3DFX INTERACTIVE INC, 10-Q, 2000-06-14

3DFX INTERACTIVE INC
10-Q, 2000-06-14
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<PAGE> 1

United States
Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended April 30, 2000.

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

Commission file number 0-22651

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

3DFX INTERACTIVE, INC.

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

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Common Stock, No Par Value --- 24,644,437 shares as of June 5, 2000.

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

3DFX INTERACTIVE, INC.

INDEX

<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements

Condensed Consolidated Balance Sheets At
January 31, 2000 and April 30, 2000..................................... 2

Condensed Consolidated Statements of Operations for
the three months ended April 30, 2000 and April 30, 1999................ 3

Condensed Consolidated Statements of Cash Flows for
the three months ended April 30, 2000 and April 30, 1999................ 4

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

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

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings....................................................... 24

Item 2. Changes in Securities and Use of Proceeds............................... 24

Item 3. Defaults Upon Senior Securities......................................... 24

Item 4. Submission of Matters to a Vote of Security Holders..................... 25

Item 5. Other Information....................................................... 25

Item 6. Exhibits and Reports on Form 8-K........................................ 25

SIGNATURES....................................................................................... 26
</TABLE>

1
<PAGE> 3

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

3dfx INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>

APRIL 30, JANUARY 31,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 44,684 $ 41,818

Short-term investments 12,986 24,012

Accounts receivable, net of allowance for doubtful
accounts of $5,201 and $6,681 65,479 66,160

Inventories, net 49,411 45,065

Other current assets 15,951 28,407
---------- ----------

Total current assets 188,511 205,462
---------- ----------

Property and equipment, net 37,041 40,269

Intangibles 11,066 12,942

Goodwill 31,595 32,709

Other assets 8,675 4,729
---------- ----------

Total assets $ 276,888 $ 296,111
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Short-term debt $25,000 $25,000

Accounts payable 60,503 60,879

Accrued liabilities 18,758 20,385

Current portion of long-term liabilities 1,314 732
---------- ----------

Total current liabilities 105,575 106,996
---------- ----------

Long-term liabilities: 1,029 1,881

Shareholders' equity:

Preferred stock, no par value, 5,000,000 shares -- --
authorized; none issued and outstanding

Common stock, no par value, 50,000,000 shares
authorized; 24,510,000 and 24,442,370 shares issued and
outstanding 249,869 251,883

Warrants 242 242

Deferred Compensation (51) (172)

Unrealized gain on equity securities (782) 1,844

Retained earnings (78,994) (66,563)
---------- ----------

Total shareholders' equity 170,284 187,234
---------- ----------

Total liabilities and shareholders' equity $ 276,888 $ 296,111
========== ==========
</TABLE>

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

2
<PAGE> 4

3DFX INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 108,578 $ 40,444

Cost of sales 82,167 26,190
--------- ---------

Gross profit 26,411 14,254
--------- ---------

Research and development 16,557 11,756

Sales, general and administrative 19,125 6,620

Amortization of goodwill and intangibles 3,830 --
--------- ---------

Total operating expenses 39,512 18,376
--------- ---------

Loss from operations (13,101) (4,122)

Interest and other income (expense), net (45) 911
--------- ---------

Loss before income taxes (13,146) (3,211)
--------- ---------

Income tax benefit (715) (1,027)
--------- ---------

Net loss ($ 12,431) ($ 2,184)
========= =========

Net loss per share:
Basic and diluted ($ 0.51) ($ 0.14)
========= =========
Shares used in net income (loss) per share calculations:
Basic and Diluted 24,510 15,768
========= =========
</TABLE>

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

3
<PAGE> 5

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($12,431) ($ 2,184)

Adjustments to reconcile net income to net cash from operating activities:
Depreciation 5,242 1,821
Amortization 3,830
Stock Compensation 121 121
Decrease in allowance for doubtful accounts (1,481) (409)
Changes in assets and liabilities:
Accounts receivable 2,162 (5,528)
Inventories (4,346) (323)
Other assets 4,417 (4,821)
Accounts payable (376) 5,206
Accrued and other long-term liabilities (1,627) (4,460)
-------- --------
Net cash used in operating activities (4,489) (10,577)
-------- --------

