3DFX INTERACTIVE INC
10-Q, 2000-09-14
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<PAGE>   1
                                  United States
                       Securities and Exchange Commission

                             Washington, D.C. 20549

                                    FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended July 31, 2000.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period from _______________ to _________________.

                         Commission file number 0-22651

                                   ----------

                             3DFX INTERACTIVE, INC.

                                   ----------

             (Exact name of registrant as specified in its charter)


           CALIFORNIA                                   77-0390421
           ----------                                   ----------
(State or Other Jurisdiction of              (IRS Employer Identification No.)
 Incorporation or Organization)

                               4435 FORTRAN DRIVE
                           SAN JOSE, CALIFORNIA 95134
                           --------------------------
               (Address of Principal Executive Office) (Zip Code)

                         TELEPHONE NUMBER (408) 935-4400
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

================================================================================

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X  No

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

Common Stock, No Par Value --- 39,362,406 shares as of July 31, 2000.
================================================================================


<PAGE>   2

                             3DFX INTERACTIVE, INC.

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                            PAGE
<S>                                                                                                         <C>
PART I     FINANCIAL INFORMATION

           Item 1.           Financial Statements

                             Condensed Consolidated Balance Sheets at
                             January 31, 2000 and July 31, 2000................................................1

                             Condensed Consolidated Statements of Operations for
                             the three and six months ended July 31, 2000 and
                             July 31, 1999.....................................................................2

                             Condensed Consolidated Statements of Cash Flows for
                             the six months ended July 31, 2000 and July 31, 1999..............................3

                             Notes to Condensed Consolidated Financial Statements..............................4

           Item 2.           Management's Discussion and Analysis of Financial Condition
                             and Results of Operations.........................................................9

           Item 3.           Quantitative And Qualitative Disclosure About Market Risk.........................30

  PART II  OTHER INFORMATION

           Item 1.           Legal Proceedings.................................................................30

           Item 2.           Changes in Securities and Use of Proceeds.........................................31

           Item 3.           Defaults Upon Senior Securities...................................................31

           Item 4.           Submission of Matters to a Vote of Security Holders...............................31

           Item 5.           Other Information.................................................................32

           Item 6.           Exhibits and Reports on Form 8-K..................................................32

SIGNATURES                   ..................................................................................33
</TABLE>



<PAGE>   3


                          PART I FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                     3dfx INTERACTIVE, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                     JULY 31,         JANUARY 31,
                                                                       2000              2000
                                                                   ------------      ------------
<S>                                                                <C>               <C>
ASSETS
Current Assets:
 Cash and cash equivalents                                         $     23,525      $     41,818
 Short-term investments                                                  13,153            24,012
 Accounts receivable, net of allowance for doubtful
     accounts of $4,954 and $6,681                                       52,627            66,160
 Inventories, net                                                        70,670            45,065
 Other current assets                                                    12,298            28,407
                                                                   ------------      ------------
     Total current assets                                               172,273           205,462
                                                                   ------------      ------------
Property and equipment, net                                              37,839            40,269
Intangibles                                                              22,350            12,942
Goodwill                                                                131,288            32,709
Other assets                                                              8,679             4,729
                                                                   ------------      ------------
     Total assets                                                  $    372,429      $    296,111
                                                                   ============      ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
 Short-term debt                                                   $     25,000      $     25,000
 Accounts payable                                                        66,665            60,879
 Accrued liabilities                                                     21,630            20,385
 Current portion of long-term liabilities                                 1,311               732
 Deferred revenue                                                         9,075                --
                                                                   ------------      ------------
     Total current liabilities                                          123,681           106,996
                                                                   ------------      ------------
Long-Term Liabilities:                                                      879             1,881
                                                                   ------------      ------------
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; 39,362,406 and 24,442,370 shares issued and
     outstanding                                                        435,506           251,883
 Warrants                                                                   242               242
 Deferred compensation                                                   (6,876)             (172)
 Note receivable                                                            (80)               --
 Unrealized gain (loss) on equity securities                             (1,433)            1,844
 Accumulated deficit                                                   (179,490)          (66,563)
                                                                   ------------      ------------
 Total shareholders' equity                                             247,869           187,234
                                                                   ------------      ------------
     Total liabilities and shareholders' equity                    $    372,429      $    296,111
                                                                   ============      ============
</TABLE>

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



                                       1
<PAGE>   4

                     3DFX INTERACTIVE, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                Three Months                        Six Months
                                                                   Ended                               Ended
                                                                  July 31,                            July 31,
                                                           2000              1999              2000              1999
                                                       ------------      ------------      ------------      ------------
<S>                                                    <C>               <C>               <C>               <C>
Net sales                                              $     66,989      $    104,836      $    175,567      $    145,280
Cost of sales                                                56,800            76,308           138,967           102,498
                                                       ------------      ------------      ------------      ------------
Gross profit                                                 10,189            28,528            36,600            42,782
                                                       ------------      ------------      ------------      ------------
Operating expenses:
  Research and development                                   19,195            16,577            35,752            28,333
  Sales, general and administrative                          16,532            19,006            35,657            25,626
  In-process research and development                        66,250             4,302            66,250             4,302
  Goodwill and intangibles amortization                       4,495             2,974             8,325             2,974
                                                       ------------      ------------      ------------      ------------
Total operating expenses                                    106,472            42,859           145,984            61,235
                                                       ------------      ------------      ------------      ------------

Loss from operations                                        (96,283)          (14,331)         (109,384)          (18,453)
Interest and other income (expense), net                       (436)              685              (481)            1,596
                                                       ------------      ------------      ------------      ------------
Loss before income taxes                                    (96,719)          (13,646)         (109,865)          (16,857)
Provision (benefit) for income taxes                          3,777            (2,047)            3,062            (3,074)
                                                       ------------      ------------      ------------      ------------
Net loss                                               $   (100,496)     $    (11,599)     $   (112,927)     $    (13,783)
                                                       ============      ============      ============      ============

Net loss per share:
  Basic and diluted                                    $      (3.81)     $      (0.50)     $      (4.44)     $      (0.71)

Shares used in net loss per share calculations:
  Basic and diluted                                          26,350            23,296            25,430            19,533
</TABLE>

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

                                       2
<PAGE>   5

                     3DFX INTERACTIVE, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (In thousands, except per share data)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                                            JULY 31,
                                                                      2000            1999
                                                                   ----------      ----------
<S>                                                                <C>             <C>
Cash flows from operating activities:
 Net loss                                                          ($ 112,927)     ($  13,783)
Adjustments to reconcile net income to net cash
from operating activities:
   Depreciation                                                        12,791           5,289
   Amortization                                                         8,325           2,974
   Stock compensation                                                     363             242
   Write-off of acquired in-process research and development           66,250           4,302
   Increase (decrease) in allowance for doubtful accounts              (1,728)          2,653
   Changes in assets and liabilities:
    Accounts receivable                                                17,561           8,710
    Inventories                                                       (25,605)         (2,191)
    Other assets                                                        7,020          (2,239)
    Accounts payable                                                    5,574          (3,379)
    Accrued and other long-term liabilities                            (4,343)         (8,381)
      Deferred revenue                                                   (355)             --
                                                                   ----------      ----------
     Net cash used in operating activities                            (27,074)         (5,803)
                                                                   ----------      ----------
Cash flows from investing activities:
  Sales (purchases) of short-term investments                          10,859           3,685
  Purchases of property and equipment                                  (9,200)        (19,391)
  Merger with STB Systems, Inc.                                            --          (7,226)
  Merger with GigaPixel Corporation                                     5,319              --
                                                                   ----------      ----------
    Net cash provided by (used in) investing activities                 6,978         (22,932)
                                                                   ----------      ----------
Cash flows from financing activities:
  Proceeds from issuance (repurchase) of common stock, net              2,226          (2,520)
  Principal payments of capitalized lease obligations, net               (423)           (417)
  Proceeds (payments) on line of credit, net                               --          (2,143)
                                                                   ----------      ----------
    Net cash provided by financing activities                           1,803          (5,080)
                                                                   ----------      ----------
Net increase (decrease) in cash and cash equivalents                  (18,293)        (33,815)
                                                                   ----------      ----------
Cash and cash equivalents at beginning of period                       41,818         103,594
                                                                   ----------      ----------
Cash and cash equivalents at end of period                         $   23,525      $   69,779
                                                                   ==========      ==========
</TABLE>

Supplemental disclosure of non-cash information:

 - Unrealized gain (loss) on equity securities available-for-sale was ($2,173)
   for the six months ended July 31, 2000.

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



                                       3
<PAGE>   6

                             3DFX INTERACTIVE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:

3dfx Interactive, Inc. (the "Company" or "3dfx") was incorporated in California
on August 24, 1994. The Company is engaged in the design, development, marketing
and support of 3D and 2D media processors, subsystems and API software for the
interactive electronic entertainment market.

The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information or footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
information included therein. While the Company believes that the disclosures
are adequate to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the audited financial
statements and accompanying notes included in the Company's Annual Report on
Form 10-K, as amended, for the fiscal year ended January 31, 2000 as filed with
the Securities and Exchange Commission.

One customer represented 19% of the Company's revenues for the three
months ended July 31, 2000, and one customer represented 18% of the Company's
revenues for the three months ended July 31, 1999. Two customers represented
more than 10% of the Company's revenues during the first six months of fiscal
2001, one customer represented 22% and the other 12% of total revenues for the
period. One customer represented 15% of the Company's revenues during the first
six months of fiscal 2000.

On July 21, 2000, 3dfx acquired GigaPixel Corporation ("GigaPixel"). Please
refer to Note 4 of these financial statements. In February 2000, GigaPixel
entered into a development agreement with Microsoft to develop a highly advanced
graphics chip. In March 2000, GigaPixel and Microsoft entered into a release
agreement under which Microsoft paid to GigaPixel the up-front development fees
of $14.0 million as provided by the development agreement. The release agreement
severs the proprietary development relationship between the companies and
provides that GigaPixel will use its best efforts to deliver by June 2001, a
non-proprietary sample of a product similar to the originally specified design.
At the time of the merger, GigaPixel had deferred revenue of approximately $9.1
million related to the deliverable called for in the agreement. At that time,
this deliverable was significantly far from being completed. As a result of the
GigaPixel merger, 3dfx is recognizing revenue ratably through June 2001.

Recent accounting pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities".
SFAS 133, as amended, requires that all derivative instruments be recorded on
the balance sheet at their fair market value. Changes in the fair market value
of derivatives are recorded each period in current earnings or comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction, and if so, the type of hedge transaction. Substantially all of
3dfx's revenues and the majority of its costs are denominated in U.S. dollars,
and to date 3dfx has not entered into any derivative contracts. 3dfx does not
expect that the adoption of SFAS 133 will have a material effect on its
financial statements. The effective date of SFAS 133, as amended, is for fiscal
quarters of fiscal years beginning after June 15, 2000.

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company believes the
application of SAB No. 101 will not have a material impact on 3dfx's financial
statements.



                                       4
<PAGE>   7

In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25. This interpretation clarifies the
definition of employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This interpretation is effective July 1, 2000. We
apply the provisions of APB Opinion 25 in accounting for our stock based
compensation and will apply the guidance in Interpretation No. 44 following its
effective date.

NOTE 2 - INVENTORY:

<TABLE>
<CAPTION>
                                     July 31,        January 31,
                                       2000             2000
                                   ------------     ------------

<S>                                <C>              <C>
Raw materials                      $     31,473     $     26,708
Work in-process                          16,309            8,940
Finished goods                           22,888            9,417
                                   ------------     ------------
     Total inventory               $     70,670     $     45,065
                                   ============     ============
</TABLE>

NOTE 3 - ACQUISITION OF STB SYSTEMS, INC:

In May 1999, 3dfx completed a merger with STB Systems, Inc. ("STB merger"). As a
result of the merger, STB is now a wholly-owned subsidiary of 3dfx. The STB
merger was accounted for under the purchase method of accounting. The purchase
price of $139.3 million included $116.1 million of stock issued at fair value
(fair value being determined as the average price of the 3dfx stock for a period
of a few days before and after the announcement of the merger), $9.9 million in
STB stock option costs (being determined under the Black Sholes formula) and
$13.3 million in estimated expenses of the transaction. The purchase price was
allocated as follows: $85.6 million to the estimated fair value of STB net
tangible assets purchased (as of May 13, 1999), ($7.6) million to establish
deferred tax liabilities associated with the certain intangibles acquired, $4.3
million to purchased in-process research and development, $11.4 million to
purchased existing technology, $4.4 million to trademarks, $2.3 million to
workforce-in-place, $1.0 million to executive covenants and $37.9 million to
goodwill. The allocation of the purchase price to intangibles was based upon an
independent, third party appraisal and management's estimates.

