Plan and (ii) an
increase in the number of shares available for purchase under the 1997 Employee
Stock Purchase Plan on the date of each annual meeting of shareholders
commencing in 1999 of the lesser of 200,000 shares or 1% of the outstanding
capitalization of the Company. 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> 23

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, 1996 and 1997 and the balance sheet data as of December
31, 1996 and 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 balance sheet data as of December 31, 1995 are
derived from financial statements of the Company that have been audited by Price
Waterhouse LLP, independent accountants, and are not included elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ -- $ 6,390 $44,069(1)
Cost of revenues............................................ -- 5,123 22,611
------- -------- -------
Gross profit................................................ -- 1,267 21,458
------- -------- -------
Operating expenses:
Research and development(2)............................... 2,940 9,435 12,412
Selling, general and administrative(2).................... 2,166 6,642 11,390
------- -------- -------
Total operating expenses.......................... 5,106 16,077 23,802
------- -------- -------
Loss from operations........................................ (5,106) (14,810) (2,344)
Interest and other income, net.............................. 67 59 630
------- -------- -------
Net loss.................................................... $(5,039) $(14,751) $(1,714)
======= ======== =======
Basic net loss per share(3)................................. $ (0.82) $ (1.74) $ (0.16)
======= ======== =======
Diluted net loss per share(3)............................... $ (0.82) $ (1.74) $ (0.16)
======= ======== =======
Shares used in basic net loss per share calculations(3)..... 6,173 8,467 10,767
Shares used in diluted net loss per share calculations(3)... 6,173 8,467 10,767
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 865 $ 5,291 $34,921
Working capital (deficit)................................... (307) 6,637 37,456
Total assets................................................ 2,440 15,581 61,917
Capitalized lease obligations, less current portion(4)...... 544 632 546
Accumulated deficit......................................... (5,039) (19,790) (21,504)
Total shareholders' equity.................................. 552 9,621 44,274
</TABLE>

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

(1) Includes $1.8 million of development contract revenues recognized under the
Sega Agreement. No future revenues will be recognized under the Sega
Agreement. See "Risk Factors -- Pending Litigation."

(2) Research and development expenses include amortization of deferred
compensation of $22,000, $50,000 and $194,000 for 1995, 1996 and 1997,
respectively. Selling, general and administrative expenses include
amortization of deferred compensation of $34,000, $146,000 and $290,000 for
1995, 1996 and 1997, respectively. 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 basic and diluted net loss per share calculations.

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

23
<PAGE> 24

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. When used in this Prospectus,
the words "expects," "anticipates," "estimates," and similar expressions are
intended to identify forward looking statements. 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 has incurred net losses in every quarter
except the quarter ended December 31, 1997. The Company incurred net losses of
approximately $5.0 million, $14.8 million and $1.7 million in 1995, 1996 and
1997, respectively, and had an accumulated deficit of $21.5 million at December
31, 1997. These net losses were attributable to the lack of substantial revenue
and continuing significant costs incurred in the research, development and
testing of the Company's products. Although the Company has experienced revenue
growth in recent periods, historical growth rates will not be sustained and are
not indicative of future operating results. There can be no assurance that
significant revenues or profitability will be sustained or increased on a
quarterly or annual basis in the future.

The Company derives revenue from the sale of 3D media processors designed
for use in PCs, coin-op arcade and LBE 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 began
commercial shipments in April 1997. The Company has developed Voodoo2, which is
expected to be commercially available in the first quarter of 1998. 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. 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 Diamond, Elitetron and Orchid accounted for
approximately 37%, 16% and 7%, respectively, of revenues for 1997. Revenues
derived from sales to Orchid, Diamond and Williams accounted for approximately
44%, 33% and 11%, respectively of revenues for 1996. 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.

In February 1997, the Company and Sega entered into the Sega Agreement
pursuant to which the Company began developing a 3D media processor chipset for
Sega's next generation home game console. During 1997, the Company recognized
development contract revenues of $1.8 million under the Sega Agreement
representing 4.1% of total revenues during that period. In July 1997, Sega
terminated the Sega Agreement. In August 1997, the Company filed a lawsuit
against Sega, and filed an amended complaint in October 1997 naming as
additional defendants NEC and VideoLogic. The complaint alleges breach of
contract, interference with contract, misrepresentation, unfair competition, and
threatened misappropriation of trade secrets. Discovery in the case is currently
being conducted. Although NEC and VideoLogic have responded to the Company's
complaint, Sega has not yet responded to the Company's complaint by way of
answer or counterclaim. The Company expects to incur significant legal expenses
in connection with this litigation which could have a material adverse effect on
the Company's financial condition and results of operations. In addition,
pursuing this litigation is likely to result in the diversion of management's
attention from the day-to-day
24
<PAGE> 25

operations of the business. There can be no assurance that the litigation will
be resolved in the Company's favor or that the litigation will be resolved
quickly. Any prolonged litigation could have a material adverse effect on the
Company's business, financial condition and results of operations. An adverse
outcome of the litigation could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Pending Litigation."

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 wafers 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. The Company's products are packaged and tested by a third party
subcontractor, ASE. Such assembly and testing is conducted on a purchase order
basis rather than under a long-term agreement.

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 $484,000 (of
which $194,000 and $290,000 were recorded in research and development expenses
and selling, general and administrative expenses, respectively) and $196,000 (of
which $50,000 and $146,000 were recorded in research and development expenses
and selling, general and administrative expenses, respectively) in the years
ended December 31, 1997 and 1996, respectively, and will result in charges over
the next 10 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).

25
<PAGE> 26

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data of the
Company expressed as a percentage of revenue for each of the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues............................................... 100.0% 100.0%
Cost of revenues....................................... 80.2 51.3
------ ------
Gross profit........................................... 19.8 48.7
------ ------
Operating expenses:
Research and development............................. 147.7 28.2
Selling, general and administrative.................. 103.9 25.8
------ ------
Total operating expenses..................... 251.6 54.0
------ ------
Loss from operations................................... (231.8) (5.3)
Interest and other income, net......................... 0.9 1.4
------ ------
Net loss............................................... (230.9%) (3.9%)
====== ======
</TABLE>

Years Ended December 31, 1997 and 1996

Revenues. Revenues increased 589.7% from $6.4 million in 1996 to $44.1
million in 1997. Revenues in 1997 included $1.8 million of development contract
revenues earned under the Sega Agreement which was terminated by Sega in July
1997. No future revenues will be recognized under the Sega Agreement. Revenues
from product sales are recognized upon product shipment. Revenues in 1997 were
principally attributable to sales of the Company's Voodoo Graphics and Voodoo
Rush chipsets as a result of increased customer demand for and market acceptance
of these products. Substantially all of the revenues in the year ended December
31, 1996 were derived from sale of the Company's Voodoo Graphics chipset, which
began commercial shipments in September 1996 and, to a lesser extent, sale of
graphics subsystems.

Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of 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 revenues does not include expenses related to development contract
revenues. Cost of revenues increased 341.4% from $5.1 million in 1996 to $22.6
million in 1997. Gross profit as a percentage of revenues was 19.8% and 48.7% in
1996 and 1997, respectively. The increase in cost of revenues resulted from the
significant increase in revenues in 1997. 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.
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;
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 31.6%
from $9.4 million in 1996 to $12.4 million in 1997. The increase reflects an
increase in non-recurring engineering costs and engineering personnel costs
resulting from the commencement of manufacturing of prototypes of the Voodoo2
chipset and the Banshee chip. The Company expects to continue to make
substantial

26
<PAGE> 27

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 71.5% from $6.6 million
in 1996 to $11.4 million in 1997. The increase resulted from the addition of
personnel in sales, marketing, finance and administration as the Company
expanded operations, increased commission expenses associated with the
commencement of commercial sales and increased involvement in tradeshow and
advertising activities. 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, Net. Interest and other income, net increased
from net interest and other income of $59,000 in 1996 to net interest and other
income of $630,000 in 1997. The increase is related to increased earnings from
investments of higher cash balances resulting from the completion of the
Company's initial public offering in June 1997, partially offset by increased
interest expense on outstanding equipment line of credit and capital lease
balances.

Provision For Income Taxes. The Company recorded no provision for income
taxes in 1996 and 1997 as it incurred losses during such periods. At December
31, 1997, the Company had net operating loss carryforwards for federal and state
income tax purposes of approximately $18.5 million and $17.5 million,
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 completion of
the Company's initial public offering in June 1997 resulted in an annual
limitation of the Company's ability to utilize net operating losses incurred
prior to that date. The annual limitation is approximately $5.4 million.

Years Ended December 31, 1996 and 1995

Revenues. 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 Graphics
chipset, which began commercial shipments in September 1996 and, to a lesser
extent, sale of graphics subsystems. There were no development contract revenues
in 1996.

Gross Profit. Gross profit and cost of revenues were $1.3 million and $5.1
million, respectively, in 1996. Gross profit as a percentage of revenues was
19.8% in 1996. Cost of 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,

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<PAGE> 28

(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, Net. Interest and other income, 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 years ended December 31, 1996 and 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, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $ -- $ -- $ 1,887 $ 4,503 $ 5,247 $ 6,507 $10,018 $22,297
Cost of revenues.......... -- -- 1,719 3,404 2,582 3,278 5,352 11,399
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............. -- -- 168 1,099 2,665 3,229 4,666 10,898
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 1,659 2,864 2,626 2,286 1,953 2,397 3,201 4,861
Selling, general and
administrative........ 1,028 1,529 1,661 2,424 1,846 2,521 2,684 4,339
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 2,687 4,393 4,287 4,710 3,799 4,918 5,885 9,200
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.............. (2,687) (4,393) (4,119) (3,611) (1,134) (1,689) (1,219) 1,698
Interest and other income
(expense), net.......... 35 3 8 13 (27) (64) 347 374
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $(2,652) $(4,390) $(4,111) $(3,598) $(1,161) $(1,753) $ (872) $ 2,072
======= ======= ======= ======= ======= ======= ======= =======
</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. Revenues were derived primarily from the sale of the
Voodoo Graphics and Voodoo Rush chipsets over the last six quarters. Revenues
increased significantly quarter to quarter in 1997 due primarily to increased
sales volumes resulting from increased customer demand for and market acceptance
of these products. During the three months ended March 31, 1997 and June 30,
1997, the Company recognized development contract revenues of $750,000 and
$1,067,000, respectively, under the Sega Agreement for the delivery of certain
engineering designs to Sega and revenues recognized under the percentage of
completion method of accounting based on costs incurred relative to total
contract costs. No future revenues will be recognized under the Sega Agreement.
See "Risk Factors -- Pending Litigation."