Cash flows from investing activities:
Sales (purchases) of short-term investments 8,400 (1,917)
Purchases of property and equipment (2,014) (6,980)
-------- --------
Net cash provided by (used in) investing activities 6,386 (8,897)
-------- --------

Cash flows from financing activities:
Proceeds from issuance (repurchase) of common stock, net 1,239 1,496
Principal payments of capitalized lease obligations, net (270) (148)
Proceeds (payments) on line of credit, net -- --
-------- --------
Net cash provided by financing activities 969 1,348
-------- --------
Net increase (decrease) in cash and cash equivalents 2,866 (18,126)
-------- --------
Cash and cash equivalents at beginning of period 41,818 73,682
-------- --------
Cash and cash equivalents at end of period $ 44,684 $ 55,556
======== ========
</TABLE>

Supplemental disclosure of non-cash information:
-Unrealized gain (loss) on equity securities available-for-sale was ($2,625)
for the three months ended April 30, 2000.

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

4
<PAGE> 6
3DFX INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:

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

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

One customer represented 29% of the Company's revenues during the first quarter
of fiscal 2001, and three customers represented 51%, 18% and 12% of the
Company's revenue during the first quarter of fiscal 2000.

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
Statement," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The application of SAB No. 101
did not have a material impact on 3dfx's financial statements.

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

NOTE 2 - INVENTORY:

<TABLE>
<CAPTION>
April 30, January 31,
2000 2000
--------- -----------

<S> <C> <C>
Raw materials $29,113 $26,708
Work in-process 13,562 8,940
Finished goods 6,736 9,417
------- -------
Total inventory $49,411 $45,065
======= =======
</TABLE>

5
<PAGE> 7
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
three days before and after the announcement of the merger), $9.9 million in STB
stock option costs (being determined under the Black Sholes formula) and $13.3
million in estimated expenses of the transaction. The purchase price was
allocated as follows: $85.6 million to the estimated fair value of STB net
tangible assets purchased (as of May 13, 1999), ($7.6) million to establish
deferred tax liabilities associated with the certain intangibles acquired, $4.3
million to purchased in-process research and development, $11.4 million to
purchased existing technology, $4.4 million to trademarks, $2.3 million to
workforce-in-place, $1.0 million to executive covenants and $37.9 million to
goodwill. The allocation of the purchase price to intangibles was based upon an
independent, third party appraisal and management's estimates.

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

<TABLE>
<CAPTION>
Estimated Fiscal 2001
Amount Useful Life Amortization
---------- ----------- ------------
<S> <C> <C> <C>
Purchased existing technology:
1.5 year life................ $6,475,000 1.5 years $ 3,418,000
3 year life.................. 4,966,000 3 years 1,655,000
Trademarks......................... 4,406,000 5 years 881,000
Workforce-in-place................. 2,250,000 5 years 450,000
Executive covenants................ 1,000,000 5 years 200,000
Goodwill........................... 37,900,000 5 years 7,816,000
</TABLE>

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

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

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

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

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

6
<PAGE> 8
Discount rate. Discounting the net cash flows back to their present value is
based on the industry weighted average cost of capital ("WACC"). The industry
WACC is approximately 14%. The discount rate used in discounting the net cash
flows from IPR&D is 20%, a 600 basis point increase from the industry WACC. This
discount rate is higher than the industry WACC due to inherent uncertainties
surrounding the successful development of the IPR&D, market acceptance of the
technology, the useful life of such technology and the uncertainty of
technological advances which could potentially impact the estimates described
above.

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

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

<TABLE>
<CAPTION>
Three Months
Ended
April 30, 1999
--------------
<S> <C>
Revenues $111,893
Net income (loss) ($18,865)
Basic net income (loss) per share ($0.79)
========
Diluted net income (loss) per share ($0.79)
========
</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 - PROPOSED MERGER:

In March 2000, 3dfx entered into a Merger Agreement with GigaPixel Corporation,
a Delaware Corporation ("GigaPixel"). The Merger Agreement provides for the
merger of a newly formed, wholly owned subsidiary of 3dfx with and into
GigaPixel (the "Merger"). GigaPixel will be the surviving corporation of the
Merger and, upon consummation will become a wholly owned subsidiary of 3dfx.
3dfx intends to account for this merger under the purchase method of accounting.
On June 6, 2000, 3dfx filed a registration statement relating to the Merger and
has been declared effective by the Securities and Exchange Commission. The
holders of outstanding shares of GigaPixel will be entitled to receive, on a pro
rata basis, an aggregate of approximately 14.7 million shares of 3dfx common
stock (or approximately 0.70 share of 3dfx common stock for each outstanding
share of GigaPixel common stock or preferred stock held by each GigaPixel
shareholder), subject to certain adjustments provided for in the merger
agreement. After completion of the merger, the common stock issued to GigaPixel
shareholders will represent approximately 37.2% of the total number of shares of
outstanding 3dfx common stock.

