NUMBER NINE VISUAL TECHNOLOGY CORP, 10-K, 1998-03-27

NUMBER NINE VISUAL TECHNOLOGY CORP
10-K, 1998-03-27
COMPUTER PERIPHERAL EQUIPMENT, NEC

Previous: DTE ENERGY CO, DEF 14A, 1998-03-27

Next: BAY POND PARTNERS L P, SC 13G, 1998-03-27

<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 27, 1997

[ ] 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: 0-25898

NUMBER NINE VISUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 04-2821358
(IRS Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)

18 HARTWELL AVENUE LEXINGTON, 02173
MASSACHUSETTS (Zip Code)
(Address of principal executive
offices)

Registrant's telephone number, including area code: (781) 674-0009

Securities registered pursuant to Section 12(b) of the Exchange Act: NONE

Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS)

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 period 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) as of March 2, 1998, was
$11,697,342, based on the last sale price as reported by The Nasdaq Stock
Market.

As of March 2, 1998, the registrant had 9,194,351 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information from the Registrant's Proxy Statement for its Annual
Meeting of Stockholders to be held June 11, 1998 is incorporated by reference
into Part III of this Annual Report on Form 10-K.
<PAGE>

PART I

ITEM 1. BUSINESS

THE COMPANY

Number Nine Visual Technology Corporation ("Number Nine" or the "Company")
is a leading innovator and supplier of high-performance visual technology
solutions, including video/graphics accelerator subsystems, chips and
productivity-enhancing software. The Company's products enable desktop
personal computers ("PCs") to generate and display the increasingly
sophisticated visual content of today's computing environment with greater
speed, photorealistic color, high resolution and full-motion video.

Number Nine provides high-performance visual technology subsystems that
render and control the graphic and video images transmitted to desktop PC
monitors. The Company's products enable a PC to operate with more color,
higher resolution, faster screen refresh rates and other features. The
Company's primary products are video/graphics accelerator subsystems
incorporating its productivity-enhancing software.

A video/graphics accelerator subsystem consists primarily of an accelerator
chip, memory chips, a digital-to-analog converter ("DAC"), and software
drivers and utilities. The accelerator chip is the graphics "engine" that
enhances speed, image clarity and color by performing functions that would
otherwise be executed by the Central Processing Unit ("CPU"). Memory chips,
which are available in DRAM, SGRAM and higher-performance VRAM and WRAM
configurations, are used to temporarily store graphics information for
display. The DAC converts data from the digital format in which it is
typically stored in the graphics memory to the analog format required by the
display monitor. Software drivers are used to interface the accelerator chip
with the CPU and optimize the overall performance of the subsystem. Software
utilities, which increase the number and variety of display features, are
increasingly being added to accelerator subsystems as end-users seek greater
functionality and access to advanced features.

The Company was incorporated in Connecticut in May 1982, reincorporated as a
Massachusetts corporation in January 1987 and reincorporated as a Delaware
corporation in December 1994. The Company's executive offices are located at
18 Hartwell Avenue, Lexington, Massachusetts 02173 and its telephone number is
(781) 674-0009.

128-BIT PRODUCTS

Imagine 128 Accelerator Subsystems. In 1994, the Company began shipping an
accelerator subsystem based on the Company's first proprietary 128-bit
video/graphics accelerator chip. This chip, ("Imagine 128") was the first 128-
bit video/graphic accelerator chip in the industry. The Company believes that
its 128-bit family of products currently represents one of the highest
performing video/graphics accelerator technology solutions for desktop PCs.
The Company is placing greater emphasis on continuing to develop, market and
sell its proprietary 128-bit based products compared to its merchant-based
products. There can be no assurance that the Company will complete development
of such additional products or that if it does it will successfully
manufacture and market such products.

The performance capabilities of its 128-bit product make it well suited for
a variety of high-end video/graphics applications. They are targeted to
business, home and professional users preferring sophisticated levels of
interactivity and graphics for applications such as desktop publishing,
imaging, pre-press, digital video editing, 3-D visualization and CAD.

This architecture couples a 128-bit graphics engine with a 128-bit data path
between the chip and the graphics memory. This architecture allows the
graphics engine to receive and process twice as much information per clock
cycle as 64-bit accelerator chips. In addition, the Imagine 128 family
interfaces with the host PC through a 32-bit register structure that directly
matches 32-bit operating systems such as Windows95, WindowsNT, 32-bit CPUs
such as the Pentium, 64-bit CPUs such as Alpha, and 32-bit buses such as PCI.
In

1
<PAGE>

1996, the Company began volume production of its second generation 128-bit
video/graphics products based on enhancements to the Imagine 128 architecture.
The first generation of the Company's 128-bit accelerator subsystems was
discontinued in 1997, and the Company intends to discontinue the second
generation in early 1998.

Third Generation 128-bit Products. The Company completed development of its
third generation 128-bit video/graphics products during 1997. It is based on
enhancements of the Imagine 128 and Imagine 128 Series 2 architecture. The
"Ticket to Ride" chip was designed to provide faster 2-D and 3-D capabilities,
including texture mapping for high-end entertainment and advanced memory
support. In addition, the Company offers both SGRAM and WRAM configurations of
its third generation 128-bit products. The Company began shipments in August,
1997. The Company expects to discontinue this product during 1998.

Fourth Generation 128-bit Products. The Company is currently designing its
fourth generation of 128-bit video/graphics products based on enhancements of
its third generation 128-bit technology. The fourth generation 128-bit chip is
being designed to provide faster performance and enhanced 2-D and 3-D
capabilities, an internal RAMDAC and advanced memory support. The Company
believes that products utilizing this chip will begin shipping in 1998. There
can be no assurance that the Company will successfully complete the design
effort of its fourth generation of its 128-bit technology.

Imagine 128 Accelerator Subsystems for the PowerMacintosh. In addition to
Imagine 128 products for the PC, during 1995, the Company introduced Imagine
128 accelerator subsystems for the PCI-based Apple PowerMacintosh and
corresponding PowerMacintosh "clones." Imagine 128 for PowerMacintosh utilizes
the Company's proprietary family of Imagine 128 accelerator chips as a
video/graphics engine. This product (with the PCI bus) interfaces with the
PowerMacintosh through the MAC O/S 32-bit operating system. Imagine 128 for
PowerMacintosh is designed for users of graphics and video-intensive
applications, such as Mac-based color, pre-press, desktop publishing and other
applications requiring photorealistic true color at high resolutions. The
Company intends to continue to market and sell products for the PowerMacintosh
with its Imagine 128 chips. However, there can be no assurance that the
Company will be successful in marketing its products for the PowerMacintosh.

Imagine 128 Accelerator Chips. In addition to accelerator subsystems, the
Company expects that there will be increasing opportunities to sell Imagine
128 technology as a chip-level product to selected OEMs and to developers of
non-PC, graphics-intensive embedded applications such as medical imaging and
3-D simulation. Number Nine believes that in addition to its performance
advantages, Imagine 128's 32-bit programming interface will facilitate such
customers' product designs. The Company has achieved chip-level design wins
from manufacturers of medical imaging devices, a company developing systems
for the Federal Aviation Administration, a company developing a RISC
workstation, a company developing video editing equipment as well as the
manufacturer of Power Macintosh accelerator subsystems, although sales to date
have been minimal. There can be no assurance that the Company will be
successful in marketing its Imagine 128 accelerator chips.

64-BIT PRODUCTS

The Company has offered two families of 64-bit accelerator subsystems, the
9FX line introduced in 1995 and the prior generation GXE64 line, which was
discontinued in 1996. The Company utilizes merchant accelerator chips for its
64-bit products, which provide high performance across a broad range of
functionality and price points. Number Nine differentiates all of its 64-bit
products through one or more of the following: custom board design, which
permits easier installation; incorporation of proprietary software drivers,
which can increase board speed and compatibility with the PC operating system;
and inclusion of the HawkEye utilities suite, which provides increased
functionality.

The Company's 64-bit VRAM products are targeted to users of sophisticated
applications such as desktop publishing, CAD, document imaging and graphics
design. These high-end products are expected to appeal to the multimedia PC
market, where business and home users are increasingly utilizing CD-ROM
educational and

2
<PAGE>

entertainment applications integrating full-motion video, or displaying
photorealistic images from input devices such as color scanners. The Company's
64-bit DRAM products are marketed to users of less demanding applications such
as Windows personal productivity applications and games, and are targeted at
cost-conscious users who do not require high-resolution, true-color
capability.

The market for products utilizing merchant accelerator chips can be
characterized as more competitive than the high-end market. The Company has
experienced significant competition in this market with efforts by competitors
to secure market share and volume. Additionally, since the Company does not
assemble its products, the cost to the Company of its products may be higher
than similar competitive products, which results in a lower gross margin. As a
result, some of the products that the Company has developed have been less
successful than the Company originally anticipated. The Company is continuing
to evaluate the market opportunity that exists with merchant chip technology
and may at times decide to manufacture and market these types of products.
There can be no assurance that the Company will develop such products, or that
if it does, it will successfully manufacture and market such products.

9FX Accelerator Subsystems. The Company's most recently introduced 64-bit
products comprise the 9FX family. The 9FX series feature video acceleration
and interpolation to provide full-screen, full-motion video with minimal loss
of color quality and motion continuity. During 1997, the Company discontinued
its Vision 330, Motion 331, Reality 332 and Reality 772 products based on S3
technology. During 1997, the Company developed the Reality 334 product based
on the S3 Virge GX2 accelerator chip. The Reality 334 is designed to provide
windows acceleration, video playback and enhanced 3D capability. The 9FX
Reality 334 product is anticipated to be discontinued by the end of 1998. The
Company will evaluate additional merchant chip technology and may provide
additional 9FX products if the Company believes it can be successful with
them.

SOFTWARE

The Company believes that in-house software expertise is essential to
providing reliable, high performance visual technology solutions. The Company
has committed substantial resources to the development and continued
enhancement of software drivers and utilities for both its proprietary and
merchant based accelerators. The Company believes its in-house development of
hardware and software give it a number of competitive advantages, including
the ability to bring products to market faster, produce better integrated
software and hardware designs, add value to its subsystems based on merchant
accelerators, ensure product quality, provide timely updates and continue to
enhance the performance and ease of use of the Company's products. The Company
believes that much of the market acceptance of its products to date has
resulted from the quality of its software drivers and productivity-enhancing
software utilities which differentiate its entire product line.

Software Drivers. Software drivers are programs that control the execution
of graphics commands and the interaction between the CPU and the accelerator
chip. Software drivers analyze complex graphics commands received from the
operating system, reduce them to simpler segments and pass them to the
accelerator chip for execution. The effective management and synchronization
of these processes can significantly influence the speed and reliability of
overall graphics performance.

Number Nine's software drivers are tailored to maximize the specific
capabilities of the graphics accelerator chip used in each of the Company's
graphics subsystems and to interact with a variety of operating systems, such
as Windows95 and Windows NT. The Company believes that its experience in
software development, including its many years of custom software design for
graphics coprocessors and its experience with S3 graphics accelerators and the
proprietary Imagine 128 chip, can provide Number Nine a competitive advantage
in terms of the speed and reliability of its drivers.

Software Utilities. Number Nine's HawkEye software utilities provide an end-
user with easy-to-use tools that control numerous graphics display features in
the Windows environment. HawkEye was introduced in 1992 and is included with
every accelerator subsystem produced by the Company. HawkEye95 was introduced
in 1995, providing an upgrade to support the Windows95 32-bit operating system
environment. The Company

3
<PAGE>

believes the common user interface provided by HawkEye makes Number Nine's
products attractive to customers seeking consistency across a broad range of
products.

CUSTOMERS AND DISTRIBUTION CHANNELS

The Company's customers are comprised of strategic original equipment
manufacturers ("OEMs") such as International Business Machines Corporation
("IBM"), NEC/Packard Bell ("NEC"), Quantex Microsystems, Inc., Micron
Electronics, Inc. ("Micron"), Digital Equipment Corporation, Hitachi, Ltd. and
Unisys Corporation; national and international distributors such as Ingram
Micro, Inc., Merisel, Inc., Tech Data Corporation, DIA Semicon Systems Inc.
and Macrotron AG; and retailers such as Fry's Electronics, Inc. In addition,
Number Nine sells through system integrators such as Electronic Data Systems
Corporation and PRC, Inc., and mail order sellers such as PC Connection, Inc.
and Publisher's Toolbox Inc. The Company's principal channels of distribution
are described below.

Strategic OEM Customers. OEMs purchase the Company's video/graphics
subsystems and integrate them into complete PC systems. The Company's OEM
sales have deteriorated significantly during 1997 as the Company was unable to
secure major OEM contracts for its products, and its largest OEM customer in
1996 changed vendors for certain of the Company's products due to pricing
considerations. OEM sales declined to $20.7 million, or 43.8% of net sales in
1997, from $80.9 million, or 68.3% of net sales in 1996. Dell, the Company's
largest OEM customer, accounted for $4.9 million or 10.4% of the Company's net
sales in 1997 compared to $62.7 million or 52.9% of the Company's net sales in
1996. The Company expects a substantial portion of its future sales to remain
concentrated with key OEM customers. There can be no assurance, however, that
the Company will be successful in broadening its OEM customer base.

OEM sales are an important element of the Company's sales strategy, offering
the Company several significant benefits. Because OEMs continually seek to
develop new systems at the forefront of evolving technology, they provide
Number Nine with insight into emerging user needs. In addition, the high unit
volumes generated by OEM sales reduce the Company's unit production costs,
enabling it to compete more aggressively in other channels. OEMs typically
expend significant advertising resources to sell systems, and they absorb a
substantial portion of post-sale support costs related to the products they
purchase. The Company's 128-bit Imagine technology allows OEMs to
differentiate their systems by offering what the Company believes is the
highest performance video/graphics accelerator technology available in the
desktop PC market today. In addition, Number Nine believes that its ability to
provide a broad product line can allow OEMs to streamline procurement of an
array of products at several price points to meet their needs. Finally, the
Company's HawkEye utilities software offers OEMs a common user interface and
functionality across its product line.

Two-Tier and Retail Distribution. Worldwide sales to customers in the two-
tier and retail distribution channel accounted for approximately 56.2% of net
sales in 1997 and 31.7% of net sales in 1996. Two-tier distributors purchase
the Company's retail-packaged products in quantity and market them to value
added resellers ("VARs"), system integrators and retailers for final sale to
end-users. Certain of these volume customers purchase products directly from
the Company rather than from two-tier distributors.

During 1996 and 1997, the Company had experienced a decline in net sales in
the two-tier and retail distribution channel as a result of a shift in
emphasis to expanding its business with OEM customers, as well as an emphasis
towards the Company's higher-end proprietary 128-bit based products. The
Company is evaluating this market and is increasing its emphasis on expanding
the VAR and system integrator segments, although the Company expects to
continue to market and sell its products to certain retailers. The Company's
efforts to emphasize the VAR and system integrator market is beginning to
expand. There can be no assurance that the Company will be successful in
marketing and selling its products into these market segments.

The Company has distribution agreements with all of its principal
distributors. As is typical in the PC industry, the Company allows its
distributors to return inventory to the Company for credit against other
purchases on negotiated terms. While the Company has historically been able to
resell a large percentage of

4
<PAGE>

returned products to other retail distribution customers, there can be no
assurance that it will always be able to do so. In addition, the Company's
agreements with its distributors typically contain price protection clauses
pursuant to which the Company grants credits if it reduces current selling
prices on products previously purchased by the distributor currently in
inventory. Sales to distributors are made pursuant to specific purchase
orders, which are cancelable without significant penalties.

International Distribution. International sales include sales to both OEMs
and two-tier and retail distributors. International sales accounted for 37.2%,
25.5%, and 29.5% of net sales in 1997, 1996 and 1995, respectively. As part of
its strategy to build international sales, the Company sought to hire local
sales and support personnel and to provide local versions of its products and
related documentation, and maintain a European sales operation with full-time
sales and support employees in Germany, England and Spain. During 1996, the
Company's net sales to its two-tier and retail distributors, primarily in
Europe, were less than anticipated. As a result, the Company replaced certain
sales employees during 1996 and the beginning of 1997. At the conclusion of
1997, the Company closed its sales offices in Spain and England because the
sales activity for these offices was less than anticipated. Although net sales
to two-tier and retail distributors increased, primarily in Germany, during
1997, there can be no assurance that the Company will continue to be
successful with these efforts. In addition, the Company has established a
sales and support operation in Japan. International sales are subject to
risks, including unexpected changes in regulatory requirements, fluctuations
in currency exchange rates, tariffs and other barriers and restrictions,
difficulties in staffing and managing foreign sales operations, potentially
adverse tax consequences, and the burdens of complying with a variety of
foreign laws. In addition, the Company is subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic
and trade relationships. The Company currently denominates all its sales in
U.S. dollars but may in the future denominate its sales in local currencies
and become subject to risks associated with fluctuations in currency exchange
rates. The Company has experienced no material difficulties to date as a
result of these factors.

