DEPENDENCE ON RELATIONSHIP WITH SEGA
In March 1997, the Company entered into a Technology Development and
License Agreement with Sega (the "Sega Agreement"), under which the Company will
develop and license to Sega the technology for a 3D media processor chipset (the
"Sega/3Dfx Chipset") for use in Sega's next generation home game console product
(the "New Sega Game Console"). The Sega Agreement grants Sega the exclusive
right for three years to the Company's architecture solely for use in home game
consoles. Through the end of 1998, the Company expects to earn development
contract revenues and certain development bonuses provided that certain
milestones set forth in the Sega Agreement are met. The Company will derive
royalty revenue for each Sega/3Dfx Chipset incorporated into products sold by
Sega. Therefore, the timely development of the Sega/3Dfx Chipset by the Company
and the successful introduction and sale of the New Sega Game Console by Sega
will be critical factors affecting the Company's future business, financial
condition and results of operations. The Company has not yet completed
development of the Sega/3Dfx Chipset, and there can be no assurance that the
Company will successfully complete such development or, if such development is
completed, that the Sega/3Dfx Chipset will perform as expected. Despite
pre-release testing of the Sega/3Dfx chipset by the Company, there can be no
assurance that, once the Sega/3Dfx Chipset is made available to Sega,
performance errors and deficiencies will not be found, or if discovered, that
the Company will be able to successfully correct such performance errors and
deficiencies in a timely manner, if at all. If the Company is unable to complete
the development of the Sega/3Dfx Chipset or successfully deliver it to Sega, the
Company's business, financial condition and results of operations would be
materially adversely affected.