The intangible assets and goodwill acquired have estimated and useful lives and
estimated first year amortization, as follows:

<TABLE>
<CAPTION>
                                                           Estimated       Fiscal 2001
                                           Amount         Useful Life     Amortization
                                        ------------      -----------     ------------
<S>                                     <C>               <C>             <C>
Purchased existing technology:
      1.5 year life                     $  6,475,000        1.5 years     $  3,418,000
      3 year life                          4,966,000          3 years        1,655,000
Trademarks                                 4,406,000          5 years          881,000
Workforce-in-place                         2,250,000          5 years          450,000
Executive covenants                        1,000,000          5 years          200,000
Goodwill                                  37,500,000          5 years        7,816,000
</TABLE>

The value assigned to purchased in-process research and development ("IPR&D")
was determined by identifying research projects in areas for which technological
feasibility had not been established. These include projects for Voodoo3 as well
as other specialized technologies totaling $4.3 million. The value was
determined by estimating the expected cash flows from the projects once
commercially viable,



                                       5
<PAGE>   8

discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value as defined below.

Net Cash Flows. The net cash flows from the identified projects are based on our
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, royalty costs and income taxes from those
projects. These estimates are based on the assumptions mentioned below. The
research and development costs included in the model reflect costs to sustain
projects, but exclude costs to bring in-process projects to technological
feasibility.

Revenues. The estimated revenues are based on management projections of each
in-process project and these business projections were compared and found to be
in line with industry analysts' forecasts of growth in substantially all of the
relevant markets. Estimated total revenues from the IPR&D product areas are
expected to peak in the year ending December 31, 1999 and decline from 2000 into
2001 as other new products are expected to become available. These projections
are based on our estimates of market size and growth, expected trends in
technology and the nature and expected timing of new project introductions by
our competitors and us.

Gross Margins. Projected gross margins associated with the identified projects
approximate STB's recent historical performance and are in line with comparable
industry margins. The estimated selling, general and administrative costs are
consistent with STB's historical cost structure, which is in line with industry
averages at approximately 10% of revenues. Research and development costs are
consistent with STB's historical cost structure.

Royalty rate. The Company applied a royalty charge of 25% of operating income
for each in-process project to attribute value for dependency on predecessor
core technologies.

Discount rate. Discounting the net cash flows back to their present value is
based on the industry weighted average cost of capital ("WACC"). The industry
WACC is approximately 14%. The discount rate used in discounting the net cash
flows from IPR&D is 20%, a 600 basis point increase from the industry WACC. This
discount rate is higher than the industry WACC due to inherent uncertainties
surrounding the successful development of the IPR&D, market acceptance of the
technology, the useful life of such technology and the uncertainty of
technological advances which could potentially impact the estimates described
above.

Percentage of completion. The percentage of completion for each project was
determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project to
technological feasibility. The percentage of completion varied by individual
project ranging from 50% to 91%. If the projects discussed above are not
successfully developed, the sales and profitability of the combined company may
be adversely affected in future periods.

Pro forma results of operations for the combined company as if the transaction
had been consummated at the beginning of the period presented are as follows:

<TABLE>
<CAPTION>
                                                 Three Months      Six Months
                                                    Ended             Ended
                                                July 31, 1999     July 31, 1999
                                                -------------     -------------
<S>                                              <C>               <C>
Revenues                                         $    114,175      $    226,068
Net income (loss)                                $    (12,693)     $    (31,558)
Basic and diluted net (loss) per share           $      (0.54)     $      (1.33)
                                                 ============      ============
</TABLE>

On a combined basis, there were no material transactions between the Company and
STB during the periods presented except for sales of product by the Company to
STB which have been eliminated.



                                       6
<PAGE>   9

NOTE 4 - ACQUISITION OF GIGAPIXEL CORPORATION:

In July 2000, 3dfx completed a merger with GigaPixel Corporation, a Delaware
corporation ("GigaPixel"). As a result of the merger, GigaPixel became a
wholly-owned subsidiary of 3dfx. The merger was accounted for under the purchase
method of accounting. The purchase price of GigaPixel was approximately $181.3
million and included $173.9 million of stock issued at fair value (fair value
being determined as the average price of the 3dfx stock for a period of a few
days before and after the announcement of the merger), $2.7 million in GigaPixel
stock option costs (being determined under the Black Sholes formula) and $4.7
million in estimated expenses of the transaction. The purchase price was
allocated as follows: $3.6 million to the estimated fair value of GigaPixel net
tangible assets purchased (as of July 21, 2000), $66.3 million to purchased
in-process research and development, $10.8 million to purchased existing
technology, $2.4 million to workforce-in-place, ($5.3) million to deferred tax
liabilities associated with certain intangibles acquired, and $103.5 million to
goodwill. The allocation of the purchase price to intangibles was based upon an
independent, third party appraisal and management's estimates.

The intangible assets and goodwill acquired have estimated and useful lives and
estimated first year amortization, as follows:

<TABLE>
<CAPTION>
                                                        Estimated        Fiscal 2002
                                         Amount        Useful Life      Amortization
                                      ------------     ------------     ------------
<S>                                   <C>              <C>              <C>
Purchased existing technology         $ 10,830,000          5 years     $  2,166,000
Workforce-in-place                       2,400,000          5 years          480,000
Goodwill                               103,510,000          5 years       20,702,000
</TABLE>

The value assigned to purchased IPR&D was determined by identifying research
projects in areas for which technological feasibility had not been established.
The value was determined by estimating the expected cash flows from the projects
once commercially viable, discounting the net cash flows back to their present
value and then applying a percentage of completion to the calculated value as
defined below.

Net Cash Flows. The net cash flows from the identified projects are based on our
estimates of revenues, research and development costs, selling, general and
administrative costs, royalty costs and income taxes from those projects. These
estimates are based on the assumptions mentioned below. The research and
development costs included in the model reflect costs to sustain projects, but
exclude costs to bring in-process projects to technological feasibility.

Revenues. The estimated revenues are based on management projections of each
in-process project and these business projections were compared and found to be
in line with industry analysts' forecasts of growth in substantially all of the
relevant markets. Estimated total revenues from the IPR&D product areas are
expected to peak in the year ending January 31, 2005 and decline in 2006 as
other new products are expected to become available. These projections are based
on our estimates of market size and growth, expected trends in technology and
the nature and expected timing of new product introductions by GigaPixel and
their competitors.

Gross Margins. Projected gross margins associated with the identified projects
are in line with comparable industry margins. Research and development, as well
as sales, general and administrative costs are consistent with industry averages
of companies of comparable size and age.

Discount Rate. Discounting the net cash flows back to their present value is
based on the industry WACC. The industry WACC is approximately 28%. The discount
rate used in discounting the net cash flows from IPR&D is 30%, a 200 basis point
increase from the industry WACC. This discount rate is higher than the industry
WACC due to inherent uncertainties surrounding the successful development of the
IPR&D, market acceptance of the technology, the useful life of such technology
and the uncertainty of technological advances which could potentially impact the
estimates described above.

Percentage of Completion. The percentage of completion for GigaPixel technology
was determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project to
technological



                                       7
<PAGE>   10
feasibility. The Company anticipates beginning to ship product incorporating
this technology in the calendar year 2001. The percentage of completion related
to GigaPixel technology was 72. If the projects discussed above are not
successfully developed, the sales and profitability of the Company may be
adversely affected in future periods.

Pro forma results of operations for the combined company as if the transaction
had been consummated at the beginning of the period presented are as follows:

<TABLE>
<CAPTION>
                                               Three Months       Six Months
                                                  Ended             Ended
                                              July 31, 2000     July 31, 2000
                                              -------------     -------------
<S>                                            <C>               <C>
Revenues                                       $     69,634      $    180,212
Net income (loss)                              $    (33,803)     $    (47,061)
Basic and diluted net (loss) per share         $      (0.86)     $      (1.20)
                                               ============      ============
</TABLE>

On a combined basis, there were no material transactions between the Company and
GigaPixel during the periods presented.

In connection with the acquisition of GigaPixel, the Company recorded deferred
compensation in the amount of approximately $6.9 million. The amount of deferred
compensation is based upon the adoption of the Financial Accounting
Standards Board Interpretation No. 44 issued in March 2000, "Accounting for
Certain Transactions Involving Stock Compensation". The amount of deferred
compensation is determined using the Black Sholes formula. This deferred
compensation will be expensed over the remaining life of unvested Gigapixel
options assumed by 3dfx in the acquisition of GigaPixel.

NOTE 5 - NET INCOME (LOSS) PER SHARE:

Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods. Diluted net income (loss) per
share is computed using the weighted average number of common and potentially
dilutive common shares during the periods. Diluted loss per share was the same
as basic loss per share for the three and six months ended July 31, 1999 and the
three and six months ended July 31, 2000. During the quarters ended July 31,
2000 and July 31, 1999, options to purchase approximately 5,516,000 and
2,084,000 shares of common stock, respectively, were outstanding but not
included in the calculation because they were anti-dilutive. For the six months
ended July 31, 2000 and July 31, 1999, options to purchase approximately
2,879,000 and 3,025,000 shares of common stock, respectively, were outstanding
but not included in the calculation because they were anti-dilutive.

NOTE 6 - INCOME TAXES:

The Company recorded income tax benefits of $447,000 and $2.0 million for the
three months ended July 31, 2000 and July 31, 1999, respectively, and $1.2
million and $3.0 million for the six months ended July 31, 2000 and July 31,
1999, respectively. The Company's effective tax rate in fiscal 2001 and 2000
differs from the statutory rate due to non-deductible charges relating to the
acquisition of STB, increase in valuation allowance against the Company's
deferred tax assets, and benefits realized as a result of a net operating loss
carryback to profitable years. The Company believes it is more likely than not
that a portion of its net deferred tax assets will not be realized. Accordingly,
a $4.3 million charge was recorded, reducing the Company's net deferred tax
asset to $10.1 million, representing the tax refunds due the Company.

NOTE 7 - COMPREHENSIVE INCOME:

Other comprehensive income (loss) for the three months ended July 31, 2000 was
an unrealized loss of ($651,000), representing a loss from investing activities,
resulting in total comprehensive income (loss) of ($100.1) million. Other
comprehensive income (loss) for the six months ended July 31, 2000 was an
unrealized loss of ($3.3) million, representing a loss from investing
activities, resulting in total comprehensive income (loss) of ($116.2) million.
Comprehensive income (loss) for the three and six months ended July 31, 1999 was
not materially different form net income (loss).


                                       8

<PAGE>   11

NOTE 8 - SHORT-TERM DEBT:

3dfx 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
or $25.0 million. Borrowings under the line are secured by $25.0 million of
restricted cash and short-term investments and all of 3dfx's owned assets and
bear interest at Libor plus 100 basis points (7.62% as of July 31, 2000). The
agreement requires that 3dfx maintain certain levels of tangible net worth and
generally prohibits 3dfx from paying cash dividends. The line of credit expires
on December 19, 2000. At July 31, 2000, $25.0 million was outstanding under this
line of credit.

The Company is in the process of negotiating with a new lender for a $30.0
million revolving credit facility, which will be based upon the level of
eligible accounts receivable of the Company. Upon consummation of this
financing, the Company intends to payoff the previous Revolving Credit Facility
and the Term Loan with the previous lender. The $25.0 million cash and
short-term investments previously pledged to secure the Revolving Credit
Facility will be used to fund the payoff.