MARKETING AND SALES

As part of the Company's strategy to diversify its distribution channels and
expand retail sales, in 1996, the Company continued its marketing efforts to
build brand awareness and gain retail shelf space. The Company's marketing
program included consumer-oriented product packaging, and demonstrations, and
direct mail and marketing to resellers and end-users. These marketing efforts
focused on the Company's 9FX and Imagine 128 product lines. Number Nine
believes that its investment in promoting greater brand awareness among end-
users may make its products more attractive to OEMs. However, the marketing
effort during 1996 to gain retail shelf space was less successful than the
Company had anticipated. As a result the Company placed greater marketing
effort on expanding its emphasis of the VAR and system integrator market
during 1997. The Company believes that brand awareness is as important with
these customers as it is with OEMs. This effort has resulted in additional
business from the VAR and system integrator market during 1997. Although, the
Company anticipates that it will continue to expand its presence in this
market, there can be no assurance that the Company will be successful in this
effort.

The Company has organized its sales force into three specialized groups
concentrating on Number Nine's major sales opportunities. The strategic OEM
sales team is actively pursuing additional major accounts as well as
developing new opportunities with current OEM customers. The Company's two-
tier and retail distribution sales group services national distributors,
implements the Company's retail sales program and responds to incoming sales
inquiries. Number Nine's international sales force is comprised of regionally-
based personnel who develop and service both OEM and distributor accounts in
specific international markets.

CUSTOMER SUPPORT

The Company employs a full-time and part-time staff of eight technical
support representatives. The Company provides its customers with a range of
technical support services. In addition to phone support, customers and
prospective customers may access a 24-hour electronic bulletin board service,
electronic mail ("e-mail"), and the internet, for distribution of updated
driver and BIOS software and other product information.

5
<PAGE>

There can be no assurance that the Company will be able to recruit, train and
retain sufficient additional customer service employees to improve its service
and keep pace with customer needs.

The Company generally offers end-users a three-year warranty on its
products. The Company has experienced no warranty claims or liabilities to
date which, individually or in the aggregate, management believes have had a
material adverse effect on the Company's operating results. There can be no
assurance, however, that future warranty claims or liabilities will not have a
material adverse effect on future operating results.

PRODUCT DEVELOPMENT AND ENGINEERING

Since its founding in 1982, the Company has sought to establish a reputation
for introducing industry-leading graphics technology. In 1983, the Company
introduced what it believes to be the industry's first 1024 x 768 resolution
graphics board; in 1984, the first 256-color capability graphics board; and in
1985, the first true color (16.7 million colors) graphics board. In November
1993, the Company's first PC graphics accelerator product, the GXE 4 MB VRAM
board configured with HawkEye, won PC Computing magazine's "MVP" award for all
graphics products. At the COMDEX shows in Fall 1995, Fall 1996 and Fall 1997,
the Company's products were named an "MVP Finalist" by PC Computing, at the
Fall 1997 show, the Company Revolution 3D product was named MVP for High-end
PC Graphics. Most recently, Number Nine received New Media Magazine's "Hyper"
award for "Best Video/Graphics Accelerator Card" for 1997 with its third
generation Revolution 3D. Number Nine believes that continued innovation and
leadership in product development will be critical to any future success of
the Company.

The Company currently employs 43 engineers, including hardware engineers
with significant expertise in ASIC design and development of graphics products
for the PC and workstation industry, software engineers with significant
experience in Microsoft Windows applications, display driver development, BIOS
and multimedia, and quality assurance engineers. The Company believes its in-
house hardware and software development capabilities give it a number of
competitive advantages, including the ability to bring products to market
faster, produce better integrated software and hardware designs, ensure
product quality, provide timely updates and continue to enhance the
performance and ease of use of the Company's products. At times, the Company
utilizes outside contractors to assist with software development and testing,
particularly for non-core applications.

The Company uses an automated design environment incorporating advanced
workstations, system simulation with hardware and software modeling, and a
high-level design description language to define, develop and deliver new and
enhanced products rapidly. The Company considers its CAD and engineering
capabilities to be important to its future success. Although the Company
rigorously tests its hardware and software products prior to their
introduction, it is possible that design errors may be discovered after
initial product sampling, resulting in delays in volume production or recall
of products sold. The Company has not experienced any material errors to date,
but the occurrence of any such errors could have a material adverse effect on
the Company's delivery schedules and operating results.

Current development efforts are focused on delivering broader driver support
and enhanced versions of the Company's proprietary products, including third
and fourth generations of its proprietary 128-bit graphics technology (Imagine
128) and the next generation of its HawkEye utilities suite. Imagine 128
provides an extendible architecture from which subsequent generations of
products are being developed by the Company. In addition, hardware and
software development is underway on upgraded products using merchant
accelerator chips. There can be no assurance that the Company will be
successful in continuing to develop subsystem, chip and software products that
incorporate new and rapidly evolving video/graphics technologies.

The Company's engineering, sales and management personnel have developed
close collaborative relationships with many of their industry counterparts and
have used these relationships to identify market demands and target research
and development to meet those demands. During 1997, 1996 and 1995, the Company
expensed approximately $8.3 million, $5.8 million and $3.0 million,
respectively, for research and

6
<PAGE>

development. Additionally, in 1996 and 1995, the Company capitalized
approximately $0.5 million and $0.8 million, respectively, of software costs
related to the development of software products, Hawkeye95 and drivers. The
Company did not capitalize software costs during 1997. The Company expects to
further increase its research and development spending on new and emerging
visual technology solutions.

COMPETITION

The market for the Company's products is highly competitive. The Company
believes that its ability to compete successfully depends upon a number of
factors both within and beyond its control, including product performance,
product features, product availability, price, quality, timing of new product
introductions by the Company and its competitors, the emergence of new
video/graphics and PC standards, customer support, and industry and general
economic trends. Number Nine seeks to compete by offering products emphasizing
high performance and quality and with a continuing commitment to product
improvements and new product introductions and the ability to provide broad
product line where demand justifies it.

The Company's principal competitors include ATI Technologies, Inc. ("ATI"),
Diamond Multimedia Systems, Inc., Matrox Electronic Systems, Inc. ("Matrox")
and STB Systems, Inc. Each of these named competitors have graphics
accelerator products that are marketed in competition with the Company's 64-
bit and 128-bit graphics accelerator products. The Company's principal
competitors on chip technology include 3DFX Interactive, Inc., 3DLabs Inc.,
Ltd., Nvidia Corporation, ATI and Matrox. Numerous competitors, particularly
in higher-volume, lower-priced product categories, compete primarily on the
basis of price, which may result in reduced sales and/or lower margins for the
Company's products. In addition, many companies compete on the basis of their
integrated circuit design capabilities, by supplying accelerator chips on a
merchant basis, by producing board-level products, by integrating the
accelerator chip that will be placed directly on the CPU motherboard. Several
of the Company's board-level competitors, as well as various independent
software developers, produce software utilities offering features comparable
to HawkEye95. Future enhancements to such competing software products that are
not matched by the Company, or the inclusion of comparable features in future
versions of the Windows operating system, could diminish the relative
attractiveness of the Company's HawkEye95 utilities software. In addition, the
Company may in the future experience indirect competition from suppliers of
memory components, CPU manufacturers and others to the extent they integrate
advanced graphics processing capabilities into future generations of products.
The Company's current and prospective competitors include many companies that
have substantially greater name recognition and financial, technical,
manufacturing and marketing resources than the Company. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors.

MANUFACTURING AND SUPPLIERS

Most manufacturing, assembly, product testing and shipping operations are
performed for the Company by third parties. This approach allows the Company
to avoid the costs of owning and operating dedicated manufacturing facilities
and to focus its resources on product design and development, quality
assurance, marketing and customer support. The Company's accelerator
subsystems are currently manufactured through modified turnkey arrangements or
consignment assembly agreements with various subcontractors in North America.
In 1996, Number Nine converted a significant portion of its product
manufacturing from consignment to turnkey operations. The Company expects to
complete the conversion of all of its manufacturing to turnkey operations in
late 1998 and to benefit from the volume purchasing, materials management,
quality control and state-of-the art manufacturing capabilities of turnkey
manufacturers. However, there can be no assurance that the Company will be
successful in transitioning to turnkey manufacturing or in managing turnkey
manufacturing to achieve the efficiencies desired.

The Company's ability to secure timely manufacture of its products is
affected by the availability of certain merchant-supplied and proprietary
components. The Company currently purchases certain primary components, such
as S3 accelerator chips, from a single supplier and other components,
including DACs, from a limited number of sources. There are numerous other
components necessary to complete add-in board assemblies,

7
<PAGE>

including printed circuit boards, memory chips and commodity components such
as capacitors and resistors. While many of these components tend to be readily
available from multiple suppliers, the Company has from time to time
experienced shortages and/or price fluctuations in the supply of memory and
accelerator chips, which has in the past and may in the future result in the
inability to fill orders and reduced profit margins. Moreover, on occasion the
quality or reliability of early versions of certain components has been
unsatisfactory. Future shortages in the availability of acceptable components
could require the Company to alter product designs to use alternative
components, reduce its production of the related product, experience delays in
shipment of its products and/or cancel a product line, any of which could
materially adversely affect the Company's business and operating results.

The Company has subcontracted the fabrication of its proprietary Imagine 128
chip designs to LSI Logic Corporation ("LSI") and NEC Corporation. The
Company's latest generation, "Ticket to Ride," is being fabricated by LSI. The
design and production ramp-up for these foundries could take longer than
anticipated, and the Company could experience problems in the reliability and
quality of chips produced by the foundries. There can be no assurance that
independent foundries will be willing or able to satisfy all of the Company's
requirements on a timely basis.

The Company purchases a variety of components and sub-assemblies from
suppliers on a purchase order basis and has no guaranteed supply arrangements.
The Company believes that the additional liquidity resulting from its equity
offering in 1995 has allowed it to increase the percentage of memory chips and
certain other key components that it purchases directly from manufacturers,
and thus obtain lower production costs, however, the Company's current
inventories and financial position may prevent the Company from attaining
these benefits. As a result, the Company from time-to-time purchases a portion
of its components other than accelerator chips from distributors or, in the
case of memory chips, on the spot market, in both cases paying higher prices
than would be paid directly to a manufacturer. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

BACKLOG

The Company's products are manufactured to meet its forecast of near-term
demand and to maintain minimum inventories of finished goods. Backlog rarely
exceeds a recent average month's sales, while standard purchase orders
received from customers contain limited or no penalties for rescheduling or
cancellation. Accordingly, the Company believes that its backlog at any given
point in time is neither a reliable indicator of future sales and earnings nor
material to an understanding of the Company's business. However, the absence
of significant backlog contributes to unpredictability of the Company's
operating results.

PROPRIETARY TECHNOLOGY

The Company's success depends in part upon its proprietary technology,
consisting of both its hardware designs and its software drivers and
utilities. The Company currently holds no patents and relies upon copyright,
trademark and trade secret laws to protect its proprietary technology. Also,
the Company generally enters into non-disclosure agreements with persons to
whom it reveals its proprietary information. Although the Company is not aware
of the development, distribution or sale of any illegal copies of the
Company's hardware or software, any infringements of its copyrights or
trademarks, or any violation of its trade secrets, confidentiality procedures
or licensing agreements to date, there can be no assurance that the steps
taken by the Company to protect its proprietary information will be adequate
to prevent misappropriation of its technology. In addition, the laws of
certain foreign countries in which the Company's products are or may be
developed, manufactured or sold, including various countries in Asia, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. While the
Company's competitive position may be affected by its ability to protect its
proprietary information, the Company believes that the rapid pace of
technological change in its industry will cause other factors, such as the
technical expertise, knowledge and innovative skill of the Company's
management and technical personnel, brand recognition, the timeliness and
quality of support

8
<PAGE>

services provided by the Company and its ability to rapidly develop, produce,
enhance and market innovative products, to be more significant in maintaining
the Company's competitive position.

As is typical in its industry, the Company from time to time is subject to
legal claims asserting that the Company has violated intellectual property
rights of third parties. In the event that a third party was to sustain a
valid claim against the Company, and any required licenses were not available
on commercially reasonable terms, the Company's operating results could be
materially and adversely affected. Litigation, which could result in
substantial cost to and diversion of the resources of the Company, may also be
necessary to enforce intellectual property rights of the Company or to defend
the Company against claimed infringement of the rights of others.

EMPLOYEES

At March 2, 1998, the Company employed 97 individuals, of whom 31 were
employed in sales, marketing and customer support, 43 in engineering, five in
operations and 18 in finance and administration. The Company regularly seeks
to identify skilled engineering and other potential employee candidates, and
has found that competition for personnel in the PC industry is intense. The
Company believes its ability to recruit and retain highly skilled technical
and other management personnel is critical to its ability to execute its
business plans. None of the Company's employees is represented by a labor
union or is subject to a collective bargaining agreement. The Company believes
that its relations with its employees are good.

ITEM 2. DESCRIPTION OF PROPERTY

The Company leases a 33,450 square foot facility in Lexington, Massachusetts
that serves as its headquarters. At present, this facility includes office and
development space as well as limited storage and production capacity for the
testing of final product. The Company's lease expires in May 1999, and the
Company has the option to extend the term for an additional three-year period.
The Company believes it currently has adequate space described above and below
and will not need to source additional space. However, should the Company need
additional space, it believes that there are adequate amounts in the nearby
area.

The Company leases a 3,000 square foot portion of a facility located in
Hudson, New Hampshire that serves as an additional site for research and
development. At present, this facility includes office space capacity for
designing and developing products. The Company's lease for this space expires
in January 1999.

The Company leases a 2,594 square foot facility in Unterhaching, Germany
that serves as its European sales office. The lease expires in 2003, and the
Company has an option to extend the lease for a five-year period. In addition
to the main European sales office in Unterhaching, Germany, the Company leases
office suites in Madrid, Spain and Potters Bar, England. At the conclusion of
1997, the Company closed its sales offices in England and Spain. The Company's
leases in Spain and England will expire during the first quarter of 1998 and
will not be renewed.

The Company leases an office suite in Tokyo, Japan that serves as its
Japanese sales office. The lease expires in April 1999. The office suite is
approximately 1,200 square feet. The Company believes that the space is
adequate to meet the Company's requirements in Japan and that it will not
require additional space for the forseeable future.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation relating to claims
arising out of its operation in the normal course of business. Other than the
litigation discussed below, the Company is currently not a party to any
additional legal proceeding the adverse outcome of which, individually or in
the aggregate, management believes would have a material adverse effect on the
financial position or results of operations of the Company.

9
<PAGE>

Bialek (the "Selling Stockholders") and the managing underwriters of the
Company's initial public offering, Robertson, Stephens & Company, Cowen &
Company and Unterberg Harris (the "Managing Underwriters"). On or about July
17, 1996, a complaint was filed in the United States District Court for the
District of Massachusetts by named plaintiff John Foley against the Company,
each member of the Company's Board of Directors, other than John G. Thompson,
(Andrew Najda, Stanley W. Bialek, Gill Cogan, Dr. Paul R. Low, Dr. Fouad H.
Nader and William H. Thalheimer), Kevin M. Hanks, former Chief Financial
Officer and Treasurer of the Company, and the Managing Underwriters. On or
about October 16, 1996, an additional complaint was filed in the United States
District Court for the District of Massachusetts by named plaintiff Robert
Schoenhofer against the Company, each member of the Company's Board of
Directors (other that John G. Thompson), Mr. Hanks, and the Managing
Underwriters. Each of the plaintiffs purports to represent a class of
purchasers of the Common Stock of the Company between and including May 26,
1995 through January 31, 1996. Each complaint alleges that the named
defendants violated the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, by, among other things, issuing to the
investing public false and misleading statements regarding the Company's
business, products, sales and earnings during the class period in question.
The plaintiffs seek unspecified damages, interest, costs and fees. By order of
the District Court, these actions have been consolidated into a single action.
It is possible that other claims may be made against the Company or that there
may be other consequences from the lawsuits. The defendants deny any
liability, believe they have meritorious defenses, and intend to vigorously
defend these and any similar lawsuits that may be filed, although the ultimate
outcome of these matters cannot yet be determined. If the lawsuits are not
resolved satisfactorily for the Company, there could be a material adverse
effect on the Company's future financial condition and results of operations
and, accordingly, income (loss). The Company does not believe that the
ultimate liability, if any, is estimable or probable, and therefore no
provision for any liability that may result from the actions has been
recognized in the accompanying consolidated financial statements.

A foreign inventor has asserted claims against several PC manufacturers,
including customers of the Company, that the graphics technology included in
their systems infringes the inventor's patents. Certain of the Company's
customers have notified the Company of these assertions and their intent to
seek indemnification from the Company in the event these claims are successful
and the infringing technology was included in products sold by the Company.
The Company believes there are meritorious defenses to these claims and that
if the technology in fact infringes the inventor's rights, the Company would
have rights of indemnification from its suppliers. While there can be no
assurance, the Company does not expect this matter to have a material adverse
effect on the Company.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 27, 1997.