Cost of revenues in 1996 and 1997 reflects significant prototype and
manufacturing start-up expenses incurred in connection with the initial
commercial shipments of Voodoo Graphics and Voodoo Rush. The increase in cost of
revenues in the three months ended June 30, 1997, September 30,

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<PAGE> 29

1997 and December 31, 1997 resulted from the increases in sales in each of the
respective periods. Cost of revenues in the three months ended December 31,
1997, includes a $700,000 charge for the write off of Voodoo2 inventory which
was not salable as a result of a manufacturing defect. Given the Company's
limited operating and product shipment history, the Company believes that
quarter to quarter comparisons of gross profit as a percentage of revenues are
not meaningful.

Research and development expenses fluctuated quarter to quarter in 1996 and
increased quarter to quarter in 1997. In 1996, research and development expenses
related to the manufacturing, development and marketing of Voodoo Graphics and
Voodoo Rush. In 1997, the increase in research and development expenses in each
quarter reflects an increase in headcount, non-recurring engineering costs
resulting from the commencement of manufacturing of the Voodoo Rush, Voodoo2
chipsets and the Banshee chip.

Selling, general and administrative expenses fluctuated quarter to quarter
in 1996 and 1997. The increase quarter to quarter in 1997 primarily relates to
increased finance and administrative staffing and related costs necessary to
support higher levels of operations, increased commission expenses associated
with the commencement of commercial sales and increased involvement in tradeshow
and advertising activities.

Interest and other income (expense), net fluctuated quarter to quarter in
1996 and 1997. The increase in interest and other in come in the three months
ended September 30, 1997 and December 31, 1997 is due to interest income earned
on the Company's investments as a result of higher cash balances from the
completion of the Company's initial public offering in June 1997, partially
offset by interest expense on outstanding balances under the equipment line of
credit and capital leases.

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. 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. See "Risk
Factors -- Potential Fluctuations in Quarterly Results."

Impact of Adoption of New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is required to be adopted for fiscal
years beginning after December 15, 1997.

In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is required to be adopted
for fiscal years beginning after December 15, 1997.

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<PAGE> 30

Year 2000 Compliance

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. While uncertainty exists
concerning the potential effects associated with such compliance, the Company
does not believe that year 2000 compliance will result in a material adverse
effect on its financial condition or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
private placements of equity securities yielding approximately $29.4 million and
most recently through an initial public offering in June 1997 yielding
approximately $34.3 million, net of underwriting fees and offering expenses. As
of December 31, 1997, the Company had approximately $5.0 million of equipment
line financing in place. As of December 31, 1997, the Company had approximately
$34.9 million in cash, cash equivalents and short-term investments.

Net cash used in operating activities in 1996 was due primarily to the net
loss of $14.8 million, and a $4.9 million and $1.5 million increase in inventory
and accounts receivable, respectively, associated with the generation of
revenues. These increases were partially offset by a $2.6 million increase in
accounts payable and accrued liabilities. Net cash used in operating activities
in 1997 was due primarily to the net loss of $1.7 million, a $12.2 million and
$2.3 million increase in accounts receivable and other assets, respectively,
offset by a $10.3 million and $1.6 million increase in accounts payable and
accrued liabilities and a $1.1 million decrease in inventory.

Net cash used in investing activities was approximately $2.2 million and
$10.7 million in 1996 and 1997, respectively, and was due, in each period, to
the purchase of property and equipment and the purchase of investments in 1997.
The Company does not have any significant capital spending or purchase
commitments other than normal purchase commitments and commitments under leases.
As of December 31, 1997, the Company had capital equipment of $10.3 million less
accumulated depreciation of $3.5 million to support its research and development
and administrative activities. The Company has financed approximately $2.8
million from capital lease obligations through December 31, 1997. The Company
has two equipment lines of credit, which provide for the purchase of up to $2.0
million and $3.0 million of property and equipment, respectively. Approximately
$3.0 million is available under these equipment lines of credit. Borrowings
under these lines are secured by all of the Company's owned assets and bear
interest at the bank's prime rate plus 1.50% and 0.75% per annum, respectively
(8.75% and 8.00%, respectively, as of December 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 December 31, 1997. The lease lines of credit expire in August
1998 and December 2001, respectively. 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 $23.8 million
and $34.6 million in 1996 and 1997, respectively, due primarily to proceeds from
the issuance of preferred stock in 1996 and the initial public offering in July,
1997.

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 80% of eligible
accounts receivable plus 100% of cash and cash equivalents or $7.0 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 0.25% 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 December 31, 1997. The line of credit was renewed in
December 1997. At December 31, 1997, there were no borrowings outstanding under
this line of credit.
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<PAGE> 31

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, and available
borrowings under line of credit arrangements and other factors. The Company
believes that the net 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.

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<PAGE> 32

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 the virtually seamless portability of software content across
interactive electronic entertainment platforms, specifically the PC and the
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. To date, the Company's efforts have been
largely focused on the multimedia add-in card market. The Company believes that
its high profile brand image in the retail channel, and its success in forging
strong relationships with software content developers, combined with the
benefits of its technology, provide powerful incentives for the leading PC OEMs
and entertainment hardware manufacturers to utilize the 3Dfx solution.

Voodoo Graphics and Voodoo Rush, the Company's first products, 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, Elitetron and Orchid, among
others, have introduced consumer multimedia add-in cards incorporating the
Company's Voodoo Graphics 3D media processor for sale in the retail channel and
for incorporation into PCs manufactured primarily by systems integrators. In the
coin-op arcade market, the Voodoo Graphics 3D media processor is being utilized
by Acclaim, Atari, Kaneko, Midway and Taito, among others. Voodoo Rush
incorporates a 3D/2D solution into a single PCI board. The Company has also
developed Voodoo2, which is expected to be commercially available in the first
quarter of 1998. The Company's next product, Banshee 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 second quarter of 1998. All of the Company's products are
manufactured, packaged and tested by third parties.

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 NHL 98, Quake II
and Tomb Raider II.

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 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.

Interactive electronic entertainment products today are generally played on
three hardware platforms -- the PC, the coin-op arcade system and the home game
console. Coin-op arcade games
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<PAGE> 33

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 relatively limited success in the PC
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

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<PAGE> 34

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 and Voodoo Rush, the Company's first products, 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.

To promote the rapid adoption of its products, the Company's architecture
supports most industry standard APIs, including: Apple Computer Inc.'s Rave3D,
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 numerous platforms reduces the developer's time
to market from the arcade to the PC, 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 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.

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. Currently, over 90 such software
entertainment titles are commercially available. 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 600 content developers, game publishers and ISVs.

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<PAGE> 35

Pursue Branding Strategy. The Company continues to devote substantial
marketing resources towards establishing 3Dfx as a recognizable brand. 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 brand awareness. The Company has recently
announced that in March 1998, Dimension Publishing will introduce a quarterly
magazine dedicated exclusively to 3Dfx products. This magazine will include
software title and hardware release schedules, product reviews, gaming tips and
other information that will enhance the return on the consumer's investment in
3Dfx based products. The Company believes that the magazine will continue to
build the Company's brand image while concurrently increasing awareness in the
marketplace about 3Dfx products. 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 Multi-Platform Architecture. The Company's 3D technology embodies
a single hardware/software architecture that can be deployed in numerous
interactive electronic entertainment platforms. For PC applications, Diamond,
Elitetron, Guillemot, Hercules, Integraph and Orchid, among others, have
introduced consumer multimedia add-in cards incorporating the Company's 3D media
processors for sale in the retail channel and for incorporation into PCs by
systems integrators. In the coin-op arcade system market, Voodoo Graphics is
being utilized by Acclaim, Atari, Kaneko, Midway, and Taito, among others.

Leverage Success in Retail Distribution Channel into OEM Channel. Given its
high performance, multi-chip product offerings, the Company's efforts to date
have largely been focused on the multimedia add-in card market. With
introduction of its Banshee product, currently anticipated in the second quarter
of 1998, the Company will extend its focus to include the PC OEM market. The
Company believes that its success in branding both 3Dfx and its Voodoo products
at the consumer level through its efforts in the retail channel, as well as its
success in working with the software content community, provide an incentive for
PC OEMs to design 3Dfx products into their future product lines. The Company
believes that its brand equity will provide PC OEMs with a differentiating
feature that consumers will recognize. Additionally, utilizing 3Dfx products
will enable OEMs to offer their customers immediate access to a substantial
software title library, including a number of entertainment titles which will
function in 3D accelerated mode only when 3Dfx technology is present in the
system.

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 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.

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<PAGE> 36

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

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 commenced commercial shipment in
April 1997. The Company has also developed Voodoo2, which is expected to be
commercially available in the first quarter of 1998. Voodoo Graphics, Voodoo
Rush and Voodoo2 are being targeted at price and performance points for the PC
and coin-op arcade markets. These products 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.

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, among others, have
each introduced multimedia add-in boards for PCs 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, Atari,
Kaneko, Midway and Taito among others for coin-op arcade systems and game
applications.

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. Voodoo
Graphics generates up to 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 II-300
MHz MMX system.

Voodoo Rush. Voodoo Rush began sampling in November 1996 and commenced
commercial shipment in April 1997. 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 and Macronix 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 35 megapixels per second for bilinear filtered textures with LOD
MIP-mapping, Z-buffering, alpha-blending and fogging enabled. The triangle rate
is 800,000 triangles per second for filtered, LOD MIP-mapped, Z-buffered,
alpha-blended, fogged, textured triangles on a Pentium II-300 MHz MMX system.

Voodoo2. Voodoo2, introduced in November 1997, is the Company's next
generation 3D-only accelerator and provides a significant increase in
performance over the Company's first generation Voodoo Graphics product.
Commercial shipment of Voodoo2 is expected in the first quarter of 1998. There
can be no assurance that Voodoo2 will be commercially shipped or accepted by the
market. Voodoo2 is targeted at the same markets as the Company's first
generation Voodoo Graphics

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<PAGE> 37

accelerator. To date, several of the Company's existing customers including
Diamond, Guillemot Orchid and Quantum3D have announced products based on
Voodoo2. In addition, Creative Labs has announced the "3D Blaster Voodoo2" as an
addition to its graphics product line.