3dfx intends to account for this merger under the purchase method of accounting.
The purchase price for GigaPixel is approximately $194.5 million and includes
$178.1 million of stock to be issued at fair value (fair value being determined
as the average price of 3dfx stock for a period of five days before and after
the announcement of the merger), $9.4 million in GigaPixel stock option costs
and $7 million in estimated expenses of the transaction. The purchase price was
allocated on a pro forma basis: $3.6 million to the estimated fair value of
GigaPixel net tangible assets purchased (as of June 5, 2000), $81.3 million to
purchased in-process research and development, $2.4 million to assembled
workforce, ($0.9 million) to deferred tax liabilities, and $108.1 million to
goodwill. The allocation of the purchase price to intangibles was based upon a
preliminary independent, third party appraisal and management's estimates and is
subject to change upon finalization of the appraisals.

On June 7, 2000, the registration statement relating to the Merger was declared
effective by the Securities and Exchange Commission. The Merger is subject to
approval of the shareholders of both 3dfx and GigaPixel among other conditions.

NOTE 5 - NET INCOME (LOSS) PER SHARE:

Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods. Diluted net income (loss) per
share is computed using the weighted average number of common and potentially
dilutive common shares during the periods. Diluted loss per share was the same
as basic loss per share for both periods. During the quarter ended April 30,
2000 and April 30, 1999, options to purchase approximately 2,941,736 and 116,250
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 $715,000 and $1.0 million for the
three months ended April 30, 2000 and April 30, 1999, respectively. The
Company's effective tax rate in fiscal 2001 and 2000 differs from the statutory
rate due to non-deductible charges relating to the acquisition of STB, increase
in valuation allowance against the Company's deferred tax assets, and benefits
realized as a result of a net operating loss carryback to profitable years.
Management believes it is more likely than not that a portion of its net
deferred tax assets will not be realized and as such has recorded a valuation
allowance.

7
<PAGE> 9

NOTE 7 - COMPREHENSIVE INCOME:

In January 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes standards
for reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. Other comprehensive income (loss) for the three months ended April
30, 2000 was an unrealized loss of ($2.6) million, representing a loss from
investing activities, resulting in total comprehensive income (loss) of ($15.0)
million. There was no other comprehensive income for the three months ended
April 30, 1999.

NOTE 8 - SHORT-TERM DEBT:

3dfx has a line of credit agreement with a bank, which provides for maximum
borrowings in an amount up to the lesser of 80% of eligible accounts receivable
or $25,000,000. Borrowings under the line are secured by $25,000,000 of cash and
short-term investments and all of 3dfx's owned assets and bear interest at Libor
plus 100 basis points (7.6625% as of April 30, 2000). The agreement requires
that 3dfx maintain certain levels of tangible net worth and generally prohibits
3dfx from paying cash dividends. The line of credit expires on December 19,
2000. At April 30, 2000, $25,000,000 was outstanding under this line of credit.

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

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include the sentence in the second
paragraph under "Overview" regarding expected customer concentration; the
sentence in the fourth paragraph under "Overview" regarding availability of raw
materials; the sentence in the second paragraph under "Results of Operations"
regarding factors affecting gross profit; the sentences in the third and fourth
paragraphs under "Results of Operations" regarding future research and
development and selling, general and administrative costs, respectively; the
sentence in the second paragraph under "Liquidity and Capital Resources"
regarding capital expenditures; the statements in the fourth paragraph under
"Liquidity and Capital Resources" regarding future liquidity and capital
requirements. 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
and 1998. In March 1999, the Company began shipment of its Voodoo3 product
family of enhanced and more fully-featured, single chip 3D/2D media processors.
The Voodoo3 product family broadened the Company's products to include
board-level products. The Company commenced shipping its new Voodoo5 products in
May 2000.