10
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's Common Stock began trading on The Nasdaq Stock Market on May
26, 1995 under the symbol "NINE." The following table sets forth, for the
periods indicated, the high and low sales prices for the Common Stock, as
reported by Nasdaq:

<TABLE>
<CAPTION>
COMMON STOCK
-------------
HIGH LOW
------ ------
<S> <C> <C>
1996:
First Quarter.................................................. $ 8.75 $ 3.88
Second Quarter................................................. $13.00 $ 4.75
Third Quarter.................................................. $ 8.50 $ 5.25
Fourth Quarter................................................. $ 8.25 $ 4.50
<CAPTION>
COMMON STOCK
-------------
HIGH LOW
------ ------
<S> <C> <C>
1997:
First Quarter.................................................. $ 6.00 $ 2.88
Second Quarter................................................. $ 6.25 $ 2.00
Third Quarter.................................................. $ 5.00 $ 2.94
Fourth Quarter................................................. $ 5.13 $ 1.75
</TABLE>

On March 2, 1998, the last sale price of the Common Stock was $1.91.

STOCKHOLDERS

As of March 2, 1998, there were approximately 109 stockholders of record of
the 9,194,351 outstanding shares of Common Stock. The Company believes there
are in excess of 5,000 beneficial owners of the Company's Common Stock.

DIVIDENDS

The Company has not paid dividends to its stockholders since its inception
and does not plan to pay cash dividends in the foreseeable future. The Company
currently intends to retain earnings, if any, to finance the growth of the
Company. In addition, the Company's revolving line of credit prohibits the
payment of dividends without prior bank approval.

RECENT SALES OF UNREGISTERED SECURITIES

On November 27, 1996, the Company issued and sold 2,000 shares of Common
Stock to one person pursuant to the exercise of an option granted under its
1989 Stock Option Plan. The purchase price paid upon the exercise of this
option was $.27 per share. These shares were issued in reliance upon the
exemption from registration set forth in Rule 701 promulgated under the
Securities Act of 1933, as amended.

11
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data with
respect to the Company which has been derived from the consolidated financial
statements of the Company for each of the five years in the period ended
December 27, 1997. The information below should be read in conjunction with
the consolidated financial statements (and notes thereto) and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 47,205 $118,525 $116,819 $66,203 $25,525
Cost of sales........... 44,053 103,357 105,792 54,007 17,491
-------- -------- -------- ------- -------
Gross profit............ 3,152 15,168 11,027 12,196 8,034
Operating expenses:
Selling, general and
administrative.......... 13,766 15,957 15,487 7,106 5,814
Research and
development............. 8,263 5,816 2,991 2,154 1,524
Settlement with
subcontractor........... -- 1,959 -- -- --
-------- -------- -------- ------- -------
Total operating
expenses................ 22,029 23,732 18,478 9,260 7,338
-------- -------- -------- ------- -------
Income (loss) from
operations.............. (18,877) (8,564) (7,451) 2,936 696
Other income (expense):
Interest expense, net. (387) (895) (443) (383) (184)
Other income, net..... 324 512 378 37 47
-------- -------- -------- ------- -------
Income (loss) before
income taxes............ (18,940) (8,947) (7,516) 2,590 559
Provision (benefit) for
income taxes............ 1,839 (296) (2,443) 890 177
-------- -------- -------- ------- -------
Net income (loss)....... $(20,779) $ (8,651) $ (5,073) $ 1,700 $ 382
======== ======== ======== ======= =======
Net income (loss) per
common share--basic
(1).................... $ (2.28) $ (0.96) $ (0.64) $ 0.31 $ 0.07
======== ======== ======== ======= =======
Net income (loss) per
common share--
diluted(1)............. $ (2.28) $ (0.96) $ (0.64) $ 0.23 $ 0.06
======== ======== ======== ======= =======
Weighted average number
of common shares
outstanding--basic (1). 9,120 8,970 7,983 5,494 5,490
Weighted average number
of common shares
outstanding--diluted
(1).................... 9,120 8,970 7,983 7,421 6,069
</TABLE>
- --------
(1)See Note B of Notes to Consolidated Financial Statements.

12
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and other parts of this Form 10-K contain forward-looking
statements involving risks and uncertainties as defined in the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed here and those included in publicly available
filings with the Securities and Exchange Commission, such as this report.

OVERVIEW

Since its founding in 1982, Number Nine has introduced successive
generations of video/graphics subsystems providing advanced video/graphics
performance in desktop PCs. The Company has focused on providing a broad line
of high-performance hardware and software video/graphics solutions, targeting
both OEMs and two-tier and retail distribution customers. The Company's series
of 128-bit proprietary accelerators have been recognized as some of the
highest performance graphics products available to the desktop PC market.
During the third quarter of 1997, the Company began shipping products
utilizing its third generation proprietary 128-bit graphics accelerator chip
technology, Ticket to Ride. Additionally, the Company has begun development of
its fourth generation 128-bit graphics accelerator chip technology. There can
be no assurance that the Company's latest generation product, Revolution3D,
utilizing the Ticket to Ride chip will be successful or that the fourth
generation product will be completed and marketed successfully. The Company
also markets Hawkeye95, a display control utilities and driver software suite,
which enhances user control over various graphics functions and is designed to
improve PC system graphics performance under Windows95. In addition, the
Company has begun to ship several new video/graphics products, including the
second and third generations of its Imagine 128 accelerator board for Apple
PowerMac PCI computers, and next-generation merchant accelerator chip based
products in its Vision, Motion and Reality product families. During 1998, the
Company currently plans to develop several different products with 3-D
capabilities and anticipates that most of its products will also incorporate
motion video acceleration.

The Company's past operating results have been, and its future operating
results will continue to be, subject to fluctuations from quarter to quarter
due to a variety of factors, including: the gain or loss of significant
customers; changes in the mix of products sold and in the mix of sales by
distribution channels; the Company's ability to introduce new technologies and
products on a timely basis; availability and timing of component shipments and
cost of components obtained from the Company's suppliers; availability and
cost of manufacturing and foundry capacity; new product introductions by the
Company's competitors; delays in related product introductions by others;
market acceptance of the Company's products; product returns or price
protection charges from customers; reductions in sales of older generation
products as customers anticipate new products, giving rise to charges for
obsolete or excess inventory; and changes in product prices by the Company,
its competitors and suppliers, including possible decreases in unit average
selling prices of the Company's products caused by competitive pressures. In
particular, in the second quarter of 1996, the Company identified charges of
approximately $5.7 million of obsolete and excess finished goods and component
inventory. There were a number of events during the second quarter of 1996
that were the primary drivers for this provision. These include an
acceleration of product transitions, further deterioration of memory inventory
value, continued pressure on pricing of older products, lower than expected
sales activity of certain products and excess component inventories. Operating
results can also be adversely affected by general economic and other
conditions affecting the timing of customer orders, a downturn in the market
for PCs, and order cancellations or rescheduling. The Company's sales to
original equipment manufacturers ("OEMs"), which accounted for 43.8% of net
sales in 1997, 68.3% of net sales in 1996, and 52.8% of net sales during 1995,
are particularly susceptible to fluctuations.

13
<PAGE>

The Company's sales to OEMs typically generate lower gross margins than
retail and distributor sales, but also generally entail lower marketing, sales
and product support costs. The Company's net sales, gross margins and profits
have in the past, and may in the future, vary significantly depending on the
proportion of its sales to OEMs and other distribution channels, as well as
the mix of products sold in each channel. The Company's sales of merchant-
based technology products are typically at a significantly lower margin than
the sales of its proprietary technology products. The gross margin on all of
the Company's products is significantly impacted by costs of components,
particularly memory costs, which have varied widely over the past several
years, as well as significant pricing pressure on its products as a result of
competition.

On June 11, 1996, a complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff RBI, an Alaskan limited
partnership, against the Company, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of the Company's initial
public offering, Robertson, Stephens & Company, Cowen & Company and Unterberg
Harris (the "Managing Underwriters"). On or about July 17, 1996, a complaint
was filed in the United States District Court for the District of
Massachusetts by named plaintiff John Foley against the Company, each member
of the Company's Board of Directors, (Andrew Najda, Stanley W. Bialek, Dr.
Fouad H. Nader and William H. Thalheimer), former members of the Company's
Board of Directors, (Gill Cogan, Dr. Paul R. Low), Kevin M. Hanks, former
Chief Financial Officer and Treasurer of the Company, and the Managing
Underwriters. On or about October 16, 1996, an additional complaint was filed
in the United States District Court for the District of Massachusetts by named
plaintiff Robert Schoenhofer against the Company, each member of the Company's
Board of Directors (during the period in question), Mr. Hanks, and the
Managing Underwriters. Each of the plaintiffs purports to represent a class of
purchasers of the Common Stock of the Company between and including May 26,
1995 through January 31, 1996. Each complaint alleges that the named
defendants violated the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, by, among other things, issuing to the
investing public false and misleading statements regarding the Company's
business, products, sales and earnings during the class period in question.
The plaintiffs seek unspecified damages, interest, costs and fees. By order of
the District Court, these actions have been consolidated into a single action.
It is possible that other claims may be made against the Company or that there
may be other consequences from the lawsuits. The defendants deny any
liability, believe they have meritorious defenses, and intend to vigorously
defend these and any similar lawsuits that may be filed, although the ultimate
outcome of these matters cannot yet be determined. If the lawsuits are not
resolved satisfactorily for the Company, there could be a material adverse
effect on the Company's future financial condition and results of operations
and, accordingly, income (loss). The Company does not believe that the
ultimate liability, if any, is estimable or probable, and therefore no
provision for any liability that may result from the actions has been
recognized in the accompanying condensed consolidated financial statements.

RESULTS OF OPERATIONS

The following table sets forth certain income and expense items as a
percentage of net sales for the periods indicated.

14
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales.......................... 93.3 87.2 90.6
----- ----- -----
Gross profit........................... 6.7 12.8 9.4
Operating Expenses:
Selling, general and administrative.. 29.2 13.5 13.2
Research and development............. 17.5 4.9 2.6
Settlement with subcontractor........ -- 1.6 --
----- ----- -----
Total operating expenses........... 46.7 20.0 15.8
----- ----- -----
Income (loss) from operations.......... (40.0) (7.2) (6.4)
Other income (expense):
Interest expense..................... (0.8) (0.8) (0.4)
Other income, net.................... 0.7 0.5 0.4
----- ----- -----
Income (loss) before income taxes...... (40.1) (7.5) (6.4)
Provision (benefit) for income taxes... 3.9 (0.2) 2.1
----- ----- -----
Net income (loss)...................... (44.0)% (7.3)% (4.3)%
===== ===== =====
</TABLE>

FISCAL YEAR ENDED DECEMBER 27, 1997 AND DECEMBER 28, 1996

Net Sales: Net sales decreased 60% to approximately $47.2 million in 1997
from approximately $118.5 million in 1996. This decrease was primarily
attributable to a decrease in net sales to the Company's OEM customers. Sales
to OEMs decreased approximately 74%, to approximately $20.7 million in 1997
from $80.9 million in 1996, representing 43.8% of net sales in 1997 compared
to 68.3% in 1996. The decrease in sales to OEMs was primarily a result of
discontinuation of the sales of the Company's products to Dell during 1997.
Sales to Dell represented approximately $4.9 million, or 10.4%, of net sales
in 1997 compared to $62.7 million, or 52.9%, of net sales in 1996. Total
international sales decreased 43% to approximately $17.2 million in 1997 from
approximately $30.2 million in 1996. Sales of the Company's proprietary based
128-bit products represented approximately $36.7 million or 77.7% of net sales
in 1997, compared to $48.6 million or 41.0% in 1996.

Gross Profit: Gross margin decreased 79%, to $3.2 million in 1997 from $15.2
million in 1996. As a result of sales, gross profit in 1997 was 6.7% compared
to 12.8% in 1996. This decrease was primarily attributable to the reduction in
net sales, particularly lower sales of the Company's proprietary products to
its OEM customers, as well as significant pricing pressure in 1997 on sales of
older technology products. The Company's future prospects will depend in part
on its ability to successfully manage its product transitions and fluctuating
component costs, particularly memory, and control inventory as new products
are introduced. There can be no assurance that the Company will be successful
in managing these changes. While the Company reserves for anticipated charges
based upon historical rates of product returns, component cost fluctuations,
and other factors, there can be no assurance that reductions in sales and
returns of older generation products will not give rise to charges for
obsolete or excess inventory or substantial price protection charges. The
effects of planned new product introductions, anticipated stock rotations and
sales activity during future periods, as further described in "Certain Factors
That May Affect Future Results of Operations" may have a negative impact on
gross margin.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased 14%, to $13.8 million in 1997 from $16.0
million in 1996, primarily as a result of a reduction of advertising and
channel promotion activities. As a percentage of net sales, selling, general
and administrative expenses were 29.2% in 1997 compared to 13.5% in 1996. The
Company currently expects that total selling, general and

15
<PAGE>

administrative expenses will continue to decrease although not necessarily as
a percentage of net sales, primarily as a result of expense controls and
headcount reductions.

Research and Development Expenses: Research and development expenses
increased 43%, to approximately $8.3 million in 1997 from $5.8 million in
1996, resulting primarily from increased staffing to support continued
development of both proprietary and merchant based video/graphics products,
lower capitalization of software costs, as well as engineering expenses
associated with the completion of chip development of the Company's third
generation proprietary based 128-bit graphics accelerator product Ticket to
Ride, as well as associated graphic boards utilizing this chip, such as
Revolution 3D. In 1997, the Company began the development of its next
generation, which is the fourth generation, proprietary 128-bit chip, and
continued development of some additional products. As a percentage of net
sales, research and development expenses increased to 17.5% in 1997 from 4.9%
in 1996.

Expenses Associated With Settlement With a Subcontractor: During 1996, the
Company incurred a charge of approximately $2.0 million related to the
settlement of a dispute with one of its sub-contractors with respect to the
Company's commitment, if any, to purchase a quantity of DRAM memory chips at
prices significantly above the then current price levels. This settlement was
1.6% of net sales in 1996.

Interest Expense: Interest expense for 1997 was $387,000 compared to
$895,000 in 1996. During 1997, the Company had lower average balances
outstanding against its revolving line of credit than during 1996.

Other Income: Other income totaled $324,000 in 1997 compared to $512,000 in
1996. Other income in 1997 and 1996 was primarily attributable to interest
earned on cash and cash equivalents.

Provision (Benefit) for Income Taxes: In 1997, the Company increased its
valuation allowance against the remainder of its net deferred tax asset, of
approximately $1.8 million. Valuation of the net deferred tax asset was
dependent upon generating sufficient taxable income in near-term periods.
Principally as a result of the net losses incurred in 1997, management
estimates of future taxable income have been reduced. As a result, management
believes it is less likely than not that the remaining net deferred tax asset
will be realized.

FISCAL YEAR ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995

Net Sales: Net sales increased 1%, to approximately $118.5 million in 1996
from $116.8 million in 1995. This increase was largely attributable to
increased sales of higher-end products with corresponding declines of the
Company's lower-end (entry-level) products. Net sales of higher-end 64-bit
VRAM and 128-bit products increased 16% to $82.8 million in 1996 from $71.2
million in 1995, representing 69.9% of net sales in 1996 compared to 61.0% of
net sales in 1995. Sales to OEMs increased 31%, to approximately $80.9 million
in 1996 from $61.7 million in 1995, representing 68.3% of net sales in 1996
compared to 52.8% in 1995. The increase in OEM sales was primarily a result of
increased sales to Dell, Unisys and Micron. Sales to Dell represented 52.9% of
net sales in 1996 compared to 47.3% of net sales in 1995. Net sales to
international two-tier distribution customers decreased approximately 43% to
approximately $13.3 million in 1996 from $23.2 million in 1995. Net sales to
domestic two-tier and retail customers decreased 24% to $24.3 million in 1996
from approximately $32.0 million in 1995. The Company's net sales to its
retail customers were less than anticipated in 1996 despite increased
marketing efforts. As a result the Company focused its marketing and sales
efforts in this channel towards VARs and system integrators. Total
international sales decreased 12% to $30.2 million in 1996 from $34.5 million
in 1995. This decrease was primarily attributable to disappointing sales to
European two-tier and retail distribution customers.

Gross Profit: Gross profit increased 38%, to approximately $15.2 million in
1996 from approximately $11.0 million in 1995. This increase was primarily
attributable to smaller inventory charges incurred during the second quarter
of 1996 compared to the inventory charge incurred during the fourth quarter of
1995. The 1996

16
<PAGE>

charges, discussed in the overview, were a result of an acceleration of
product transitions, deterioration of memory inventory value, pressure on
pricing of older generation products and lower than expected sales activity of
the Company's Macintosh-based products. The Company's gross profit margin
increased to 12.8% in 1996 from 9.4% in 1995, principally due to the smaller
inventory charges in 1996 and a product mix shift towards the Company's
proprietary-based products, which tend to generate higher gross profit margins
than products based on merchant technology.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 3%, to approximately $16.0 million in 1996
from approximately $15.5 million in 1995, primarily as a result of increased
expenses related to additional costs associated with increased staffing, the
hiring of new key personnel, legal expenses associated with the pending
securities litigation and additional advertising and channel promotion
activities. As a percentage of net sales, selling, general and administrative
expenses increased to 13.5% in 1996 from approximately 13.2% in 1995.

