3DFX INTERACTIVE INC, 10-Q, 2000-12-20

3DFX INTERACTIVE INC
10-Q, 2000-12-20
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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 October 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)

<TABLE>
<S> <C>
CALIFORNIA 77-0390421
------------------------ -----------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
</TABLE>

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, 448,733 shares as of October 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 October 31, 2000..........................1

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

Condensed Consolidated Statements of Cash Flows for the
nine months ended October 31, 2000 and October 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.............................................31

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>
OCTOBER 31, JANUARY 31,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 33,606 $ 41,818
Short-term investments -- 24,012
Accounts receivable, net of allowance
for doubtful accounts of $5,202 and $6,681 30,177 66,160
Inventories, net 45,794 45,065
Other current assets 5,075 28,407
--------- ---------
Total current assets 114,652 205,462
--------- ---------

Property and equipment, net 36,961 40,269
Goodwill and other intangibles 27,221 45,651
Other assets 10,433 4,729
--------- ---------

Total assets $ 189,267 $ 296,111
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 30,983 $ 25,000
Accounts payable 62,678 60,879
Accrued liabilities 17,499 20,385
Current portion of long-term liabilities 1,324 732
Deferred revenue 6,075 --
--------- ---------
Total current liabilities 118,559 106,996
--------- ---------
Long-term liabilities 701 1,881

Shareholders' Equity:
Preferred stock, no par value,
5,000 shares authorized; none
issued and outstanding -- --
Common stock, no par value, 50,000
shares authorized; 39,448 and
24,442 shares issued and outstanding 440,816 251,883
Warrants 242 242
Deferred compensation (11,000) (172)
Unrealized gain (loss) on equity securities (1,983) 1,844
Accumulated deficit (358,068) (66,563)
--------- ---------

Total shareholders' equity 70,007 187,234
--------- ---------

Total liabilities and shareholders' equity $ 189,267 $ 296,111
========= =========
</TABLE>

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

<PAGE> 4

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

<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
October 31, October 31,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 39,189 $ 105,856 $ 214,757 $ 251,135
Cost of sales 60,935 88,624 199,903 191,122
--------- --------- --------- ---------
Gross profit (loss) (21,746) 17,232 14,854 60,013

Operating expenses:
Research and development 18,767 18,040 54,830 46,373
Sales, general and administrative 15,399 18,329 50,750 43,954
Restructuring expense -- 1,830 -- 1,830
In-process research and -- -- 66,250 4,302
development
Goodwill and intangibles amortization 9,667 3,627 17,993 6,601
Impairment of goodwill and other
intangibles 117,065 -- 117,065 --
--------- --------- --------- ---------
Total operating expenses 160,898 41,826 306,888 103,060
--------- --------- --------- ---------
Loss from operations (182,644) (24,594) (292,034) (43,047)
Interest and other income
(expense), net 696 393 215 1,988

Loss before income taxes (181,948) (24,201) (291,819) (41,059)
Benefit for income taxes (3,375) (6,583) (313) (9,658)
--------- --------- ---------- ----------
Net loss $(178,573) $ (17,618) $(291,506) $ (31,401)
========= ========= ========== ==========
Net loss per share:
Basic and diluted $ (4.53) $ (.73) $ (9.69) $ (1.48)
========= ========= ========== ==========
Shares used in net loss per share calculations:
Basic and diluted 39,442 24,131 30,077 21,163
</TABLE>

<PAGE> 5

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($291,506) ($ 31,401)
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 18,181 9,537
Amortization 17,993 6,601
Stock compensation 1,539 363
Write-off of acquired in-process research
and development 66,250 4,302
Impairment of goodwill and other intangibles 117,065 --
Deferred tax benefit related to write-off of
intangibles (2,426)
Increase (decrease) in allowance for
doubtful accounts (1,986) 2,653
Changes in assets and liabilities:
Accounts receivable 40,349 (7,586)
Inventories (729) 9,118
Other assets 11,622 1,279
Accounts payable 1,588 (14,335)
Accrued and other long-term liabilities (6,050) (9,059)
Deferred revenue (3,355) --
--------- ---------
Net cash used in operating activities (31,465) (28,528)
--------- ---------
Cash flows from investing activities:
Sales (purchases) of short-term investments 24,012 6,665
Purchases of property and equipment (13,711) (20,972)
Merger with STB Systems, Inc. -- (9,084)
Merger with GigaPixel Corporation 5,319 --
--------- ---------
Net cash provided (used in) investing
activities 15,620 (23,391)
--------- ---------

Cash flows from financing activities:
Proceeds from issuance (repurchase) of common
stock, net 2,238 (3,082)
Principal payments of capitalized lease
obligations, net (588) (315)
Proceeds (payments) on short term debt, net 5,983 11,209
--------- ---------
Net cash provided by financing activities 7,633 7,812
--------- ---------

Net increase (decrease) in cash and cash
equivalents (8,212) (44,107)
--------- ---------
Cash and cash equivalents at beginning of period 41,818 103,594
--------- ---------
Cash and cash equivalents at end of period $ 33,606 $ 59,487
========= =========
</TABLE>

Supplemental disclosure of non-cash information:
- Unrealized loss on equity securities available-for-sale was $2,723
for the nine months ended October 31, 2000.

- Deferred compensation on repricing of stock options was $5,301 for
the nine months ended October 31,2000.

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

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred losses of
$63.3 million for the year ended January 31, 2000, incurred an additional loss
of $291.5 million in the nine months ended October 31, 2000, and had an
accumulated deficit of $358.1 million as of October 31, 2000.