ITEM 2. 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 within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Any statements contained in this document, including
without limitation statements to the effect that 3dfx or its management
"believes," "expects," "anticipates," "plans," "may," "will," "projects,"
"continues," or "estimates," or statements concerning "potential," or
"opportunity" or other variations thereof or comparable terminology or the
negative thereof, that are not statements of historical fact should be
considered forward-looking statements. These forward-looking statements are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth below
under "Risk Factors".

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 derives revenue from the sale of 3D and 3D/2D
media processors and graphics boards designed for use in PCs. The Company began
commercial shipments of its first 3D graphics product, the Voodoo Graphics
chipset, in September 1996 and introduced subsequent media processors in 1997,
1998 and 1999. In 1999, the Company broadened its product offerings to include
board-level products. The Company commenced shipping significant quantities of
its new Voodoo5 products in June 2000.

The Company's sales have historically been concentrated among a limited number
of customers. Revenues derived from sales to D&H Distribution and Ingram Micro
accounted for approximately 19% and 18% of revenues, respectively, for the
quarter ended July 31, 2000. For the six months ended July 31, 2000, D&H
Distribution and Ingram Micro accounted for approximately 12% and 21% of
revenues, respectively. The Company expects that a small number of customers
will continue to account for a substantial portion of its total revenues for the
foreseeable future. The loss of any one of these customers could have a material
impact on the Company's results of operations, cash flows, or financial
position. In addition, sales to these customers can fluctuate and could have a
material impact on the Company's revenues and profitability on a quarterly
basis.

The announcement and consummation of the merger between 3dfx and STB in May 1999
caused some of 3dfx's customers to end or curtail their relationships with the
combined company. For example, two of 3dfx's former largest customers, Creative
Labs and Diamond Multimedia Systems, Inc., compete directly with 3dfx. Sales to
Diamond and Creative Labs following the merger have been reduced significantly
from prior levels and these customers are no longer customers of the combined
company. To date, the loss



                                       9
<PAGE>   12

of business from former 3dfx customers has not been fully replaced through the
sale of the combined company's own add-in-board level products, which has
negatively impacted the Company's revenues. If other major customers of 3dfx
terminate their relationship with the combined company or sales of the combined
company's add-in boards continue to be less than sales to former 3dfx customers,
the Company's business could be materially harmed.

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 Taiwan Semiconductor Manufacturing Corporation
("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 orders. 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 product 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 by three third party
subcontractors, Advanced Semiconductor Engineering Group ("ASE"), Caesar
Technology, Inc., and Siliconware. All of the Company's products are tested by
ASE. Such assembly and testing is conducted on a purchase order basis rather
than under a long-term agreement. All purchases of wafers and assembly and test
services are denominated in U.S. dollars. The Company is in the process of
developing a relationship with a new manufacturer of wafers.

In connection with the grant of stock options to employees since inception
(August 1994) through the effective date of the Company's initial public
offering, 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. This
amortization resulted in charges to operations of $121,000 in each of the
quarters ended July 31, 2000 and July 31, 1999 (of which $48,000 and $73,000
will be recorded in research and development expenses and selling, general and
administrative expenses, respectively). The Company recorded amortization of
deferred compensation of $242,000 for the six months ended July 31, 2000 and
July 31, 1999, of which $96,000 was charged to research and development expense
and $146,000 was charged to selling, general and administrative expense. As of
July 31, 2000, there was no remaining deferred compensation relating to these
stock options.

OVERVIEW OF GIGAPIXEL MERGER AND TREATMENT OF IPR&D

In July 2000, 3dfx completed a merger with GigaPixel Corporation, a Delaware
Corporation. As a result of the merger, GigaPixel became a wholly-owned
subsidiary of 3dfx. The merger was accounted for under the purchase method of
accounting. The purchase price of GigaPixel was approximately $181.3 million and
included $173.9 million of stock issued at fair value (fair value being
determined as the average price of the 3dfx stock for a period of five days
before and after the announcement of the merger), $2.7 million in GigaPixel
stock option costs (being determined under the Black Sholes formula) and $4.7
million in estimated expenses of the transaction. The purchase price was
allocated as follows: $3.6 million to the estimated fair value of GigaPixel net
tangible assets purchased (as of July 21, 2000), $66.3 million to purchased
in-process research and development, $10.8 million to purchased existing



                                       10
<PAGE>   13

technology, $2.4 million to workforce-in-place, ($5.3) million to deferred tax
liabilities, and $103.5 million to goodwill. The allocation of the purchase
price to intangibles was based upon an independent, third party appraisal and
management's estimates.

The intangible assets and goodwill acquired have estimated and useful lives and
estimated first year amortization, as follows:

<TABLE>
<CAPTION>
                                                          Estimated        Fiscal 2002
                                           Amount        Useful Life      Amortization
                                        ------------     ------------     ------------
<S>                                     <C>              <C>              <C>
Purchased existing technology:          $ 10,830,000          5 years     $  2,166,000
Workforce-in-place                         2,400,000          5 years          480,000
Goodwill                                 103,510,000          5 years       20,702,000
</TABLE>

The value assigned to purchased IPR&D was determined by identifying research
projects in areas for which technological feasibility had not been established.
The value was determined by estimating the expected cash flows from the projects
once commercially viable, discounting the net cash flows back to their present
value and then applying a percentage of completion to the calculated value as
defined below.

Net Cash Flows. The net cash flows from the identified projects are based on our
estimates of revenues, research and development costs, selling, general and
administrative costs, royalty costs and income taxes from those projects. These
estimates are based on the assumptions mentioned below. The research and
development costs included in the model reflect costs to sustain projects, but
exclude costs to bring in-process projects to technological feasibility.

Revenues. The estimated revenues are based on management projections of each
in-process project and these business projections were compared and found to be
in line with industry analysts' forecasts of growth in substantially all of the
relevant markets. Estimated total revenues from the IPR&D product areas are
expected to peak in the year ending January 31, 2005 and decline in 2006 as
other new products are expected to become available. These projections are based
on our estimates of market size and growth, expected trends in technology and
the nature and expected timing of new product introductions by GigaPixel and
their competitors.

Gross Margin. Projected gross margins associated with the identified projects
are in line with comparable industry margins. Research and development, as well
as sales, general and administrative costs are consistent with industry average
of companies of comparable size and age.

Discount Rate. Discounting the net cash flows back to their present value is
based on the industry WACC. The industry WACC is approximately 28%. The discount
rate used in discounting the net cash flows from IPR&D is 30%, a 200 basis point
increase from the industry WACC. This discount rate is higher than the industry
WACC due to inherent uncertainties surrounding the successful development of the
IPR&D, market acceptance of the technology, the useful life of such technology
and the uncertainty of technological advances which could potentially impact the
estimates described above.

Percentage of Completion. The percentage of completion for GigaPixel technology
was determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project to
technological feasibility. The percentage of completion related to GigaPixel
technology was 72. If the projects discussed above are not successfully
developed, the sales and profitability of the combined company may be adversely
affected in future periods.

In connection with the acquisition of GigaPixel, the Company recorded deferred
compensation in the amount of approximately $6.9 million. The amount of deferred
compensation is based upon the adoption of the Financial Accounting Standards
Board Interpretation No. 44 issued in March 2000, "Accounting for Certain
Transactions Involving Stock Compensation". The amount of deferred compensation
is determined using the Black Sholes formula. This deferred compensation will be
expensed over the remaining life of unvested Gigapixel options assumed by 3dfx
in the acquisition of GigaPixel.

OVERVIEW OF STB MERGER AND TREATMENT OF IPR&D

In May 1999, 3dfx completed a merger with STB Systems, Inc. As a result of the
STB merger, STB is now a wholly-owned subsidiary of 3dfx. The STB merger was
accounted for under the purchase method of accounting. The purchase price of
$139.3 million included $116.1 million of stock issued at fair value (fair value
being determined as the average price of the 3dfx stock for a period three days
before and after the announcement of the merger), $9.9 million in STB stock
option costs (being determined under both the Black Sholes formula and in
accordance with the merger agreement) and $13.3 million in estimated expenses of
the transaction. The purchase price was



                                       11
<PAGE>   14

allocated as follows: $85.6 million to the estimated fair value of STB net
tangible assets purchased (as of May 13, 1999), ($7.6) million to establish
deferred tax liabilities associated with the certain intangibles acquired, $4.3
million to purchased in-process research and development, $11.4 million to
purchased existing technology, $4.4 million to trademarks, $2.3 million to
workforce-in-place, $1.0 million to executive covenants and $37.9 million to
goodwill. The allocation of the purchase price to intangibles was based upon an
independent, third party appraisal and management's estimates.

The intangible assets and goodwill acquired have estimated and useful lives and
estimated first year amortization, as follows:

<TABLE>
<CAPTION>
                                                          Estimated        Fiscal 2001
                                           Amount        Useful Life      Amortization
                                        ------------     ------------     ------------
<S>                                     <C>              <C>              <C>
Purchased existing technology:
       1.5 year life                    $  6,475,000        1.5 years     $  3,418,000
       3 year life                         4,966,000          3 years        1,655,000
Trademarks                                 4,406,000          5 years          881,000
Workforce-in-place                         2,250,000          5 years          450,000
Executive covenants                        1,000,000          5 years          200,000
Goodwill                                  37,500,000          5 years        7,816,000
</TABLE>

The value assigned to purchased IPR&D was determined by identifying research
projects in areas for which technological feasibility had not been established.
These include projects for Voodoo3 as well as other specialized technologies
totaling $4.3 million. The value was determined by estimating the expected cash
flows from the projects once commercially viable, discounting the net cash flows
back to their present value and then applying a percentage of completion to the
calculated value as defined below.

Net Cash Flows. The net cash flows from the identified projects are based on our
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, royalty costs and income taxes from those
projects. These estimates are based on the assumptions mentioned below. The
research and development costs included in the model reflect costs to sustain
projects, but exclude costs to bring in-process projects to technological
feasibility.

Revenues. The estimated revenues are based on management projections of each
in-process project and the business projections were compared and found to be in
line with industry analysts' forecasts of growth in substantially all of the
relevant markets. Estimated total revenues from the IPR&D product areas are
expected to peak in the year ending December 31, 1999 and decline from 2000 into
2001 as other new products are expected to become available. These projections
are based on our estimates of market size and growth, expected trends in
technology and the nature and expected timing of new project introductions by
our competitors and us.

Gross Margins. Projected gross margins associated with the identified projects
approximate STB's recent historical performance and are in line with comparable
industry margins. The estimated selling, general and administrative costs are
consistent with STB's historical cost structure, which is in line with industry
averages at approximately 10% of revenues. Research and development costs are
consistent with STB's historical cost structure.

Royalty Rate. The Company applied a royalty charge of 25% of operating income
for each in-process project to attribute value for dependency on predecessor
core technologies.

Discount Rate. Discounting the net cash flows back to their present value is
based on the industry WACC. The industry WACC is approximately 14%. The discount
rate used in discounting the net cash flows from IPR&D is 20%, a 600 basis point
increase from the industry WACC. This discount rate is higher than the industry
WACC due to inherent uncertainties surrounding the successful development of the
IPR&D, market acceptance



                                       12
<PAGE>   15

of the technology, the useful life of such technology and the uncertainty of
technological advances which could potentially impact the estimates described
above.

Percentage of Completion. The percentage of completion for each project was
determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project to
technological feasibility. The percentage of completion varied by individual
project ranging from 50% to 91%. If the projects discussed above are not
successfully developed, the sales and profitability of the combined company may
be adversely affected in future periods.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2000 AND JULY 31, 1999

Revenues. Revenues are recognized upon product shipment. The Company's total
revenues were $67.0 million in the three months ended July 31, 2000, a decrease
of 36.1%, or $37.8 million from revenues of $104.8 million in the three months
ended July 31, 1999. The decrease was primarily attributable to delays in the
launch of the Voodoo5 product line, component shortages and pricing pressure in
the retail and commercial channel on the Voodoo3 products. As a result of the
delays, the Company was only able to recognize significant revenues from the
Voodoo5 product line in the second half of the quarter. Revenues for the three
months ended July 31, 2000 were derived from sales of the Company's Voodoo3 and
Voodoo5 products. Substantially all of the revenues in the three months ended
July 31, 1999 were attributable to sales of the Company's Voodoo3 products.