Research and Development Expenses: Research and development expenses
increased 94%, to $5.8 million in 1996 from approximately $3.0 million in
1995, resulting primarily from increased staffing to support continued
development of both proprietary and merchant-based video/graphics products,
lower capitalization of software costs, and engineering expenses associated
with the completion of chip development and subsequent production launch of
the Company's Imagine 128 Series 2 products. During 1996, the Company began
the development of its next-generation Imagine 128 Series 3 chip, released to
production products based on the Imagine 128 Series 2 chip, 9FX Reality 332,
based on S3's Virge chip and 9FX Reality 772, based on S3's VirgeVX chip, and
continued development of additional products. As a percentage of net sales,
research and development expenses increased to 4.9% in 1996 from 2.6% in 1995.

Expenses Associated With Settlement With a Subcontractor: During the second
quarter of 1996, the Company incurred a charge of approximately $2.0 million
related to the settlement of a dispute with one of its sub-contractors with
respect to the Company's commitment, if any, to purchase a quantity of DRAM
memory chips at prices significantly above current price levels.

Interest Expense: Interest expense increased to $895,000 in 1996 compared to
interest expense of $443,000 in 1995. During 1996, the Company had higher
average balances outstanding against its revolving line of credit than during
1995.

Other Expense/Income: Other income totaled $512,000 in 1996 compared to
other income of $378,000 in 1995. Other income during 1996 was primarily
attributable to interest earned on cash and cash equivalents; other income
during 1995 was primarily attributable to foreign currency gains, as well as
interest earned on cash and cash equivalents during the third quarter of 1995.

Provision (Benefit) for Income Taxes: During 1996 and 1995, the Company
provided income tax benefits of $296,000 and $2.4 million, respectively. The
1996 tax benefit is substantially less than the expected statutory tax rate
due to the uncertainty of realizing the benefit from future taxable income.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

This report contains forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Such statements are
based on management's current expectations and are subject to a number of
factors and uncertainties which could cause actual results to differ
materially from those described in the forward-looking statements. The Company
cautions investors that there can be no assurance that actual results or
business conditions will not differ materially from those projected or
suggested in such forward-looking statements as a result of various factors,
including, but not limited to the following:

The Company is dependent on sole or limited source suppliers for certain key
components and has experienced limited availability, delays in shipments and
unanticipated cost fluctuations related to the supply of

17
<PAGE>

components, particularly memory chips. The Company is actively working with
memory component suppliers to secure pricing and volume commitments for future
production. Additionally, the Company's suppliers could impact the
availability of key components, particularly memory and graphics accelerator
chips, to the extent that they reduce the Company's lines of credit and
payment terms. In such an event, the Company could have difficulty securing
sufficient supply to meet customer requirements. There can be no assurance
that commitments will be secured in sufficient amounts to meet the needs of
the Company or at prices that will enable the Company to attain profitability.

The PC industry in general, and the market for the Company's products in
particular, are characterized by rapid technological advances, frequent new
product introductions, short product life cycles, product obsolescence,
changes in customer requirements or preferences for competing products,
evolving industry standards, significant competition, and rapidly changing
pricing. In this regard, the life cycle of products in the Company's markets
is often as short as six to twelve months. Therefore, the Company's future
prospects will depend in part on its ability to enhance the functionality of
its existing products in a timely manner and to continue to identify, develop
and achieve market acceptance of products that incorporate new technologies
and standards and meet evolving customer needs. There can be no assurance that
the Company will be successful in managing product transitions, including
controlling inventory of older generation products as new products are
introduced. The Company has in the past experienced and could in the future
experience reductions in sales of older generation products as customers
anticipate new product introductions. For example, the Company is currently
completing its development efforts on its fourth generation proprietary 128-
bit video/graphics accelerator chip, while its third generation proprietary
128-bit video/graphics accelerator chip is nearing the end of its product life
cycle. The Company's ability to successfully transition its Revolution 3D
products to its fourth generation proprietary-based 128-bit products will
depend on such factors. While the Company reserves for anticipated returns
based upon historical rates of product returns and other factors, there can be
no assurance that reductions in sales and returns of older generation products
by distributors, which are primarily attributable to customer stock rotation,
will not give rise to charges for obsolete or excess inventory or substantial
price protection charges.

The volume and timing of orders received during a particular quarter are
very difficult to forecast. The Company's customers can change delivery
schedules or cancel orders with limited or no penalties. For example, in
September 1996 the Company received notice from Dell that Dell would
discontinue buying its merchant graphics solution from the Company in the
fourth quarter of 1996. In addition, during the first quarter of 1997, Dell
reduced its purchases of the Company's proprietary Imagine 128 Series 2 4MB
VRAM product. As a result, the Company's net sales to Dell in 1997 were not
significant, $4.9 million during 1997 compared to $62.7 million during 1996.
Future sales to Dell are uncertain and depend upon the performance and pricing
of new Company products and their acceptance by Dell. Customers generally
order on an as-needed basis, and as a result, the Company has historically
operated without significant backlog. Moreover, as is often the case in the PC
industry, a disproportionate percentage of the Company's net sales in any
quarter may be generated in the final month or weeks of a quarter.
Consequently, a shortfall in sales in any quarter as compared to management
expectations may not be identifiable until the end of the quarter. Because a
significant portion of operating expense levels are relatively fixed, the
timing of expense levels is based in large part on the Company's expectations
of future sales. As a result of the decline in net sales to the Company's OEM
customers, primarily Dell, and product transitions, net sales declined in 1997
compared to 1996. If sales do not meet the Company's expectations, it may be
unable to quickly adjust spending, which could have a material adverse effect
on the Company's operating results.

The Company's products have historically been based both on merchant and
proprietary-based video/graphic accelerator chips. These product lines have
each contributed gross profit for the Company during the last few years.
However, the Company believes that over the long-term, its proprietary-based
products will become an increasingly more important factor in determining
success for the Company, and the Company currently anticipates reduced sales
of merchant based products. For example, during 1996, the Company's reliance
on its proprietary products increased as a percentage of net sales and gross
profit throughout 1996. If sales of the Company's proprietary-based products
do not meet the Company's expectations or if there are delays

18
<PAGE>

in the completion and availability of these proprietary-based products, the
Company may have significantly reduced sales, which could have a material
adverse effect on the Company's operating results.

Due primarily to industry seasonality, demand for the Company's products
historically has been strongest during the fourth calendar quarter, and sales
in the subsequent calendar quarter have tended to decline. Net sales decreased
40.8% in the first quarter of 1997 from the fourth quarter of 1996 and 12.7%
in the first quarter of 1996 from the fourth quarter of 1995, although period-
to-period comparisons of financial results should not be relied upon as an
indication of future performance. Quarterly peaks in sales also tend to
coincide with peak working capital requirements.

The Company has been served notice of three lawsuits seeking class action
status on or about June 11, 1996, July 16, 1996 and October 16, 1996,
respectively, filed in the United States District Court for the District of
Massachusetts naming as defendants the Company, the members of the Board of
Directors during the period in question, the former Chief Financial Officer
and Treasurer of the Company, and the Selling Shareholders and Managing
Underwriters of the Company's 1995 initial public offering. The alleged class
of plaintiffs consists of all persons who purchased shares of the Company's
Common Stock on the open market between and including May 26, 1995 through
January 31, 1996. The plaintiffs, who seek unspecified damages, interest,
costs and fees, allege, among other things, that the Company's Registration
Statement and Prospectus in its initial public offering and other public
statements and reports filed with the Securities and Exchange Commission
during the class period in question contained false and materially misleading
statements. The defendants deny liability, believe they have meritorious
defenses and intend to vigorously defend against these and any similar
lawsuits that may be filed, although the ultimate outcome of these matters
cannot yet be determined. If the lawsuits are not resolved satisfactorily for
the Company, there could be a material adverse effect on the Company's future
financial performance and results of operations and accordingly, income
(loss).

LIQUIDITY AND CAPITAL RESOURCES

The accompanying financial statements have been presented on a going concern
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. (See Note B of Condensed
Consolidated Financial Statements.)

The Company has continued to incur substantial losses from operations, lost
a significant customer, is not in compliance with all of the covenants
required by its lender, has unresolved class actions litigation concerning
alleged violations of securities laws, and needs additional financing to
continue operations, all of which raises substantial doubt about its ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. The Company has retained investment banking counsel to advise it
on the possible sale of equity securities, as well as to introduce and assist
it in the evaluation of potential merger and partnering opportunities.
However, no assurance can be provided that the Company will be successful in
raising capital or entering into a business alliance. The financial statements
do not include any adjustments relating to the recovery and classifications of
recorded asset amounts or the amounts and classifications of liabilities that
might be necessary should the Company be unable to continue as a going
concern.

Several factors in the development of the Company's business during 1995,
1996 and 1997 have had a significant impact on its balance sheet and cash
flows. During 1995 and 1996, the Company experienced significantly higher
sales to two-tier and retail distribution channel customers. These customers
tend to order toward the end of each quarter and to pay more slowly than OEM
customers. The Company has since shifted its business, increasing sales to its
OEM customers. In addition, the Company's manufacturing strategy has focused
on purchasing a higher proportion of components directly from manufacturers,
which reduces component costs but requires longer-term commitments and faster
payment compared to distributor suppliers. Finally, the fluctuating cost of
memory components has resulted in variable gross and operating margins, and
limited availability at times has required the use of cash when necessary to
secure supplies of memory. The Company incurred valuation adjustments for
inventory during the fourth quarter of 1995 and second quarter of 1996, and
recorded charges to cost of sales associated with obsolete and excess
inventory of $8.0 million and $5.7 million,

19
<PAGE>

respectively. The Company determined that the market value for this material
was substantially less than the cost to procure and build, and the Company has
written down the components to estimated net realizable value less selling
costs. Significant pricing pressure for the Company's products has been
experienced during 1997 resulting in lower gross margin and less net income.
In combination, these factors have resulted in the Company requiring more
working capital and generating less cash flow from operations than
anticipated.

In 1997, the Company continued to incur losses on reduced revenue while
marketplace pricing pressure has increased. The Company's operating activities
used cash of approximately $9.0 million in 1997, compared to operating
activities which provided cash of approximately $11.2 million in 1996. In
1997, net decreases in accounts receivable, and inventories provided cash of
approximately $1.1 million and $6.6 million, respectively, which was more than
offset by a net loss from operations of approximately $20.8 million. Decreases
in accounts receivable have primarily been attributable to lower sales levels
in 1997. The Company believes it can operate with lower levels of working
capital relative to net sales and has committed additional resources to the
management and control of its receivables and inventories. At December 27,
1997, the Company's principal sources of liquidity consisted of approximately
$2.5 million of cash and cash equivalents and approximately $6.5 million
available under its revolving line of credit, pending approval of the debt
covenant waivers and subject to the Company's receivables described below.

In 1997, investing activities used cash of approximately $2.5 million for
purchases of computer and office equipment compared to $2.4 million for
purchases and office equipment in 1996. During 1996, the Company capitalized
software costs of $466,000; the Company did not have any capitalized software
costs in 1997. Financing activities provided cash of approximately $168,000 in
1997, attributable to the exercise of common stock options and through the
issuance of common stock through the "1995 Employee's Stock Purchase Plan".
During 1996, financing activities provided cash of $274,000, primarily
attributable to the exercise of common stock options.

As of December 27, 1997, approximately $8.5 million was outstanding under
the Company's revolving credit facility (the "Loan Agreement"). The Loan
Agreement contains financial covenants including, but not limited to, a
minimum current ratio, minimum tangible net worth, a maximum debt to tangible
net worth ratio, and maximum quarterly net loss. The Loan Agreement also gives
the lender the right to call the loan in the event of a material adverse
change in the Company's business and prohibits the Company from paying
dividends without the consent of the lender. The Company has been out of
compliance with certain terms of its Loan Agreement from time to time and as a
result has entered into amendments revising certain covenants in such Loan
Agreement or has required a waiver from its lender. The Company sought, and
received, a waiver for noncompliance with certain covenants at the conclusion
of 1997, and as such remains out of compliance with such covenants of its Loan
Agreement. Additionally, the Company is currently operating under a
forebearance agreement with its lender, which allows the Company to continue
to borrow necessary funds in excess of the existing capacity of the Company's
borrowing base. The Company believes that the lender will continue to allow
the Company to operate under its forebearance agreement while the Company
seeks to secure additional financing. Should the lender refuse to grant any
future waiver or amendment, and the line of credit is not available to the
Company, management anticipates that it would require alternative financing.
However, if the Company is not able to secure alternative financing, the
Company's liquidity would be adversely affected.

The Company believes that its existing cash balances plus additional funds
currently expected to be generated from product sales and the existing bank
debt or alternative financing, if available to the Company, would be
sufficient to fund operations at current levels through the first quarter of
1998. However, future growth in sales, significant losses and limitations of
credit/terms by suppliers, and/or continued increases in working capital
required by the Company's business would result in the need for the Company to
obtain additional equity or debt financing. Additionally, the Company believes
that working capital requirements for future product releases, as well as
continued investments in operations, particularly research and development,
during 1998 will require additional equity or debt financing. As a result, the
Company has retained an investment bank to explore and evaluate different
strategic or financing alternatives for the Company and is actively exploring
all strategic financial alternatives. No assurances can be given that any
financing will be available to the Company on acceptable terms, if at all.

20
<PAGE>

YEAR 2000

The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date
has been stored as just two digits (e.g., 97 or 1997). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software which
uses only two digits to represent the year may recognize a date using 00 as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruption of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar business activities.

The Company has conducted a review of its internal information systems to
determine the extent of any Year 2000 problem. Such review included specific
inquires about the Year 2000 Issue posed to the vendors of its software
programs. Based on such review, the Company does not currently believe that it
has material exposure to the Year 2000 Issue with respect to its own
information systems, since its principal information systems correctly define
the year 2000.

The Company conducted a review of its internal information systems to
determine the extent of any Year 2000 problem. Based on such review, the
Company does not believe that the impact of any Year 2000 problem will be
material because its principal information systems correctly define the year
2000. Although there exists the possibility that Year 2000 issues will be
identified, based on such review to date, the Company does not currently
expect that any such problems will have a material adverse elect on the
Company's future operatic results or financial condition

The Company is in the process of contacting its major suppliers and
customers in an effort to determine the extent to which the Company may be
vulnerable to those parties' failure to timely correct their own Year 2000
problems. To date, the Company is unaware of any situations of noncompliance
that would materially adversely affect its operations or financial condition.
There can be no assurance, however, that instances of noncompliance which
could have a material adverse effect on the Company's operations or financial
condition will not be identified; that the systems of other companies with
which the Company transact business will be corrected on a timely basis; or
that a failure by such entities to correct a Year 2000 problem or a correction
which is incompatible with the Company's information systems would not have a
material adverse effect on the Company's operations or financial condition.

NEW ACCOUNTING PRONOUNCEMENTS

Financial Accounting Standards Board Statement No. 129 ("FAS 129")
"Disclosure of Information about Capital Structure" is effective for financial
statements issued for periods ending after December 31, 1997. FAS 129
establishes standards for disclosure of information about securities,
liquidation preference of preferred stock and redeemable stock.

Financial Accounting Standards Board Statement No. 130 ("FAS 130")
"Reporting Comprehensive Income" is effective for fiscal years beginning after
December 31, 1997, although earlier application is permitted. The Company
intends to adopt the requirements of this pronouncement in its financial
statements for the year ending January 2, 1999. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. FAS 130 requires that all
components of comprehensive income shall be reported in the financial
statements in the period in which they are recognized. Furthermore, a total
amount for comprehensive income shall be displayed in the financial statement
where the components of other comprehensive income are reported. The Company
was not previously required to present comprehensive income or the components
thereof in its financial statements under generally accepted accounting
principles.

21
<PAGE>

regarding the different types of business activities in which an enterprise
engages and the different economic environments in which it operates.

Financial Accounting Standards Board Statement No. 132 ("FAS 132")
"Employers' Capital Disclosures about Pensions and other Postretirement
Benefits" is effective for fiscal years beginning after December 15, 1997,
although earlier application is encouraged. FAS 132 establishes standards
related to the disclosure requirements for pensions and other postretirement
benefits. FAS 132 requires additional information to be disclosed regarding
changes in the benefit obligation and fair value of plan assets, as well as
eliminates other disclosures no longer considered useful.

The Company does not believe that the implementation of FAS 129, FAS 130,
FAS 131 or FAS 132 will have a material impact on the Company's financial
statements.