The Company's sales have historically been concentrated among a limited number
of customers. Revenues derived from sales to Ingram Micro accounted for
approximately 29% of revenues for the quarter ended April 30, 2000. Revenues
derived from sales to STB Systems, Inc. ("STB"), Creative Technology, Ltd.
("Creative") and its subsidiaries, and Elitetron Electronic Co., Ltd.
("Elitetron") accounted for approximately 51%, 18% and 12%, respectively, of
revenues for the quarter ended April 30, 1999. 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

8
<PAGE> 10

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 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.

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 each of the
quarters ended April 30, 2000 and April 30, 1999 (of which $48,000 and $73,000
will be recorded in research and development expenses and selling, general and
administrative expenses, respectively).

OVERVIEW OF STB MERGER AND TREATMENT OF IPR&D

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

9
<PAGE> 11
The intangible assets and goodwill acquired have estimated and useful lives and
estimated first year amortization, as follows:

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

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

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

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

PROPOSED MERGER WITH GIGAPIXEL CORPORATION

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RESULTS OF OPERATIONS

THREE MONTHS ENDED APRIL 30, 2000 AND APRIL 30, 1999

Revenues. Revenues are recognized upon product shipment. The Company's total
revenues were $108.6 million in the three months ended April 30, 2000, an
increase of $68.1 million over revenues of $40.4 million in the three months
ended April 30, 1999. The increase was primarily attributable to revenues
generated from board-level sales incorporating Voodoo3 technology. Substantially
all of the revenues in the three months ended April 30, 2000 were attributable
to sales of the Company's Voodoo3 products. Revenues in the three months ended
April 30, 1999 were derived from the sale of the Company's Voodoo Banshee, the
Voodoo2 chipsets and the Voodoo3 chip. As a result of the STB merger, some of
the Company's former significant customers do not do business with the combined
company because these customers are now competitors of 3dfx.

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. Gross profit as a
percentage of revenues was 24% and 35% in the three months ended April 30, 2000
and April 30, 1999, respectively. The decrease can primarily be attributed to
the gross profit generated from sales of board-level products, which have lower
margins as compared with the margins on chip-only products. In addition, the
decrease in gross profit as a percentage of revenues resulted from lower margins
associated with pricing pressure in the retail and commercial channel on the
Voodoo3 products sold in the three months ended April 30, 2000. The Company's
future gross profit will be affected by the overall level of sales, the mix of
products sold in a period, manufacturing yields, and the Company's ability to
reduce product procurement and production costs.

Research and Development. Research and development expenses consist primarily of
compensation and other expenses related to research and development personnel,
occupancy costs of research and development facilities, depreciation of capital
equipment used in product development and engineering costs paid to the
Company's foundries in connection with manufacturing start-up of new products.
Research and development expenses increased 41% from $11.8 million in the three
months ended April 30, 1999 to $16.6 million in the three months ended April 30,
2000. Included in the quarter ended April 30, 2000 is $2.6 million in research
and development expenses attributable to the operations of STB. Excluding the
effect of STB's operations, research and development expenses increased 19% in
the three months ended April 30, 2000 as compared to three months ended April
30, 1999. This increase reflects an increase in personnel costs, common cost
allocations and engineering costs resulting from the development of Voodoo5 and
other future products. The Company expects to continue to make substantial
investments in research and development and anticipates that research and
development expenses will increase in absolute dollars in future periods,
although such expenses as a percentage of total revenues will fluctuate.

Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 189% from $6.6 million in
the three months ended April 30, 1999 to $19.1 million in the three months ended
April 30, 2000. The increase is primarily attributable to the inclusion of $10.5
million in expenses relating to the operations of STB. Excluding the effect of
STB's operations, selling, general and administrative expenses increased 30% in
the quarter ended April 30, 2000 as compared to the quarter ended April 30,
1999, due primarily to increased marketing costs associated with the VSA 100
product family launch and increased legal costs. The Company expects that
selling, general and administrative expenses will increase in absolute dollars
in future periods, although such expenses as a percentage of total revenues will
fluctuate.

Goodwill and Other Intangibles Amortization. In connection with the STB merger,
the Company recorded assets representing goodwill of approximately $37.9 million
and intangibles of approximately $19.1 million. These amounts will be amortized
ratably over the amortization periods of the applicable assets. For the three
months ended April 30, 2000, the Company recorded $3.8 million in related
amortization. There was no amortization relating to goodwill or intangibles for
the three months ended April 30, 1999.