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 and the procurement of semiconductors from the Company's contract
manufacturers, labor and overhead associated with such procurement, board
assembly and warehousing, shipping and warranty costs. The Company's gross
profit decreased by $18.3 million from $28.5 million in the three months ended
July 31, 1999 to $10.2 million in the three months ended July 31, 2000. Gross
profit as a percentage of revenues was 15.2% and 27.2% in the three months ended
July 31, 2000 and July 31, 1999, respectively. The decrease can primarily be
attributed to lower margins associated with pricing pressure in the retail and
commercial channel on the Voodoo3 products sold in the three months ended July
31, 2000. In addition, lower unit volumes resulted in increased overhead applied
on a per unit basis, resulting in decreased overall gross profit margin. 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 and production 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.
Research and development expenses increased 15.7% from $16.6 million in the
three months ended July 31, 1999 to $19.2 million in the three months ended July
31, 2000. This increase reflects an increase in personnel costs, common cost
allocations and engineering costs resulting from the development of Voodoo5 and
other future products. In addition, the Company recorded a onetime charge for
the write-down of certain purchased software in the amount of $1.9 million. The
Company expects to continue to make substantial investments in research and
development and anticipates that research and development expenses will increase
in absolute dollars in future periods, although such expenses as a percentage of
total revenues will fluctuate.

Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses decreased 13.2% from $19.0 million
in the three months ended July 31, 1999 to $16.5 million in the three months
ended July 31, 2000. The



                                       13
<PAGE>   16

decrease is primarily attributable to decreases in marketing costs, advertising
and Co-Op advertising associated with the commercial channel. 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.

Goodwill and Other Intangibles Amortization. In connection with the STB merger
and the GigaPixel merger, the latter of which was consummated in July 2000, the
Company recorded assets representing goodwill of $37.9 million and $103.5
million, respectively, and intangibles of $19.1 million and $13.2 million,
respectively. These amounts will be amortized ratably over the amortization
periods of the applicable assets. The Company recorded amortization expense in
the amount of $4.5 million for the three months ended July 31, 2000, and $3.0
million for the three months ended July 31, 1999.

Interest and Other Income (Expense), Net. Interest and other income (expense),
net decreased from income of $685,000 in the three months ended July 31, 1999 to
a net expense of $436,000 in the three months ended July 31, 2000. The decrease
is related to decreased earnings from lower invested cash balances and higher
interest expense on the outstanding equipment line of credit, capital lease
balances and the revolving credit facility. In addition, the Company recorded an
expense related to the settlement of a lawsuit.

Provision (Benefit) For Income Taxes. The Company recorded income tax benefits
of $447,000 and $2.0 million for the three months ended July 31, 2000 and July
31, 1999, respectively. The Company's effective tax rate in fiscal 2001 and 2000
differs from the statutory rate due to non-deductible charges relating to the
acquisition of STB, increase in valuation allowance against the Company's
deferred tax assets and benefits realized as a result of a net operating loss
carryback to profitable years. Management believes it is more likely than not
that a portion of its net deferred tax assets will not be realized. Accordingly,
a $4.3 million charge was recorded reducing the Company's net deferred tax asset
to $10.1 million, representing the tax refunds due the Company. At January 31,
2000, 3dfx had net operating loss carryforwards of $22.5 million and $32.2
million for federal and state purposes, respectively. At January 31, 2000, 3dfx
had research and development credit carryforwards of approximately $1.5 million
and $1.0 million for federal and California purposes, 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. Due to the completion of 3dfx's initial public offering in June
1997, the acquisition of STB Systems, Inc. and the merger with GigaPixel
Corporation, certain annual limitations will apply which will limit the amount
of net operating losses that may be utilized on an annual basis.

SIX MONTHS ENDED JULY 31, 2000 AND JULY 31, 1999

Revenues. Revenues are recognized upon product shipment. The Company's total
revenues were $175.6 million in the six months ended July 31, 2000, an increase
of $30.3 million over revenues of $145.3 million in the six months ended July
31, 1999. The increase was primarily attributable to revenues generated from
board-level sales incorporating Voodoo technology throughout the period.
Revenues for the six months ended July 31, 1999 include board level sales from
May 13, 1999 through the end of the quarter; however, prior to the STB merger,
substantially all of the revenues were comprised of chip level sales, which are
priced significantly less on a per unit basis. Substantially all of the revenues
in the six months ended July 31, 2000 were attributable to sales of the
Company's Voodoo3 products. Revenues in the six months ended July 31, 1999 were
derived in part from the sale of the Company's Voodoo Banshee, the Voodoo2
chipsets and the Voodoo3 chip. In addition, subsequent to May 13, 1999, the
effective date of the STB merger, sales of board level products contributed to a
substantial amount of revenues for the period.



                                       14
<PAGE>   17

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 and the procurement of semiconductors from the Company's contract
manufacturers, labor and overhead associated with such procurement, board
assembly and warehousing, shipping and warranty costs. The Company's gross
profit decreased by $6.2 million from $42.8 million in the six months ended July
31, 1999 to $36.6 million in the six months ended July 31, 2000. Gross profit as
a percentage of revenues was 20.8% and 29.4% in the six months ended July 31,
2000 and July 31, 1999, respectively. The decrease can primarily be attributed
to the gross profit generated from sales of board-level products, which have
lower margins as compared with the margins on chip-only products. In addition,
the decrease in gross profit as a percentage of revenues resulted from lower
margins associated with pricing pressure in the retail and commercial channel on
the Voodoo3 products sold in the six months ended July 31, 2000. Decreased unit
volumes of products for the six months ended July 31, 2000 also had a negative
impact on gross margin. 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 and production
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.
Research and development expenses increased 26.1% from $28.3 million in the six
months ended July 31, 1999 to $35.7 million in the six months ended July 31,
2000. This increase is due in part to research and development expenses
attributable to the operations of STB, which are included in the total research
and development expenses for the entire six months ended July 31, 2000, but only
for a portion of the six-month period ended July 31, 1999. In addition, this
increase reflects an increase in personnel costs, common cost allocations and
engineering costs resulting from the development of Voodoo5 and other future
products, as well as a onetime write-down of certain purchased software in the
amount of $1.9 million. The Company expects to continue to make substantial
investments in research and development and anticipates that research and
development expenses will increase in absolute dollars in future periods,
although such expenses as a percentage of total revenues will fluctuate.

Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 39.4% from $25.6 million
in the six months ended July 31, 1999 to $35.7 million in the six months ended
July 31, 2000. The selling, general and administrative expenses relating to the
operations of STB, are included in total in the six months ended July 31, 2000,
and from the effective date of the merger, May 13, 1999 through July 31, 1999.
In addition, marketing costs associated with the Voodoo5 product family launch
and increased legal costs contributed to the increase in selling, general and
administrative. 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.

Goodwill and Other Intangibles Amortization. In connection with the STB merger,
the Company recorded assets representing goodwill of approximately $37.9 million
and intangibles of approximately $19.1 million. Additionally, the Company
recorded goodwill of approximately $103.5 million and intangibles of $13.2
million in connection with the GigaPixel merger, consummated on July 21, 2000.
These amounts will be amortized ratably over the amortization periods of the
applicable assets. The Company recorded $8.3 million and $3.0 million in related
amortization for the six months ended July 31, 2000 and the six months ended
July 31, 1999, respectively.

Interest and Other Income (Expense), Net. Interest and other income (expense),
net decreased from income of $1.6 million in the six months ended July 31, 1999
to a net expense of $481,000 in the six months ended July 31, 2000. The decrease
is primarily



                                       15
<PAGE>   18
related to decreased earnings from lower invested cash balances and higher
interest expense on the outstanding equipment line of credit, capital lease
balances and the revolving credit facility. In addition, the Company recorded an
expense related to the settlement of a lawsuit.

Provision (Benefit) For Income Taxes. The Company recorded income tax benefits
of $1.2 million and $3.0 million for the six months ended July 31, 2000 and July
31, 1999, respectively. The Company's effective tax rate in fiscal 2001 and 2000
differs from the statutory rate due to non-deductible charges relating to the
acquisition of STB, increase in valuation allowance against the Company's
deferred tax assets and benefits realized as a result of a net operating loss
carryback to profitable years. Management believes it is more likely than not
that a portion of its net deferred tax assets will not be realized. Accordingly,
a $4.3 million charge was recorded reducing the Company's net deferred tax asset
to $10.1 million, representing tax refunds due the Company. At January 31, 2000,
3dfx had net operating loss carryforwards of $22.5 million and $32.2 million for
federal and state purposes, respectively. At January 31, 2000, 3dfx had research
and development credit carryforwards of approximately $1.5 million and $1.0
million for federal and California purposes, 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. Due to the completion of 3dfx's initial public offering in June
1997, the acquisition of STB Systems, Inc. and the proposed merger with
GigaPixel Corporation, certain annual limitations will apply which will limit
the amount of net operating losses that may be utilized on an annual basis.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2000, the Company had working capital of $48.6 million including
cash, cash equivalents and short-term investments of $36.7 million. Net cash
used in operating activities in the first six months of fiscal 2001 was due
primarily to a net loss of $112.9 million, and increases of $25.6 million in
inventory, partially offset by the immediate write-off of acquired in-process
research and development of $66.3 million, adjustments of depreciation of $12.8
million and amortization of $8.3 million, as well as decreases in accounts
receivable and other assets of $17.6 million and $7.0 million, respectively. Net
cash used in operating activities for the six months ended July 31, 1999 of $5.8
million was due primarily to a net loss of $13.8 million, and decreases of $8.4
million in accrued liabilities and $3.4 million in accounts payable, partially
offset by a decrease of $8.7 million in accounts receivable, adjustments to
depreciation of $5.3 million and amortization of $3.0 million, and the write-off
of in-process research and development of $4.3 million.

Net cash provided by investing activities in the first six months ended July 31,
2000 was approximately $7.0 million due to maturities of short-term investments,
and proceeds from the GigaPixel merger, partially offset by purchases of
property and equipment of $9.2 million. Net cash used in investing activities in
the six months ended July 31, 1999 was primarily due to purchases of property
and equipment of $19.4 million and $7.2 million used in the merger of STB
Systems. The Company does not have any significant capital spending or purchase
commitments other than normal purchase commitments and commitments under leases.
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 for the six months ended July 31, 2000
of $1.8 million was due to the net proceeds from the issuance of common stock of
$2.2 million, partially offset by payments on its capital lease obligations. Net
cash used in financing activities was approximately $5.1 million for the six
months ended July 31, 1999 due primarily to the repurchase of common stock of
$2.5 million and payments on line of credit and capital lease obligations.

3dfx has a $25.0 million revolving credit facility ("Revolving Credit
Facility"), as well as a $3.0 million term loan ("Term Loan"). At July 31, 2000,
$25.0 million was


                                       16
<PAGE>   19
outstanding under the Revolving Credit Facility and $1.6 million was outstanding
under the Term Loan. Principal amounts outstanding under the Revolving Credit
Facility bear interest at LIBOR plus 100 basis points (7.62% at July 31, 2000).
Amounts outstanding under the Term Loan bear interest at LIBOR plus 250 basis
points and are payable in 60 monthly installments of principal and interest
(9.12% at July 31, 2000). Payment of principal and interest began November 1,
1997. Formulas based on eligible accounts receivable determine availability
under the Revolving Credit Facility. 3dfx has pledged $25.0 million of cash and
short term-term investments, as well of 3dfx's owned assets as collateral to
secure the Revolving Credit Facility. All indebtedness under the Revolving
Credit Facility matures on December 19, 2000, and indebtedness under the Term
Loan matures on November 1, 2002 (subject to renewal of the Revolving Credit
Facility through such date).