Voodoo2 will be offered to the consumer in a configuration previously
marketed by the Company for use in the arcade and simulation markets. Voodoo2 is
delivered as a 3-chip chipset that includes a pixel chip for controlling the
display memory and two texture units that process texture maps in parallel.
Voodoo2 maintains compatibility with Voodoo Graphics so virtually all existing
games for Voodoo Graphics that are currently on the retail shelf operate
unchanged with Voodoo2. In addition to the features supported by Voodoo
Graphics, Voodoo2 now has a more advanced triangle setup unit that increases
triangle throughput to 3,000,000 triangles per second measured on a Pentium
II-300 MHz MMX system. The second texture unit doubles the texturing performance
for games that include support for the second texture unit. Voodoo2 provides
performance of 90 Megapixels per second and 90 Megatexels per second; when the
second texture unit is activated, Voodoo2 provides up to 180 Megatexels per
second. Voodoo2 boards also incorporate a scan-line interleave connector that
allows two boards to operate in parallel thus doubling rendering capability. In
this configuration, Voodoo2 provides performance of 180 Megapixels per second
and 180 Megatexels per second; when the second texture unit is activated,
Voodoo2 provides up to 360 Megatexels per second.

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 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 during the second
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, Voodoo
Rush and Voodoo2. 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, multimedia board vendors, coin-op board
manufacturers and coin-op arcade system manufacturers. 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."
- --------------------------------------------------------------------------------
3DFX PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
COMMERCIAL
PRODUCT AVAILABILITY TARGET MARKET KEY FEATURES(1)
- -----------------------------------------------------------------------------------------------------
Voodoo Graphics September 1996 PCs, coin-op arcade Add-on 3D solution; systems scalability;
systems 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 April 1997 PCs Single-board 3D/2D solution; consistent
sustained performance with all features
enabled; fill rate of 45 Mpixel/sec; fully
featured triangle rate of 800K/sec; texture
streaming; fully featured architecture; 3D
in a window
- -----------------------------------------------------------------------------------------------------
Voodoo2 Expected first PCs, coin-op arcade Add-on 3D solution; systems scalability;
quarter 1998 systems consistent sustained performance with all
features enabled; fully featured triangle
rate of up to 3.0 M/sec; texture streaming;
on-chip triangle set up; fully featured
architecture
- -----------------------------------------------------------------------------------------------------
Banshee Expected second PCs, coin-op arcade Single chip 3D/2D solution; large feature
quarter 1998 systems set; fully integrated architecture; high
sustained fill rate and triangle rate with
all features enabled; compatible 3D
architecture with Voodoo Graphics
- -----------------------------------------------------------------------------------------------------
</TABLE>

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

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<PAGE> 38

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 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
representative list of the companies that 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>
A-trend Technologye(1) Acclaim Entertainment Inc.(2)
Canopus Corporation Eolith Co., Ltd.(2)
Creative Labs(2) IGS Taiwan(2)
Deltron Precision, Inc.(1) Kaneko Ltd.(2)
Diamond Multimedia Systems, Inc. Konami Co. Ltd.
Elitetron Electronic Co., Ltd. RealVision Corporation(2)
Guillemot International Taito Corporation
Hercules Computer Technology, Inc. WMS Industries, Inc. (Williams)
Intergraph Corporation
Jazz Multimedia
Orchid Technology
Quantum3D, Inc.
Skywell Technology Corp.(1)
TechWorks, Inc.
</TABLE>

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

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

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

Because of the Company's limited operating history and early stage of
development, it has only a limited number of customers and its sales are highly
concentrated. Revenues derived from sales to Diamond, Elitetron and Orchid
accounted for approximately 37%, 16% and 7%, respectively, of revenues for 1997.
Revenues derived from sales to Orchid, Diamond and Williams accounted for
approximately 44%, 33% and 11%, respectively of revenues for 1996. 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.

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 10 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 11 sales representatives. 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 December 31, 1997, the
Company employed 30 individuals in its sales, marketing and customer support
organization.

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<PAGE> 39

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 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.

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<PAGE> 40

As of December 31, 1997, there were 86 game titles for the PC and 6 arcade
titles utilizing the Company's hardware that were commercially available. The PC
game titles utilize different APIs, including Glide, D3D and OpenGL, or some
combination thereof. The following table is a representative list of game titles
for use with platforms utilizing the Company's hardware that were commercially
available as of December 31, 1997:

<TABLE>
<CAPTION>
TITLE PUBLISHER DEVELOPER API PLATFORM
- ---------------------- ----------------------- ------------------------ --------- --------------
<S> <C> <C> <C> <C>
Andretti Racing Electronic Arts Electronic Arts Glide/D3D PC
Flight Unlimited 2 Eidos Interactive Looking Glass Technology Glide PC
Grand Theft Auto Gremlin DMA Design Glide PC
Heavy Gear Activision Activision Glide/D3D PC
Hexen II Activision Raven Software OpenGL PC
Interstate '76 Activision Activision Glide/D3D PC
Jedi Knight-Dark LucasArts LucasArts Glide/D3D PC
Forces II
Jet Fighter III Interplay Productions Mission Studios Glide PC
Longbow 2 Janes Combat Simulation Janes Combat Simulation Glide PC
Microsoft Flight Microsoft Microsoft D3D PC
Simulator '98
Myth: The Fallen Lords Bungie Bungie Glide PC
Need for Speed II SE Electronic Arts Electronic Arts Glide PC
NHL Hockey '98 Electronic Arts Sports Electronic Arts Glide PC
Quake II Activision id Software OpenGL PC
Shadows of the Empire LucasArts LucasArts D3D PC
Tanarus (on-line only) Sony Interactive Sony Interactive Glide PC
Test Drive 4 Accolade Pitbull Syndicate Glide PC
Tomb Raider II Eidos Interactive Core Designs D3D PC
Turok Acclaim Sculpted Software Glide PC
Virtua Squad Sega Sega D3D PC
Blitz Midway Atari Games Glide Coin-Op Arcade
San Francisco Rush Midway Atari Games Glide Coin-Op Arcade
</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 sometimes 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 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 brand
awareness. 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 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 has
recently announced that in March 1998 Dimension Publishing will introduce a
quarterly magazine dedicated exclusively to 3Dfx products. This magazine will
include software title and hardware release schedules, product
40
<PAGE> 41

reviews, gaming tips and other information that will enhance the return on the
consumer's investment in 3Dfx based products. The Company believes that this
magazine will continue to build the Company's brand image while concurrently
increasing awareness in the marketplace about 3Dfx products. 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.

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 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

41
<PAGE> 42

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. 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, Voodoo Rush and the Company's
subsequent 3D media processors 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:

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 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.

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.

42
<PAGE> 43

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 $12.4
million in 1995, 1996 and 1997, respectively.

MANUFACTURING

The Company has adopted a "fabless" manufacturing strategy for its
semiconductor products 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, packaging,
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 wafers 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 early 1998, TSMC will move to a 0.35
micron ASIC, CMOS process technology in connection with production of Voodoo2.
After the wafer production process is completed, the semiconductor die is
shipped to ASE, which packages and tests the semiconductor die, tests the
finished product, and ships the finished product to the Company or its
customers. 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.

43
<PAGE> 44

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

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.

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
Factor -- 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 multiple and requires the Company to compete against different companies
in several 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 3Dlabs, 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, Intergraph, 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

44
<PAGE> 45

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.

Furthermore, a substantial number of companies including Intel have
announced plans to release 3D graphics chips in 1998 that promise to provide low
cost 3D functionality for PCs and workstations. The Company believes that Intel
will introduce a single chip 2D/3D graphics accelerator in the near future.
Intel has been very active in the graphics market, having previously invested in
3Dlabs and having recently signed a development agreement with 3Dlabs in late
1997 targeting the high end workstation market. In early 1998, Intel acquired
CHIPS. To the extent that Intel's initiatives in the graphics sector are
successful, it could materially adversely affect the Company's financial
position and results of operations. The Company has had a relationship with
Intel since November 1996, when, in conjunction with Intel's investment in the
Company, 3Dfx and Intel entered into an agreement to license an early version of
Glide, the Company's proprietary low level 3D API. 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. Intel plans to sell all of its shares of Common Stock in connection
with this offering. See "Principal and Selling Shareholders."

Coin-op Arcade and Console Segments. The market for electronic arcade
entertainment is comprised of a small number of companies, including Acclaim,
Atari, Midway, Namco, Sega, Taito and 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. In
July 1997, Sega terminated its agreement with the Company to develop a new home
game console incorporating the Company's technology. As a result of the
termination of the Company's contract with Sega and the related litigation, the
Company currently does not participate in the home game console market.

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, can be expected to provide such competitors with
substantial competitive advantages. The Company does not seek to compete on the
basis of price alone.

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

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 six patent applications pending in the United States
Patent and Trademark Office. There can be no assurance that the Company's
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

46
<PAGE> 47

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."

In addition, in connection with the Company's litigation against Sega, the
Company was granted a preliminary injunction enjoining Sega from using or
providing to any other person or entity access to the Company's confidential
information and trade secrets that were provided to them in connection with the
Sega Agreement. Sega has been ordered by the court to return to the Company all
of the Company's confidential documents and/or information now possessed by
Sega. While to date, Sega has begun to return such proprietary information to
the Company, the Company has been unable to verify whether all such information
has been returned. There can be no assurance that Sega will comply with the
court order or that Sega has not used and will not use the proprietary
information to its competitive advantage.

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 December 31, 1997, the Company had 123 employees, 70 of whom were
engaged in engineering, and 53 of whom were engaged in marketing, sales,
operations and administrative positions. As of December 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 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 leases approximately 77,805 square feet for its headquarters in
one building in San Jose, California pursuant to a lease that expires in 2007,
with an option to extend the lease for an additional five-year term. In
addition, beginning in August 1998 the Company will lease approximately 52,000
square feet in a building adjacent to its San Jose headquarters building
pursuant to a lease that expires in 2005, with an option to extend the lease for
an additional three-year term. 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

U.S. subsidiary, Sega of America, Inc., NEC, and VideoLogic, and includes claims
for breach of contract, interference with contract, misrepresentation, unfair
competition, and threatened misappropriation of trade secrets. Discovery in the
case is currently being conducted. As of the date of this Prospectus, although
NEC and VideoLogic have answered the complaint, Sega has not responded to the
Company's complaint by way of answer or counterclaim. The Company expects to
incur significant legal expenses in connection with this litigation which will
have an adverse effect on the Company's financial condition and results of
operations. In addition, pursuing this litigation is likely to result in the
diversion of management's attention from the day-to-day operations of the
business. There can be no assurance that the litigation will be resolved in the
Company's favor or that the litigation will be resolved quickly. Any prolonged
litigation could have a material adverse effect on the Company's business,
financial condition and results of operations. An adverse outcome of the
litigation could have a material adverse effect on the Company's business,
financial condition and results of operations.

From time to time, the Company may be involved in additional litigation
relating to claims arising out of its operations in the normal course of
business. As of the date of this Prospectus, the Company is not engaged in any
legal proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company's business, financial condition or
results of operations.