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Interest and Other Income (Expense), Net. Interest and other income (expense),
net decreased from income of $911,000 in the three months ended April 30, 1999
to a net expense of $45,000 in the three months ended April 30, 2000. The
decrease is primarily related to decreased earnings from lower invested cash
balances and 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 $715,000 and $1.0 million for the three months ended April 30, 2000 and
April 30, 1999, respectively. The Company's effective tax rate in fiscal 2001
and 2000 differs from the statutory rate due to non-deductible charges relating
to the acquisition of STB, increase in valuation allowance against the
Company's deferred tax assets and benefits realized as a result of a net
operating loss carryback to profitable years. Management believes it is more
likely than not that a portion of its net deferred tax assets will not be
realized and as such has recorded a valuation allowance. At January 31, 2000,
3dfx had net operating loss carryforwards of $22.5 million and $32.2 million
for federal and state purposes, respectively. At January 31, 2000, 3dfx had
research and development credit carryforwards of approximately $1.5 million and
$1.0 million for federal and California purposes, respectively.

Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Due to the completion of 3dfx's initial public offering in June
1997, the acquisition of STB Systems, Inc. and the proposed merger with
GigaPixel Corporation, certain annual limitations will apply which will limit
the amount of net operating losses that may be utilized on an annual basis.

LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2000, the Company had working capital of $82.9 million including
cash, cash equivalents and short-term investments of $57.7 million. Net cash
used in operating activities in the first quarter of fiscal 2001 was due
primarily to a net loss of $12.4 million, and increases of $4.3 million in
inventory, partially offset by adjustments of depreciation of $5.2 million and
amortization of $3.8 million, as well as decreases in accounts receivable and
other assets of $2.2 million and $4.4 million, respectively. Net cash used in
operating activities in the first quarter ended April 30, 1999 was due primarily
to a net loss of $2.2 million, increases of $5.5 million and $4.8 million in
accounts receivable and other assets, respectively, and increases in accrued and
other liabilities of $4.5 million, partially offset by a $5.2 million increase
in accounts payable and depreciation of $1.8 million.

Net cash provided by investing activities in the first quarter ended April 30,
2000 was approximately $8.4 million due to maturities of short-term investments,
partially offset by purchases of property and equipment of $2.0 million. Net
cash used in investing activities in the first quarter ended April 30, 1999 was
primarily due to purchases of property and equipment of $7.0 million. The
Company does not have any significant capital spending or purchase commitments
other than normal purchase commitments and commitments under leases. The Company
expects capital expenditures to increase over the next several years as it
expands facilities and acquires equipment to support the planned expansion of
its operations.

Net cash provided by financing activities for the first quarter ended April 30,
2000 of $969,000 was due to the net proceeds from the issuance of common stock
of $1.2 million, partially offset by payments on its capital lease obligations.
Net cash provided by financing activities was approximately $1.3 million in the
first quarter ended April 30, 1999 due primarily to proceeds from the issuance
of common stock.

3dfx has a $25 million revolving credit facility ("Revolving Credit Facility"),
as well as a $3.0 million term loan ("Term Loan"). At April 30, 2000, $25.0
million was outstanding under the Revolving Credit Facility and $1.8 million was
outstanding under the Term Loan. Principal amounts outstanding under the
Revolving Credit Facility bear interest at LIBOR plus 100 basis points (7.66% at
April 30, 2000). Amounts outstanding under the Term Loan bear interest at LIBOR
plus 250 basis points and are payable in 60 monthly installments of principal
and interest (9.16% at April 30, 2000). Payment of principal and interest began
November 1, 1997. Formulas based on eligible accounts receivable determine
availability under the Revolving Credit Facility. 3dfx has pledged $25 million
of cash and short term-term investments, as well of 3dfx's owned assets as
collateral to secure the Revolving Credit Facility. All indebtedness under the
Revolving Credit Facility matures on December 19, 2000, and indebtedness under
the Term Loan matures on November 1, 2002 (subject to renewal of the Revolving
Credit Facility through such date).