The Company believes that its cash balances and cash generated from operations
at October 31, 2000 were insufficient to meet the Company's operating and
capital requirements through the following three months. On December 15, 2000,
the Company entered into an asset purchase agreement with nVidia Corporation in
an effort to raise capital to satisfy the Company's current operating and
capital requirements. The terms of the agreement are discussed Note 11 of the
Notes to Consolidated Financial Statements. The Company believes that the $15.0
million bridge loan to be provided by nVidia will enable it to meet its
essential operating expenses pending closing of the nVidia asset sale, and that
the proceeds from the asset sale will be sufficient to enable the Company to
satisfy all known debts and liabilities, although there can be no assurance in
either regard. If the Company is unable to consummate the asset sale, secure
additional financing or otherwise increase its liquidity in the near future, the
Company may seek protection of state insolvency or federal bankruptcy law for
the orderly liquidation of its assets, or the same may be imposed upon the
Company by its creditors.

Subsequent to October 31, 2000, the Company has taken measures to cut its
expense in an effort to conserve its remaining cash reserves by substantially
reducing its workforce, reducing its use of office space and reducing other
non-essential expenses. In addition, the Company plans to sell its Juarez,
Mexico manufacturing facility. The Company has not had an opportunity to fully
evaluate the impact of these changes in business and certain negative
consequences may not be fully understood.

Given the recent change in the Company's business outlined above,the following
description of the Company's historical business operations is not indicative of
what its future operations will be. Although the Company has recently taken
actions to reduce its expense levels, the Company will continue to experience
losses that raise substantial doubt about the Company's ability to continue as a
going concern. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

One customer represented 12% of the Company's revenues for the three months
ended October 31, 2000, and three customers represented 13%, 12% and 11% of the
Company's revenues for the three months ended October 31, 1999. Two customers
represented more than 10% of the Company's revenues during the first nine months
of fiscal 2001, one customer represented 19% and the other 11% of total revenues
for the period. One customer represented 15% of the Company's revenues during
the first nine 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

-4-
<PAGE> 7

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.

NOTE 2 - INVENTORY:

<TABLE>
<CAPTION>
October 31, January 31,
2000 2000
----------- -----------
<S> <C> <C>
Raw materials $28,175 $26,708
Work in-process 10,527 8,940
Finished goods 7,092 9,417
------- -------
Total inventory $45,794 $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.

-5-
<PAGE> 8

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 Nine Months
Ended Ended
October 31,1999 October 31, 1999
--------------- ----------------
<S> <C> <C>
Revenues $105,856 $331,924
Net income (loss) $(17,618) $(49,176)
Basic and diluted net (loss per share $( 0.73) $( 2.06)
======== ========
</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.

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 2001
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 .................................... 103,510,900 5 years 20,702,980
</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.

-6-
<PAGE> 9

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 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>
Nine Months
Ended
October 31, 2000
----------------
<S> <C>
Revenues $ 220,701
Net income (loss) ($121,629)
Basic and diluted net (loss per share ($3.10)
==========
</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. For the quarter and nine months ended October
31, 2000, the Company recorded amortization of deferred compensation related to
the GigaPixel acquisition of $.7 million which has been included in Research
and Development Costs.

NOTE 5 - NET INCOME (LOSS) PER SHARE:

-7-
<PAGE> 10

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 nine months ended October 31, 1999 and
the three and nine months ended October 31, 2000. During the quarters ended
October 31, 2000 and October 31, 1999, options to purchase approximately
5,761,000 and 4,156,000 shares of common stock, respectively, were outstanding
but not included in the calculation because they were anti-dilutive. For the
nine months ended October 31, 2000 and October 31, 1999, options to purchase
approximately 5,860,000 and 3,368,000 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 $3.4 million and $6.6 million for
the three months ended October 31, 2000 and October 31, 1999, respectively, and
$.3 million and $9.7 million for the nine months ended October 31, 2000 and
October 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 and GigaPixel, 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 and a reduction of $2.4 million of
deferred tax liabilities related to the write-off of intangible assets in the
quarter ended October 31, 2000. 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 in the second quarter of fiscal 2001,
reducing the Company's net deferred tax asset to $10.1 million, representing the
tax refunds due the Company. As of October 31, 2000, these tax refunds have been
collected, reducing the Company's net deferred tax asset to zero.

NOTE 7 - COMPREHENSIVE LOSS:

Other comprehensive loss for the three months ended October 31, 2000 was an
unrealized loss of $.6 million, representing a loss from investing activities,
resulting in total comprehensive loss of ($) 179.2 million. Other comprehensive
loss for the nine months ended October 31, 2000 was an unrealized loss of $3.9
million, representing a loss from investing activities, resulting in total
comprehensive loss of $295.4 million. Comprehensive loss for the three and nine
months ended October 31, 1999 was not materially different from net loss.

NOTE 8 - SHORT-TERM DEBT:

At October 31, 2000, the Company had a line of credit agreement with a bank,
which provided for maximum borrowings in an amount up to the lesser of 80% of
eligible accounts receivable or $25.0 million. Borrowings under the line were
secured by $25.0 million of restricted cash and short-term investments and all
of the Company's owned assets. The line of credit expires on December 19, 2000.
At October 31, 2000, $25.0 million was outstanding under this line of credit. In
November 2000, the $25.0 million cash and short-term investments previously
pledged to secure the Revolving Credit Facility was used to payoff the entire
outstanding balance on the line of credit in November 2000. The Company does not
intend to utilize the facility in the future.

In the quarter ended October 31, 2000, the Company recorded liabilities of $6.0
million reflecting future payments due within twelve months under software
license agreements.

-8-
<PAGE> 11
NOTE 9 - IMPAIRMENT OF LONG LIVED ASSETS

During the three months ended October 31, 2000, the Company recorded a charge
of $117.1 million for the impairment of goodwill and intangibles. In accordance
with the Company's accounting policy, the Company assessed impairment of its
long-lived assets and determined that the carrying amount of goodwill and
intangibles would not be recoverable due to the deteriorating condition of its
operations. The impairment loss was measured as the amount by which the
carrying amount of the assets exceeded the estimated fair value of the assets
as determined using the present value of expected future cash flows.