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<PAGE> 49

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..... 44 President, Chief Executive Officer and Director
Gordon A. 53
Campbell(1).......... Chairman of the Board of Directors
Scott D. Sellers....... 29 Vice President, Research and Development and Director
Gary Tarolli........... 41 Vice President and Chief Scientist
Philip Carmack......... 35 Vice President, Hardware Engineering
Karl Chicca............ 40 Vice President, Operations
Andy Keane............. 35 Vice President, Marketing
Darlene R. Kindler..... 45 Vice President, Customer Marketing
Janet Leising.......... 40 Vice President, Software Engineering
Jordan G. Watters...... 35 Vice President, Sales
David Zacarias......... 48 Chief Financial Officer and Vice President, Administration
George J. Still, 39
Jr.(2)............... Director
Anthony Sun(1)......... 44 Director
Philip M. Young(1)..... 57 Director
James Whims(2)......... 43 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.

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

49
<PAGE> 50

that, Mr. Sellers was a Microprocessor Engineer at Pellucid, Inc., 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.

Philip Carmack has served as Vice President, Hardware Engineering of the
Company since June 1997 and Director of Hardware Engineering since December
1995. Prior to joining the Company, Mr. Carmack was the 3D Graphics Manager at
3DO Company, a 3D console graphics company, from August 1994 to November 1995.
He was Systems Engineering Group Manager at Kubota Graphics Corporation, a 3D
graphics systems company, from September 1991 to August 1994. Prior to that, Mr.
Carmack was the Chief Architect and Technical Lead at Loral/ROLM Mil-Spec
Computers, a defense company, from July 1989 to September 1991. Prior to joining
Loral/ROLM, he was a Systems Design Engineer A at Amdahl Corporation, Computer
Development Division for two years. Mr. Carmack received a BS in electrical
Engineering from Brigham Young University and a MS in Electrical Engineering
from Stanford University.

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 Peripherals
Corp. 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 and as Director, Product Marketing from March 1995 to 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.

Darlene R. Kindler has served as Vice President, Customer Marketing since
February 1998. From September 1996 to February 1998, Ms. Kindler was the
Company's Director of Publisher and Developer Relations. Prior to joining the
Company, Ms. Kindler served, from July 1996 to September 1996, as Vice President
of Consumer Division, and from April 1994 to July 1996, as Director of Sales and
Marketing for Data East, Inc., a licensee and publisher of Nintendo, Sony
Playstation and Sega games, as well as a manufacturer and distributor of arcade
games. From 1990 to April 1994, Ms. Kindler served as Director of Sales and
Marketing for IREM America Corp., a Japanese company specializing in arcade
games and Nintendo consumer products. Ms. Kindler was Manager of International
Marketing at Nintendo of America, Inc., a manufacturer of home console video
game machines, from 1984 to 1990. She holds a BS from Washington State
University.

Janet Leising has served as Vice President, Software Engineering of the
Company since June 1997 and as Director of Software Engineering since August
1995. Prior to joining the Company, Ms. Leising was the Director of Software
Engineering at Weitek Systems Inc., a multimedia semiconductor company, from
November 1993 to July 1995. She was PC Graphics Manager and the X/PEX Manager at
Kubota Graphics Computers Inc., a workstation company, from November 1991 to
November 1993. Prior to that, Ms. Leising was the Section Manager at Data
General, R.T.P., a workstation company,
50
<PAGE> 51

from June 1988 to November 1991. Ms. Leising received a BS in Computer Science
from Utah State University.

Jordan G. Watters has served as Vice president, Sales of the Company since
January 1998. From May 1997 until January 1998, Mr. Watters was the Company's
Director of Worldwide Sales. Prior to joining the Company, Mr. Watters served,
from January 1996 to May 1997, as Vice President of Sales and Marketing and,
from April 1995 to January 1996, as Director of Sales at VideoLogic, Inc., a
manufacturer and distributor of PC multimedia products. From 1989 to April 1995,
Mr. Watters served in a variety of sales and managerial positions, most recently
as Business Unit Manager, at Conner Peripherals, Inc., a manufacturer of
computer storage products. Mr. Watters has BS degrees in Engineering and
Chemistry from California State University at Chico and a MS degree in
Engineering from Stanford University.

David Zacarias has served as Chief Financial Officer and Vice President,
Administration of the Company since February 1998. Prior to joining the Company,
Mr. Zacarias served as Chief Financial Officer, from February 1993 to January
1998 and as Chief Operating Officer from July 1995 to January 1998 of OPTi Inc.,
a fabless semiconductor company. Mr. Zacarias received his BS in Business and
MBA from the University of California at Berkeley. Mr. Zacarias is a Certified
Public Accountant.

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.

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., The 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 currently serves on the Board of
Directors of T-HQ, Inc. 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

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<PAGE> 52

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. Pursuant to such automatic
grant mechanism, on June 25, 1997, Gordon A. Campbell received an option to
purchase 11,000 shares of the Company's Common Stock and each of George J.
Still, Jr., Anthony Sun, Philip M. Young and James Whims received an option to
purchase 6,000 shares of the Company's Common Stock at an exercise price of
$11.00 per share.

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."

Mr. Whims provides consulting services to the Company for which the Company
pays a fee of $5,000 per month. The Company made total payments to Mr. Whims in
fiscal 1997 of $60,000. No such payments were made prior to fiscal 1997.

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 years ended December 31, 1996 and 1997, for the Company's
Chief Executive Officer and the Company's next five most highly compensated
executive officers whose salary and bonus for 1997 fiscal year exceeded $100,000
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION --------------
----------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#)(1)
--------------------------- ------ --------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
L. Gregory Ballard(2).................... 1997 $210,167 $6,220 -- 18,750
President, Chief Executive Officer and 1996 11,538 -- -- 350,000
Director
Scott D. Sellers......................... 1997 149,079 4,665 -- 68,750
Vice President, Research and 1996 116,667 1,400 -- 25,000
Development and Director
Gary Tarolli............................. 1997 155,500 5,000 -- 68,750
Vice President and Chief Scientist 1996 130,000 1,400 -- 25,000
Philip Carmack........................... 1997 147,619 4,665 40,000
Vice President, Hardware Engineering 1996 140,000 -- -- 50,000
Karl Chicca(3)........................... 1997 147,171 5,000 -- 18,750
Vice President, Operations 1996 75,385 -- 110,003 75,000
David Bowman(4).......................... 1997 134,226 -- 84,000 18,750
Vice President, Sales 1996 96,923 -- -- 100,000
</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) Mr. Chicca joined the Company in June 1996. Other annual compensation amount
relates to relocation bonus.

(4) Other annual compensation amount relates to commissions paid. Mr. Bowman
resigned as a Vice President in December 1997.

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<PAGE> 53

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, 1997.
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 1997 SHARE(2)(3) DATE(4) 5%($) 10%($)
---- ---------- -------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard.......... 18,750 1% $12.00 3/31/07 $141,501 $ 358,592
Scott D. Sellers............ 18,750 1 12.00 3/31/07 141,501 358,592
50,000 4 15.75 10/27/07 495,255 1,255,072
Gary Tarolli................ 18,750 1 12.00 3/31/07 141,501 358,592
50,000 4 15.75 10/27/07 495,255 1,255,072
Philip Carmack.............. 40,000 3 12.00 3/31/07 301,869 764,996
Karl Chicca................. 18,750 1 12.00 3/31/07 141,501 358,592
David Bowman................ 18,750 1 12.00 3/31/07 141,501 358,592
</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.

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<PAGE> 54

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

The following table sets forth certain information regarding exercises of
stock options during the year ended December 31, 1997 and stock options held as
of December 31, 1997 by the Named Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997(#)(1) DECEMBER 31, 1997($)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard...... 850 $ 16,553 86,650 281,250 $1,871,640 $5,866,875
Scott D. Sellers........ -- -- 8,854 84,896 195,319 890,556
Gary Tarolli............ -- -- 8,854 84,896 195,319 890,556
Philip Carmack.......... -- -- 23,177 66,823 515,785 1,016,215
Karl Chicca............. 23,438 36,563 4,687 65,625 103,395 1,230,938
David Bowman............ -- -- 16,667 77,083 367,674 1,483,701
</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 the last sale price of the Common Stock on December 31, 1997,
$22.50 per share, minus the exercise price.

STOCK PLANS

1995 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. In addition, the Board of Directors
has approved an increase of 1,700,000 shares to be reserved for issuance under
the 1995 Plan subject to the approval of the shareholders at the 1998 Annual
Meeting of Shareholders, currently scheduled for May 1998. 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

54
<PAGE> 55

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 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 December 31, 1997, 452,958 shares of Common Stock, net of
repurchases, had been issued upon the exercise of options granted under the 1995
Plan, options to purchase 2,158,042 shares of Common Stock at a weighted average
exercise price of $5.09 per share were outstanding and 64,000 shares remained
available for future option grants under the 1995 Plan.

1997 Supplementary Stock Option Plan. The Company's 1997 Supplementary
Stock Plan (the "1997 Supplementary Plan") was adopted by the Board of Directors
in October 1997 and amended in February 1998. As of December 31, 1997, a total
of 500,000 shares of Common Stock were reserved for issuance under the 1997
Supplementary Plan. In February 1998, an additional 500,000 were reserved for
issuance under the 1997 Supplementary Plan. The 1997 Supplementary Plan, as
amended, provides for grants of nonstatutory stock options to employees or
consultants of the Company. The purpose of the 1997 Supplementary 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 1997 Supplementary 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 1997 Supplementary Plan is stated in
the option agreement. Options granted under the 1997 Supplementary 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. 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

55
<PAGE> 56

shall notify optionees that all options shall be fully exercisable for a period
of 15 days, after which such options shall terminate. The consideration for
exercising any nonstatutory stock option may consist of 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, reduction in amount of any
Company liability, or any combination of the foregoing methods of payment or
such other consideration or method of payment to the extent permitted under
applicable law. The 1997 Supplementary Plan will terminate in October 2007,
unless sooner terminated by the Board of Directors.

As of December 31, 1997, under the 1997 Supplementary Plan, options to
purchase 312,950 shares of Common Stock at a weighted average exercise price of
$14.75 per share were outstanding and 187,050 shares remained available for
future option grants under the 1997 Supplementary 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 Board
of Directors has approved an amendment to the Purchase Plan that would provide
for an annual increase, commencing in 1999, in the number of shares reserved for
issuance under the Purchase Plan equal to the lesser of 200,000 or 1% of the
Company's outstanding capitalization. This amendment is subject to the approval
of the shareholders at the 1998 Annual Meeting of Shareholders. If such
amendment is approved, a maximum additional 1,600,000 shares would be reserved
under the Purchase Plan and therefore the maximum number of shares which could
be issued under the Purchase Plan over its term would be 2,150,000 shares. As of
December 31, 1997, 34,742 shares had been purchased 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 began on June 25, 1997 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 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
56
<PAGE> 57

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 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.