22
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES NUMBER
--------------------------------------------------------------- ------
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants....................................... F-1
Consolidated Balance Sheets as of December 27, 1997 and December 28,
1996................................................................... F-2
Consolidated Statements of Operations for the Fiscal Years Ended
December 27, 1997,
December 28, 1996 and December 30, 1995................................ F-3
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 27, 1997, December 28, 1996 and December 30, 1995....... F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 27, 1997,
December 28, 1996 and December 30, 1995................................ F-5
Notes to Consolidated Financial Statements.............................. F-6
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement
for the June 11, 1998 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in the Company's
Proxy Statement for the June 11, 1998 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Share Ownership" in the Company's Proxy
Statement for the June 11, 1998 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Certain Relationships and Related
Transactions" and "Executive Compensation--Employment Agreements, Termination
of Employment and Change of Control Arrangements" in the Company's Proxy
Statement for the June 11, 1998 Annual Meeting of Stockholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>
<C> <S>
The following documents are filed as part of this annual report
ITEM 14(A). on Form 10-K.
ITEM 14(A)(1) See "Index to Consolidated Financial Statements and Financial
AND (2). Statement Schedules" at Item 8 to this Annual Report on Form
10-K. Other financial statement schedules have not been
included because they are not applicable or the information is
included in the financial statements or notes thereto.
ITEM 14(A)(3). Exhibits
</TABLE>

23
<PAGE>

The following is a list of exhibits filed as part of this Annual Report on
Form 10-K.

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3.1** Restated Certificate of Incorporation (3.1)
3.2* Restated By-Laws (3.4)
4.1* Instruments defining the rights of security holders (See
Exhibits 3.1 and 3.2 hereto)
4.2* Form of Common Stock Certificate (4.2)
10.1(a)*>+ 1996 Employee, Director and Consultant Stock Option Plan (10.1)
10.1(b)*+ 1994 Employee, Director and Consultant Stock Option Plan (10.1)
10.2*+ 1989 Stock Option Plan (10.2)
10.3>>+ 1995 Employee Stock Purchase Plan, as amended (10.1)
10.4* Series A Preferred Stock Purchase Agreement, dated as of
December 30, 1994, among the registrant and the purchasers
named therein (10.4)
10.5* Stockholders Agreement, dated December 30, 1994, among the
Registrant, Andrew Najda, Stanley W. Bialek and the investors
named therein (10.5)
10.6* Lease Agreement, dated as of April 1, 1991, as amended, between
the Registrant and Lexington Management Incorporated (10.6)
10.7(a)* Loan and Security Agreement, dated December 10, 1992, as
amended, between the Registrant and Marine Midland Business
Loans, Inc. (10.7)
10.7(b)# Amendment to Loan and Security Agreement, dated December 10,
1992, as amended, between the Registrant and Marine Midland
Business Loans, Inc.
10.7(c)### Amendment to Loan and Security Agreement, dated December 10,
1992, as amended, between the Registrant and Marine Midland
Business Loans, Inc.
10.8* Purchase Money Security Agreement, dated as of March 23, 1993,
as amended, between the Registrant and TAL Financial
Corporation (10.8)
10.9* Equipment Lease, dated as of June 1, 1994, between the
Registrant and TAL Financial Corporation (10.9)
10.10* Intercompany Agreement, dated as of April 1, 1993, between the
Registrant and Number Nine GmbH (10.10)
10.11* ASIC Design and Purchase Agreement, dated as of September 7,
1994, by and between the Registrant and LSI Logic Corporation
(10.11)
10.12* Master Development and Production Agreement, dated as of
January 24, 1995, between the Registrant and NEC (10.12)
10.13#+ Severance Agreement, dated February 1, 1996, between the
Registrant and Michael P. Casey (10.13)
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.14#+ Severance Agreement, dated March 21, 1996, between the
Registrant and Kevin M. Hanks (10.14)
10.15##+ Severance Agreement, dated April 10, 1996, between the
Registrant and Gregory C. McHale (10.1)
10.16##+ Employment Letter Agreement, dated May 11, 1996, between the
Registrant and John G. Thompson (10.2)
10.17##+ Employment Letter Agreement, dated April 25, 1996, between the
Registrant and Beverly Schultz (10.3)
10.18###+ Employment Letter Agreement, dated October 11, 1996, between
the Registrant and Michael Romanies
10.19###+ Employment Letter Agreement, dated November 20, 1996, between
the Registrant and Archie Miller
10.20+ Employee Separation Agreement, dated October 6, 1997, between
the Registrant and John G. Thompson
10.21+ Employee Separation Agreement, dated November 20, 1997, between
the Registrant and Beverly Schultz
10.22+ Employee Separation Agreement, dated January 19, 1998, between
the Registrant and Daniel W. Muehl
10.23+ Employee Separation Agreement, dated February 6, 1998, between
the Registrant and James O'Bray
21.1* Subsidiaries of the Registrant (21.1)
27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement filed on
Form S-1 (File No. 33-91002)

** Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from, the Company's Quarterly Report on Form 10-Q for
the Quarter ended June 30, 1995.

> Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from, the Company's Registration Statement on Form S-8
filed May 22, 1996.

>> Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from, the Company's Registration Statement on Form S-8
filed April 29, 1996.

# Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from, the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 30, 1995.

## Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from, the Company's Quarterly Report on Form 10-Q for
the Fiscal Quarter Ended June 29, 1996.

### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from, the Company's Annual Report on Form 10-K for the
fiscal Year Ended December 27, 1996.

+ Management contract or compensatory plan, contract or arrangement.

Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.

ITEM 14(B). REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarter ended December 27,
1997.

25
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Number Nine Visual Technology Corporation:

We have audited the accompanying consolidated balance sheets of Number Nine
Visual Technology Corporation as of December 27, 1997 and December 28, 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three fiscal years in the period ended
December 27, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Number Nine
Visual Technology Corporation as of December 27, 1997 and December 28, 1996,
and the results of its operations and its cash flows for each of the three
fiscal years in the period ended December 27, 1997 in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue to be a going concern. As discussed in
Note B to the consolidated financial statements, the Company has continued to
incur substantial losses from operations, has lost a significant customer, is
not in compliance with all of the covenants required by its lender, has
unresolved class action litigation concerning alleged violations of securities
laws and needs additional financing to continue operations, all of which raise
substantial doubt about its ability to continue as a going concern. The
Company has hired financial management with experience in working with
financially troubled companies. The Company also has retained investment
banking counsel to advise it on the possible sale of equity securities, as
well as to introduce and assist in the evaluation of potential merger and
partnering opportunities. However, no assurance can be provided that the
Company will be successful in raising capital or entering into a business
alliance. The financial statements do not include any adjustments relating to
the recovery and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

Boston, Massachusetts
March 26, 1998

Coopers & Lybrand L.L.P.

F-1
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 2,481 $13,895
Accounts receivable, trade, net of allowances for
doubtful accounts of $193 and $364, at December
27, 1997 and December 28, 1996.................... 10,506 11,584
Receivables from manufacturing contractor(s)....... 1,678 2,324
Inventories........................................ 2,864 9,422
Prepaid expenses................................... 274 612
Deferred tax assets................................ -- 1,839
-------- -------
Total current assets............................. 17,803 39,676
Property and equipment, net........................ 3,906 2,671
Capitalized software costs, net.................... -- 648
Other assets....................................... 150 185
-------- -------
Total assets..................................... $ 21,859 $43,180
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit........................... $ 8,500 $ 8,500
Accounts payable................................... 6,148 5,848
Accrued expenses and other current liabilities..... 1,429 2,439
Current portion of capital lease obligations....... -- 67
-------- -------
Total current liabilities........................ 16,077 16,854
Commitments and contingencies (Note I)............. -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding....... -- --
Common Stock, $.01 par value; 20,000,000 shares
authorized; 9,172,548 shares issued and
outstanding at December 27, 1997; 9,053,256 shares
issued and outstanding at December 28, 1996....... 92 91
Additional paid-in capital......................... 35,994 35,760
Accumulated deficit................................ (30,304) (9,525)
-------- -------
Total stockholders' equity......................... 5,782 26,326
-------- -------
Total liabilities and stockholders' equity....... $ 21,859 $43,180
======== =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-2
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................... $ 47,205 $118,525 $116,819
Cost of sales............................... 44,053 103,357 105,792
-------- -------- --------
Gross profit................................ 3,152 15,168 11,027
Operating expenses:
Selling, general, and administrative...... 13,766 15,957 15,487
Research and development.................. 8,263 5,816 2,991
Settlement with subcontractor............. -- 1,959 --
-------- -------- --------
Total operating expenses................ 22,029 23,732 18,478
-------- -------- --------
Loss from operations........................ (18,877) (8,564) (7,451)
Other income:
Interest expense.......................... (387) (895) (443)
Other income, net......................... 324 512 378
-------- -------- --------
Loss before income taxes.................... (18,940) (8,947) (7,516)
Provision (benefit) for income taxes........ 1,839 (296) (2,443)
-------- -------- --------
Net loss.................................... (20,779) (8,651) (5,073)
======== ======== ========
Net loss per common share--basic............ $ (2.28) $ (0.96) $ (0.64)
======== ======== ========
Net loss per common share--diluted.......... $ (2.28) $ (0.96) $ (0.64)
======== ======== ========
Weighted average common
equivalent shares outstanding--basic....... 9,120 8,970 7,983
======== ======== ========
Weighted average common shares outstanding--
diluted.................................... 9,120 8,970 7,983
======== ======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND DECEMBER
27, 1997

<TABLE>
<CAPTION>
CLASS "A"
COMMON CLASS "B" COMMON COMMON
STOCK STOCK STOCK RETAINED
------------- ----------------- --------------- ADDITONAL EARNINGS TOTAL
PAR PAR PAR PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL DEFICIT) EQUITY
------ ----- ---------- ----- --------- ----- --------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 1,600 $-- 5,488,000 $ 55 $ 143 $ 4,199 $ 4,397
Conversion of Class A
and Class B Common
Stock into Common
Stock.................. (1,600) -- (5,488,000) (55) 5,489,600 $55
Issuance of common
stock, net of issuance
costs of $3,283........ 2,197,509 22 29,658 29,680
Conversion of Series A
redeemable preferred
stock into Common
Stock.................. 814,112 8 5,484 5,492
Exercise of stock
options................ 256,560 3 16 19
Net loss................ -- -- -- -- -- -- -- (5,073) (5,073)
------ ---- ---------- ---- --------- --- ------- -------- --------
Balance at December 30,
1995................... -- $-- -- $-- 8,757,781 $88 $35,301 $ (874) $ 34,515
------ ---- ---------- ---- --------- --- ------- -------- --------
Exercise of stock
options................ 295,475 3 459 462
Net loss................ -- -- -- -- -- -- -- (8,651) (8,651)
------ ---- ---------- ---- --------- --- ------- -------- --------
Balance at December 28,
1996................... -- $-- -- $-- 9,053,256 $91 $35,760 $ (9,525) $ 26,326
------ ---- ---------- ---- --------- --- ------- -------- --------
Exercise of stock
options and purchase
plan................... 119,292 1 234 235
Net loss................ -- (20,779) (20,779)
------ ---- ---------- ---- --------- --- ------- -------- --------
Balance at December 27,
1997................... -- $-- -- $-- 9,172,548 $92 $35,994 $(30,304) $ 5,782
====== ==== ========== ==== ========= === ======= ======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(20,779) $(8,651) $(5,073)
Adjustments to reconcile net loss to net
cash provided by (used for) operating
activities:
Depreciation and amortization............. 1,337 875 572
Amortization of capitalized software
costs.................................... 648 758 392
Provision for doubtful accounts........... -- 167 1,047
Deferred taxes............................ 1,839 770 (2,485)
Change in operating assets and
liabilities:
Accounts receivable..................... 1,078 15,895 (15,177)
Receivable due from manufacturing
contractors............................ 646 6,776 (9,100)
Inventories............................. 6,558 17,071 (8,832)
Prepaids and other assets............... 373 1,601 (1,874)
Accounts payable........................ 300 (24,517) 11,840
Accrued expenses and other current
liabilities............................ (1,010) 487 1,013
Income taxes payable.................... -- -- (147)
-------- ------- -------
Net cash provided by (used for)
operating activities................. (9,010) 11,232 (27,824)
Cash flows used for investing activities:
Purchase of property and equipment.......... (2,572) (2,380) (813)
Capitalized software costs.................. -- (466) (781)
-------- ------- -------
Net cash used for investing
activities........................... (2,572) (2,846) (1,594)
Cash flows provided by financing activities:
Payments of issuance costs on Series A
Preferred Stock............................ -- -- (105)
Proceeds from issuance of common stock, net
of issuance costs.......................... -- -- 29,680
Proceeds for exercise of common stock
options.................................... 235 462 19
Advances (payments) on revolving line of
credit, net................................ -- (233) 2,132
Principal payments on note payable.......... -- (19) (104)
Principal payments on capital lease
obligations................................ (67) (100) (97)
Proceeds on related party notes receivable,
net........................................ -- 164 71
-------- ------- -------
Net cash provided by financing
activities........................... 168 274 31,596
Net change in cash and cash equivalents....... (11,414) 8,660 2,178
Cash and cash equivalents, beginning of
period....................................... 13,895 5,235 3,057
-------- ------- -------
Cash and cash equivalents, end of period...... $ 2,481 $13,895 $ 5,235
======== ======= =======
Supplemental disclosures of cash flow
information:
Interest paid............................... $ 387 $ 86 $ 373
Income taxes paid........................... $ -- $ -- $ 1,731
Supplemental disclosures of non-cash financing
transactions:
Conversion of Series A 7% promissory notes
to Series A Preferred Stock................ $ -- $ -- $ 5,597
Conversion of Class A voting and Class B
non-voting Common Stock to Common Stock.... $ -- $ -- $ 198
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Notes to Condensed Consolidated Financial Statements and other parts of
this Form 10-K contain forward-looking statements involving risks and
uncertainties as defined in the Private Securities Litigation Reform Act of
1995. The Company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and included in publicly available filings with the Securities and
Exchange Commission, such as this report.

A. NATURE OF OPERATIONS:

Number Nine Visual Technology Corporation (the "Company") is an innovative
supplier of high-performance visual technology solutions, including
video/graphics accelerator subsystems, chips and productivity-enhancing
software for desktop personal computers. The Company operates in a single
industry segment.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company,
its foreign sales corporation, and its wholly-owned German subsidiary. All
material intercompany accounts and transactions have been eliminated in
consolidation.

Basis of Presentation

The accompanying financial statements have been presented on a going concern
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.

The Company has continued to incur substantial losses from operations, has
lost a significant customer, is not in compliance with all of the covenants
required by its lender, has unresolved class action litigation concerning
alleged violations of securities laws and needs additional financing to
continue operations, all of which raise substantial doubt about its ability to
continue as a going concern. The Company has hired financial management with
experience in working with financially troubled companies. The Company also
has retained investment banking counsel to advise it on the possible sale of
equity securities, as well as to introduce and assist it in the evaluation of
potential merger and partnering opportunities. However, no assurance can be
provided that the Company will be successful in raising capital or entering
into a business alliance. The financial statements do not include any
adjustments relating to the recovery and classification of recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.

Use of Accounting Estimates

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

Foreign Currency Translation

The financial statements of the Company's German subsidiary, where the US
dollar is the functional currency, are translated using exchange rates in
effect at the end of the period for monetary assets and liabilities while non-
monetary items are translated at historical exchange rates. Income and expense
accounts are translated

F-6
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

at the average rates in effect during the period, except for depreciation and
cost of sales which are translated at historical rates and are recognized in
the consolidated statement of operations. Transaction gains and losses are
recognized in the consolidated statements of operations in the period of
occurrence. For 1997, 1996 and 1995 transaction gains and losses were
immaterial.

Revenue Recognition

The Company recognizes revenue from product sales upon shipment. The Company
offers its customers a limited warranty for a period of typically one to three
years for each original equipment manufacturer ("OEM") and five years for
distributors. Costs associated with the warranty program are accrued when
revenue is recognized and are determined on the basis of estimated future
costs to fulfill the warranty commitment.

Stock rotation returns are allowed to distributors once every three months
and are generally limited to 10% of products purchased during the preceding
six month period provided an equivalent dollar amount of the other products is
purchased at the time of the return. Also, under the terms of the distributor
agreements, in the event the Company reduces its selling prices, the
distributors receive price protection credit for the difference between the
original purchase price of product remaining in their inventories and the
Company's reduced price for such products provided they were purchased during
the preceding ninety days. The Company records sales and cost of sales, net of
estimated stock rotation returns and price adjustments. These estimates are
calculated using (i) inventory reporting from distributors, (ii) historical
rates of return and (iii) the effect of new product introductions, transitions
and price adjustments. The Company also monitors in-channel inventory and will
not recognize revenue if a distributor's inventory exceeds near term
anticipated usage, generally less than six weeks. Actual stock rotation
returns and price adjustments could exceed these estimates and impact future
results of operations and cash flows.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents and those
with maturities between 90 and 365 days to be short-term investments. Cash
equivalents are carried at amortized cost plus accrued interest, which
approximates fair value, and consist primarily of money market accounts.