NOTE 10 - STOCK OPTION EXCHANGE

On October 20, 2000, the Company announced a stock option exchange program,
allowing employees the opportunity to surrender their existing stock options in
exchange for a new grant of 50% of the original options with a new exercise
price of $2.00 per share. The options will vest over nine months being full
vested on June 30, 2001, and expiring on June 30, 2002. This program was offered
to all active employees whose options were granted on September 5, 2000, or
earlier. On this date, options for 4.7 million shares were canceled and options
for 2.4 million shares were granted under this program. As the market value of
the shares at the date of grant exceeded the exercise price for these options,
the Company recorded deferred compensation of $5.3 million to be amortized over
the vesting period. In accordance with Financial Accounting Standards Board
Interpretation No. 44 issued in March 2000, "Accounting for Certain transaction
Involving Stock Compensation", the repricing requires the Company to account for
the options as variable from the date of modification to the date the award is
exercised, forfeited, or expires unexercised. The Company recorded amortization
of deferred compensation of $900,000 for the quarter ended October 31, 2000.
Total amortization for all deferred compensation for the quarter ended October
31, 2000 was $1.5 million.

NOTE 11 - SUBSEQUENT EVENT

On December 15, 2000, the Company entered into a definitive agreement with
nVidia Corporation under which nVidia will acquire most of the Company's assets,
including the Company's intellectual property, chip inventory as well as other
assets (the "Asset Sale"). Under the terms of the purchase agreement, nVidia has
agreed to pay the Company $70 million cash and 1.0 million shares of registered
nVidia common stock. Upon signing the purchase agreement, nVidia has agreed to
loan to the Company $15.0 million for working capital, which will be credited to
the cash portion of the purchase price to be paid at closing. In addition, upon
signing the purchase agreement, the Company transferred to nVidia its "3dfx" and
"Voodoo" trademarks and both 3dfx and nVidia agreed to stay the patent
infringement litigation between them through closing of the transaction, at
which time it will be jointly dismissed. The closing of the transaction is
subject to a variety of conditions, including 3dfx shareholder approval, receipt
of governmental approval including approval under the Hart-Scott Rodino
Antitrust Improvement Act of 1976, and receipt of all necessary consents of
third parties. There can be no assurance that the Company's sale of assets to
nVidia Corporation will be completed.

The board of directors of the Company has approved a plan of dissolution and is
recommending that its shareholders also approve this plan. Assuming 3dfx's
shareholders approve the plan of dissolution, following the closing of the Asset
Sale, 3dfx will proceed to wind up its affairs. The proceeds from the Asset Sale
and the sale of the Company's remaining assets will be used to pay or adequately
provide for the Company's debts and liabilities. Any remaining assets will
thereafter be distributed to the Company's shareholders in one or more
distributions, and the Company will then dissolve.

Subsequent to October 31, 2000, the Company has announced its plans to
substantially reduce its costs in order to best conserve its resources. These
cost-cutting measures include a reduction of substantially all of the Company's
workforce by early 2001, reduction in office space, and other efforts to reduce
non-essential expenses. The Company will also offer manufacturing services to
third parties to cover the overhead expenses associated with its Juarez, Mexico
manufacturing facility pending the sale of that facility. In the meantime, the
Company expects to continue to maintain an adequate workforce to support its
customers.

The target market for the Company has historically been the retail graphics
market, a market that the Company has dominated since 1998. The retail graphics
market represents approximately 10.0% of the overall graphics market, and is
subject to extreme volatility and unpredictability. Specifically, high inventory
expenses, decreasing margins and slowing demand have done irreparable harm to
the Company. There is no assurance that the Company can successfully consummate
the sale of its assets to nVidia Corporation, secure additional financing or
otherwise increase its liquidity. If the Company is unable to consummate the
asset sale with nVidia, secure additional financing or otherwise increase its
liquidity, the Company may seek the protection of state insolvency or federal
bankruptcy law for the orderly liquidation of its assets, or the same may be
imposed upon the Company by its creditors. The accompanying financial statements
do not reflect the impact of such liquidation.

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, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Any statements contained in this
document, including without limitation statements to the effect that 3dfx or its

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<PAGE> 12

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.

On December 15, 2000, 3dfx entered into a definitive agreement with nVidia
Corporation under which nVidia will acquire most of 3dfx's assets, including
3dfx's intellectual property, chip inventory as well as other assets. Under the
terms of the purchase agreement, nVidia has agreed to pay 3dfx $70 million cash
and 1.0 million shares of registered nVidia common stock. Upon signing the
purchase agreement, nVidia has agreed to loan to 3dfx $15.0 million for working
capital, which will be credited to the cash portion of the purchase price to be
paid at closing. In addition, upon signing the purchase agreement, 3dfx
transferred to nVidia its "3dfx" and "Voodoo" trademarks and both 3dfx and
nVidia agreed to stay the patent infringement litigation between them through
closing of the transaction, at which time it will be jointly dismissed. The
closing of the transaction is subject to a variety of conditions, including 3dfx
shareholder approval. There can be no assurance that 3dfx's sale of assets to
nVidia Corporation will be completed.

The board of directors of 3dfx has approved a plan of dissolution and is
recommending that its shareholders also approve this plan. Assuming 3dfx's
shareholders approve the plan of dissolution, following the closing of the asset
sale, 3dfx will proceed to wind up its affairs. The proceeds from the asset sale
and the sale of 3dfx's remaining assets will be used to pay or adequately
provide for 3dfx's debts and liabilities. Any remaining assets will thereafter
be distributed to 3dfx's shareholders in one or more distributions, and 3dfx
will then dissolve.