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

3dfx has invested in capital equipment through equipment leases for its
manufacturing facility in Juarez, Mexico. 3dfx's aggregate obligations under all
such equipment lease financing arrangements totaled approximately $5.2 million
at April 30, 2000.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including the costs and timing of expansion of research and
product development efforts and the success of these development efforts, the
costs and timing of expansion of sales and marketing activities, the extent to
which the Company's existing and new products gain market acceptance, competing
technological and market developments, the costs involved in maintaining and
enforcing patent claims and other intellectual property rights, and available
borrowings under line of credit arrangements and other factors. The Company
believes that its current cash balances and cash generated from operations and
from available or future debt financing will be sufficient to meet the Company's
operating and capital requirements through at least January 2001. However, there
can be no assurance that the Company will not require additional financing
within this time frame. The Company's forecast of the period of time through
which its financial resources will be adequate to support its operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described earlier in this paragraph will impact
the Company's future capital requirements and the adequacy of its available
funds. The Company may be required to

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

RISK FACTORS

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

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

The proposed merger of GigaPixel with and into a wholly-owned subsidiary of
3dfx, which will result in GigaPixel becoming a wholly-owned subsidiary of 3dfx,
involves some specific risks, including the following:

o 3dfx and GigaPixel 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
3dfx and GigaPixel in a timely manner could result in a
failure of the combined company to realize any of the
anticipated benefits of the merger and could materially harm
the business of the combined company.

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

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

o The merger will dramatically increase the number of freely
tradeable 3dfx shares and will result in a substantial
dilution to current 3dfx shareholders, which could drive down
the price of 3dfx common stock. Upon the issuance of shares of
3dfx common stock in connection with the merger, current
GigaPixel shareholders will hold approximately 37.2% of the
then outstanding number of shares of common stock of 3dfx,
based on the number of shares of 3dfx common stock outstanding
on March 27, 2000. Subject to certain contractual restrictions
and relevant securities laws generally applicable to
affiliates, all of the shares of 3dfx common stock issued in
the merger will be freely tradable in the public market.
Actual sales or the perception of the potential for
significant sales in the public market of a substantial number
of these shares following completion of the merger could
adversely affect the market price of 3dfx common stock.

o GigaPixel has reported net losses in recent historical
periods, and if these losses continue, they would adversely
affect 3dfx's financial performance and condition. GigaPixel
has incurred net losses for both

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of the years ended December 31, 1998 and December 31, 1999. If
the combined company is not successful in reversing the
performance of GigaPixel's business operations, those business
operations would have a negative impact on the overall
business of the combined company.

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

o The combined company's success following the merger will
depend on the retention and integration of key personnel.

o There will be substantial expenses resulting from the
GigaPixel merger.

o The closing of the merger is subject to certain conditions
that might not be satisfied in a timely manner, which could
prevent the merger from being consummated.

In addition, in the event of the consummation of the merger with
GigaPixel, there are a number of risks related to the business and operations of
GigaPixel that would affect the operations of the combined company, 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. In the
event that the merger is not consummated, 3dfx will face other risks, including
the opportunity costs associated with the pursuit of a business combination with
GigaPixel.

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

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

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

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

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

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

o Gains or losses of significant customers or strategic
relationships

o The volume and timing of customer orders

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

o The timing of new product announcements or introductions by
competitors

o Product obsolescence and the management of product transitions

o Production delays

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o Decreases in the average selling prices of products

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

3DFX IS GROWING RAPIDLY AND MAY NOT HAVE THE RESOURCES TO MANAGE EFFECTIVELY
ADDITIONAL GROWTH.

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

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

o Attract and retain additional qualified personnel

o Expand its physical facilities

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

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

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

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

3dfx will depend, in part, on its ability to develop leading
technologies, enhance its existing services and develop and introduce new
technologies and products to meet the needs of 3dfx's customers. 3dfx also must
continue to meet the demands of technological advances and emerging industry
standards and practices on a timely and cost-effective basis. Although 3dfx will
strive to be a technological leader, future technology advances may not
complement or be compatible with its products. In addition, 3dfx may be unable
to economically and timely incorporate technology changes and technology
advances into its business. 3dfx may be unsuccessful in effectively using new
technologies, adapting its services to emerging industry standards or
developing, introducing and marketing product enhancements or new products. 3dfx
may also experience difficulties that could delay or prevent the successful
development, introduction or marketing of these products. The inability or delay
of 3dfx to develop and introduce new technologies or products or to enhance
existing products or services on a timely and cost-effective basis, or the
failure of new technologies or products to achieve market acceptance, could have
a material adverse effect on its business, operating results and financial
condition.