The Company is in the process of negotiating with a new lender for a $30.0
million revolving credit facility which will be based upon the level of eligible
accounts receivable of the Company. Upon consummation of this financing, the
Company intends to payoff the previous Revolving Credit Facility and the Term
Loan with the previous lender. The $25.0 million cash and short-term investments
previously pledged to secure the Revolving Credit Facility will be used to fund
the payoff. The Company estimates that approximately $24.0 million in cash will
be available to the Company from the new facility following the payoff. Although
the Company has been informed of approval of the facility by the lender's credit
committee, a formal commitment letter has not been received. No assurances can
be given that the new revolving credit facility will be completed between the
Company and such new lender.

3dfx is obligated under a five-year agreement to lease a facility in Richardson,
Texas which was previously the corporate headquarters of STB Systems.
Construction of the 210,000 square foot facility was completed in December 1998.
The total cost of the land and building was approximately $22.8 million. 3dfx
made lease payments of approximately $187,000 per month in fiscal 2000, although
the lease agreement provides that the amount of the lease payments is subject to
adjustment based upon prevailing interest rates. Consequently, an increase in
prevailing interest rates will increase the expense of the facility. 3dfx
previously entered into an interest rate swap agreement that fixes the interest
rate on a majority of the lease obligation at 7.55%. 3dfx does not currently use
a portion of the facility and has subleased substantially all of the unused
space, constituting approximately 50% of the facility space, to third parties
under long term leases expiring in approximately five years. At the end of the
initial five-year lease term, 3dfx has the option to renew the lease for an
additional five years, pay off the underlying debt or cause the building to be
sold. In the event of a sale, the proceeds are to be used to retire the
underlying debt. Any excess will be paid to 3dfx. Any remaining unpaid balance
owing on the underlying obligation after the sale of the facility will be the
responsibility of 3dfx.

3dfx has invested in capital equipment through equipment leases for its
manufacturing facility in Juarez, Mexico. 3dfx's aggregate obligations under all
such equipment lease financing arrangements totaled approximately $4.7 million
at July 31, 2000.

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 its current cash balances and cash generated from operations and
from available or future debt financing, together with capital to be provided
under the new revolving credit facility, will be sufficient to meet the
Company's operating and capital requirements through at least the next twelve
months. 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



                                       17
<PAGE>   20

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 or an equity component.
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.

RISK FACTORS

This Quarterly Report contains certain forward-looking statements within the
meaning of the federal securities laws. 3dfx's actual results and the timing of
certain events could differ greatly from those anticipated in these
forward-looking statements as a result of known and unknown factors, including
the risks faced by 3dfx described below. The risks and uncertainties described
below are not the only ones facing 3dfx. Additional risks and uncertainties not
presently known by 3dfx or that 3dfx does not currently believe are important
may also harm 3dfx's business operations. If any of the following risks actually
occur, 3dfx's business, financial conditions or results of operations could be
seriously harmed.

3DFX'S MERGER WITH GIGAPIXEL POSES A NUMBER OF SIGNIFICANT RISKS TO 3DFX'S
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The merger of GigaPixel with and into a wholly-owned subsidiary of 3dfx,
involves some specific risks, including the following:

         o        3dfx may encounter substantial difficulties and costs
                  integrating the two companies' products, technologies,
                  research and development activities, administration, sales and
                  marketing and other aspects of operations in a timely manner.
                  The difficulties, costs and delays involved in this
                  integration may increase operating costs, cause lower than
                  anticipated financial performance or lead to the loss of
                  customers and employees. The failure to successfully integrate
                  the GigaPixel operations in a timely manner could result in a
                  failure of 3dfx to realize any of the anticipated benefits of
                  the merger and could materially harm the business of the
                  combined company.

         o        Uncertainty in the marketplace or customer concern regarding
                  the impact of the merger on 3dfx could result in customers or
                  potential customers of 3dfx deferring purchasing or licensing
                  decisions until they have had an opportunity to assess that
                  impact, or ceasing to do business with 3dfx altogether, which
                  could harm the business of 3dfx.

         o        Because some GigaPixel customers and licensees compete with
                  3dfx, these customers and licensees may cease to do business,
                  or may reduce the amount of business that they do, with 3dfx,
                  which could cause a decline in the combined company's
                  revenues.

         o        The merger has dramatically increased the number of freely
                  tradeable 3dfx shares and will result in a substantial
                  dilution to current 3dfx shareholders, which could drive down
                  the price of 3dfx common stock. Subject to certain contractual
                  restrictions and relevant securities laws generally applicable
                  to affiliates, all of the shares of 3dfx common stock issued
                  in the merger will be freely tradable in the public market.
                  Actual sales or the perception of the potential for
                  significant sales in the public market of a substantial number
                  of these shares following



                                       18
<PAGE>   21

                  completion of the merger could adversely affect the market
                  price of 3dfx common stock.

         o        GigaPixel has reported net losses in recent historical
                  periods, and if these losses continue, they would adversely
                  affect 3dfx's financial performance and condition. GigaPixel
                  has incurred net losses for both of the years ended December
                  31, 1998 and December 31, 1999. If 3dfx is not successful in
                  reversing the performance of GigaPixel's operations, those
                  business operations would have a negative impact on the
                  overall business of the combined company.

         o        Because of the purchase accounting treatment of the merger,
                  non-cash charges associated with the amortization of goodwill
                  and other intangibles will reduce 3dfx's earnings in the
                  future, which could adversely affect 3dfx's stock price.

         o        3dfx's success following the merger will depend on the
                  retention and integration of key personnel.

         o        There are substantial expenses resulting from the GigaPixel
                  merger.

In addition, there are a number of risks related to the business and operations
of GigaPixel that would affect the operations of 3dfx, including a number of the
same or similar risks faced by 3dfx identified below, as well as a number of
risks specific to GigaPixel, including GigaPixel's limited operating history,
its dependence on a limited number of customers, GigaPixel's inability to
control or influence its licensees' manufacturing, promotion, distribution or
pricing of products incorporating its 3D core technologies and its limited
experience in the set-top box, game console and portable device markets.

3DFX MAY EXPERIENCE UNEXPECTED REVENUE SHORTFALLS AND QUARTERLY VARIATIONS IN
OPERATING RESULTS.

3dfx's quarterly and annual results of operations have varied significantly in
the past and are likely to continue to vary in the future. These variations are
the result of a number of factors, many of which are beyond 3dfx's control.
These factors include:

         o        The ability to successfully develop, introduce and market new
                  or enhanced products.

         o        The ability to introduce and market products in accordance
                  with customer design requirements and design cycles.

         o        Changes in the relative volume of sales of various products
                  with different margins.

         o        Changes in demand for 3dfx's products or for its customers'
                  products.

         o        Gains or losses of significant customers or strategic
                  relationships.

         o        The volume and timing of customer orders.

         o        The availability, pricing and timeliness of delivery of
                  components for 3dfx's products.

         o        The timing of new product announcements or introductions by
                  competitors.

         o        Product obsolescence and the management of product
                  transitions.

         o        Production delays.



                                       19
<PAGE>   22

         o        Decreases in the average selling prices of products.

Any one or more of the factors listed above or other factors could cause 3dfx to
fail to achieve its revenue and profitability expectations. Most of 3dfx's
operating expenses are relatively fixed in the short term. 3dfx may be unable to
rapidly adjust spending to compensate for any unexpected sales shortfall, which
could materially harm quarterly operating results. As a result of the above
factors, 3dfx does not believe that you should rely on period-to-period
comparisons of results of operations as an indication of future performance or
that the results of any one quarter should be viewed as indicative of results to
be expected for a full fiscal year.

3DFX's BUSINESS CHANGES RAPIDLY AND IT MAY NOT HAVE THE RESOURCES TO EFFECTIVELY
MANAGE THESE RAPID CHANGES.

The potential future growth of 3dfx has placed significant demands on its
management as well as on its technical, administrative, operational and
financial resources. As a result, 3dfx may not have sufficient resources to
sustain and effectively manage any additional growth. The expansion of 3dfx's
business to take advantage of new market opportunities will require significant
technical resources, management attention and financial resources. To manage
additional growth 3dfx may be required to:

         o        Expand its engineering, sales, marketing and customer support
                  organizations.

         o        Attract and retain additional qualified personnel.

         o        Expand its physical facilities.

         o        Invest in the development or enhancement of its current
                  products and develop new technologies and products that meet
                  changing industry needs.

         o        Develop systems, procedures or controls to support the
                  expansion of its operations.

An inability on the part of 3dfx to sustain or manage any additional growth
could have a material adverse effect on the business, operating results and
financial condition of 3dfx.

3DFX WILL DEPEND ON ITS ABILITY TO EFFECTIVELY DEVELOP NEW TECHNOLOGIES AND
PRODUCTS TO MEET THE CHANGING INDUSTRY STANDARDS, PRACTICES AND CUSTOMER NEEDS
ASSOCIATED WITH THE RAPIDLY CHANGING AND INTENSELY COMPETITIVE PC AND GRAPHICS
CHIP AND BOARD INDUSTRIES.

3dfx will depend, in part, on its ability to develop leading technologies,
enhance its existing services and develop and introduce new technologies and
products to meet the needs of 3dfx's customers. 3dfx also must continue to meet
the demands of technological advances and emerging industry standards and
practices on a timely and cost-effective basis. Although 3dfx will strive to be
a technological leader, future technology advances may not complement or be
compatible with its products. 3dfx has expended significant resources, primarily
through the acquisition of GigaPixel, to develop non-PC based products. However,
there is no assurance that these non-PC based products will either be accepted
or competitive in the market place, or will be profitable for 3dfx. In addition,
3dfx may be unable to economically and timely incorporate technology changes and
technology advances into its business. 3dfx may be unsuccessful in effectively
using new technologies, adapting its services to emerging industry standards or
developing, introducing and marketing product enhancements or new products. 3dfx
may also experience difficulties that could delay or prevent the successful
development, introduction or marketing of these products. The inability or delay
of 3dfx to develop and introduce new technologies or products or to enhance
existing products or services on a timely and cost-effective basis, or the
failure of new technologies or products to achieve market acceptance, could have
a material adverse effect on its business, operating results and financial
condition.



                                       20
<PAGE>   23

3DFX'S OPERATIONS DEPEND ON THE EXPERIENCE OF KEY PERSONNEL AND ITS ABILITY TO
RETAIN, ATTRACT AND INTEGRATE ITS KEY PERSONNEL.

3dfx's business operations depend on the continued services of its executive
officers and other key personnel. 3dfx may be unable to retain its key personnel
or to attract other qualified personnel. The future operations of 3dfx depend
upon its ability to retain, attract and integrate key management personnel.

In addition, competition for highly-skilled technical personnel is intense in
the industries in which 3dfx operates. 3dfx's shareholders cannot be assured
that 3dfx will be able to successfully identify, attract, hire and retain
highly-skilled technical personnel in a timely and effective manner. Moreover,
competitors may intensify their efforts to recruit highly-skilled technical
personnel currently employed by 3dfx as a result of its merger with GigaPixel.
The loss of services of one or more highly-skilled technical personnel, the
failure to attract and retain other highly-skilled technical personnel or to
recruit new highly-skilled technical personnel could disrupt operations and have
a negative effect on employee productivity and morale of 3dfx.

AS NEARLY ALL OF THE REVENUES OF 3DFX WILL BE DERIVED FROM THE PC AND GRAPHICS
BOARD AND CHIP INDUSTRIES, A DOWNTURN IN ANY ONE OF THESE INDUSTRIES WOULD
LIKELY ADVERSELY AFFECT 3DFX'S BUSINESS.

For the fiscal years ended December 31, 1997, December 31, 1998 and January 31,
2000, 93%, 100% and 100% of 3dfx's revenues were derived from graphics chips and
graphics boards sold for use in PCs. 3dfx expects to continue to derive its
revenues primarily from the sale of products for use in PCs and, in the longer
term, for use in the consumer product markets. These markets are cyclical and
have been characterized by:

         o        Rapid technological change;

         o        Evolving industry standards;

         o        Cyclical and seasonal market patterns;

         o        Frequent new product introductions and short product life
                  cycles;

         o        Significant price competition and price erosion;

         o        Fluctuating inventory levels;

         o        Alternating periods of over-capacity and capacity constraints;

         o        Variations in manufacturing costs and yields; and

         o        Significant expenditures for capital equipment and product
                  development.