As of December 31, 1997, no shares of Common Stock had been issued upon the
exercise of options granted under the Director Plan, options to purchase 35,000
shares of Common Stock at a weighted average exercise price of $11.00 per share
were outstanding and 115,000 shares remain available for future option grants
under the Director Plan.

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 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. Contribu-

57
<PAGE> 58

tions 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,
David Bowman, Philip Carmack, 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, Bowman, Carmack 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.

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<PAGE> 59

CERTAIN TRANSACTIONS

PRIVATE PLACEMENT OF SECURITIES

Between January 12 and May 18, 1995, the Company sold an aggregate of
1,646,253 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:
2,750,992 shares of Series A Preferred Stock at a price of $2.00 per share;
2,650,003 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 -- -- --
L. Gregory Ballard...................................... -- -- -- 2,500
David Bowman............................................ -- -- -- 2,500
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."

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, 1996 and 1997 of $45,000, $60,000, $60,000,
respectively.

The Company has an agreement with Quantum3D, a supplier of advanced
graphics subsystems based on the Company's technology, pursuant to which the
Company will supply graphic boards and components to Quantum3D. Gordon Campbell,
Chairman of the Board of Directors of the Company, is a Director, significant
investor in and shareholder of Quantum3D. Sales to Quantum3D during 1997

59
<PAGE> 60

totaled $949,000. As of December 31, 1997, the Company has an outstanding trade
receivable from Quantum3D of approximately $624,500.

In connection with the termination of Gary Martin's employment with the
Company, the Company and Mr. Martin, who was Chief Financial Officer and Vice
President, Administration until January 31, 1998, entered into a Separation
Agreement pursuant to which Mr. Martin will (i) remain a temporary employee
through August 1, 2000 and (ii) continue to receive medical insurance through
December 31, 1998. In addition, all options granted to Mr. Martin pursuant to
the Stock Plans will continue to vest through August 1, 2000. As of January 1,
1998, Mr. Martin held vested options to purchase 83,810 shares of Common Stock
and unvested option to purchase 57,240 shares of Common Stock. In the event of a
Change of Control, the Company will (i) waive its right to repurchase any
unvested shares of Common Stock owned by Mr. Martin and (ii) accelerate the
vesting of all unvested stock options granted to Mr. Martin pursuant to the
Stock Plans. For purposes of the separation agreement, a "Change of Control"
occurs, subject to certain conditions and exceptions, upon (i) the acquisition,
directly or indirectly, by any person (other than existing beneficial owners) of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities; (ii) the merger
or consolidation of the Company with another corporation in which the voting
securities of the Company outstanding immediately prior to such merger or
consolidation ceased to represent at least 50% of the voting power represented
by the voting securities of the Company thereafter; or (iii) the liquidation of
the Company or the sale or disposition of all or substantially all of the
Company's assets.

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.

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<PAGE> 61

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of February 6, 1998 and as adjusted
to reflect the sale of the 2,900,000 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, (iv) by all directors and executive officers of the
Company as a group and (v) the Selling Shareholders. 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 BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) SHARES OFFERING(1)
------------------- BEING -------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
---------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Entities affiliated with U.S. Venture
Partners(2)................................. 855,544 6.7% -- 855,544 5.8%
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Entities affiliated with Venrock
Associates(3)............................... 928,295 7.3 -- 928,295 6.3
755 Page Mill Road, A-230
Palo Alto, CA 94304
Norwest Equity Partners V(4).................. 344,590 2.7 -- 344,590 2.3
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301-1426
Entities affiliated with Chase Venture Capital
Associates(5)............................... 926,971 7.3 200,000 726,971 4.9
380 Madison Avenue, 12th Flr.
New York, NY 10017
Entities affiliated with Techfarm, Inc.(6).... 809,382 6.3 -- 809,382 5.5
111 West Evelyn Avenue, #101
Sunnyvale, CA 94086
Intel Corporation............................. 666,667 5.2 666,667 -- 0.0
SC-4-210
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Anthony Sun(3)................................ 928,295 7.3 -- 928,295 6.3
Philip M. Young(2)............................ 855,544 6.7 -- 855,544 5.8
George J. Still, Jr.(4)....................... 344,590 2.7 -- 344,590 2.3
Gordon A. Campbell(6)......................... 809,382 6.3 -- 809,382 5.5
L. Gregory Ballard(7)......................... 119,167 1.0 5,000 114,167 *
James Whims(8)................................ 21,166 * -- 21,166 *
Scott D. Sellers(9)........................... 295,417 2.3 -- 295,417 2.0
Gary Tarolli(10).............................. 290,907 2.3 -- 290,907 2.0
Karl Chicca(11)............................... 57,813 * -- 57,813 *
Philip Carmack(12)............................ 27,649 * -- 27,649 *
David Bowman(13).............................. 27,501 * -- 27,501 *
All executive officers and directors as a
group (15 persons)(14)...................... 3,833,238 29.3 5,000 3,828,238 25.4
Other Selling Shareholder
Andrew Rothfusz(15)......................... 3,631 * 193 3,438 *
</TABLE>

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

* Less than 1%.

(1) Applicable percentage ownership is based on 12,707,215 shares of Common
Stock outstanding as of February 6, 1998, and 14,735,355 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

61
<PAGE> 62

Common Stock subject to options or warrants currently exercisable, or
exercisable within 60 days after February 6, 1998, are deemed outstanding
for the 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 89,170 shares held by Second Ventures, II, L.P., 43,477 shares
held by USVP Entrepreneur Partners II, L.P., 734,586 shares held by U.S.
Venture Partners IV, L.P., 1,809 shares held by Mr. Young and 4,500 shares
issuable upon exercise of stock options exercisable within 60 days of
February 6, 1998 held by Mr. Young. 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 600,584 shares held by Venrock Associates, L.P., 301,061 shares
held by Venrock Associates II, L.P., 22,150 shares held by the Anthony Sun
Family Trust as to which Mr. Sun claims beneficial ownership and 4,500
shares issuable upon exercise of stock options exercisable within 60 days
of February 6, 1998 held by Mr. Sun. 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, Ray A. Rothrock and Mark Bailey.

(4) Includes 328,834 shares held by Norwest Equity Partners V, L.P., 4,981
shares held by Mr. Still, 6,275 shares held by Still Family Partners as to
which Mr. Still claims beneficial ownership and 4,500 shares issuable upon
exercise of stock options exercisable within 60 days of February 6, 1998
held by Mr. Still. 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) Based on a Form 13G filed with the Securities and Exchange Commission on
February 17, 1998, Chase Venture Capital Associates, L.P. ("CVCA") owns
926,971 shares. The general partner of CVCA is Chase Capital Partners, the
general partners of which are John R. Baron, Mitchell J. Blutt, M.D.,
Arnold L. Chavkin, Michael R. Hannon, Donald J. Hofmann, Stephen P. Murray,
John M.B. O'Connor, Brian J. Richmand, Shahan D. Soghikian, Jeffrey C.
Walker, Damion E. Wicker, M.D., Chase Capital Corporation, CCP Principals
L.P. and CCP European Principals, L.P.

(6) Includes 77,084 shares held by Techfarm, L.P., 10,834 shares held by
Techfarm II, L.P., 3,854 held by Techfarm Management Inc. (dba Techfarm,
Inc.), 659,360 shares held by Gordon A. Campbell and 58,250 shares issuable
upon exercise of stock options exercisable within 60 days of February 6,
1998 held by Gordon A. Campbell. Mr. Campbell is President of Techfarm,
Inc., the general partner of Techfarm, L.P. and Techfarm II, L.P. Techfarm,
Inc., Techfarm, L.P. and Techfarm II, L.P. disclaim beneficial ownership of
the shares held by Mr. Campbell, and Mr. Campbell disclaims beneficial
ownership of the shares held by Techfarm, L.P. and Techfarm, II, L.P.

(7) Includes 116,667 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of February 6, 1998 held by Mr. Ballard.

(8) Includes 21,166 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Whims.

(9) Includes 10,417 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Sellers.

(10) Includes 28,750 shares held by the Tarolli Grantor Retained Annuity Trust
as to which Mr. Tarolli claims voting and investment control, 10,417 shares
issuable upon exercise of stock options exercisable within 60 days of
February 6, 1998 held by Mr. Tarolli and 30,000 shares held by Mr.
Tarolli's wife. Mr. Tarolli disclaims beneficial ownership of the shares
held by his wife.

(11) Includes 34,375 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Chicca.

(12) Includes 27,344 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Carmack.

(13) Includes 25,001 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Bowman.

(14) Includes 374,168 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by all executive officers and
directors as a group.

(15) Includes 2,527 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Rothfusz.

62
<PAGE> 63

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is 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 December 31, 1997, there were 12,566,630 shares of Common Stock
outstanding held of record by approximately 248 shareholders. As of December 31,
1997, options to purchase an aggregate of 2,505,984 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

The Company is 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

At December 31, 1997 there were outstanding warrants to purchase 43,750
shares, 19,886 shares, 5,000 shares and 25,000 shares of Common Stock at
exercise prices of $2.00, $4.40, $7.50 and $13.875 per share, respectively. 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 warrant to
purchase 43,750 shares expires on March 31, 2002, the warrant to purchase 19,886
shares expires on January 1, 2003, the warrant to purchase 5,000 shares expires
on December 31, 2001 and the warrant to purchase 25,000 shares expires on
December 3, 2002.

REGISTRATION RIGHTS

The holders of approximately 3,106,181 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 40% of the Registrable Securities may require,
on two occasions after 180 days 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
63
<PAGE> 64

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 BankBoston, N.A. Its telephone
number is (781) 575-3120.

64
<PAGE> 65

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, the Company will have 14,594,770 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 2,900,000 shares of Common Stock sold in the offering and the 3,450,000
shares sold in the Company's initial public offering will be freely transferable
without restriction under the Securities Act unless they are held by
"affiliates" of the Company as that term is used under the Securities Act and
the regulations promulgated thereunder. The remaining approximately 8,816,630
shares of Common Stock (the "Restricted Shares") held by officers, directors,
employees, consultants and other shareholders of the Company were sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act and are "restricted" securities within the meaning of Rule 144
under the Securities Act. Of this number, 4,564,551 shares are freely tradeable
without restriction. An additional 87,510 shares will become eligible for sale
beginning on June 30, 1998 under Rule 144. An additional 3,564,569 shares that
are subject to lock-up agreements (as described below under "Underwriting") will
become eligible for sale beginning on the open of market on the third trading
day following the date of public disclosure of the Company's financial results
for the three months ended March 31, 1998 upon expiration of such agreements and
subject to compliance with the provisions of Rules 144(k), 144 and 701.