Subsequent to October 31, 2000, the Company announced its plans to substantially
reduce its costs in order to best conserve its resources. These cost-cutting
measures include a reduction of substantially all of the Company's workforce by
early 2001, reduction in office space and other efforts to reduce non-essential
expenses. The Company will also offer manufacturing services to third parties to
cover the overhead expenses associated with its Juarez, Mexico manufacturing
facility pending the sale of that facility. In the meantime, the Company expects
to continue to maintain an adequate workforce to support its customers.

The Company's sales have historically been concentrated among a limited number
of customers. Revenues derived from sales to Best Buy accounted for
approximately 12% of revenues, for the quarter ended October 31, 2000. For the
nine months ended October 31, 2000, D&H Distribution and Ingram Micro accounted
for approximately 11% and 19% 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 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.

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<PAGE> 13
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.

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 the quarter ended
October 31, 1999 (of which $48,000 and $73,000 was recorded in research and
development expenses and selling, general and administrative expenses,
respectively). The Company recorded amortization of deferred compensation of
$242,000 and $363,000 for the nine months ended October 31, 2000 and October 31,
1999, respectively, of which $96,000 and $144,000, respectively, was charged to
research and development expense and $146,000 and $219,000, respectively, was
charged to selling, general and administrative expense. As of July 31, 2000,
there was no remaining deferred compensation relating to these stock options.

On October 20, 2000, the Company undertook a stock option exchange program,
allowing employees the opportunity to surrender their existing stock options in
exchange for a new grant of 50% of the original options with a new exercise
price of $2.00 per share. The options will vest over nine months, being fully
vested on June 30, 2001, and expiring on June 30, 2002. This program was offered
to all active employees whose options were granted on September 5, 2000, or
earlier. On this date, options for 4.7 million shares were canceled and options
for 2.4 million shares were granted under this program. As the market value of
the shares at the date of grant exceeded the exercise price for these options
the Company recorded deferred compensation of $5.3 million to be amortized over
the vesting period. In accordance with Financial Accounting Standards Board
Interpretation No. 44 issued in March 2000. "Accounting for Certain transaction
Involving Stock Compensation", the repricing requires the Company to account for
the options as variable from the date of modification to the date the award is
exercised, forfeited, or expires unexercised. The Company recorded amortization
of deferred compensation of $.9 million for the quarter ended October 31, 2000.
Total amortization for all deferred compensation for the quarter ended October
31, 2000 was $1.5 million.

During the three months ended October 31, 2000, the Company recorded a charge of
$117.1 million for the impairment of goodwill and other intangibles. In
accordance with the Company's accounting policy, the Company assessed impairment
of its long-lived assets and determined that the carrying amount of goodwill and
intangibles would not be recoverable due to the deteriorating condition of its
operations. The impairment loss was measured as the amount by which the carrying
amount of the assets exceeded the estimated fair value of the assets as
determined using the present value of expected future cash flows.

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
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>

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<PAGE> 14

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.

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 Scholes formula. This deferred compensation will
be expensed over the remaining life of unvested Gigapixel options assumed by the
Company 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 Scholes formula and in
accordance with the merger agreement) 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

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<PAGE> 15

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 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.

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<PAGE> 16

RESULTS OF OPERATIONS

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

Revenues. Revenues are recognized upon product shipment. The Company's total
revenues were $39.2 million in the three months ended October 31, 2000, a
decrease of 63.0%, or $66.7 million from revenues of $105.9 million in the three
months ended October 31, 1999. The decrease was primarily attributable to
sluggish sales in the retail and commercial channel. Sell through of the
Company's Voodoo5 products in the retail and commercial channel was
significantly less than expected. In addition, pricing pressure in the channel
on the Voodoo5 product line resulted in additional price protection reserves
taken. Sales to international customers during the quarter, primarily in Western
Europe, were significantly less than a year ago. Revenues for the three months
ended October 31, 2000 were derived from sales of the Company's Voodoo3 and
Voodoo5 products. Substantially all of the revenues in the three months ended
October 31, 1999 were attributable to sales of the Company's Voodoo3 products.

Gross Profit (Loss). Gross profit (loss) 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 (loss) decreased by $38.9 million from $17.2 million in the three months
ended October 31, 1999 to ($21.7) million in the three months ended October 31,
2000. Gross profit (loss) as a percentage of revenues was 16.3% in the three
months ended October 31, 1999 and (55.5%) in the three months ended October 31,
2000. The decrease can primarily be attributed to lower margins associated with
pricing pressure in the retail and commercial channel on the Voodoo3 and Voodoo5
products sold in the three months ended October 31, 2000. In addition, lower
production volumes resulted in increased overhead applied on a per unit basis,
resulting in decreased overall gross profit margin. The Company also took
additional price protection reserves to promote sell through in the commercial
and retail channel, as well as additional inventory reserves, due to excess
inventories resulting from lower than anticipated sales volumes.

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 4.4% from $18.0 million in the
three months ended October 31, 1999, to $18.8 million in the three months ended
October 31, 2000. This slight increase reflects an increase in personnel costs
related to the GigaPixel acquisition and general engineering costs resulting
from the development of Voodoo5 and other future products.

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 15.8% from $18.3 million
in the three months ended October 31, 1999 to $15.4 million in the three months
ended October 31, 2000. This decrease is primarily attributable to decreases in
salary and compensation expense resulting from lower headcount, as well as
decreases in general operating expenses.

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<PAGE> 17
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 are amortized ratably over the amortization periods
of the applicable assets. The Company recorded amortization expense in the
amount of $9.7 million for the three months ended October 31, 2000, and $3.6
million for the three months ended October 31, 1999.