The PC market has grown substantially in recent years. However, such growth may
not continue. A decline in PC or semiconductor sales or in the growth rate of
such sales would likely reduce demand for 3dfx'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 forecasted product
transitions. In such cases, the manufacturers may abruptly stop purchasing
additional inventory from suppliers such as 3dfx until the excess inventory has
been used. Such suspension of purchases or any reduction in the demand for PCs
generally, or for particular products that incorporate 3dfx's products, would
materially harm 3dfx's business.

In addition, the PC market has experienced significant economic downturns at
various times in the past, characterized by lower product demand and accelerated
reduction of



                                       21
<PAGE>   24

product prices. In addition, the consumer product market will likely experience
significant volatility as it develops. 3dfx may experience substantial
period-to-period fluctuations in its results of operations due to general
conditions in the semiconductor industry.

BECAUSE 3DFX DEPENDS ON THE RETAIL/DISTRIBUTOR DISTRIBUTION CHANNEL, THE
INABILITY TO ADEQUATELY SUPPORT THE RETAIL/DISTRIBUTOR DISTRIBUTION CHANNEL
WOULD LIKELY HARM 3DFX'S ABILITY TO SELL AND TO MARKET ITS PRODUCTS.

3dfx's products have historically been distributed in the retail/distributor
distribution channel. To access the retail/distributor channel, 3dfx depends on
getting adequate retail shelf space to sell its products. 3dfx has developed a
presence in the retail/distributor distribution channel through its own
marketing efforts, as well as through the significant marketing efforts of a
number of its customers. Although 3dfx successfully penetrated the
retail/distributor distribution channel, there can be no assurances that this
success will continue in the future.

3DFX'S LIMITED EXPERIENCE IN MANAGING AND INTEGRATING ORGANIZATIONS MAY RESULT
IN FUTURE ACQUISITIONS OR JOINT VENTURES BEING DIFFICULT AND DISRUPTIVE.

3dfx regularly evaluates acquisition and joint venture opportunities, and in the
future 3dfx may make acquisitions of other companies or technologies or enter
into joint ventures. 3dfx's merger with GigaPixel is an example of such an
acquisition. These acquisitions or joint ventures may divert the time and
resources of 3dfx's management. Further, 3dfx has limited experience in
integrating newly acquired organizations into its operations. Acquisitions
involve many risks, including:

         o        Difficulty in integrating or otherwise assimilating
                  technologies, products, personnel and operations;

         o        Diversion of management's attention from other business
                  concerns;

         o        Issuance of dilutive equity securities and incurrence of debt
                  or contingent liabilities;

         o        Large write-offs and amortized expenses related to goodwill
                  and other intangible assets;

         o        Loss of key employees of acquired organizations;

         o        Risks of entering markets in which 3dfx has no or limited
                  prior experience; and

         o        Payments of cash, incurrence of debt or assumption of other
                  liabilities to acquire other businesses.

The result of one or more of these factors could have a material adverse effect
on the business, operating results and financial condition of 3dfx.



                                       22
<PAGE>   25

3DFX'S LIMITED OPERATING HISTORY MAKES THE ASSESSMENT OF ITS FUTURE OPERATING
RESULTS DIFFICULT.

3dfx has been shipping products only since the third quarter of 1996. This
limited operating history makes the assessment of 3dfx's future operating
results difficult. Additionally, 3dfx incurred net losses of approximately $1.7
million in fiscal 1997 and $63.3 million in fiscal 2000. The net losses in
fiscal 2000 were attributable to substantial reduction in revenues due to a
delayed product launch, changes in component costs with no ability to adjust
pricing, additional unanticipated costs relating to 3dfx's merger with STB
Systems, Inc. and continuing significant costs incurred in product research,
development and testing and in connection with the amortization of intangibles.
3dfx may also be unable to sustain or to increase revenues on a consistent basis
in the future, and in the near term, it is unlikely to have profits due to the
amortization of intangibles.

3DFX'S FINANCIAL RESULTS DEPEND SIGNIFICANTLY ON ITS ABILITY TO CONTINUALLY
DEVELOP NEW PRODUCTS AND TECHNOLOGIES.

The markets for which 3dfx's products and technologies are designed are
intensely competitive and are characterized by short product life cycles,
rapidly changing technology, evolving industry standards and declining average
selling prices. As a result, the financial performance of 3dfx depends to a
significant extent on 3dfx's ability to successfully develop new products,
including non-PC based products arising primarily from GigaPixel's technology.
Because of the rapidly changing technologies in the businesses in which 3dfx
will operate, 3dfx believes that significant expenditures for research and
development will continue to be required by 3dfx in the future. To succeed in
these businesses, 3dfx must anticipate the features and functionality that
customers will demand. 3dfx must then incorporate those features and
functionality into products that meet the design requirements of the PC,
graphics chip and graphics board markets and the timing requirements of retail
selling seasons. The success of 3dfx's new product introductions will depend on
several factors, including:

         o        Proper new product definition;

         o        Timely completion and introduction of new product designs;

         o        The ability of subcontractors and component manufacturers to
                  effectively design and implement the manufacture of new
                  products and technologies;

         o        The quality of new products and technologies;

         o        Product and technology performance as compared to competitors'
                  products and technologies;

         o        Market acceptance of 3dfx's and its customers' products;

         o        Competitive pricing of products and technologies; and

         o        Introduction of new products and technologies to the market
                  within the limited time window for retail selling seasons and
                  OEM design cycles.

As the markets for 3dfx's products continue to develop and competition
increases, 3dfx anticipates that product life cycles will shorten and that the
average selling prices of these products will decline. In particular, average
selling prices and, in some cases, gross margins for 3dfx's products and
technologies will decline as those products and technologies mature. Thus, 3dfx
will need to introduce new products and technologies to maintain average selling
prices and gross margins. To do this, 3dfx must successfully identify new
product and technology opportunities and develop and bring new products and
technologies to market in a timely manner. 3dfx has in the past experienced
delays in completing the development and introduction of new products. The
failure of 3dfx to successfully develop and introduce new products and
technologies or



                                       23
<PAGE>   26

to achieve market acceptance for such products and technologies would materially
harm the business and financial performance of 3dfx.

BECAUSE 3DFX'S PRODUCTS WILL HAVE SHORT PRODUCT LIFE CYCLES, 3DFX MUST
SUCCESSFULLY MANAGE PRODUCT TRANSITIONS.

In the past, 3dfx's products have had short product life cycles, and 3dfx
believes that its products will continue to have short product life cycles in
the future. A failure by 3dfx to successfully introduce new products within a
given product cycle could materially harm its business for that cycle and
possibly in subsequent cycles. Any such failure could also damage 3dfx's brand
name, reputation and relationships with its customers and cause long-term harm
to its business.

The PC market frequently undergoes transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis.
3dfx's products must be able to support the new features and performance levels
being required by PC manufacturers at the beginning of such a transition.
Otherwise, 3dfx will likely lose business as well as the opportunity to compete
for new design contracts until the next product transition. An inability to
develop products with required features and performance levels or even a short
delay in bringing a new product to market could significantly reduce 3dfx's
revenues for a substantial period.

The success of 3dfx will depend upon continued market acceptance of its existing
products, and its ability to continually develop and introduce new products and
technologies and new product features and enhancements to meet changing customer
requirements. Each new product cycle presents new opportunities for competitors
of 3dfx to gain market share.

Some components used in 3dfx's products have also historically required long
lead times. Therefore, 3dfx may not be able to quickly reduce its production or
inventory levels in response to unexpected shortfalls in sales or, conversely,
to increase production in response to unexpected demand. If 3dfx is unable to
quickly identify, develop, manufacture or market new products and technologies
or to enhance its existing products and technologies rapidly, then 3dfx's
business and results of operations could be materially and adversely affected.

BECAUSE 3DFX HAS SIGNIFICANT CUSTOMER CONCENTRATION, THE LOSS OF ANY OF ITS
SIGNIFICANT CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON 3DFX'S FINANCIAL
PERFORMANCE AND RESULTS OF OPERATIONS.

3dfx's sales are highly concentrated among a limited number of customers. For
the fiscal year ended January 31, 2000, 3dfx's largest customer, Ingram MicroD,
Inc., accounted for approximately 13% of its net revenues, while 3dfx's 6
largest customers collectively accounted for approximately 40.5% of its net
revenues. There can be no assurance that 3dfx will be able to retain such
customers or to continue to derive significant revenues from them. The loss of
any one of 3dfx's significant customers could have a material adverse effect on
its financial performance and results of operations

BECAUSE 3DFX DOES NOT TYPICALLY ENTER INTO LONG-TERM CONTRACTS WITH ITS
CUSTOMERS, THERE CAN BE NO ASSURANCE THAT HISTORICAL SALES VOLUMES WILL CONTINUE
IN THE FUTURE.

All of 3dfx's sales are made pursuant to purchase orders. The lack of long-term
commitments, together with the customer concentration noted above, poses a
significant risk to 3dfx. If a single customer of 3dfx cancels an order or
ceases to be a customer of 3dfx, then 3dfx's business and financial condition
could be materially harmed.



                                       24
<PAGE>   27

BECAUSE 3DFX HAS LIMITED PRODUCT DIVERSITY, IF 3DFX WERE UNABLE TO INCREASE OF
MAINTAIN 3DFX'S HISTORICAL SALES VOLUMES, THERE COULD BE A NEGATIVE IMPACT ON
3DFC'S RESULTS OF OPERATIONS.

3dfx's revenues depend on the markets for 3D/2D and 3D graphics chips and boards
for PCs and on 3dfx's ability to compete effectively in those markets. Since
3dfx currently has no other products, 3dfx's business would be materially harmed
if it were unable to continue to sell these products at historical levels or to
increase these historical sales levels in the future.

BECAUSE 3DFX DEPENDS ON THIRD PARTY DEVELOPERS AND PUBLISHERS TO CREATE AND
MARKET SOFTWARE TITLES THAT OPERATE WITH ITS GRAPHICS CHIPS, THERE CAN BE NO
ASSURANCE THAT A SUFFICIENT NUMBER OF QUALITY SOFTWARE TITLES THAT ARE
COMPATIBLE WITH 3DFX'S PRODUCTS WILL BE DEVELOPED.

3dfx believes that the availability of numerous high quality, commercially
successful software entertainment titles and applications significantly affects
sales of its products. 3dfx depends on third party software developers and
publishers to create, produce and market software titles that will operate with
3dfx's graphics chips. 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. Therefore, a sufficient number of high
quality, commercially successful software titles compatible with 3dfx's products
may not be developed. In addition, the development and marketing of game titles
that do not fully demonstrate the technical capabilities of 3dfx's products
could create the impression that 3dfx's technology offers only marginal
performance improvements, if any, over competing products.

3DFX'S DEPENDENCE ON SINGLE SOURCE MANUFACTURERS WILL EXPOSE IT TO SIGNIFICANT
RISK IF THE OPERATIONS OF THESE MANUFACTURERS AND OTHER THIRD PARTIES ARE
INTERRUPTED.

3dfx's graphics chip products require wafers manufactured with state-of-the-art
fabrication equipment and techniques. Currently, 3dfx does not manufacture the
semiconductor wafers used for its graphics chip products and does not own or
operate a wafer fabrication facility, nor does 3dfx expect to manufacture
semiconductor wafers or to own or operate a wafer fabrication facility in the
future. Taiwan Semiconductor Manufacturing Company, or TSMC, currently
manufactures all of 3dfx's wafers in Taiwan. 3dfx obtains manufacturing services
from TSMC on a purchase order basis. 3dfx depends on TSMC to:

         o        Produce wafers of acceptable quality and with acceptable
                  manufacturing yields;

         o        Deliver those wafers to 3dfx and its independent assembly and
                  testing subcontractors on a timely basis; and

         o        Allocate to 3dfx a portion of its manufacturing capacity
                  sufficient to meet 3dfx's needs.