In general, under Rule 144 as currently in effect, 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 146,000 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 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 (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, 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 one-year minimum holding period requirements.

In October 1997, the Company filed a Registration Statement on Form S-8
registering 3,499,768 shares of Common Stock subject to outstanding options or
reserved for future issuance under its stock plans. As of December 31, 1997,
options to purchase a total 2,505,992 shares were outstanding and 1,381,308
shares were reserved for future issuance under the Company's stock plans. Common
Stock issued upon exercise of outstanding vested options or issued pursuant to
the Purchase Plan, other than Common Stock issued to affiliates of the Company,
are available for immediate resale in the open market.

No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of a substantial amount of
such shares by existing shareholders or by shareholders purchasing in the
offering could have a negative impact on the market price of the Common Stock.

65
<PAGE> 66

UNDERWRITING

The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC 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>
BancAmerica Robertson Stephens.............................. 1,220,160
NationsBanc Montgomery Securities LLC....................... 629,920
UBS Securities LLC.......................................... 629,920
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 100,000
Arcadia Investment Corp..................................... 80,000
The Buckingham Research Group Incorporated.................. 80,000
Fahnestock & Co. Inc........................................ 80,000
Van Kasper & Company........................................ 80,000
-----------
Total............................................. 2,900,000
===========
</TABLE>

The Representatives have advised the Company and the Selling Shareholders
that they propose to offer the shares of Common Stock to the public at the
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 $0.76 per share, of
which $0.10 may be reallowed to other dealers. After the completion of the
Offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall affect the amount of
proceeds to be received by the Company and the Selling Shareholders 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 435,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 2,028,140 shares that the Underwriters have agreed to
purchase from the Company. 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 2,900,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 2,900,000 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 shareholders of the Company
have agreed with the Representatives 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 until the open of market on the third trading day following the
date of public disclosure of the Company's financial results for the three
months ended March 31, 1998 (the "Lock-Up Period"), without the prior written
consent of BancAmerica Robertson Stephens. However, BancAmerica Robertson
Stephens 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 3,564,569 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

66
<PAGE> 67

prior written consent of BancAmerica Robertson Stephens issue, sell, contract to
sell or otherwise dispose of any shares of 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." In
addition, the Underwriters have agreed, upon completion of the offering, to
rebate to a certain Selling Shareholder a portion of the underwriting discount
and commission associated with the sale of its shares of Common Stock to the
Underwriters.

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.

In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.

67
<PAGE> 68

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, 1996 and 1997,
and for each of the three years in the period ended December 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.

The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also makes electronic filings publicly available on the
Internet within 24 hours of acceptance. The Commission's Internet address is
http://www.sec.gov. The Commission web site also contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The Common Stock of the Company is quoted on
the Nasdaq National Market. Reports, proxy and information statements and other
information concerning the Company may be inspected at the National Association
of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.

68
<PAGE> 69

3DFX INTERACTIVE, INC.

INDEX TO FINANCIAL STATEMENTS

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

F-1
<PAGE> 70

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
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, 1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 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
January 27, 1998, except as to the fifteenth
paragraph of Note 1 which is as of March 3, 1998

F-2
<PAGE> 71

3DFX INTERACTIVE, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 5,291 $ 28,937
Short-term investments.................................... -- 5,984
Accounts receivable less allowance for doubtful accounts
of $78 and $308........................................ 1,393 13,387
Inventory................................................. 4,960 3,845
Other current assets...................................... 321 2,400
-------- --------
Total current assets.............................. 11,965 54,553
Property and equipment, net................................. 3,482 6,816
Other assets................................................ 134 548
-------- --------
$ 15,581 $ 61,917
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit............................................ $ 1,076 $ 777
Accounts payable.......................................... 2,236 12,573
Accrued liabilities....................................... 1,415 2,969
Current portion of capitalized lease obligations.......... 601 778
-------- --------
Total current liabilities......................... 5,328 17,097
-------- --------
Capitalized lease obligations, less current portion......... 632 546
-------- --------
Commitments (Note 8)
Shareholders' Equity:
Preferred Stock, no par value, 7,269,018 and 5,000,000
shares authorized; 6,951,692 and none issued and
outstanding............................................ 28,701 --
Common Stock, no par value, 25,033,000 and 50,000,000
shares authorized; 1,890,013 and 12,566,630 shares
issued and outstanding................................. 1,626 66,717
Warrants.................................................. 353 242
Notes receivable.......................................... (19) --
Deferred compensation..................................... (1,250) (1,181)
Accumulated deficit....................................... (19,790) (21,504)
-------- --------
Total shareholders' equity........................ 9,621 44,274
-------- --------
$ 15,581 $ 61,917
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 72

3DFX INTERACTIVE, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... -- $ 6,390 $ 44,069
Cost of revenues............................................ -- 5,123 22,611
------- -------- --------
Gross profit................................................ -- 1,267 21,458
------- -------- --------
Operating expenses:
Research and development.................................. 2,940 9,435 12,412
Selling, general and administrative....................... 2,166 6,642 11,390
------- -------- --------
Total operating expenses.......................... 5,106 16,077 23,802
------- -------- --------
Loss from operations........................................ (5,106) (14,810) (2,344)
Interest and other income, net.............................. 67 59 630
------- -------- --------
Net loss.................................................... $(5,039) $(14,751) $ (1,714)
======= ======== ========
Net loss per share
Basic..................................................... $ (0.82) $ (1.74) $ (0.16)
======= ======== ========
Diluted................................................... $ (0.82) $ (1.74) $ (0.16)
======= ======== ========
Shares used in net loss per share calculations (Note 1)
Basic..................................................... 6,173 8,467 10,767
------- -------- --------
Diluted................................................... 6,173 8,467 10,767
------- -------- --------
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 73

3DFX INTERACTIVE, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- -------------------- NOTES DEFERRED
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION
---------- ------- ---------- ------- -------- ---------- ------------
<S> <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) $ --
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
cost................................. 2,750,992 5,474 -- -- -- -- --
Common Stock options exercised......... -- -- 125,000 25 -- -- --
Forgiveness of notes receivable from
shareholders......................... -- -- -- -- -- 21 --
Deferred compensation.................. -- -- -- 224 -- -- (224)
Amortization of deferred
compensation......................... -- -- -- -- -- -- 56
Net loss............................... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----- ---- -------
Balance at December 31, 1995........... 2,750,992 5,474 1,771,250 310 -- (25) (168)
Issuance of Series B Convertible
Preferred Stock in March 1996 at
$4.40 per share, net of issuance
cost................................. 2,650,003 11,634 -- -- -- -- --
Issuance of Series C Convertible
Preferred Stock in November 1996 at
$7.50 per share, net of issuance
cost................................. 1,550,697 11,593 -- -- -- -- --
Common Stock options exercised......... -- -- 185,209 42 -- -- --
Forgiveness of notes receivable from
shareholders......................... -- -- -- -- -- 6 --
Repurchased Common Stock............... -- -- (66,446) (4) -- -- --
Issuance of Series B and C Convertible
Preferred Stock warrants............. -- -- -- -- 353 -- --
Deferred compensation.................. -- -- -- 1,278 -- -- (1,278)
Amortization of deferred
compensation......................... -- -- -- -- -- -- 196
Net loss............................... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----- ---- -------
Balance at December 31, 1996........... 6,951,692 28,701 1,890,013 1,626 353 (19) (1,250)
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, net of Issuance
cost................................. 70,167 521 -- -- -- -- --
Conversion of Preferred Stock to Common
Stock................................ (7,021,859) (29,222) 7,021,859 29,222 -- -- --
Issuance of common stock in connection
with initial public offering, less
issuance costs....................... -- -- 3,450,000 34,336 -- -- --
Issuance of common stock under stock
option and purchase plans............ -- -- 214,757 413 -- -- --
Common Stock repurchased............... -- -- (104,246) (9) -- -- --
Exercise of warrants to purchase Common
Stock................................ -- -- 94,247 714 (329) -- --
Issuance of warrant to purchase Common
Stock................................ -- -- -- -- 218 -- --
Repayment of notes receivable from
shareholders......................... -- -- -- -- -- 19 --
Deferred compensation.................. -- -- -- 415 -- -- (415)
Amortization of deferred
compensation......................... -- -- -- -- -- -- 484
Net loss............................... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----- ---- -------
Balance at December 31, 1997........... -- $ -- 12,566,630 $66,717 $ 242 $ -- $(1,181)
========== ======= ========== ======= ===== ==== =======

ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Issuance of Common Stock to founders,
investors and employees at $0.025 per
share................................ $ -- $ 15
Issuance of Common Stock to founders,
investors and employees at $0.075 per
share................................ -- --
Issuance of Common Stock to founders,
investors and employees at $0.10 per
share................................ -- --
Issuance of Series A Convertible
Preferred Stock in March 1995 at
$2.00 per share, net of issuance
cost................................. -- 5,474
Common Stock options exercised......... -- 25
Forgiveness of notes receivable from
shareholders......................... -- 21
Deferred compensation.................. -- --
Amortization of deferred
compensation......................... -- 56
Net loss............................... (5,039) (5,039)
-------- --------
Balance at December 31, 1995........... (5,039) 552
Issuance of Series B Convertible
Preferred Stock in March 1996 at
$4.40 per share, net of issuance
cost................................. -- 11,634
Issuance of Series C Convertible
Preferred Stock in November 1996 at
$7.50 per share, net of issuance
cost................................. -- 11,593
Common Stock options exercised......... -- 42
Forgiveness of notes receivable from
shareholders......................... -- 6
Repurchased Common Stock............... -- (4)
Issuance of Series B and C Convertible
Preferred Stock warrants............. -- 353
Deferred compensation.................. -- --
Amortization of deferred
compensation......................... -- 196
Net loss............................... (14,751) (14,751)
-------- --------
Balance at December 31, 1996........... (19,790) 9,621
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, net of Issuance
cost................................. -- 521
Conversion of Preferred Stock to Common
Stock................................ -- --
Issuance of common stock in connection
with initial public offering, less
issuance costs....................... -- 34,336
Issuance of common stock under stock
option and purchase plans............ -- 413
Common Stock repurchased............... -- (9)
Exercise of warrants to purchase Common
Stock................................ -- 385
Issuance of warrant to purchase Common
Stock................................ -- 218
Repayment of notes receivable from
shareholders......................... -- 19
Deferred compensation.................. -- --
Amortization of deferred
compensation......................... -- 484
Net loss............................... (1,714) (1,714)
-------- --------
Balance at December 31, 1997........... $(21,504) $ 44,274
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 74