Impairment of Goodwill and Other Intangibles. During the three months ended
October 31, 2000 the Company recorded a charge of $117.1 million for the
impairment of goodwill and other intangibles as discussed in the Overview.

Interest and Other Income (Expense), Net. Interest and other income (expense),
net increased from income of $393,000 in the three months ended October 31, 1999
to income of $696,000 in the three months ended October 31, 2000. The increase
is related primarily to tenant income from subleasing activities relating to the
facility located in Richardson, Texas.

Provision (Benefit) For Income Taxes. The Company recorded income tax benefits
of $3.4 million and $6.6 million for the three months ended October 31, 2000 and
October 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 Systems, Inc. and GigaPixel Corporation and a
reduction of $2.4 million of deferred tax liabilities related to the write-off
of intangible assets in the third quarter of fiscal 2001.

NINE MONTHS ENDED OCTOBER 31, 2000 AND OCTOBER 31, 1999

Revenues. Revenues are recognized upon product shipment. The Company's total
revenues were $214.8 million in the nine months ended October 31, 2000, a
decrease of $36.4 million from revenues of $251.1 million in the nine months
ended October 31, 1999. The decrease was primarily attributable to slower than
anticipated sales of the Company's Voodoo5 product into the retail and
commercial channel. Revenues for the nine months ended October 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. Substantially all of the revenues in the nine months ended
October 31, 2000 were attributable to sales of the Company's Voodoo3 and Voodoo5
products. Revenues in the nine months ended October 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.

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 $45.2 million from $60.0 million in the nine months ended
October 31, 1999 to $14.9 million in the nine months ended October 31, 2000.
Gross profit as a percentage of revenues was 6.9% and 23.9% in the nine months
ended October 31, 2000 and October 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 and Voodoo5 products sold in the nine months
ended October 31, 2000. The Company also took additional price protection
reserves to promote sell through in the commercial and retail channel, as well
as additional inventory reserves, due to excess inventories resulting from lower
than anticipated sales volumes. Decreased production volumes of products for the
nine months ended October 31, 2000 also had a negative impact on gross margin.

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<PAGE> 18
costs paid to the Company's foundries in connection with manufacturing start-up
of new products. Research and development expenses increased 18.1% from $46.4
million in the nine months ended October 31, 1999 to $54.8 million in the nine
months ended October 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 nine months ended
October 31, 2000, but only for a portion of the nine-month period ended October
31, 1999. In addition, this increase reflects an increase in personnel costs
relating to the GigaPixel acquisition, 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.

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 15.5% from $43.9 million
in the nine months ended October 31, 1999 to $50.8 million in the nine months
ended October 31, 2000. The selling, general and administrative expenses
relating to the operations of STB, are included in total in the nine months
ended October 31, 2000, and from the effective date of the merger, May 13, 1999
through October 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.

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 are being amortized ratably over the amortization periods of the
applicable assets. The Company recorded amortization expense in the amount of
$18.0 million and $6.6 million in related amortization for the nine months ended
October 31, 2000 and the nine months ended October 31, 1999, respectively.

Impairment of Goodwill and Other Intangibles. During the nine months ended
October 31, 2000 the Company recorded a charge of $117.1 million for the
impairment of goodwill and other intangibles as discussed in the Overview.

Interest and Other Income (Expense), Net. Interest and other income (expense),
net decreased from income of $2.0 million in the nine months ended October 31,
1999 to income of $215,000 in the nine months ended October 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.

Provision (Benefit) For Income Taxes. The Company recorded income tax benefits
of $.3 million and $9.7 million for the nine months ended October 31, 2000 and
October 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 Systems, Inc. and GigaPixel Corporation, 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 to write off the balance of the Company's net deferred tax asset in
the second quarter of fiscal 2001. Additionally, a tax benefit of $2.4 million
was recorded in the third quarter of fiscal 2001 related to the release of
deferred tax liabilities associated with intangible asset write-offs in that
period.

LIQUIDITY AND CAPITAL RESOURCES

As of October 31, 2000, the Company had net negative working capital of ($3.9)
million including cash, cash equivalents and short-term investments of $33.6
million. Net cash used in operating activities in the first nine months of
fiscal 2001 was due primarily to a net loss of $291.5 million, partially offset
by the immediate write-off of acquired in-process research and development of
$66.3 million, depreciation of $18.1 million and amortization of $18.0 million,
impairment of goodwill and intangible assets of $117.1 million, as well as
decreases in accounts receivable and other assets of $40.3 million and $11.6
million, respectively.

Net cash provided by investing activities in the first nine months ended October
31, 2000 was approximately $15.6 million due to maturities of short-term
investments, and proceeds from the GigaPixel merger, partially offset by
purchases of property and equipment of $13.7 million. The Company does not

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<PAGE> 19

have any significant capital spending or purchase commitments other than normal
purchase commitments and commitments under leases. Net cash provided by
financing activities for the nine months ended October 31, 2000 of $7.6 million
was due to the net proceeds from the issuance of common stock of $2.2 million,
and increased short term debt of $6.0 million.

At October 31, 2000, the Company had a $25.0 million revolving credit facility
("Revolving Credit Facility"), as well as a $3.0 million term loan ("Term
Loan"). At October 31, 2000, $25.0 million was outstanding under the Revolving
Credit Facility and $1.6 million was outstanding under the Term Loan. Payment of
principal and interest began November 1, 1997. Formulas based on eligible
accounts receivable determine availability under the Revolving Credit
Facility. Subsequent to October 31, 2000, the Company repaid in full all of its
indebtedness under the Revolving Credit facility. The Company does not intend to
utilize the facility in the future.