3dfx expects to continue to be dependent upon TSMC in the near future. 3dfx is
in the process of qualifying an alternative source of supply, however, it could
take several months to establish a strategic relationship with a new
manufacturing partner. As a result, a manufacturing disruption (such as the one
that occurred in September 1999 when an earthquake struck Taiwan) or capacity
constraints experienced by TSMC would negatively impact the production of 3dfx's
graphics chips and boards and, consequently, would have a negative effect on
3dfx's business and results of operations.



                                       25
<PAGE>   28

BECAUSE 3DFX PRIMARILY DEPENDS ON A SINGLE GRAPHICS BOARD MANUFACTURING
FACILITY, ANY DISRUPTION OF THE GRAPHICS BOARD MANUFACTURING OPERATIONS AT THIS
FACILITY COULD MATERIALLY HARM 3DFX'S BUSINESS.

3dfx's sole graphics board manufacturing facility is located in Juarez, Mexico.
Although a portion of 3dfx's board production is secured from third party
sources, 3dfx is substantially dependent on this single manufacturing facility.
As a result, any disruption of 3dfx's graphics board manufacturing operations at
this facility could materially harm its business. Such disruption could result
from various factors, including difficulties in attracting and retaining
qualified manufacturing employees, difficulties associated with the use of new,
reconfigured or upgraded manufacturing equipment, labor disputes, human error,
governmental or political risks or a natural disaster such as an earthquake,
tornado, fire or flood.

In comparison to those of its competitors that do not maintain their own
graphics board manufacturing facilities, 3dfx incurs higher relative fixed
overhead and labor costs as a result of operating its own manufacturing
facility. Any failure to generate the level of product revenues needed to absorb
these overhead and labor costs would materially harm 3dfx's business.

3DFX'S INTERNATIONAL OPERATIONS WILL MAKE IT SUSCEPTIBLE TO GLOBAL ECONOMIC
FACTORS, FOREIGN TAX LAW ISSUES, FOREIGN BUSINESS PRACTICES AND CURRENCY
FLUCTUATIONS.

3dfx relies on foreign third-party manufacturing, assembly and testing
operations that are located in Asia for its graphics chips and relies primarily
on its own Mexican manufacturing facility for graphics boards. 3dfx also has
significant export sales. These international operations subject 3dfx to a
number of risks associated with conducting business outside of the United
States. These risks include:

         o        Unexpected changes in legislative or regulatory requirements;

         o        Delays resulting from difficulty in obtaining export licenses
                  for some technology;

         o        Tariffs, quotas and other trade barriers and restrictions;

         o        Longer accounts receivable payment cycles;

         o        Difficulties in collecting payment, including increased credit
                  exposures;

         o        Potentially adverse tax consequences, including repatriation
                  of earnings;

         o        Burdens of complying with a variety of foreign laws;

         o        Unfavorable intellectual property laws;

         o        Political instability; and

         o        Foreign currency fluctuations.

Any of these factors could materially harm the international operations and
sales of 3dfx, and consequently, its business. Recently, financial markets in
Asia have experienced significant turmoil, which could harm 3dfx's international
sales or operations. Currently, all of 3dfx's product sales and its arrangements
with its foundry, assembly and test vendors provide for pricing and payment in
U.S. dollars. To date, 3dfx has not engaged in any currency hedging activities,
although 3dfx may do so in the future. An increase in the value of the U.S.
dollar relative to foreign currencies could make 3dfx's products more expensive
and potentially less competitive in foreign markets.



                                       26
<PAGE>   29

3DFX MAY BE UNABLE TO ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS OR PREVENT THEIR
UNAUTHORIZED USE, WHICH COULD DIVERT ITS FINANCIAL RESOURCES AND HARM ITS
BUSINESS.

3dfx's success will depend upon its proprietary technology. 3dfx currently
relies upon a combination of patents, copyrights, trademarks, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
technology rights. Despite current efforts to protect these proprietary rights,
protective measures may not be adequate to prevent misappropriation or
independent third-party development of 3dfx's technology. The laws of many
foreign jurisdictions offer less protection of intellectual property rights than
the laws of the United States. Effective patent, copyright, trademark and trade
secret protection may not be available in other jurisdictions. In addition, 3dfx
may need to litigate claims against third parties to enforce its intellectual
property rights, protect its trade secrets, determine the validity and scope of
the proprietary rights of others or defend against claims of infringement or
invalidity. On September 21, 1998, 3dfx filed suit against nVidia in Northern
California District Federal Court. 3dfx's complaint alleges patent infringement
relating to nVidia's use of multi-texturing technology in its RIVA TNT product.
Discovery in this case is presently under way. This litigation, and other
litigation like it, could result in substantial cost and diversion of management
resources. A successful claim against 3dfx could effectively block its ability
to use or license its technology in the United States or abroad. Any failure of
3dfx to protect its proprietary rights adequately could have a material adverse
effect on the business, operating results and financial condition of 3dfx.

3DFX RELIES ON SEVERAL TECHNOLOGY LICENSES FROM THIRD PARTIES, THE LOSS OF WHICH
MAY HARM 3DFX'S ABILITY TO DEVELOP AND SELL ITS SERVICES.

3dfx currently possesses, and in the future 3dfx may procure, licenses from
third parties relating to its services or technology. Certain of these licenses
are critical to 3dfx's business and would be difficult to replace. If 3dfx were
unable to obtain or maintain these licenses, its ability to develop and to sell
its products could be impaired. If 3dfx or its suppliers are unable to obtain
licenses, 3dfx could be forced to market products without some technological
features. 3dfx also licenses some software and technology for its operations. If
3dfx were unable to obtain licenses or to obtain such licenses on competitive
terms, there could be a material adverse effect on the ability of 3dfx to
effectively offer its products.

BECAUSE THE MARKETS IN WHICH 3DFX WILL OPERATE ARE INTENSELY COMPETITIVE, 3DFX
MAY LOSE MARKET SHARE AND BE FORCED TO REDUCE THE PRICE OF ITS PRODUCTS.

The markets in which 3dfx competes are intensely competitive and are likely to
become more competitive in the future. Existing competitors and new market
entrants may introduce products that are less costly or provide better
performance or features than 3dfx's products. 3dfx does not compete on the basis
of price alone. 3dfx believes that the principal competitive factors for 3D
graphics products are:

         o        Product performance and quality;

         o        Conformity to industry standard application programming
                  interfaces, or APIs;

         o        Access to customers and distribution channels;

         o        Brand awareness;

         o        Price;

         o        Product support; and

         o        Ability to bring new products to the market in a timely
                  manner.



                                       27
<PAGE>   30

Many of 3dfx's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than 3dfx. These competitors may also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than 3dfx. As a result, such competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements. Some of
3dfx's principal competitors offer a single vendor solution, because they
maintain their own semiconductor foundries and may therefore benefit from some
capacity, cost and technical advantages.

3dfx seeks to use strategic relationships to augment its capabilities. However,
the benefits of these relationships may not be realized or sufficient to
overcome the established market positions of 3dfx's largest competitors.
Regardless of the relative qualities of 3dfx's products, the market power,
product breadth and customer relationships of its larger competitors can be
expected to provide such competitors with substantial competitive advantages.

3dfx competes primarily against companies that offer a board or chip solution to
the 3D/2D PC graphics market. These companies typically have operated in the PC
2D graphics market and now offer 3D capability as an enhancement to their 2D
solutions. These competitors include ATI Technologies, Inc., S3 Incorporated,
Creative Technology Ltd. And nVidia. 3dfx 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, including
3Dlabs, Inc., Integraph Corporation and SGI. These companies are developing
lower cost versions of their 3D technology to bring workstation-like 3D graphics
to mainstream applications. Intel Corporation also competes in the 3D graphics
market by offering an integrated core logic/3D/2D solution aimed at the
mainstream PC market. These companies may enter the interactive electronics
entertainment market, and, if they do, then 3dfx may not be able to compete
successfully against them.

3dfx now also competes with graphics board manufacturers, with suppliers who
sell graphics chips directly to OEMs, with OEMs who internally produce graphics
chips or integrategraphics chips on the main computer processing board of their
personal computers, commonly known as the motherboard, and with the makers of
other personal computer components and software that are increasingly providing
graphics processing capabilities.

3DFX MAY REQUIRE ADDITIONAL FINANCING TO MEET ITS FUTURE CAPITAL AND OPERATIONAL
REQUIREMENTS AND MAY FACE UNCERTAINTY IN OBTAINING FAVORABLE FINANCING
ALTERNATIVES.

If the liquidity and cash flow from 3dfx's operations are insufficient to meet
its operating and capital requirements, then 3dfx may have to seek additional
financing, including public or private debt or equity offerings that may be
dilutive to 3dfx's shareholders. If adequate funds are not available on
acceptable terms, then 3dfx may be unable to develop or enhance its services,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. 3dfx's future capital requirements will depend on
numerous factors, including 3dfx's profitability, operational cash requirements,
competitive pressures, development of new services and applications, acquisition
of complementary businesses or technologies and response to unanticipated
requirements. There can be no assurance that any financing alternatives sought
by 3dfx will be available, or, if available, will be on terms or in amounts
attractive to 3dfx.

POTENTIAL YEAR 2000 ISSUES MAY EXPOSE 3DFX TO LIABILITY OR LOSS.

3dfx has not experienced any material adverse impact from the transition to the
year 2000. Even though no material adverse impact from the year 2000 transition
has been noted through internal investigations and inquiries with its major
customers and suppliers, 3dfx cannot provide any assurance that its suppliers
and customers have not been affected in a manner that is not yet apparent. 3dfx
will continue to monitor its year 2000 compliance and the year 2000 compliance
of its suppliers and customers.



                                       28
<PAGE>   31

LITIGATION MAY DIVERT 3DFX'S RESOURCES AND REDUCE THE MARKET PRICE OF 3DFX'S
COMMON STOCK.

In the past, following periods of volatility in the market price of a company's
stock, securities class action litigation has been brought against the issuing
company. It is possible that similar litigation could be brought against 3dfx.
Such litigation could result in substantial costs and would likely divert
management's attention and resources. Any adverse determination in such
litigation could also subject 3dfx to significant liabilities. A securities
class action lawsuit of this type was filed October 9, 1998 in Dallas County,
Texas against STB, which 3dfx acquired by merger in May 1999. The suit was
brought against STB and some of its officers and directors and the underwriters
who participated in the STB secondary offering on March 20, 1998. The petition
alleges that the registration statement for the secondary public offering
contained false and misleading statements of material facts and omitted to state
material facts. The petition asserts claims under Sections 11, 12(a)(2) and 15
of the Securities Act of 1933, as amended, and Sections 581-33A of the Texas
Securities Act on behalf of a purported class of persons who purchased or
otherwise acquired STB common stock in the public offering. The petition seeks
recission and/or unspecified damages. That action was removed to federal court
in April 2000. On December 17, 1999, a similar securities class action lawsuit
was also filed in the United States District Court for the Northern District of
Texas, Dallas Division, against STB and three of its officers and directors. The
action asserts claims under Sections 10 and 20 of the Securities Exchange Act of
1934. On February 8, 2000, another similar class action lawsuit, asserting
claims under Sections 10 and 20 of the Securities Exchange Act of 1934, was
filed against STB and three of its officers and directors in the United States
District Court for the Northern District of Texas. All of these actions have
subsequently been consolidated, and the parties have now reached an agreement in
principle to settle them. The settlement, which is subject to final
documentation and Court approval, does not reflect any admission of liability by
any of the defendants. The principal terms of the settlement call for the
establishment of a settlement fund consisting of $4.7 million to be paid by
insurance.

THE STOCK PRICE OF 3DFX HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE DUE
TO MANY FACTORS, WHICH MAY MAKE IT MORE DIFFICULT FOR 3DFX SHAREHOLDERS TO SELL
THEIR SHARES AT PRICES THEY FIND ATTRACTIVE.