3DFX INTERACTIVE INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (5,039) $ (14,751) $ (1,714)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 227 1,017 2,238
Warrant valuation.................................... -- 353 --
Stock compensation................................... 56 196 484
Increase in allowance for doubtful accounts.......... -- 78 230
Changes in assets and liabilities:
Accounts receivable............................... -- (1,471) (12,224)
Inventory......................................... (37) (4,923) 1,115
Other assets...................................... (169) (286) (2,275)
Accounts payable.................................. 471 1,765 10,337
Accrued liabilities............................... 564 851 1,554
--------- ---------- ----------
Net cash used in operating activities........... (3,927) (17,171) (255)
--------- ---------- ----------
Cash flows from investing activities:
Purchases of short-term investments, net.................. -- -- (5,984)
Purchases of property and equipment....................... (589) (2,210) (4,730)
--------- ---------- ----------
Net cash used in investing activities.................. (589) (2,210) (10,714)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock,
net.................................................... 5,474 23,227 521
Proceeds from initial public offering, net................ -- -- 34,336
Proceeds from issuance of Common Stock, net............... 61 44 423
Proceeds from exercise of warrants........................ -- -- 385
Principal payments of capitalized lease obligations,
net.................................................... (154) (540) (751)
Proceeds (payments) on drawdown
on line of credit, net................................. -- 1,076 (299)
--------- ---------- ----------
Net cash provided by financing activities.............. 5,381 23,807 34,615
--------- ---------- ----------
Net increase in cash and cash equivalents................... 865 4,426 23,646
--------- ---------- ----------
Cash and cash equivalents at beginning of period............ -- 865 5,291
--------- ---------- ----------
Cash and cash equivalents at end of period.................. $ 865 $ 5,291 $ 28,937
========= ========== ==========

SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest.................. $ 45 $ 96 $ 263
Acquisition of property and equipment under
capitalized lease obligations.......................... 1,007 920 842
</TABLE>

The accompanying notes are an integral part of these financial statments.
F-6
<PAGE> 75

3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:

The Company

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

In June 1997, the Company completed its initial public offering and issued
3,000,000 shares of its Common Stock to the public at a price of $11.00 per
share. The Company received cash of approximately $30,400,000, net of
underwriting discounts and commissions. Upon the closing of initial public
offering, all outstanding shares of the Company's then outstanding Convertible
Preferred Stock were automatically converted into shares of Common Stock. On
July 25, 1997, the Company's underwriter exercised an option to purchase an
additional 450,000 shares of Common Stock at a price of $11.00 per share to
cover over-allotments. The Company received cash of approximately $3,900,000,
net of underwriting discounts and commissions.

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 generally 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.

Cash equivalents and investments

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 December 31, 1997, approximately $3,137,000 and $24,218,000, respectively,
of money market funds and commercial paper instruments, the fair value of which
approximate cost, are included in cash and cash equivalents.

Investments in debt securities are classified as "available for sale" and
have maturities greater than three months from the date of acquisition.
Investments classified as "available for sale" are reported at fair value with
unrealized gains and losses, net of related tax, if any, reported as a separate
component of shareholders' equity. Unrealized gains and losses were not material
during the year ended December 31, 1997.

Concentration of credit risk

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

F-7
<PAGE> 76
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3Dfx invests primarily in money market accounts, commercial paper
instruments and term notes. Cash equivalents and short-term investments 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. Two customers
account for 29% and 26% of accounts receivable at December 31, 1997.

The following table summarizes the revenues from customers in excess of 10%
of the total revenues:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Customers comprising 10% or more of the Company's revenues
for the periods indicated:
A .................................................... 44% 7%
B .................................................... 33% 37%
C .................................................... 11% 2%
D .................................................... -- 16%
</TABLE>

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.

Research and software development costs

Research and development costs are charged to operations as incurred.
Software development and prototype 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).

F-8
<PAGE> 77
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Earnings (loss) per share

Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the periods. Diluted earnings (loss)
per share is computed using the weighted average number of common and
potentially dilutive common shares during the periods, except those that are
antidilutive. All prior years' data in this report have been restated to reflect
the requirements of SFAS 128. SFAS 128 requires a reconciliation of the
numerators and denominators of the basic and diluted per share computations as
follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER, 31
------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Net loss available to common shareholders
(numerator).............................. $(5,039) $(14,751) $(1,714)
------- -------- -------
Weighted average shares outstanding
(denominator for both computations)...... 6,173 8,467 10,767
======= ======== =======
Basic loss per share....................... $ (0.82) $ (1.74) $ (0.16)
======= ======== =======
Diluted loss per share..................... $ (0.82) $ (1.74) $ (0.16)
======= ======== =======
</TABLE>

During the years ended December 31, 1995, 1996 and 1997, options to
purchase approximately 513,250, 1,538,509 and 2,505,984 shares, respectively,
were outstanding but are not included in the computation because they are
antidilutive.

Recent accounting pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This Statement establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is required to be adopted for fiscal
years beginning after December 15, 1997.

F-9
<PAGE> 78
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Inventory:
Raw material........................................... $ 424 $ 531
Work-in-progress....................................... 231 2,246
Finished goods......................................... 4,305 1,068
------- -------
$4,960.. $ 3,845
------- -------
Property and equipment:
Computer equipment..................................... $ 3,122 $ 6,179
Purchased computer software............................ 1,047 3,011
Furniture and equipment................................ 557 1,108
------- -------
4,726 10,298
Less: Accumulated depreciation and amortization........ (1,244) (3,482)
------- -------
$ 3,482 $ 6,816
======= =======
</TABLE>

Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $1,927,000 and $2,769,000 with related
accumulated amortization of $602,000 and $1,514,000 at December 31, 1996 and
1997, respectively.

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Accrued liabilities:
Accrued salaries, wages and benefits..................... $ 354 $1,014
Accrued prototype costs.................................. 143 1,070
Other accrued liabilities................................ 918 885
------ ------
$1,415 $2,969
====== ======
</TABLE>

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 80% of eligible accounts
receivable plus 100% of cash and cash equivalents or $7,000,000. Borrowings
under the line are secured by all of the Company's owned assets and bear
interest at the bank's prime rate plus 0.25% per annum (8.75%) as of December
31, 1997. The agreement requires that the Company maintain certain financial
ratios and levels of tangible net worth, profitability and liquidity. As of
December 31, 1997, the Company was in compliance with its covenants. The line of
credit expires in December 1998. At December 31, 1997, there were no borrowings
outstanding under this line of credit.

The Company has two lease lines of credit with a bank, which provides for
the purchase of up to $5,000,000 of property and equipment. Borrowings under
these lines are secured by all of the Company's owned assets and bear interest
at the bank's prime rate plus 1.50% and 0.75% per annum, respectively. The
agreement requires that the Company maintain certain financial ratios and levels
of tangible net worth, profitability and liquidity. As of December 31, 1997, the
Company was in compliance with its covenants. The equipment lines of credit
expire in August 1998 and December 2001, respectively. At December 31, 1997,
approximately $777,000 was outstanding under these equipment lines of credit.

F-10
<PAGE> 79
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- DEVELOPMENT CONTRACT:

In February 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 $1,817,00 in the year ended December
31, 1997, representing a non-refundable amount due for the delivery of certain
engineering designs and revenue recognized under the percentage of completion
method of accounting. The Company has no further obligations to Sega with regard
to the $1,817,000 of development contract revenue recognized. The Company has an
outstanding receivable for $267,000 related to the Sega agreement which in light
of the litigation noted below, is classified as a long-term asset. The Company
did not earn any royalty revenue in the year ended December 31, 1997. Costs
incurred during the period relating to this contract are included in research
and development expense.

In July 1997, Sega terminated the development and license agreement with
the Company. In August 1997, the Company filed a lawsuit against Sega alleging
breach of contract, interference with the contract, misrepresentation, unfair
competition and threatened misappropriation of trade secrets. Discovery in the
case is presently under way. There can be no assurance that this litigation will
be resolved in the Company's favor. The resolution of this matter could have a
material adverse impact on the Company's financial position, results of
operations and liquidity. No future revenues will be recognized under the Sega
agreement.

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 years ended December 31, 1996 and 1997,
49,571 and 83,855 shares, respectively, of Common Stock were repurchased.

In addition, during the period ended December 31, 1997, certain employees
exercised options to purchase 306,292 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 years ended December 31, 1996 and 1997, 16,875 and 20,391 shares,
respectively, of Common Stock were repurchased.

As of December 31, 1996 and 1997, approximately 835,130 and 306,292 shares,
respectively, of Common Stock were subject to these repurchase rights.

Convertible preferred stock

At December 31, 1996, the aggregate authorized number of preferred shares
was 7,269,018, of which 2,794,742, 2,818,412 and 1,655,864 were 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 was
converted into one Share of Common Stock upon the completion of the underwritten
initial public offering (IPO) of Common Stock in June 1997. The holders of
Series A, B and C Convertible Preferred Stock had voting rights equal to Common
Stock on an if-converted basis.

F-11
<PAGE> 80
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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. Upon completion of the Company's IPO, this
warrant was exchanged for a warrant to purchase Common Stock. The Company has
reserved 43,750 shares of Common 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. Upon completion of the Company' IPO, this
warrant was exchanged for a warrant to purchase Common Stock. The Company has
reserved 19,886 shares of Common 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. In December 1997, the financial institution exercised the
warrant for 6,737 shares of Common Stock in a cashless exercise.

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 purchase right of 50,000 warrants is
exercisable, in whole or in part, at any time on or before December 31, 2001;
however, would have expired, if not previously exercised, immediately upon the
closing of the underwritten initial public offering in June 1997. 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 37,510 shares
of Series B Convertible Preferred Stock in conjunction with wafer purchases in
1996. These warrants would have expired on December 31, 2001. The warrant was
deemed to have a value of approximately $211,000 and was recognized as a cost of
revenues and research and development expense during 1996. In conjunction with
the Company's IPO in June 1997, TSMC exercised its warrant to purchase 87,510
shares of Series B Convertible Preferred Stock. The aggregate proceeds to the
Company were approximately 385,000. The Series B Convertible Preferred Stock
converted into Common Stock upon completion of the Company's IPO on June 25,
1997 included the shares issued in exchange for this warrant. No further warrant
rights exist with respect to this agreement.

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 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 warrant for 30,000 shares of Common
Stock expired upon the closing of the Company's IPO as it was not exercised. The
warrant for 5,000 shares expires on December 31, 2001. Upon completion of the
Company's IPO, the warrant for 5,000 shares was exchanged for a warrant to
purchase Common Stock. The Company has reserved 5,000 shares of Common Stock for
the exercise of this warrant.