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

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

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

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

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

o Rapid technological change;

o Evolving industry standards;

o Cyclical and seasonal market patterns;

o Frequent new product introductions and short product life
cycles;

o Significant price competition and price erosion;

o Fluctuating inventory levels;

o Alternating periods of over-capacity and capacity constraints;

o Variations in manufacturing costs and yields; and

o Significant expenditures for capital equipment and product
development.

The PC market has grown substantially in recent years. However, such
growth may not continue. A decline in PC or semiconductor sales or in the growth
rate of such sales would likely reduce demand for 3dfx's products. Moreover,
such changes in demand could be large and sudden. Since PC manufacturers often
build inventories during periods of anticipated growth, they may be left with
excess inventories if growth slows or if they have incorrectly forecasted
product transitions. In such cases, the manufacturers may abruptly stop
purchasing additional inventory from suppliers such as 3dfx until the excess
inventory has been used. Such suspension of purchases or any reduction in the
demand for PCs generally, or for particular products that incorporate 3dfx's
products, would materially harm 3dfx's business.

In addition, the PC market has experienced significant economic
downturns at various times in the past, characterized by lower product demand
and accelerated reduction of product prices. In addition, the consumer product
market will likely experience significant volatility as it develops. 3dfx may
experience substantial period-to-period fluctuations in its results of
operations due to general conditions in the semiconductor industry.

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

3dfx's products have historically been distributed in the
retail/distributor distribution channel. To access the retail/distributor
channel, 3dfx depends on getting adequate retail shelf space to sell its
products. 3dfx has developed

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a presence in the retail/distributor distribution channel through its own
marketing efforts, as well as through the significant marketing efforts of a
number of its customers. Although 3dfx successfully penetrated the
retail/distributor distribution channel, there can be no assurances that this
success will continue in the future.

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

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

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

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

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

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

o Loss of key employees of acquired organizations;

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

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

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

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

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

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

The markets for which 3dfx's products and technologies are designed are
intensely competitive and are characterized by short product life cycles,
rapidly changing technology, evolving industry standards and declining average
selling prices. As a result, the financial performance of 3dfx depends to a
significant extent on 3dfx's ability to successfully develop new products.
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:

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o Proper new product definition;

o Timely completion and introduction of new product designs;

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

o The quality of new products and technologies;

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

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

o Competitive pricing of products and technologies; and

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

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

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

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

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

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

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

18
<PAGE> 20

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 13.0% of its net revenues,
while 3dfx's 6 largest customers collectively accounted for approximately 40.5%
of its net revenues. There can be no assurance that 3dfx will be able to retain
such customers or to continue to derive significant revenues from them. The loss
of any one of 3dfx's significant customers could have a material adverse effect
on its financial performance and results of operations

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

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

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

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

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

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

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

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

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

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

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

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<PAGE> 21
3dfx expects to continue to be dependent upon TSMC in the future. 3dfx
has no readily available alternative source of supply, and it could take several
months to establish a strategic relationship with a new manufacturing partner.
As a result, a manufacturing disruption (such as the one that occurred in
September 1999 when an earthquake struck Taiwan) or capacity constraints
experienced by TSMC would negatively impact the production of 3dfx's graphics
chips and boards and, consequently, would have a negative effect on 3dfx's
business and results of operations.

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

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

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

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

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

o Unexpected changes in legislative or regulatory requirements;

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

o Tariffs, quotas and other trade barriers and restrictions;

o Longer accounts receivable payment cycles;

o Difficulties in collecting payment, including increased credit
exposures;

o Potentially adverse tax consequences, including repatriation
of earnings;

o Burdens of complying with a variety of foreign laws;

o Unfavorable intellectual property laws;

o Political instability; and

o Foreign currency fluctuations.