Several factors have caused the stock price of 3dfx common stock to be extremely
volatile in the past and may cause the stock price of 3dfx common stock to be
extremely volatile in the future. The 3dfx stock price could be subject to wide
fluctuations in response to a variety of factors, including the following:

         o        Actual or anticipated variations in quarterly operating
                  results;

         o        The ability of 3dfx to successfully develop, introduce and
                  market new or enhanced products and technologies on a timely
                  basis;

         o        Unexpected changes in demand for 3dfx's products and services;

         o        The pricing policies of 3dfx's competitors;

         o        Announcements of technological innovations or new products by
                  3dfx or its competitors;

         o        Changes in securities analysts' recommendations;

         o        Changes in the market valuations of other similarly situated
                  companies;

         o        Announcements by 3dfx or its competitors of significant
                  acquisitions, strategic partnerships, joint ventures or
                  capital commitments; and



                                       29
<PAGE>   32

         o        Market fluctuations and performance of the PC and graphics
                  chip and board industries.

In addition, the trading prices of technology stocks as a whole have experienced
particularly extreme price and volume fluctuations and such effects have often
been unrelated to the operating performance of the applicable companies. Any
negative change in the public's perception of the prospects of technology
companies or other broad market and industry factors could depress the market
price of 3dfx common stock, regardless of its operating performance. Market
fluctuations, as well as general political and economic conditions, such as
recession or interest rate or currency rate fluctuations, may also decrease the
market price of 3dfx's common stock.

3DFX'S SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING
CONTROL OF 3DFX.

On October 30, 1998, 3dfx adopted a shareholder rights plan that gives each
holder of 3dfx common stock the right to purchase one one-thousandth of a share
of 3dfx's preferred stock if a tender or exchange offer is announced by an
entity or individual that has acquired 12% or more of 3dfx's outstanding common
stock. The shareholder rights plan may make it more difficult for a third party
to acquire control of 3dfx or may discourage acquisition bids for 3dfx
altogether.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         None


                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On September 21, 1998, 3dfx filed suit against nVidia Corporation ("nVidia") in
Northern California District Federal Court. The complaint alleges patent
infringement relating to nVidia's use of multi-texturing technology in its RIVA
TNT product. Discovery in the case is presently under way.

On August 28, 2000, nVidia filed suit against 3dfx in Northern California
District Federal Court. The complaint alleges infringement by 3dfx of five
nVidia patents in the Voodoo3, Voodoo4, Voodoo5 and VSA-100 families of 3dfx
products. nVidia is seeking damages for the alleged infringement. The suit has
just recently been filed and discovery in the case has not yet commenced.

A securities class action lawsuit was filed October 9, 1998 in Dallas County,
Texas against STB Systems, Inc. ("STB"), which 3dfx acquired by merger in May,
1999. The suit was brought against STB and some of its officers and directors
and the underwriters who participated in the STB secondary offering on March 20,
1998. The petition alleges that the registration statement for the secondary
public offering contained false and misleading statements of material facts and
omitted to state material facts. The petition asserts claims under Sections 11,
12(a)(2) and 15 of the Securities Act of 1933, as amended, and Sections 581-33A
of the Texas Securities Act on behalf of a purported class of persons who
purchased or otherwise acquired STB common stock in the public offering. The
petition seeks recission and/or unspecified damages. That action was removed to
federal court in April 2000.

On December 17, 1999, a similar securities class action lawsuit was also filed
in the United States District Court for the Northern District of Texas, Dallas
Division, against STB and three of its officers and directors. The action
asserts claims under Sections 10 and 20 of the Securities Exchange Act of 1934.
On February 8, 2000, another similar class action lawsuit, asserting claims
under Sections 10 and 20 of the Securities Exchange Act of 1934, was filed
against STB and three of its officers and



                                       30
<PAGE>   33

directors in the United States District Court for the Northern District of
Texas. All of these actions have subsequently been consolidated, and the parties
have now reached an agreement in principle to settle their actions. The
settlement, which is subject to final documentation and Court approval, does not
reflect any admission of liability by any of the defendants. The principal terms
of the settlement call for the establishment of a settlement fund consisting of
$4.7 million to be paid by insurance.

3dfx is a party from time to time to some other legal proceedings arising in the
ordinary course of business. Although the amount of any liability that could
arise with respect to these proceedings cannot be predicted accurately, 3dfx
believes that any liability that might result from such claims will not have a
material adverse effect on its financial position.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

         None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         None

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

         At the Annual Meeting held on July 19, 2000, 3dfx shareholders voted to
approve each of the following proposals:

         (1) to approve the Agreement and Plan of Reorganization by and among
3dfx, Galapagos Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of 3dfx, and GigaPixel Corporation, a Delaware corporation, to
approve the merger of 3dfx and GigaPixel, and to approve the issuance of shares
of 3dfx common stock to GigaPixel shareholders in the merger:

<TABLE>
<CAPTION>
                                               Votes Cast Against or      Abstention
                     Votes Cast in Favor              Withheld           and Non-Vote
                     -------------------       ---------------------     ------------
<S>                                            <C>                        <C>
                          13,155,822                   231,818             8,999,177
</TABLE>


         (2)      to approve an amendment to the 3dfx Interactive, Inc. 1995
                  Employee Stock Option Plan to increase the number of shares of
                  common stock reserved for issuance under the stock plan by
                  2,500,000 shares for a total of 8,875,000 shares:

<TABLE>
<CAPTION>
                                               Votes Cast Against or      Abstention
                     Votes Cast in Favor              Withheld           and Non-Vote
                     -------------------       ---------------------     ------------
<S>                                            <C>                        <C>
                          10,024,950                  3,362,690            8,999,177
</TABLE>


         (3)      to approve an amendment to the 3dfx Interactive, Inc. 1997
                  Employee Stock Purchase Plan to increase the number of shares
                  of common stock reserved for issuance under the purchase plan
                  by 850,000 shares for a total of 1,600,000 shares, as well as
                  to provide for larger annual increases in the number of shares
                  reserved for issuance under the purchase plan equal to the
                  lesser of 600,000 shares or 1.5% of 3dfx's then outstanding
                  shares:

<TABLE>
<CAPTION>
                                               Votes Cast Against or      Abstention
                     Votes Cast in Favor              Withheld           and Non-Vote
                     -------------------       ---------------------     ------------
<S>                                            <C>                        <C>
                          11,831,493                  1,556,147            8,999,177
</TABLE>



                                       31
<PAGE>   34

         (4) to ratify the selection of PricewaterhouseCoopers LLP as the
independent public accountants for 3dfx's fiscal year ending January 31, 2001:

<TABLE>
<CAPTION>
                                               Votes Cast Against or
                     Votes Cast in Favor             Withheld
                     -------------------       ---------------------
<S>                                            <C>
                          22,229,457                   157,360
</TABLE>


ITEM 5. OTHER INFORMATION

         None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

         3.1*     Amended and Restated Bylaws.

         10.1*    Indemnity Escrow Agreement, dated as of July 20, 2000, by and
                  between the Company, GigaPixel Corporation, Galapagos
                  Acquisition Corp. and U.S. Trust Company, N.A.

         10.2*    Consulting Agreement, dated July 20, 2000, by and between the
                  Company and George T. Haber.

         10.3*    Noncompetition Agreement, dated as of July 20, 2000, by and
                  between the Company and George T. Haber.

         10.4*    Contingent Recourse Non-Negotiable Promissory Note, dated as
                  of July 20, 2000, made by George T. Haber for the benefit of
                  GigaPixel Corporation.

         10.5*    Lock Up Agreement dated as of July 20, 2000, by and between
                  the Company and George T. Haber.

         10.6*    Noncompetition Agreement dated July 20, 2000, by and between
                  the Company and Philip Carmack.

         10.7*    Employment Agreement for Executive Officer dated as of July
                  20, 2000, by and between GigaPixel Corporation and Philip
                  Carmack.

         10.8*    Contingent Recourse Non-Negotiable Promissory Note dated as of
                  July 20, 2000, made by Philip Carmack for the benefit of
                  GigaPixel Corporation.

         10.09*   Performance Bonus Agreement dated as of July 20, 2000, by and
                  between GigaPixel Corporation and Philip Carmack.

         10.10    3dfx Interactive, Inc. Employee Stock Plan (Amended and
                  Restated as of May 1, 2000) (incorporated by reference to
                  Exhibit 4.1 of the Company's Registration Statement on Form
                  S-8 filed on July 25, 2000).

         10.11    GigaPixel Corporation 1997 Employee Incentive Plan
                  (incorporated by reference to Exhibit 4.1 of the Company's
                  Registration Statement on Form S-8 filed on July 25, 2000).

         27.1*    Financial Data Schedule

----------

         *        Filed herewith

         (b)      Reports on Form 8-K

                  (i)      Current Report on Form 8-K filed on June 23, 2000
                           disclosing a press release, dated as of June 22,
                           2000, announcing that the Company's revenues for the
                           three months ended July 31, 2000 will be lower than
                           previously expected due to the Company not receiving



                                       32
<PAGE>   35

                           a substantial portion of certain components that a
                           supplier committed to provide.

                  (ii)     Current Report on Form 8-K filed on July 28, 2000
                           disclosing the consummation of the merger of
                           GigaPixel Corporation with the Company pursuant to
                           the Agreement and Plan of Reorganization by and among
                           3dfx Interactive, Inc., Galapagos Acquisition Corp.
                           and GigaPixel Corporation dated March 27, 2000
                           (incorporated by reference to the Form S-4 declared
                           effective by the Commission on June 7, 2000).


                                   SIGNATURES

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

Dated: September 14, 2000

                                             3DFX INTERACTIVE, INC.
                                             (Registrant)


                                             By: /s/ ALEX LEUPP
                                                 -------------------------------
                                                 Alex Leupp
                                                 Chief Executive Officer
                                                 (Principal Executive Officer)


                                             By: /s/ DAVID ZACARIAS
                                                 -------------------------------
                                                 David Zacarias
                                                 Vice President, Administration
                                                 and Chief Financial Officer
                                                 (Principal Financial and
                                                 Accounting Officer)




                                       33
<PAGE>   36


                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER            DESCRIPTION
-------           -----------
<S>               <C>

         3.1*     Amended and Restated Bylaws.

         10.1*    Indemnity Escrow Agreement, dated as of July 20, 2000, by and
                  between the Company, GigaPixel Corporation, Galapagos
                  Acquisition Corp. and U.S. Trust Company, N.A.

         10.2*    Consulting Agreement, dated July 20, 2000, by and between the
                  Company and George T. Haber.

         10.3*    Noncompetition Agreement, dated as of July 20, 2000, by and
                  between the Company and George T. Haber.

         10.4*    Contingent Recourse Non-Negotiable Promissory Note, dated as
                  of July 20, 2000, made by George T. Haber for the benefit of
                  GigaPixel Corporation.

         10.5*    Lock Up Agreement dated as of July 20, 2000, by and between
                  the Company and George T. Haber.

         10.6*    Noncompetition Agreement dated July 20, 2000, by and between
                  the Company and Philip Carmack.

         10.7*    Employment Agreement for Executive Officer dated as of July
                  20, 2000, by and between GigaPixel Corporation and Philip
                  Carmack.

         10.8*    Contingent Recourse Non-Negotiable Promissory Note dated as of
                  July 20, 2000, made by Philip Carmack for the benefit of
                  GigaPixel Corporation.

         10.09*   Performance Bonus Agreement dated as of July 20, 2000, by and
                  between GigaPixel Corporation and Philip Carmack.

         10.10    3dfx Interactive, Inc. Employee Stock Plan (Amended and
                  Restated as of May 1, 2000) (incorporated by reference to
                  Exhibit 4.1 of the Company's Registration Statement on Form
                  S-8 filed on July 25, 2000).

         10.11    GigaPixel Corporation 1997 Employee Incentive Plan
                  (incorporated by reference to Exhibit 4.1 of the Company's
                  Registration Statement on Form S-8 filed on July 25, 2000).

         27.1*    Financial Data Schedule
</TABLE>

----------

         *        Filed herewith



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