On December 3, 1997, the Company issued a warrant to purchase 25,000 shares
of Common Stock at a exercise price of $13.875 per share in conjunction with
developing a relationship with another company. The warrant is fully exercisable
and expires December 3, 2002. The Company valued the warrant under the
"Black-Scholes" formula at approximately $218,000. The warrant value will be

F-12
<PAGE> 81
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

amortized over a one-year period as a cost of revenue. The Company has reserved
25,000 shares of Common Stock for the exercise of this warrant.

As of December 31, 1997, the Company had reserved 93,636 shares of Common
Stock for the exercise of warrants.

NOTE 6 -- STOCK OPTION PLANS:

The 1995 Plan

In May 1995, the Company adopted a Stock Plan, (the 1995 Plan) which
provides for granting of incentive and nonqualified stock options to employees,
consultants and directors of the Company. Under the 1995 Plan, 2,675,000 shares
of Common Stock have been reserved for issuance at December 31, 1997.

Options granted under the 1995 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 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 1995 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.

The 1997 Plan

In October 1997, the Company adopted the 1997 Supplementary Stock Plan (the
1997 Plan), which provides for granting of nonqualified stock options to
employees (excluding officers, consultants and directors) of the Company. Under
the 1997 Plan, 500,000 shares of Common Stock have been reserved for issuance at
December 31, 1997.

Options granted under the 1997 Plan are generally for periods not to exceed
ten years and are granted at the fair market value of the stock on the date of
grant. Options granted under the 1997 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.

Directors' Option Plan

In March 1997, the Company adopted a 1997 Directors' Option Plan. Under
this plan options to purchase 150,000 shares of Common Stock may be granted. The
plan provides that options may be granted at a price not less than fair value of
a share at the date of grant. The Director's Option Plan provides for an initial
option grant to purchase 12,500 shares of Common Stock to each new nonemployee
director of the Company at the date he or she becomes a director. Each
nonemployee director and Chairman of the Board of Directors will annually be
granted an option to purchase 5,000 and 10,000 shares of Common Stock,
respectively, beginning with the 1998 annual meeting of shareholders. If a
director serves on either the Audit Committee or Compensation Committee, he or
she will annually be granted an option to purchase 1,000 shares of Common Stock,
respectively, beginning with the 1997 annual meeting of shareholders. Options
granted under the Director' Plan are generally for ten years and are granted at
the fair market value of the stock on the date of grant. The initial 12,500
option grant vests at a rate of 1/48 per month following the date of grant. The
annual option grant of 5,000, 10,000 or 1,000 vests at a rate of 1/12 per month
following the date of grant.

F-13
<PAGE> 82
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following is a summary of activity under the 1995 Plan, the 1997 Plan
and the Directors' Option Plan during the years ended December 31, 1995, 1996
and 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............................. 1,274,992 -- $ --
Granted................................................ (1,306,244) 1,306,244 $12.15
Exercised.............................................. -- (180,015) $ 0.49
Canceled............................................... 158,754 (158,754) $ 3.86
Repurchased............................................ 20,391 -- $ 0.08
---------- ---------
Balance at December 31, 1997............................. 366,050 2,505,984 $ 6.38
========== =========
</TABLE>

At December 31, 1996 and December 31, 1997, 186,172 and 471,937,
respectively, Common Stock options were vested.

Prior to the Company completing its IPO, 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 calculated deferred
compensation of approximately $1,900,000 related to options granted prior to the
completion of the Company's IPO. Such deferred compensation will be amortized
over the vesting period relating to these options, of which $56,000, $196,000
and $484,000 has been amortized during the years ended December 31, 1995, 1996
and 1997, respectively.

Information relating to stock options outstanding under the 1995 Plan, the
1997 Plan and the Directors' Plan at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES: OUTSTANDING LIFE PRICE
------------------------- ----------- ----------- --------
<S> <C> <C> <C>
$0.20 - $0.30........................... 265,797 7.6 years $ 0.21
$0.44 - $0.75........................... 591,825 8.6 years $ 0.48
$0.90................................... 442,796 8.9 years $ 0.90
$2.00 - $12.00.......................... 741,616 9.3 years $ 11.07
$13.88 - $17.06......................... 463,950 9.9 years $ 15.18
2,505,984 8.99 years $ 6.38
</TABLE>

F-14
<PAGE> 83
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
OPTIONS VESTED
------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
RANGE OF EXERCISE PRICES: VESTED PRICE
------------------------- -------- --------
<S> <C> <C>
$0.20 - $0.30.......................................... 139,708 $ 0.21
$0.44 - $0.75.......................................... 207,496 $ 0.47
$0.90.................................................. 107,233 $ 0.90
$2.00 - $12.00......................................... 17,500 $ 11.00
$13.88 - $17.06........................................ -- $ --
471,937 $ 0.88
</TABLE>

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. As of December 31, 1997, 34,742 shares have been
purchased under the Employee Stock Purchase Plan.

Certain Pro Forma Disclosures

The Company accounts for its employee stock option plans and employee stock
purchase plan 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 options plans, employee stock purchase plans and
shares issued to founders which are subject to repurchase.

For the years ended December 31, 1995 and 1996, the value of each option on
the date of grant was determined utilizing the minimum value method as the
Company was non-public.

For the year ended December 31, 1997, the fair value of each option on the
date of grant was determined utilizing the Black-Scholes model.

To determine the value of each option on the date of grant the following
assumptions were used for the years ended December 31, 1995 and 1996: dividend
yield of 0.0%; a risk-free interest rate of 6%; a weighted average expected
option term of four years. The following assumptions were used for the stock
option plan and stock purchase plan, respectively, for the year ended December
31, 1997: dividend yield of 0.0% for both the stock option and stock purchase
plans; volatility of 70% for both the stock option plan and the stock purchase
plans; risk-free interest rates of 5.7% and 5.4%, respectively; a weighted
average expected term of 4 and 0.5 years, respectively. The weighted average
fair value of stock options granted in the years ended December 31, 1995, 1996
and 1997, was $0.18, $0.60 and $12.15, 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:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Pro forma net loss................... $(5,045) $(14,801) $(3,705)
Pro forma basic loss per share....... $ -- $ (1.53) $ (0.32)
Pro forma diluted loss per share..... $ -- $ (1.53) $ (0.32)
</TABLE>

F-15
<PAGE> 84
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The pro forma effect on net loss and loss per share for 1995, 1996 and 1997
is not representative of the pro forma effect on net income (loss) in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.

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, 1996 and 1997 as the Company incurred net
operating losses.

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

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Net operating losses..................................... $ 7,278 $ 7,358
Expenses not currently deductible........................ 357 644
Tax credit carryforwards................................. 134 821
------- -------
7,769 8,823
Less: valuation allowance................................ (7,769) (8,823)
------- -------
$ -- $ --
======= =======
</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, 1997, the Company had net operating loss carry-forwards for
federal and state income tax purposes of approximately $18,500,000 and
$17,500,000, respectively, which expire beginning in 2010 and 2000,
respectively. At December 31, 1997, the Company had research and development
credit carry-forwards for federal and state income tax purposes of approximately
$491,000 and $330,000, respectively.

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 completion of the Company's IPO resulted in an
annual limitation of the Company's ability to utilize net operating losses
incurred prior to that date. The annual limitation is approximately $5,400,000.

NOTE 8 -- COMMITMENTS:

The Company leases under noncancelable operating leases for certain of its
facilities and equipment in addition to equipment capital leases. Rent expense
on the operating leases for the years
F-16
<PAGE> 85
3DFX INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

ended December 31, 1995, 1996 and 1997 was approximately $192,000, $305,000 and
$568,000, respectively.

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

<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
1998.................................................. $ 848 $ 841
1999.................................................. 908 451
2000.................................................. 934 174
2001.................................................. 996 --
2002.................................................. 1,027 --
Thereafter............................................ 5,011 --
------ ------
Total minimum lease payments.......................... $9,724 $1,466
======
Less: amount representing interest.................... (142)
------
Present value of minimum lease payments............... 1,324
Less: current portion................................. (778)
------
Noncurrent portion of capitalized lease obligations... $ 546
======
</TABLE>

Purchase Commitments

The Company's manufacturing relationship with Taiwan Semiconductor
Manufacturing Corporation ("TSMC") allows the Company to cancel all outstanding
purchase orders, but requires the repayment of all expenses incurred to date. As
of December 31, 1997, TSMC had incurred approximately $3,200,000 of
manufacturing expenses on the Company's outstanding purchase orders. The Company
does not expect to cancel any of its outstanding purchase orders.

NOTE 9 -- RELATED PARTY TRANSACTIONS:

Since April 1995, a consulting company has been providing management
services to the Company for which the Company pays a monthly fee of $5,000 for
consulting services. The Chairman and a director of the Board of Directors of
the Company are also officers of the consulting company. Total payments for such
management services during 1995, 1996 and 1997 were $45,000, $60,000 and
$60,000, respectively.

During 1997, a member of the Board of Directors provided consulting
services to the Company. Total payments for such consulting services in 1997 was
$45,000.

In April 1997, an officer of the Company resigned and subsequently founded
Quantum3D, Inc., a supplier of advanced graphic subsystems based on 3Dfx
technology. Sales to Quantum3D, Inc. during 1997 totaled $949,000. As of
December 31, 1997, the Company has an outstanding trade receivable from
Quantum3D, Inc. of approximately $624,500.

NOTE 10 -- SUBSEQUENT EVENT:

In February 1998, the Company's Board of Directors approved an increase of
1,700,000 shares of Common Stock, 500,000 shares of Common Stock and an annual
increase, commencing in 1999, in the number of Common Stock shares equal to the
lesser of 200,000 or 1% of the Company's outstanding capitalization to be
reserved for issuance under the 1995 Plan, 1997 Plan and Employee Stock Purchase
Plan, respectively. These increases to the 1995 Plan and the Employee Stock
Purchase Plan are contingent upon shareholder approval.

F-17
<PAGE> 86

APPENDIX -- DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER

Graphic: Illustration depicting PC screen shots from 42 computer 3D video
games designed to or utilizing the Company's 3D hardware.

Caption: PC Gaming Comes of Age. 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 Shiny Entertainment, Interplay Productions,
Eidos Interactive, Activision, Ritual Entertainment, id Software, Origin
Systems, and Electronic Arts. All other trademarks are the property of their
respective owners. Copyright (C)1998 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.

OUTSIDE BACK COVER

3Dfx Interactive, Inc. Logo.
<PAGE> 87

LOGO