Inventories

Inventories are stated at the lower of cost or market, with cost determined
using standard costs, which approximates the first-in, first-out method.
Provision for estimated excess and obsolete inventories are accrued on a
quarterly basis. In providing for excess and obsolete inventories, the Company
considers the effects of planned new product introductions, anticipated stock
rotations and sales activity.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
following estimated useful lives:

<TABLE>
<S> <C>
Machinery and equipment....... 3-5 years
Furniture and fixtures........ 3-5 years
Leasehold improvement......... Shorter of lease term or estimated useful life
</TABLE>

Major additions and improvements are capitalized while maintenance and
repairs are charged to expense as incurred. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is credited or charged to
income.

F-7
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Income Taxes

The Company provides taxes for income based on the liability method, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred taxes are determined
based on the difference between the income tax bases of assets and liabilities
and the corresponding financial reporting amounts using enacted tax rates in
effect in the years in which the differences are expected to reverse. The
Company provides a valuation allowance against net deferred tax assets if,
based on the available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.

Research and Development and Capitalized Software Costs

Costs incurred prior to the establishment of technological feasibility are
charged to research and development expense. Software production costs
incurred subsequent to the establishment of technological feasibility are
capitalized until the product is available for general release to customers.
Amortization is based on the greater of (i) the ratio that current gross
revenues for a product bear to the total of current and anticipated future
gross revenues for that product or (ii) the straight-line method over the
remaining estimated economic life of the product. It is reasonably possible
that these estimates of anticipated future gross revenues, the remaining
estimated economic life of the product or both may be reduced in the near
term.

Concentrations

Credit Risk

The Company invests its excess cash primarily in deposits with commercial
banks and a financial institution. The Company has not experienced any losses
to date on its invested cash.

Customers

The Company sells its products to a wide variety of customers including
OEMs, distributors and value-added resellers. Sales to OEMs account for a
significant portion of the Company's sales. During the years ended December
27, 1997, December 28, 1996 and December 30, 1995, one OEM customer accounted
for 10.4%, 52.9% and 47.3%, respectively, of net sales. The Company performs
ongoing credit evaluations of its customers, but does not require collateral
or other security to support customer receivables. The Company maintains
reserves for potential credit losses. For the years ended December 27, 1997,
December 28, 1996 and December 30, 1995, the Company wrote off receivable
balances of approximately $67,000, $439,000 and $315,000, respectively. The
carrying amount of trade receivables approximates fair value and any credit
losses have been within management's expectations.

Suppliers

The Company is dependent on sole or limited source suppliers for certain key
components and has experienced limited availability, delays in shipment and
unanticipated cost increases related to the supply of memory components.

New Accounting Pronouncements

F-8
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

the year ending January 2, 1999. FAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. FAS 130 requires that all components of
comprehensive income shall be reported in the financial statements in the
period in which they are recognized. Furthermore, a total amount for
comprehensive income shall be displayed in the financial statement where the
components of other comprehensive income are reported. The Company was not
previously required to present comprehensive income or the components thereof
in its financial statements under generally accepted accounting principles.

Financial Accounting Standards Board Statement No. 131 ("FAS 131")
"Disclosure about Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which
it operates.

The Company believes that FAS 130 and FAS 131 will not impact the Company's
financial position or results of operations.

Net Income Per Common and Common Equivalent Share

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." This statement replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share
(EPS). Basic EPS excludes the effect of any dilutive options, warrants or
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed by dividing income available to common stockholders by
the sum of the weighted average number of common shares and common share
equivalents computed using the average market price for the period under the
treasury stock method. All earnings per share amounts have been restated to
conform with the SFAS 128 requirements. The following table reconciles the
numerator and the denominators of the basic and diluted EPS computations shown
on the Consolidated Statements of Operations (in thousands, except per share
data).

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Numerator:
Net income (loss)...................... ($20,779) ($8,651) ($5,073)
Denominator:
Weighted average common shares out-
standing.............................. 9,120 8,970 7,983
Basic EPS............................... $ (2.28) $ (0.96) $ (0.64)
DILUTED EPS COMPUTATION:
Numerator
Net income (loss)...................... ($20,779) ($8,651) ($5,073)
Denominator:
Weighted average common shares out-
standing.............................. 9,120 8,970 7,983
Stock options.......................... -- -- --
-------- ------- -------
Total Shares........................... 9,120 8,970 7,983
Diluted EPS............................. $ (2.28) $ (0.96) $ (0.64)
</TABLE>

F-9
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Options to purchase shares of the Company's common stock of 2,000,124 at
December 27, 1997; 1,959,269 at December 28, 1996; and 1,435,400 at December
30, 1995 were outstanding during the year but not included in the computation
of diluted EPS because they were anti-dilutive due to the net loss sustained
in 1997, 1996 and 1995 respectively.

C. INVENTORIES:

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials...................................... $ 527 $2,733
Work in process.................................... 715 57
Finished goods..................................... 1,622 6,632
------ ------
$2,864 $9,422
====== ======
</TABLE>

The market for the Company's products is characterized by rapid
technological advances, frequent new product life cycles, product
obsolescence, changes in customer requirements, evolving industry standards,
significant competition and rapidly changing pricing.

At December 30, 1995 and June 28, 1996, a portion of inventory related to
several of the Company's products was identified as in excess of current
requirements based on a number of factors such as an acceleration of product
transitions, further deterioration of memory inventory value, continued
pressure on pricing of older products, lower than expected sales activity of
certain products and excess component inventories. Accordingly, during the
fourth quarter of 1995 and second quarter of 1996, the Company wrote off
approximately $8.0 and $5.7 million of inventory, respectively related to
these products. Management has developed a program to reduce the remaining
inventory to desired levels over the near term and believes no loss will be
incurred on its disposition. No estimate can be made of a range of amounts of
loss that are reasonably possible should the program not be successful. At
December 27, 1997 and December 28, 1996, the Company had a $1.7 million and
$2.3 million receivable, respectively, due from a manufacturing contractor,
which arose from components sold by the Company at cost to the contractor for
assembly into finished goods.

D. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Machinery and equipment............................ $6,969 $4,476
Furniture and fixtures............................. 979 903
Leasehold improvements............................. 328 380
------ ------
8,276 5,759
Less accumulated depreciation and amortization..... 4,370 3,088
------ ------
$3,906 $2,671
====== ======
</TABLE>

Property and equipment included above under capital leases consist of the
following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Machinery and equipment............................ $ -- $327
Less accumulated amortization...................... -- 282
---- ----
$ -- $ 45
==== ====
</TABLE>

F-10
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

E. DEBT:

Revolving Line of Credit

The Company is party to an amended loan and security agreement with a
commercial bank providing for a revolving credit facility of $15 million.
Pursuant to this agreement, the Company may borrow an amount equal to 65% of
qualified accounts receivable (as defined in the agreement) up to the maximum
amount at an interest rate per annum equal to either the prime rate (8.50% as
of December 27, 1997) plus 1% or at the Libor Rate (as defined in the
agreement) plus 2.5%, plus an unused line fee at a rate of 0.5% per annum on
the unused portion of the maximum borrowing amount. The agreement expires on
December 2, 1998 and is renewable on a yearly basis thereafter. The loan
balance is collateralized by substantially all of the Company's assets.

The agreement contains financial covenants including, but not limited to, a
minimum current ratio, minimum tangible net worth, a maximum debt to tangible
net worth ratio, and minimum quarterly net loss. The agreement also gives the
lender the right to call the loan in the event of a material adverse change in
the Company's business and prohibits the Company from paying dividends without
the consent of the lender. The Company received a waiver from the lender for
noncompliance with certain covenants in the agreement for 1997. The Company
anticipates that it will not be in compliance with certain covenants of the
lender during 1998. If the Company is not in compliance with all of the
covenants of the lender, there can be no assurance that the lender will grant
additional waivers and/or amendments, nor can there be any assurance that
alternative financing will be available. Currently the Company is operating
under a forebearance agreement with the commercial bank. The Company believes
that the lender will continue to allow the Company to operate under its
forebearance agreement while the Company seeks to secure additional financing.
Should the lender refuse to grant any future waiver or amendment, and the line
of credit is not available to the Company, management anticipates that it
would require alternative financing. However, if the Company is not able to
secure alternative financing, the Company's liquidity would be adversely
affected.

The average outstanding borrowings of the revolving line of credit were
approximately $5.4 million, $9.2 million and $3.7 million, in 1997, 1996 and
1995, respectively, and the weighted average interest rate was approximately
9.45%, 9.20% and 9.20%, respectively. The carrying amount of the revolving
line of credit is a reasonable estimate of the fair value because of its short
term maturity.

F. STOCKHOLDERS' EQUITY:

Initial Public Offering

On June 2, 1995, the Company completed its initial public offering ("IPO")
and sold an aggregate 2,197,509 shares of Common Stock at $15.00 per share
resulting in net proceeds, after deducting underwriting discounts and
expenses, of approximately $29,680,000. In addition, upon the effectiveness of
the IPO, all issued and outstanding shares of Class A and Class B Common Stock
were converted into 5,489,600 shares of Common Stock on a one-for-one basis
and the issued and outstanding shares of Series A Preferred Stock were
automatically converted into 814,112 shares of Common Stock on a one-for-eight
basis in accordance with the underlying agreements.

Common Stock

On April 5, 1995, the stockholders approved an 8-for-1 split of the
Company's outstanding Common Stock, an increase in the authorized shares of
Common Stock to 20,000,000 shares, and an increase in the number of shares
available for grant under the 1994 Employee, Director and Consultant Stock
Option Plan to 1,400,000 shares. All common and common equivalent shares and
per share amounts have been restated to reflect the 8-for-1 stock split.

F-11
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Preferred Stock

On April 5, 1995, the stockholders approved an increase in the number of
authorized shares of $.01 par value undesignated Preferred Stock to 5,000,000
shares. The Company, upon terms designated by the Board of Directors, may
issue shares of Preferred Stock without stockholder approval.

Employee Stock Purchase Plan

On April 3, 1995, the Board of Directors and on April 5, 1995, the
stockholders, approved the Company's Employee Stock Purchase Plan (the
"Purchase Plan"). Under the Purchase Plan, a maximum of 600,000 shares of
common stock may be purchased by eligible employees. All full-time employees
of the Company who have been employed for at least three months by the Company
are eligible to participate in the Purchase Plan, except for persons who are
deemed under Section 423(b)(3) of the Internal Revenue Code to own 5% or more
of the voting stock of the Company.

Stock Option Plans

The 1989 Stock Option Plan

The provisions of the Company's 1989 Stock Option Plan (the "1989 Stock
Plan") provide that options to purchase up to 800,000 shares of Common Stock,
may be granted to any eligible employees either in the form of Incentive Stock
Options (ISOs) as defined in Section 422 of the Internal Revenue Code, or non-
qualified stock options, or both. The option price per share with respect to
each option shall not be less than the fair value of the Common Stock at the
time the option is granted.

The 1994 Stock Option Plan

On July 8, 1994 the Company's Board of Directors and stockholders approved
the Employee, Director and Consultant Stock Option Plan (the "1994 Stock
Plan"). The 1994 Stock Plan provides that options to purchase up to 1,400,000
shares of Common Stock may be granted to any eligible employees either in the
form of ISOs or non-qualified stock options or both. The option price per
share with respect to each option shall not be less than the par value of the
Common Stock at the time the option is granted.

The 1996 Stock Option Plan

On May 14, 1996 the Company's Board of Directors approved the Employee,
Director and Consultant Stock Option Plan (the "1996 Stock Plan"). The 1996
Stock Plan provides that options to purchase up to 900,000 shares of Common
Stock may be granted to any eligible employees either in the form of ISOs or
non-qualified stock options or both. The option price per share with respect
to each option shall not be less than the par value of the Common Stock at the
time the option is granted.

F-12
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Information with respect to the Plans is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER
SHARES OPTION PRICE PRICE EXERCISABLE
--------- -------------- -------- -----------
<S> <C> <C> <C> <C>
Outstanding at December 31,
1994....................... 1,302,136 $ .27 - 5.63 $1.02 617,468
--------- -------------- ----- -------
Granted................... 425,264 5.63 - 15.00
Exercised................. (256,560) .27 - .81
Canceled.................. (35,440) .81 - 15.00
--------- --------------
Outstanding at December 30,
1995....................... 1,435,400 $ .27 - 15.00 $4.52 545,490
--------- -------------- ----- -------
Granted................... 941,500 5.313 - 9.375
Exercised................. (295,475) .27 - 5.63
Canceled.................. (122,156) .81 - 15.00
--------- --------------
Outstanding at December 28,
1996....................... 1,959,269 $ .27 - 9.375 $4.50 626,854
--------- -------------- ----- -------
Granted................... 618,300 2.63 - 3.07
Exercised................. (58,995) .27 - .81
Canceled.................. (518,450) .81 - 9.375
--------- --------------
Outstanding at December 27,
1997....................... 2,000,124 $ .27 - 5.75 $2.50 853,702
========= ============== ===== =======
</TABLE>

Prior to the IPO, the exercise price of each of the above grants was
determined by the Board of Directors of the Company to be equal to the fair
market value of the Class B Common Stock on the date of grant. In reaching
this determination at the time of each grant, the Board considered a broad
range of factors including: (i) the illiquid nature of an investment in the
Company's Class B Common Stock into which options are exercisable; (ii) the
non-voting nature of the Class B Common Stock; (iii) the Company's then
current and forecasted financial performance and valuations thereof relative
to comparable high technology companies; (iv) and the terms of offers to
invest and/or actual investments in the Company by independent third parties
including price per share, voting rights, rights to elect directors, and
liquidation preferences. Subsequent to the IPO, stock options are granted at
an exercise price equal to the closing price of the common stock on the date
of grant.

Stock options are exercisable over periods determined by a committee of the
Board of Directors at the time the stock option is granted. Most of these
options vest 25% on the first anniversary of the date of the grant and an
additional 25% on each anniversary thereafter. The options terminate ten years
after the grant date, subject to earlier termination in accordance with the
1996, 1994 or 1989 Stock Plans, as appropriate and the applicable option
agreement. There were 488,846 options available and 853,702 options
exercisable at December 27, 1997.

F-13
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Stock Compensation Plans

At December 27, 1997, the Company had several stock-based compensation plans
which are described above. The Company applies Accounting Principles Board
Opinion No. 25 ("APB Opinion 25"), "Accounting for Stock Issued to Employees",
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for the Company's four stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed by
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("SFAS 123"), the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Net loss
As reported..................................... $(20,779) $ (8,651)
Pro forma....................................... $(21,689) $(10,040)
Primary earnings per share
As reported..................................... $ (2.28) $ (0.96)
Pro forma....................................... $ (2.38) $ (1.12)
</TABLE>
--------
The pro forma effect of the compensation cost determined using the fair
value-based method are not indicative of future amounts when the new method
will apply to all vested and non-vested awards.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. In computing these pro forma amounts,
the Company has assumed weighted-average assumptions used for grants in 1997
and 1996, respectively: dividend yield of 0.0%; expected volatility of 60
percent; weighted average risk-free interest rates of 6.04% and 5.73%; and
expected lives of four years. The average fair value of the options granted
during 1997 and 1996 is estimated as $3.81 and $3.86, respectively on the date
of the grant.

Fixed Stock Option Plans

The Company has three fixed option plans. Under the 1989 Employee Stock
Option Plan, the Company may grant options to its employees for up to 800,000
shares of common stock. Under the 1994 Employee Stock Option Plan, the Company
may grant options to its employees for up to 1.4 million shares of common
stock. Under the 1996 Employee Stock Option Plan, the Company may grant
options to its employees for up to 900,000 shares of common stock. Under the
plans, the exercise price of each option equals the market price of the
Company's stock on the date of grant and an option's maximum term is 10 years.
Options are granted throughout the year and typically begin vesting at the end
of the first year under the Plans.

The following table summarizes information about fixed stock options
outstanding at December 27, 1997:

<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/27/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/27/97 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.27 125,050 2.24 $0.27 125,050 $0.27
$0.81 246,920 6.51 $0.81 187,240 $0.81
$2.25 134,400 6.72 $2.25 107,520 $2.25
$2.63 363,300 9.95 $2.63 -- $2.63
$3.07 1,115,454 7.81 $3.07 423,892 $3.07
$5.75 15,000 8.00 $5.75 10,000 $5.75
</TABLE>

F-14
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Employee Stock Purchase Plan

Under the 1995 Employee Stock Purchase Plan, the Company is authorized to
issue up to 600,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the Plan,
employees can choose each year to have up to 10 percent of their annual base
earnings withheld, not to exceed a maximum of $25,000 per year, to purchase
the Company's common stock. The purchase price of the stock is 85 percent of
the lower of its beginning of the period or end of the period market price.
Approximately 36 percent of eligible employees have participated in the Plan
in the last year. Under the Plan, the Company sold 38,525 and 21,772 shares in
1997 and 1996, respectively. The fair value of the employees' purchase rights
was estimated using the Black-Scholes model with the following assumptions for
1997 and 1996: dividend yield of 0.0%; an expected life of six months for all
years; expected volatility of 60 percent; and risk-free interest rates of
5.17% respectively. The weighted-average fair value of those purchase rights
granted in 1997 and 1996 was $1.53 and $1.36 respectively.

G. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

On December 30, 1994, the Company issued an aggregate of 101,764 shares of
Series A Preferred Stock in conjunction with the conversion of 7% convertible
promissory notes previously issued on December 7, 1994 in the original issue
amount of $6,000,000. Upon the May 25, 1995 effective date of the Company's
IPO, the Series A Preferred Stock converted into 814,112 shares of Common
Stock.

H. INCOME TAXES:

The components of loss before income taxes are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Domestic.............................. $(18,904) $(8,977) $(7,639)
Foreign............................... 36 30 123
-------- ------- -------
$(18,940) $(8,947) $(7,516)
======== ======= =======
</TABLE>

The components of the provision (benefit) for income taxes are as follows
(in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal................. $ -- $ -- $ (37)
State................... -- -- 10
Foreign................. -- -- 69
------ ----- -------
-- -- 42
------ ----- -------
Deferred
Federal................. $1,839 $(296) $(2,018)
State................... -- -- (467)
------ ----- -------
$1,839 $(296) $(2,485)
====== ===== =======
Total income tax provision
(benefit)................ $1,839 $(296) $(2,443)
====== ===== =======
</TABLE>

F-15
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is a reconciliation between the U.S. federal statutory tax
rate and the effective tax rate:

<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
U.S. federal statutory tax rate
benefit............................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal
benefit............................. -- -- (3.9)
Foreign sales corporation............ -- -- --
Change in valuation allowance........ 43.7 30.2 6.7
Other, net........................... -- 0.4 (1.3)
----- ----- -----
Effective tax rate................... 9.7% (3.4)% (32.5)%
===== ===== =====
</TABLE>

The principal components of the Company's deferred tax assets and
liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory........................................ $ 627 $ 421
Reserve for bad debts............................ 77 138
Depreciation..................................... 13 13
Net operating loss carry forward................. 11,786 5,924
Accrued compensation and benefits................ 116 157
Sales and warranty reserves...................... 392 260
Tax benefit from exercised stock options......... 1,659 1,659
Valuation allowance.............................. (14,670) (6,488)
------- ------
Total deferred tax assets...................... $ 0 $2,084
======= ======
Deferred tax liabilities:
Capitalized software............................. -- 245
------- ------
Total deferred tax liabilities................. $ 0 $ 245
======= ======
</TABLE>

The Company has recorded a valuation allowance of approximately $14.7
million against the deferred tax assets. The realization of these deferred tax
assets is dependent upon future earnings in specific tax jurisdictions. Due to
the uncertainty as to when the deferred tax assets may be realized, the
Company has recorded a full valuation allowance. The Company periodically
reviews the need for the valuation allowance and if the valuation allowance is
reduced, the tax benefit will be recorded as a reduction of the Company's
income tax expense except for approximately $1.6 million which is attributable
to stock options and will be credited to additional paid in capital when
realized.

At December 27, 1997, the Company had net operating loss carryforwards of
approximately $28.9 million and $32.6 million available to offset future
federal and state taxable income, respectively. The federal carryforward begin
to expire in 2010 and the state carryforward begin to expire in 2000.

I. COMMITMENTS AND CONTINGENCIES:

Leases

The Company has entered into certain operating lease agreements for computer
equipment and its office and sales facilities. The Company also leases certain
computer equipment and furniture and fixtures under capital leases. Under the
terms of certain operating lease agreements, the Company is required to pay
for utilities, real estate taxes, insurance and maintenance expenses.

F-16
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company's lease agreement for its office facilities that serve as its
North American headquarters expires in May 1999, with an option to extend the
term for an additional three-year period. The Company's monthly rent is
subject to future increases at specified dates for which the Company is
providing for rent expense on a straight line basis. The facilities lease
contains provisions for increases in real estate taxes and operating costs
over the base period amounts as stated in the lease agreements. The Company
also has a facility in Germany with a lease agreement that expires in 2003
with an option to extend the lease for a five-year period.

At December 27, 1997, approximate future minimum lease payments under
operating leases are as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
---- ---------
<S> <C>
1998............................................................... $709
1999............................................................... 211
2000............................................................... 71
2001............................................................... 50
2002............................................................... 50
------
Total future minimum lease payments................................ $1,091
======
</TABLE>

Rental expense amounted to approximately $824,716, $893,000, and $670,000 in
1997, 1996 and 1995, respectively.

Royalties

In 1995, the Company entered into a one year royalty agreement with a
designer of circuit boards used in the production of one of the Company's
products. Under the terms of the agreement, the Company was obligated to make
monthly royalty payments for each board sold. The agreement did not contain
any minimum royalty provision. The Company currently is in negotiation with
the designer discussing similar royalty arrangements for the second generation
of this product.

The Company has entered into royalty agreements with various software
providers "bundled" with certain product offerings in the Company's 9FX family
of products. Under the terms of the agreement, the Company was obligated to
make "pre-paid" royalty payments for each copy of the software sold with these
products. The Company believes it has met its minimum royalty obligations
defined in these agreements.

Contingencies

F-17
<PAGE>

NUMBER NINE VISUAL TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

alleges that the named defendants violated the Securities Act of 1933 and the
Securities Exchange Act of 1934 by, among other things, issuing to the
investing public false and misleading statements regarding the Company's
business, products, sales and earnings during the class period in question.
The plaintiffs seek unspecified damages, interest, costs and fees. By order of
the District Court, these actions have been consolidated into a single action.
It is possible that other claims may be made against the Company or that there
may be other consequences from the lawsuits. The defendants deny any
liability, believe they have meritorious defenses, and intend to vigorously
defend these and any similar lawsuits that may be filed, although the ultimate
outcome of these matters cannot yet be determined. If the lawsuits are not
resolved satisfactorily for the Company, there could be a material adverse
effect on the Company's future financial condition and results of operations
and,
accordingly, income (loss). The Company does not believe that the ultimate
liability, if any, is estimable or probable, and therefore no provision for
any liability that may result from the actions has been recognized in the
accompanying consolidated financial statements.

J. EXPORT SALES:

Export sales to unaffiliated customers were approximately $17.6 million,
$30.2 million and $34.5 million for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995, respectively. Sales generated by the
Company's wholly-owned German subsidiary are shipped and billed directly to
the customer by the Company.

K. DEFINED CONTRIBUTION AND PROFIT SHARING PLAN:

The Company has a Profit Sharing and Savings Program ("the Program") which
consists of two parts: (i) a profit sharing pool and (ii) a tax-qualified,
defined contribution 401(k) plan (the "401(k) Plan").

All employees of the Company with three months of service are eligible to
participate in the profit sharing pool, except commissioned salespersons and
management employees having an incentive component to their compensation.
During 1997, 1996 and 1995, the Company made contributions of $0, $0 and
$30,000 respectively, to the profit sharing pool.

The 401(k) Plan is intended to qualify under Section 401(k) of the Internal
Revenue Code. All employees of the Company, including commissioned
salespersons and management employees having an incentive component to their
compensation, with three months of service are eligible to participate in the
401(k) Plan. The Company does not make matching contributions to the 401(k)
Plan.

F-18
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN LEXINGTON,
MASSACHUSETTS ON MARCH 27, 1998.

Number Nine Visual Technology
Corporation

By: /s/ Andrew Najda
----------------------------------
Andrew Najda
Chief Executive Officer
and Chairman of the Board

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED BELOW AND ON THE DATES INDICATED.

SIGNATURES TITLE DATE
<TABLE>
<S> <C>

By: /s/ Andrew Najda Chief Executive Officer March 27, 1998
(principal executive
---------------------- officer) and Chairman of
Andrew Najda the Board

By:/s/ Timothy J. Burns Acting Chief Financial March 27, 1998
Officer
---------------------- (principal financial and
Timothy J. Burns accounting officer)

By:
/s/ Stanley W. Bialek Director March 27, 1998
----------------------
Stanley W. Bialek

By: /s/ Fouad H. Nader Director March 27, 1998
----------------------
Fouad H. Nader, Ph.D.

By: /s/ William H. Director March 27, 1998
Thalheimer
----------------------
William H. Thalheimer
</TABLE>

F-19
<PAGE>

EXHIBIT LIST

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
10.20 Employment Separation Agreement, dated October 6, 1997, between
the Registrant and John G. Thompson.............................
10.21 Employment Separation Agreement, dated November 20, 1997,
between the Registrant and Beverly Schultz......................
10.22 Employment Separation Agreement, dated January 19, 1998, between
the Registrant and Daniel W. Muehl..............................
10.23 Employment Separation Agreement, dated February 6, 1998, between
the Registrant and James O'Bray.................................
27.1 Financial Data Schedule.........................................
</TABLE>

<PAGE>
EXHIBIT 10.20

Number Nine Visual Technology Corporation
18 Hartwell Avenue
Lexington, MA 01273

October 6, 1997

John G. Thompson
10 Gilboa Lane
Nashua, NH 03062

Dear John:

The purpose of this Letter Agreement is to confirm the terms of your
separation from Number Nine Visual Technology Corporation ("Number Nine"), a
Delaware corporation. The severance pay and benefits described below are
contingent on your agreement to and compliance with the terms of this Letter
Agreement. Based upon your stated willingness to enter into such an agreement,
this Letter Agreement has been prepared which sets forth the specific
understandings between you and Number Nine.

1. Resignation: You hereby resign as the President, Chief Operating
------------
Officer, member of the Board of Directors and any other position with Number
Nine effective October 6, 1997 (the "Separation Date"). You acknowledge that
from and after the Separation Date, you shall have no authority to represent
yourself as an employee or agent of Number Nine and that you shall not represent
yourself in the future as an employee or agent of Number Nine.

2. Severance Pay and Benefits: In exchange for the mutual covenants set
---------------------------
forth in this Letter Agreement, and commencing on the eighth (8th) day following
your execution of this Letter Agreement (the "Effective Date") Number Nine
agrees to provide you with continuation at Number Nine's expense of your
participation in Number Nine's medical and dental insurance programs to the same
extent that such insurance is provided to persons employed by Number Nine until
August 30, 1998. You shall have the right to continue your medical and dental
insurance after such date pursuant to the provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA"); provided, however, the COBA period
shall be deemed to have commenced on October 6, 1997.

In recognition of the services you have provided to Number Nine, Number
Nine agrees that prior to December 31, 1997 it will make a contribution of
$40,000 to Monroe Community College Scholarship Foundation. Number Nine will
make not less than $20,000 of this contribution on or before October 15, 1997,
an additional $10,000 on or before November 15, 1997 and an additional $10,000
on or before December 15, 1997. Number Nine will make the checks payable to
Monroe Community College Scholarship Foundation and will deliver them to you for
delivery to Monroe Community College Scholarship Foundation.

You expressly acknowledge and agree that the Severance Pay and Benefits
provided for herein are not otherwise due or owing to you under any employment
agreement (oral or written) or Number Nine policy or practice. You further
acknowledge that you have been paid and provided all wages, commissions,
bonuses, vacation pay, holiday pay and any other form of compensation, benefit
or reimbursement that may be due to you now or which would have become due in
the future in connection with your employment with or separation of employment
from Number Nine.

<PAGE>

Without limiting the generality of the foregoing, you expressly acknowledge
and agree that the terms and conditions set forth in this Letter Agreement
superceed the terms of that certain Letter Agreement between you and Number Nine
dated May 11, 1996, and that this Letter Agreement, together with that certain
Non-Compete and Confidentiality Agreement dated May 15, 1996 between you and the
Company shall constitute the sole agreement between you and Number Nine.

You further agree that through December 31, 1997 you shall be available,
upon reasonable notice, either by telephone or, if Number Nine believes
necessary, in person to assist Number Nine in any matter relating to the
services performed by you during your employment with Number Nine. You further
agree that through such date and thereafter that you shall cooperate fully with
Number Nine in the defense or prosecution of any claims or actions now in
existence or which may be brought or threatened in the future against or on
behalf of Number Nine, including any claims or actions against its officers,
directors and employees. Your cooperation in connection with such claims or
actions shall include, without limitation, your being reasonably available (and,
to the extent possible, outside of work obligations you may have) to meet with
Number Nine in connection with any regulatory matters, to prepare for any
proceeding (including, without limitation, depositions, consultation, discovery
or trial), to provide affidavits, to assist with any audit, inspection,
proceeding or other inquiry, and to act as a witness in connection with any
litigation or other legal proceeding affecting Number Nine. You further agree
that should you be contacted (directly or indirectly) by any party representing
a party adverse to Number Nine, you shall promptly (within 48 hours) notify
Michael Albanese at Number Nine.

3. Property: Number Nine acknowledges that you have in your possession
--------
two chairs which are the property of Number Nine. Effective on the eighth (8th)
day following your execution of this Letter Agreement, Number Nine transfers to
you such chairs. Except for such chairs, you represent that you have returned
to Number Nine all property of every kind and nature belonging to Number Nine in
your possession.

4. Stock Rights: The parties hereby incorporate by reference the terms
------------
and conditions of the Stock Options granted to you under the Number Nine
Computer Corporation 1996 Employee, Director and Consultant Stock Option Plan
(the "1996 Options"). The parties further agree that as of the date hereof, a
total of 137,500 options are vested and that you may exercise such options at a
price of $3.07 per share only on or after December 31, 1997 and that all of such
options will terminate on January 6, 1998, and that from and after the date
hereof, and notwithstanding any of the terms of the option agreements to the
contrary, no further options shall vest. You acknowledge and agree that you
shall not buy or sell any shares of Number Nine stock including, but not limited
to, any shares acquired by you upon exercise of options that you may exercise
under the 1996 Options, until the November 1997 trading window. Except for the
foregoing, you acknowledge and agree that you do not have now, and shall not in
the future have, any rights in, including any rights to vest in, any stock
options under any Number Nine stock or stock option plan (of whatever name or
kind) that you participated in or were eligible to participate in during your
employment.

5. Confidentiality/Non-Competition/Non-Solicitation: You hereby agree and
------------------------------------------------
acknowledge the following:

(i) that you shall abide by any and all common law and/or statutory
obligations relating to protection and non-disclosure of Number Nine's trade
secrets and/or

-2-
<PAGE>

confidential and proprietary documents and information (including, but not
limited to, any information regarding Number Nine's financial conditions,
products, product development, sales and any other similar information, but
excluding information that is publicly available, and that you have and
shall continue to abide by the convenants set forth in the "Noncompete and
Confidentiality Agreement" dated May 15, 1996 (which agreement is attached
hereto as Exhibit A and incorporated herein by reference).

(ii) that all information relating in any way to the subject matter of
this Agreement, including the terms and amount of this Agreement, shall be
held confidential by you and shall not be publicized or disclosed to any
person (other than an immediate family member, legal counsel or financial
advisor, provided that any such individual to whom disclosure is made
agrees to be bound by these confidentiality obligations), business entity
or government agency (except as mandated by state or federal law).

(iii) that you shall not make any statements that are disparaging about or
adverse to the business interests of Number Nine (including its officers,
directors and employees) or which are intended to harm the reputation of
Number Nine including, but not limited to, any statements that disparage
any product, service, finances, financial condition, capability or any
other aspect of the business of Number Nine.

(iv) that the breach of any of the foregoing covenants by you shall
constitute a material breach of this Agreement and shall relieve Number
Nine of any further obligations hereunder and, in addition to any other
legal or equitable remedy available to Number Nine, shall entitle Number
Nine to recover any monies already paid to you pursuant to paragraph 2 of
this Agreement.

6. Release of Claims: You hereby agree and acknowledge that by signing
------------------
this Letter Agreement and accepting the Severance Pay and Benefits, and other
good and valuable consideration provided for in this Letter Agreement, you are
waiving any right to assert any form of legal claim against Number Nine (which
term shall be deemed to include its divisions, affiliates and subsidiaries and
all related entities, and its and their officers, directors, employees, agents,
attorneys, contractors, successors and assigns) of any kind whatsoever arising
from the beginning of time through the Effective Date. Your waiver and release
is intended to bar any form of legal claim, charge, complaint or any other form
of action (jointly referred to as "Claims") against Number Nine seeking any form
of relief including, without limitation, equitable relief (whether declaratory,
injunctive or otherwise), the recovery of any damages or any other form of
monetary recovery whatsoever (including, without limitation, back pay, front
pay, compensatory damages, emotional distress damages, punitive damages,
attorneys fees and any other costs) against Number Nine up through the
Effective Date. You understand that there could be unknown or unanticipated
claims resulting from your employment with Number Nine and the termination
thereof and agree that such claims are intended to be and are included in this
waiver and release. Furthermore, you agree not to participate in any Claims,
and waive any recovery for any Claims, brought on your behalf by a third party
against Number Nine.