Under the terms of the December 15, 2000 asset purchase agreement with nVidia,
nVidia will provide a $15 million bridge loan to the Company. The loan is to be
repaid upon the closing of the asset sale or the termination of the agreement.

The Company 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. The Company 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. The Company previously entered into an interest rate swap
agreement that fixes the interest rate on a majority of the lease obligation at
7.55%. Subsequent to October 31, 2000, the swap agreement was cancelled in
exchange for a cash payment of approximately $300,000. The Company 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, the Company 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 the Company. Any
remaining unpaid balance owing on the underlying obligation after the sale of
the facility will be the responsibility of the Company. The Company has entered
into an agreement to sell its Richardson facility for a sales price in excess of
its obligations under the lease.

The Company holds an option to purchase real estate adjoining its Texas
headquarters. The option entitles the Company to purchase the real estate for
$3.9 million, but the option would increase to current market value of the real
estate if not exercised by December 31, 2000. The Company expects to exercise
the option and then resell the property pursuant to an agreement to sell the
property to a third party.

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

The Company's liquidity and capital requirements depend upon numerous factors,
including the availability to the Company of additional capital on terms
acceptable to the Company, successful implementation of cost-cutting measures,
completion of the asset sale to nVidia Corporation, the costs involved in
maintaining and enforcing patent claims and other intellectual property rights,
available borrowings under line of credit arrangements and other factors.

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<PAGE> 20
The Company has in recent years been unable to generate cash from its
operations due to the sluggish retail chip market and other factors, and has
used, and continues to use its remaining cash resources to finance its
operations and its efforts to find a strategic partner, as well as pay its
outstanding debts. The Company expects to continue to incur certain operating
expenses that will consume available cash resources over time. On December 15,
2000, the Company entered into an asset purchase agreement with nVidia
Corporation in an effort to raise capital to satisfy the Company's current
operating and capital requirements. Under the terms of the agreement the Company
will sell nVidia certain assets and intellectual property for $70 million in
cash and 1.0 million shares of nVidia common stock. See additional discussion
regarding the terms of the agreement in Item 5.

The Company believes that its cash balances and cash generated from operations
at October 31, 2000 were insufficient to meet the Company's operating and
capital requirements through the following three months. The Company believes
that the $15.0 million bridge loan to be provided by nVidia will enable it to
meet its essential operating expenses pending closing of the nVidia Asset Sale,
and that the proceeds from the Asset Sale will be sufficient to enable the
Company to satisfy all known debts and liabilities, although there can be no
assurance in either regard. If the Company is unable to consummate the Asset
Sale, secure additional financing or otherwise increase its liquidity in the
near future, the Company may seek protection of state insolvency or federal
bankruptcy law for the orderly liquidation of its assets, or the same may be
imposed upon the Company by its creditors. The accompanying financial statements
do not reflect the results of such liquidations.

The Company has taken measures subsequent to October 31, 2000 to cut its
expenses in an effort to conserve its remaining cash reserves by substantially
reducing its workforce, reducing its use of office space and reducing other
non-essential expenses. In addition, the Company plans to sell its Juarez,
Mexico manufacturing facility.

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.

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.

THE ASSET SALE MAY NOT BE CONSUMMATED.

The consummation of the Asset Sale under the asset purchase agreement with
nVidia Corporation is subject to numerous conditions. There can be no assurance,
even if the shareholders of 3dfx vote to approve the Asset Sale, that the Asset
Sale will be consummated. If it is not consummated, 3dfx may not be able to sell
its assets to another buyer on terms as favorable as those provided in the asset
purchase agreement, or at all, which would mean that less cash would be
available for distribution to 3dfx's shareholders than if the asset sale had
been consummated. Further, the termination of the Asset Purchase Agreement under
certain circumstances would result in 3dfx being obligated to pay certain
expenses and fees to nVidia, as well as other negative consequences.

3DFX MAY REQUIRE ADDITIONAL SOURCES OF CASH TO MEET ITS CAPITAL AND OPERATIONAL
REQUIREMENTS AND FACES UNCERTAINTY IN OBTAINING CASH ON SATISFACTORY TERMS.

The liquidity and cash flow from 3dfx's operations are insufficient to meet its
operating and capital requirements. As a result, although nVidia Corporation has
agreed to extend a bridge loan to 3dfx and to purchase most of 3dfx's assets
(subject to certain conditions), 3dfx may be required to seek additional sources
of cash through financing or other means, including public or private debt or
equity financings. If adequate funds are not available, then 3dfx may be unable
to continue as a going concern. 3dfx's capital requirements depend on numerous
factors, including the availability to the Company of additional capital on
terms acceptable to the Company, successful implementation of cost-cutting
measures, completion of the asset sale to nVidia Corporation, the costs involved
in maintaining and enforcing patent claims and other intellectual property
rights, available borrowings under line of credit arrangements and other
factors.
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<PAGE> 21

(Something missing) assurance that any means of raising cash sought by 3dfx
will be available, or, if available, will be on terms or in amounts attractive
to 3dfx.

If the Company fails to resolve its current liquidity issues, management
believes the Company will experience severe financial and operational
difficulties, including (i) the inability to generate sufficient working capital
from operations to respond to changes in customer demand, to increase sales
base, to satisfy the outstanding debts, working capital or capital expenditure
requirements, (ii) being required to make price or receivables concessions,
thereby resulting in further deterioration in financial results in future
periods, (iii) erosion of the Company's relationships with its vendors, thereby
resulting in further deterioration in future periods, (iv) the inability to
retain its key personnel, and (v) the inability to fully realize the carrying
value of certain assets including capital equipment.

3DFX MAY BE SUBJECT TO CLAIMS OF FRAUDULENT CONVEYANCE BY 3DFX'S CREDITORS.