Any of these factors could materially harm the international operations
and sales of 3dfx, and consequently, its business. Recently, financial markets
in Asia have experienced significant turmoil, which could harm 3dfx's

20
<PAGE> 22

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. On September 21, 1998, 3dfx filed
suit against nVidia in Northern California District Federal Court. 3dfx's
complaint alleges patent infringement relating to nVidia's use of
multi-texturing technology in its RIVA TNT product. Discovery in this case is
presently under way. This litigation, and other litigation like it, could result
in substantial cost and diversion of management resources. A successful claim
against 3dfx could effectively block its ability to use or license its
technology in the United States or abroad. Any failure of 3dfx to protect its
proprietary rights adequately could have a material adverse effect on the
business, operating results and financial condition of 3dfx.

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

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

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

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

o Product performance and quality;

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

o Access to customers and distribution channels;

o Brand awareness;

o Price;

21
<PAGE> 23
o Product support; and

o 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 integrategraphics chips on the main computer
processing board of their personal computers, commonly known as the motherboard,
and with the makers of other personal computer components and software that are
increasingly providing graphics processing capabilities.

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

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

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

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

22
<PAGE> 24
LITIGATION MAY DIVERT 3DFX'S RESOURCES AND REDUCE THE MARKET PRICE OF 3DFX'S
COMMON STOCK.

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

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

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

o Actual or anticipated variations in quarterly operating
results;

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

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

o The pricing policies of 3dfx's competitors;

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

o Changes in securities analysts' recommendations;

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

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

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

In addition, the trading prices of technology stocks as a whole have
experienced particularly extreme price and volume fluctuations and such effects
have often been unrelated to the operating performance of the applicable

23
<PAGE> 25

companies. Any negative change in the public's perception of the prospects of
technology companies or other broad market and industry factors could depress
the market price of 3dfx common stock, regardless of its operating performance.
Market fluctuations, as well as general political and economic conditions, such
as recession or interest rate or currency rate fluctuations, may also decrease
the market price of 3dfx's common stock.

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

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

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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 is subject to final
documentation and Court approval, does not reflect any admission of liability by
any of the defendants. The principal terms of the settlement call for the
establishment of a settlement fund consisting of $4.7 million to be paid by
insurance.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

JOINT DEVELOPMENT AGREEMENT

3dfx and GigaPixel entered into a joint development agreement effective
March 27, 2000 providing for collaborative research and development efforts
pending completion of the merger. In the joint development agreement the parties
agreed to jointly design and develop various products identified by the parties
or as set forth in project statements from time to time and to provide
marketing, sales and support activities related to the marketing of these
products to prospective customers. The joint development agreement is an
exclusive product development and marketing agreement with respect to the
products covered by the agreement. As a result, 3dfx may not enter into
agreements with other third parties with respect to the joint development and
marketing or independently pursue the development of the products under the
joint development agreement for certain specified markets without GigaPixel's
written consent, and GigaPixel may not enter into agreements with other third
parties with respect to the joint development and marketing or independently
pursue the development of these products for certain other specified markets
without 3dfx's express written consent. The joint development agreement also
sets forth provisions providing for the protection of each party's confidential
information and intellectual property rights.

The joint development agreement has an initial term of one (1) year, is
renewable for additional one (1) year periods, and will terminate early upon the
consummation of the merger.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

2.1 Agreement and Plan of Reorganization by and between the
Registrant and GigaPixel Corporation dated as of March 27, 2000
(Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (File No. 333-38678) filed with the
Securities and Exchange Commission on June 6, 2000).

3.1 The Registrant's Bylaws, amended effective as of the
Registrant's 2000 Annual Shareholders Meeting (Incorporated by
reference to the Registrant's Registration Statement on Form S-4
(File No. 333-38678) filed with the Securities and Exchange
Commission on June 6, 2000).

27.1 Financial Data Schedule.

(b) Reports on Form 8-K

None

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<PAGE> 27
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: June 14, 2000

3DFX INTERACTIVE, INC.
(Registrant)

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

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

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<PAGE> 28
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------

<S> <C>
2.1 Agreement and Plan of Reorganization by and between the Registrant and
GigaPixel Corporation dated as of March 27, 2000 (Incorporated by
reference to the Registrant's Registration Statement on Form S-4 (File
No. 333-38678) filed with the Securities and Exchange Commission on
June 6, 2000).

3.1 The Registrant's Bylaws, amended effective as of the Registrant's 2000
Annual Shareholders Meeting (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-38678)
filed with the Securities and Exchange Commission on June 6, 2000).

27.1 Financial Data Schedule.
</TABLE>