Without limiting the foregoing general waiver and release, you specifically
waive and release Number Nine from any Claim arising from or related to your
employment relationship with Number Nine or the termination thereof, including,
without limitation:

-3-

<PAGE>

** Claims under any state or federal discrimination related statute,
regulation or executive order, fair employment practices or other
employment related statute, regulation or executive order (as they may
have been amended through the Effective Date) prohibiting
discrimination or harassment based upon any protected status
including, without limitation, race, national origin, age, gender,
marital status, mental or physical disability, veteran status or
sexual orientation. Without limitation, specifically included in this
paragraph are any Claims arising under the Massachusetts Fair
Employment Practices Statute, the Massachusetts Civil Rights Acts, the
Massachusetts Equal Protection Act, the Federal Age Discrimination in
Employment Act, the Older Workers Benefit Protection Act, the Civil
Rights Act of 1991, the Equal Pay Act and the Americans with
Disabilities Act.

** Claims under any other state or federal employment related statute,
regulation or executive order (as they may have been amended through
the Effective Date) relating to wages, hours or any other terms and
conditions of employment. Without limitation, specifically included in
this paragraph are any Claims arising under the Fair Labor Standards
Act, the Family Medical Leave Act of 1993, the National Labor
Relations Act, the Employee Retirement Income Security Act of 1974,
the Consolidated Omnibus Budget Reconciliation Act of 1985 and any
similar state statute.

** Claims under any state or federal common law theory, including,
without limitation, wrongful discharge, breach of express or implied
contract, promissory estoppel, unjust enrichment, breach of a covenant
of good faith and fair dealing, violation of public policy,
defamation, interference with contractual relations, intentional or
negligent infliction or emotional distress, invasion of privacy,
misrepresentation, deceit, fraud or negligence.

** Any other Claim arising under state or federal law, including, without
limitation, unfair and deceptive trade practices statutes.

Nothwithstanding the foregoing, this paragraph shall not release Number
Nine from any obligation expressly set forth in this Letter Agreement, nor
shall it release Number Nine from the ongoing indemnification obligations set
forth in the Certificate of Incorporation or Bylaws of Number Nine.

You acknowledge and agree that, but for providing this waiver and release,
you would not be receiving the Severance Pay and Benefits. You further
acknowledge and agree that the provision to you of the Severance Pay and
Benefits is not, and is not intended to be, an admission of any liability on the
part of the parties hereby released or an indication that they expect any
liability to hereafter arise, and that such releases deny any liability.

-4-

<PAGE>

Agreement by signing below. In addition, you may rescind your assent to this
Agreement if, within seven (7) days after the date you sign this Letter
Agreement, you deliver a notice of recision to Michael Albanese at Number Nine.
To be effective, such recision must be hand delivered or postmarked within the
seven (7) day period and sent by certified mail, return receipt requested, to
Michael Albanese, Human Resources, Number Nine Visual Technology Corporation at
18 Hartwell Avenue, Lexington, MA 02173.

7. Entire Agreement/Choice of Law/Full Agreement: Except as expressly
---------------------------------------------
provided for in this Letter Agreement (e.g., your obligations set forth in the
---
your Confidentiality and Noncompetition Agreement), this Letter Agreement
supersedes any and all prior oral and/or written agreements, and sets forth the
entire agreement between you and Number Nine. No variations or modifications
hereof shall be deemed valid unless reduced to writing and signed by the parties
hereto. This Letter Agreement shall take effect as an instrument under seal
and shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts. The provisions of this Letter Agreement are
severable, and if for any reason any part hereof shall be found to be
unenforceable, the remaining provisions shall be enforced in full.

It is Number Nine's desire and intent to make certain that you fully
understand the provisions and effects of this Letter Agreement. To that end,
you have been encouraged and given the opportunity to consult with legal
counsel. By executing this Letter Agreement, you are acknowledging that you
have been afforded sufficient time to understand the terms and effects of this
Letter Agreement, that your agreements and obligations hereunder are made
voluntarily, knowingly and without duress and that neither Number Nine nor its
agents or representatives have made any representations inconsistent with the
provisions of this Letter Agreement.

If the foregoing correctly sets forth our understanding, please sign, date
and return the enclosed copy of this Letter Agreement to Mike Albanese at Number
Nine.

Very truly yours,

Number Nine Visual Technology
Corporation

By: /s/ Michael Albanese
-------------------------
Michael Albanese

Confirmed and Agreed:
John G. Thompson

/s/ John G. Thompson
- --------------------

Dated: 10/6/97
-------

<PAGE>
EXHIBIT 10.21

[NUMBER NINE VISUAL TECHNOLOGY LOGO APPEARS HERE]

November 20, 1997

Ms. Beverly Schultz:
- --------------------

RE: SEPARATION LETTER AGREEMENT
---------------------------

Dear Beverly:

The purpose of this letter is to confirm the terms regarding your
separation of employment with the Number Nine Visual Technology Corporation (the
"Company" or "Number Nine"). As more fully set forth below, the Company
desires to provide you with severance pay and benefits and exchange for certain
agreements by you.

1. SEPARATION OF EMPLOYMENT. Your employment with the Company will
-------------------------
terminate effective October 24, 1997 (the "Separation Date"). You acknowledge
that from and after the Separation Date, you shall have no authority and shall
not represent yourself as an employee or agent of the Company.

2. SEVERANCE PAY AND BENEFITS. In exchange for the mutual covenants set
---------------------------
forth in this letter, and commencing on the eighth day following your execution
of this Letter Agreement (the "Effective Date"), the Company agrees to provide
you with the following Severance Pay and Benefits.

(i) Continue to provide sick pay until the end of your approved family
leave (November 17, 1997) in the gross amount of Eight Thousand One
Hundred and Fifty Three Dollars and Eighty Six Cents ($8,153.86) less
applicable taxes.
(ii) Severance Pay in the gross amount of Sixteen Thousand Three Hundred
and Seven Dollars and Twenty cents ($16,307.20), less applicable
taxes, which sum represents pay through December 31, 1997, and shall
be paid to you in one lump sum payable on the eighth day following
your execution of this Letter Agreement.
(iii) Continuation of your participation in Number Nine's medical and
dental insurance programs to the same extent that such insurance is
provided to persons still employed by Number Nine until December 31,
1997. You shall have the right to continue your medical and dental
insurance programs to the same extent that such insurance is provided
to persons still employed by Number Nine until December 31, 1997. You
shall have the right to continue your medical and dental insurance
after that time, at your sole expense, pursuant to the provisions of
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA");
provided, however, that you timely elect COBRA. The COBRA period
shall be deemed to have commenced on October 24, 1997.
(iv) You may take ownership of (at not cost to you) the Twinhead laptop
computer and docking station which was issued to you by the Company
value $4,100.

You acknowledge and agree that the Severance Pay and Benefits provided
herein are

<PAGE>

not otherwise due or owing to you under any Company employment agreement (oral
or written) or Company policy or practice, nor is this Severance Pay and
Benefits intended to, and shall not, constitute a severance plan, and shall
confer no benefit on anyone other than the parties hereto. You further
acknowledge that except for (i) the specific financial consideration set forth
in this letter, and (ii) any accrued vacation days that are earned as of the
Separation Date, which the Company paid on the Separation Date, you have been
paid and provided all wages, commissions, bonuses, vacation pay, holiday pay and
any other form of compensation or benefit that may be due to you now or which
would have become due in future in connection with your employment with or
separation of employment from Number Nine.

3. STOCK RIGHTS. To the extent applicable, all of the terms, rights and
-------------
conditions of the (a) Number Nine Computer Corporation 1989 Stock Option Plan,
and (b) the Number Nine Computer Corporation 1994 Employee, Director and
Consultant Plan (jointly the "Stock Option Plans"), and any documents executed
by you pursuant to the issuance of any stock options under the Stock Option
Plans, are hereby incorporated by reference and shall survive the signing of
this Agreement. You will be allowed to immediately exercise and sell any and all
of your stock options which have vested (12,500 options) since the date of grant
(May 28, 1996) at a purchase price of $3.07 per share. In addition, the economy
will accelerate the vesting of 12,500 additional options. Normally you would not
be eligible to exercise and sell these options until mid February 1998. The
value of these 25,000 options on October 28, 1997 was $26,374 (this value will
change based on stock market variations). Except for the foregoing if
applicable, you acknowledge and agree that you do not have now, and shall not in
the future have, any rights in, including any rights to vest in, any stock
options under any Number Nine stock or stock option plan (of whatever name or
kind) that you may have participated in or were eligible to participate in
during your employment.

4. CONFIDENTIALITY/NON-COMPETITION/NON-SOLICITATION: You hereby and
-------------------------------------------------
ackowledge the following:

(i) that you have returned to Number Nine all Number Nine documents (and
any copies thereof) and property, that you shall abide by the provisions of
the "Non-Compete and Confidentiality Agreement" previously executed by you
and attached hereto as Exhibit A (the terms of which are hereby
incorporated by reference and shall survive the signing of this Agreement),
and that you otherwise shall abide by any and all common low and/or
statutory obligations relating to protection and non-disclosure of Number
Nine's trade secrets and/or confidential and proprietary documents and
information; however, notwithstanding the foregoing, you shall not be
deemed to be in violation of section 2 or your Non-Compete and
Confidentiality Agreement so long as such employment or association does
not involve development, manufacture, sale or distribution of products
directly competitive with the products developed, manufactured, sold or
distributed by Number Nine.

(ii) that all information relating in any way to the subject matter if
this Letter

<PAGE>

Agreement, including the terms and amounts, shall be held confidential by
you and shall not be publicized or disclosed to any person (other than an
immediate family member, legal counsel or financial advisor, provided that
any such individual to whom disclosure is made agrees to be bound by these
confidentiality obligations), business entity or government agency (except
as mandated by state of federal law).

(iii) That you will not make any statements that are professionally or
personally disparaging about, or adverse to, the interests of Number Nine
(including its officers, directors and employees) including, but not
limited to, any statements that disparage any person, product, service,
finances, financial condition, capability or any other aspect of the
business of Number Nine, or engage in any conduct which is intended to harm
professionally or personally the reputation of Number Nine (including its
officer, directors and employees);

5. RELEASE OF CLAIMS: You hereby agree and acknowledge that by signing
-----------------
this letter and accepting the Severance Pay and Benefits discussed in Section 2
to be provided to you, and other good and valuable consideration provided for in
this letter, you are waiving your right to assert any form of legal claim
against Number Nine, its divisions, affiliates, subsidiaries and related
entities, and its and their respective officers, directors, employees, agents,
successors and assigns) of any kind whatsoever from the beginning of time
through the Effective Date of this Letter Agreement. Your waiver and release
herein is intended to bar any form of legal claim, charge, complaint or any
other form of action (jointly referred to as "Claims") against the Company
seeking any form of relief including, without limitation, equitable relief
(whether declaratory, injunctive or otherwise), the recovery of any damages or
any other form of monetary recovery whatsoever (including, without limitation,
back pay, front pay, compensatory damages, emotional distress damages, punitive
damages, attorneys fees and any other costs) against the Company, up through
the Effective Date.

Without limiting the foregoing general waiver and releasem you
specifically waive and release the Company from any Claim arising from or
related to your employment relationship with the Company or the termination
thereof, including, without limitation:

** Claims under any state or federal discrimination, fair employment
practices or other employment related statute, regulation or
executive order(as they may have been amended through the Effective
Date) prohibiting discrimination or harassment based upon any
protected status including, without limitation, race, national
origin, age, gender, marital status, disability, veteran status or
sexual orientation. Without limitation, specifically included in this
paragraph are any

<PAGE>

Claims arising under the federal Age Discrimination in Employment
Act, the Older Workers Benefit Protection Act, the Civil Rights Acts
of 1966 and 1971, Title VII of the Civil Rights Act of 1964, the
Civil Rights Act of 1991, the Equal Pay Act, the Americans With
Disabilities Act and any similar Massachusetts or other state
statute.

** Claims under any other state or federal employment related statute,
regulation or executive order (as they may have been amended through
the Effective Date) relating to wages, hours or any other terms and
conditions of employment. Without limitation, specifically included
in this paragraph are any Claims arising under the Fair Labor
Standards Act, the Family and Medical Leave Act of 1993, the National
Labor Relations Act, the Employee retirement Income Security Act of
1974, the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA) and any similar Massachusetts or other state statute.

** Claims under any state or federal common law theory including,
without limitation, wrongful discharge, breach of express or implied
contract, promissory estoppel, unjust enrighment, breach of a
covenant of good faith and fair dealing, violation of public policy,
defamation, interference with contractual relations, intentional or
negligent infliction of emotional distress, invasion of privacy,
misrepresentation, deceit, fraud or negligence.

** Any other Claim arising under state or federal law.

Nothwithstanding the foregoing, this Section shall not release the Company
from any obligation expressly set forth in this Letter Agreement. You
acknowledge and agree that, but for providing this release of claims, you would
not be receiving the Severance Pay and Benefits being provided to you under the
terms of this Letter Agreement.

Number Nine and you hereby acknowledge that because you are over 40
years of age, you are granted specific rights under the Older Workers Benefit
Protection Act ("OWBPA"), which prohibits discrimination on the basis of age,
and the release set forth in this section is intended to release any right that
you may have to file a claim against Number Nine alleging discrimination on the
basis of age. Consistent with the provisions of OWBPA, Number Nine is providing
you with forty-five (45) days in wich to consider and accept the terms of this
Letter Agreement by signing below. In addition, you may rescind your assent to
this Letter Agreement if, within seven (7) days after the date you sign this
Letter, you deliver a notice of recision to Michael Albanese at Number Nine. To
be effective, such recision must be hand delivered or postmarked within the
seven (7) day period and sent by certified mail, return receipt requested, to
Michael Albanese, Human Resources, Number Nine Visual Technology Corporation at
18 Hartwell Avenue, Lexington, MA 02173.

<PAGE>

6. ENTIRE AGREEMENT/CHOICE OF LAW/FULL AGREEMENT. This Letter Agreement
----------------------------------------------
supersedes any and all prior oral and/or written agreements, and sets forth the
entire agreement between you and the Company. No variations or modifications
hereof shall be deemed valid unless reduced to writing and signed by the parties
hereto. This Letter Agreement shall take effect as an instrument under seal and
shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts. The provisions of this Letter of Agreement are
severable, and if for any reason any part hereof shall be found to be
unenforceable, the remaining provisions shall be enforced in full.

It is the Company's desire and intent to make certain that you fully
understand the provisions and effects of this letter. To that end, you have
been encouraged and given the opportunity to consult with legal counsel for the
purpose of reviewing the terms of this letter. Also, by executing this letter,
you are acknowledging that you have been afforded sufficient time to understand
the terms and effects of this letter, that your agreements and obligations
hereunder are made voluntarily, knowingly and without duress, and that neither
the Company nor its agents or representatives have made any representations
inconsistent with the provisions of this letter.

If the foregoing correctly sets forth our understanding, please sign, date
and return the enclosed copy of this letter to Michael Albanese at the Company
within the time frame discussed in this letter.

Very truly yours,

Number Nine Visual Technology Corp.

By: /s/ Michael Albanese
-----------------------------
Michael Albanese

Confirmed and Agreed:

/s/ Beverly Schultz
- ----------------------------
Beverly Schultz
Dated: November 20, 1997

<PAGE>
EXHIBIT 10.22

[NUMBER 9 LOGO APPEARS HERE]

Andy Najda
C.E.O.
Number Nine Visual Technology Corporation

I am resigning my position as Chief Operating Officer and Chief Financial
Officer of the Company. My last day will be January 30, 1998.

Sincerely,

/s/ Daniel W. Muehl
- ---------------------------
Daniel W. Muehl
C.O.O/C.F.O.

<PAGE>

EXHIBIT 10.23

MIKE ALBANESE
- --------------------------------------------------------------------------------

FROM: Jim O'Bray
SENT: Friday, February 6, 1998 1:57 PM
TO: Andy Najda
SUBJECT: Resignation

Andy;

This note is to confirm that I am resigning from Number Nine effective 2/20/98
to pursue other interests. We can discuss the need and/or manner in which to
inform our key suppliers at your convenience.

Best of luck in the coming month.

Regards;

Jim O'Bray

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> DEC-27-1997
<CASH> 2,481
<SECURITIES> 0
<RECEIVABLES> 12,184
<ALLOWANCES> 193
<INVENTORY> 2,864
<CURRENT-ASSETS> 17,803
<PP&E> 3,906
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,859
<CURRENT-LIABILITIES> 16,077
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 5,690
<TOTAL-LIABILITY-AND-EQUITY> 21,859
<SALES> 47,205
<TOTAL-REVENUES> 47,205
<CGS> 44,053
<TOTAL-COSTS> 66,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 387
<INCOME-PRETAX> (18,940)
<INCOME-TAX> 1,839
<INCOME-CONTINUING> (20,779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,779)
<EPS-PRIMARY> (2.28)
<EPS-DILUTED> (2.28)

</TABLE>