3DFX has incurred substantial indebtedness. Under federal and state fraudulent
conveyance statutes in a bankruptcy, reorganization or rehabilitation case or
similar proceeding or a lawsuit by unpaid creditors of 3dfx, under certain
circumstances, such court could enjoin or void the Asset Sale and/or take other
action detrimental to 3dfx and its shareholders. These circumstances include the
findings that, at the time 3dfx consummated the Asset Sale, (i) the assets were
sold to hinder, delay or defraud current or future creditors or (ii) (A) the
Company received less than reasonably equivalent value or fair consideration for
its assets and (B) the Company, (1) was insolvent or was rendered insolvent by
reason of the Asset Sale, (2) was engaged, or about to engage, in a business or
transaction for which its assets constituted unreasonably small capital, (3)
intended to incur, or believed that it would incur, debts beyond its ability to
pay as such debts matured (as all of the foregoing terms are defined in or
interpreted under such fraudulent conveyance statutes) or (4) was a defendant in
an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment, the judgment is
unsatisfied).

The measure of insolvency for purposes of the foregoing considerations will vary
depending upon the federal or local law that is being applied in any such
proceeding. Generally, however, 3dfx would be considered insolvent if, at the
time it consummated the Asset Sale, either (i) the fair market value (or fair
saleable value) of its assets is less than the amount required to pay its total
existing debts and liabilities (including the probable liability on contingent
liabilities) as they become absolute and mature or (ii) it is incurring debts
beyond its ability to pay as such debts mature.

3DFX MAY NOT BE ABLE TO SATISFY ITS DEBT OBLIGATIONS AND MAY BE FILE OR FORCED
INTO BANKRUPTCY BY ITS CREDITORS.

3dfx has entered into a definitive agreement with nVidia Corporation for the
sale of its assets. If such transaction is not consummated, it is not likely
that 3dfx will be able to satisfy its debt obligations and may be forced to
resort to bankruptcy protection. Even if 3dfx is able to consummate the asset
sale with nVidia, the proceeds provided by such transaction may not be
sufficient to satisfy all of 3dfx's known and unknown outstanding debts and
liabilities. In the event that the proceeds from the nVidia asset sale are
insufficient to pay its outstanding debts and other liabilities, 3dfx's
creditors will be able to foreclose on any collateral granted by the Company to
secure its indebtedness, and may force 3dfx into involuntary bankruptcy.
Further, in the event that there are insufficient proceeds to pay or otherwise
provide for 3dfx debts and obligations, there will be no assets available for
distribution to 3dfx's shareholders.

3DFX HAS EXPERIENCED 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:

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

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

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

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

- Gains or losses of significant customers or strategic
relationships.

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<PAGE> 22

- The volume and timing of customer orders.

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

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

- Product obsolescence and the management of product transitions.

- Production delays.

- 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.

AS NEARLY ALL OF THE REVENUES OF 3DFX WILL BE DERIVED FROM THE PC AND GRAPHICS
BOARD AND CHIP INDUSTRIES, THE RECENT DOWNTURN IN THE RETAIL GRAPHICS MARKET HAS
ADVERSELY AFFECTED 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. These markets are cyclical and have been
characterized by:

- Rapid technological change;

- Evolving industry standards;

- Cyclical and seasonal market patterns;

- Frequent new product introductions and short product life
cycles;

- Significant price competition and price erosion;

- Fluctuating inventory levels;

- Alternating periods of over-capacity and capacity constraints;

- Variations in manufacturing costs and yields; and

- Significant expenditures for capital equipment and product
development.

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

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<PAGE> 23

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
recently, characterized by lower product demand and accelerated reduction of
product prices. As a result, the sell through of the Company's Voodoo5 products
in the retail and commercial channel has been significantly less than expected.
Consequently, 3dfx has not been able to generate sufficient revenues from the
sale of its Voodoo products to satisfy its debt obligations and continue its
operations as currently conducted. The slowdown of the PC market and the
sluggish sales of the Company's Voodoo products have had a material adverse
effect on the Company's business, operating results and financial condition.

IN ORDER TO CONSERVE ITS CASH RESERVES SO THAT 3DFX CAN MEET ITS DEBT
OBLIGATIONS AND OPERATE ITS BUSINESS AS CURRENTLY CONDUCTED, 3DFX WILL NEED TO
TAKE MEASURES TO CUT ITS EXPENSES.

In an effort to conserve its remaining cash reserves, 3dfx will implement cost
cutting measures to minimize its expenses by curtailing or discontinuing various
activities and operations, including substantially reducing its workforce,
reducing its use of office space and other efforts to reduce non-essential
expenses. There can be no assurance that 3dfx will be successful in timely and
adequately reducing its expenses.

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 OPERATING HISTORY, COMBINED WITH ITS RECENT SUBSTANTIAL LOSSES,
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, $63.3 million in fiscal 2000 and $291.5 million in the
first nine months of fiscal 2001. Even though 3dfx is undertaking substantial
cost-cutting measures, it is unlikely to ever return to profitability.

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:

-21-
<PAGE> 24

- Actual or anticipated variations in quarterly operating results;

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

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

- The pricing policies of 3dfx's competitors;

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

- Changes in securities analysts' recommendations;

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

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

- Market fluctuations and performance of the PC and graphics chip
and board industries;

- Changes in the perceived likelihood of the closing of the nVidia
asset sale; and

- Changes in the amount of assets, if any, that will be available
to distribute to 3dfx shareholders following the payment or
provision for 3dfx's debts and liabilities.

The price of a share of 3dfx has in recent periods declined, and declined
significantly following 3dfx's announcement on December 15, 2000 of the proposed
asset sale to nVidia and dissolution of 3dfx. The closing sale price of 3dfx
common stock on December 18, 2000 was $.19 per share.

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 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:

- Proper new product definition;

- Timely completion and introduction of new product designs;

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

- The quality of new products and technologies;

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

-22-
<PAGE> 25

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

- Competitive pricing of products and technologies; and

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

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

-23-
<PAGE> 26

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.

BECAUSE 3DFX HAS LIMITED PRODUCT DIVERSITY, 3DFX'S INABILITY TO MAINTAIN ITS
HISTORICAL SALES VOLUMES HAS RESULTED IN A NEGATIVE IMPACT ON 3DFX'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 has been materially harmed
as it has been unable to continue to sell these products at historical levels.

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:

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

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

- 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

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<PAGE> 27

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.

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.

In November 2000, 3dfx announced its plans to close its facility in Juarez,
Mexico and remove itself from the graphics card manufacturing 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:

- Unexpected changes in legislative or regulatory requirements;

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

- Tariffs, quotas and other trade barriers and restrictions;

- Longer accounts receivable payment cycles;

- Difficulties in collecting payment, including increased credit
exposures;

- Potentially adverse tax consequences, including repatriation of
earnings;

- Burdens of complying with a variety of foreign laws;

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<PAGE> 28

- Unfavorable intellectual property laws;

- Political instability; and

- 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.

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. Such litigation 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 OPERATES 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:

- Product performance and quality;

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

-26-
<PAGE> 29

- Access to customers and distribution channels;

- Brand awareness;

- Price;

- Product support; and

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

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 integrate graphics 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.

LITIGATION MAY DIVERT 3DFX'S RESOURCES, OTHERWISE HARM 3DFX 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. In addition,
securities class actions or other actions initiated by shareholders of 3dfx
could seek to enjoin the Asset Sale or otherwise seek damages against 3dfx and
its officers and directors.

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<PAGE> 30

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.

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

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

- 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.

- 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.

- The merger has dramatically increased the number of freely
tradeable 3dfx shares, resulting in a substantial dilution to
current 3dfx shareholders, which could negatively impact 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 were 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 completion of the merger could adversely affect the
market price of 3dfx common stock.

- 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

-28-
<PAGE> 31

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.

- 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.

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

- 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.

-29-
<PAGE> 32

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

None

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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<PAGE> 33
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. On September 29, 2000, the Court issued a ruling which in 3dfx's
opinion, interpreted the patent claims in favor of the Company.

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.

Under the terms of the asset purchase agreement between 3dfx and nVidia
Corporation, the parties agree to stay the pending patent litigation between
them through the closing of the asset sale, at which time the suits will be
jointly dismissed with prejudice.

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 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 has been approved by
the Court, 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 which has been 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

None.

ITEM 5. OTHER INFORMATION

On December 15, 2000, 3dfx entered into a definitive agreement with nVidia
Corporation under which nVidia will acquire certain of 3dfx's assets, including
3dfx's intellectual property, chip inventory as well as other assets (the "Asset
Sale"). Under the terms of the purchase agreement, nVidia has agreed to pay 3dfx
$70 million cash and 1.0 million shares of registered nVidia common stock. Upon
signing the purchase agreement, nVidia has agreed to loan to 3dfx $15.0 million
for working capital, which will be credited to the cash portion of the purchase
price to be paid at closing. In addition, upon signing the purchase agreement,
3dfx transferred to nVidia its "3dfx" and "Voodoo" trademarks and both 3dfx and
nVidia agreed to stay the patent infringement litigation between them through
closing of the transaction, at which time it will be jointly dismissed. The
closing of the transaction is subject to a variety of conditions, including 3dfx
shareholder approval, receipt of governmental approval including approval under
the Hart-Scott Rodino Antitrust Improvement Act of 1976, and receipt of all
necessary consents of third parties. There can be no assurance that 3dfx's sale
of assets to nVidia Corporation will be completed.

The board of directors of 3dfx has approved a plan of dissolution and recommends
that its shareholders also approve this plan. Assuming 3dfx's shareholders
approve the plan of dissolution, following the closing of the Asset Sale, 3dfx
will proceed to wind up its affairs. The proceeds from the Asset Sale and the
sale of 3dfx's remaining assets will be used to pay or adequately provide for
3dfx's debts and liabilities. Any remaining assets will thereafter be
distributed to 3dfx's shareholders in one or more distributions, and 3dfx will
then dissolve.

3dfx has announced its plans to substantially reduce its costs in order to best
conserve its resources. These cost-cutting measures include a reduction of
substantially all of 3dfx's workforce by early next year, reduction in office
space and other efforts to reduce non-essential expenses. 3dfx will also offer
manufacturing services to third parties to cover the overhead expenses
associated with its Juarez, Mexico manufacturing facility pending the sale of
that facility. In the meantime, 3dfx expects to continue to maintain an adequate
workforce to support its customers.

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<PAGE> 34

Messrs. Andrei M. Manoliu and George T. Haber recently resigned from the board
of directors of 3dfx. No action has been taken to fill the vacancies created by
these resignations.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1* Employment Agreement, dated as of October 20, 2000, by and
between the Company and Richard Burns.

27.1* Financial Data Schedule.

------------
* Filed herewith

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<PAGE> 35

(b) Reports on Form 8-K

None

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: December 19, 2000

3DFX INTERACTIVE, INC.
(Registrant)

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

By: /s/ RICHARD A. HEDDLESON
----------------------------------
Richard A. Heddleson
Chief Financial Officer
(Principal Financial and
Accounting Officer)

-33-
<PAGE> 36

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT Documents
------- ---------
<S> <C>
10.1* Employment Agreement, dated as of November 10, 2000, by and between the
Company and Richard Burns.

27.1* Financial Data Schedule.
</TABLE>

------------
* Filed herewith