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

                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 31, 1998
                                       or

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

                         Commission File Number: 0-25580

                        DIAMOND MULTIMEDIA SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

          DELAWARE                                      77-0390654
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                2880 JUNCTION AVENUE, SAN JOSE, CALIFORNIA 95134
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (408) 325-7000

           Securities registered pursuant to Section 12(b) of the Act:
                            Title of each class: None
                 Name of each exchange on which registered: None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                          COMMON STOCK, $.001 PAR VALUE
                                (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 the 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. [ ]


As of March 1, 1999, 31,971,548 shares of common stock were outstanding. The
aggregate market value of the voting shares (based on the closing price reported
by the Nasdaq Stock Market on March 1, 1999) of Diamond Multimedia Systems,
Inc., held by nonaffiliates was $229,795,001. For purposes of this disclosure,
shares of common stock held by persons who own 5% or more of the outstanding
common stock and shares of common stock held by each officer and director have
been excluded in that such persons may be deemed to be "affiliates" as that term
is defined under the Rules and Regulations of the Act. This determination of
affiliate status is not necessarily conclusive.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed prior to April 30, 1999,
pursuant to Regulation 14A of the Securities and Exchange Act of 1934 are
incorporated by reference into Part III of this Form 10-K.


<PAGE>

PART I

ITEM 1.  BUSINESS

        The discussion and analysis below contains forward-looking statements 
within the meaning of Section 27A of the Securities Act of 1933 and 
Section 21E of the Securities Exchange Act of 1934. Actual results could 
differ materially from those projected in the forward-looking statements 
as a result of the risk factors set forth under "Certain Factors That 
May Affect Future Performance" in this report.

Diamond Profile

        Diamond Multimedia Systems, Inc. ("Diamond" or the "Company") 
designs, develops, manufactures and markets multimedia and connectivity 
products for personal computers ("PCs"). The Company is a leading 
supplier of graphics and multimedia accelerator subsystems for PCs, and 
is expanding its position as a leader in multimedia and connectivity 
products for the digital home, enabling consumers to create, access and 
experience compelling new media content from their desktops and through 
the Internet. Diamond products include the Rio line of Internet music 
players, the Stealth and Viper series of video accelerators, the Monster 
series of gaming accelerators, the Fire series of NT workstation 3D 
graphics accelerators, the Supra? series of modems, and the HomeFree 
line of home networking products. Headquartered in San Jose, CA, Diamond 
has sales, marketing and technical facilities in several locations 
including Vancouver (Wash.), Singapore, Sydney, Hong Kong, Seoul, Tokyo, 
Starnberg (Germany), Saarbrecken (Germany), Paris, and Winnersh (U.K.). 
Diamond's products are sold through regional, national and international 
distributors as well as directly to major computer retailers, mass 
merchants, VARs and OEMs worldwide. In addition, the Company sells its 
products through e-commerce websites, including its own on-line store at 
www.diamondmm.com, mail order catalog organizations and national 
reseller organizations. The Company has been engaged in expanding its 
product offerings and distribution channels through internal development 
and acquisitions. In September 1995, the Company acquired Supra 
Corporation ("Supra"), which designs, develops, manufactures and markets 
modem products. In November 1995, the Company acquired SPEA Software AG 
("Spea"), a German corporation that designs, develops and markets 
professional 3D graphics accelerators for Windows NT workstations. In 
June 1998, the Company acquired Micronics Computers, Inc. ("Micronics"), 
which designs, develops and markets graphics and audio accelerators and 
motherboards. In September 1998, the Company acquired DigitalCast, a 
Korean corporation that designed and developed the Company's initial 
Internet appliance sold under the Rio brand name. 

        The Company was incorporated in Delaware in December 1994 as the 
successor to Diamond Multimedia Systems, Inc., a California corporation 
incorporated in May 1973 ("Diamond CA"). For additional information 
regarding the Reorganization, refer to Note 1 in the Notes to 
Consolidated Financial Statements. In April 1995, the Company completed 
an initial public offering of 7,475,000 shares of common stock raising 
net proceeds of approximately $117 million. Additionally, in November 
1995, the Company completed a follow-on public offering of common stock 
which raised net proceeds of approximately $94 million. Refer to 
Liquidity and Capital Resources in Item 7 for discussion of the use of 
these proceeds.

Strategy

        Diamond's strategy is to identify emerging markets and customers 
needs, to use its technological expertise to quickly provide integrated, 
easy to install and use, high-performance multimedia and connectivity 
solutions for the PC platform, and to use its worldwide channels to 
achieve broad distribution and support of its products.  The Company's 
objectives for the coming year include: capitalizing on new technologies 
such as digital audio over the Internet, digital video over the 
Internet, 3D graphics for NT workstations, broadband modems and home 
networking; expanding business with large OEMs, international retailers 
and VARs; expanding international sales; increasing penetration of the 
market for audio accelerators and digital audio players; launching a 
major Internet audio portal and audio content aggregation website; and 
strengthening its information technology systems infrastructure to 
provide better customer delivery and support at lower operating costs.

        Through selective acquisitions, Diamond has been able to add to its 
technical expertise and product offerings while further improving its 
distribution channels and market presence both domestically and 
internationally. In September 1995, Diamond purchased Supra, giving 
Diamond added expertise in PC communications and presence in the retail 
markets. In November 1995, the Company purchased Spea.  The addition of 
Spea provided Diamond with a key strategic position in Europe, helping 
to expand Diamond's presence internationally as a leading supplier of 
visual and connectivity systems for the PC, and added professional 3D 
graphics and Open GL software driver expertise to the Company.  In 
November 1997, the Company acquired Binar Graphics, Inc. ("Binar"), 
adding graphics engineering capability and certain proprietary 
intellectual property in graphics acceleration. In June 1998, the 
Company acquired Micronics, adding selected retail channels in Northern 
Europe and the U.K. and a design, test and quality assurance team for 
integrated system boards. In September 1998, the company acquired 
DigitalCast, adding digital audio Internet appliances to the Company's 
product line.

        A key element of Diamond's strategy is to remain silicon agile, 
allowing the Company to incorporate the best semiconductor integrated 
circuits available on the open market. By sourcing chips from a variety 
of semiconductor developers, the Company believes it is better able to 
keep pace with the current rapid advances in multimedia and connectivity 
technology and bring best-of-breed products to market. The Company 
currently has research and development efforts underway using chipsets 
from a variety of companies, including but not limited to Aureal, 
Conexant, IBM, Intel, Lucent, Motorola, NVidia, S3, and Texas 
Instruments. There can be no assurance, however, that these efforts will 
result in actual new product introductions.

        With the increasing incorporation of multimedia, connectivity and 
visual computing capabilities into the PC platform, Diamond's objectives 
are to expand international sales, serve new OEM and channel assembly 
customers such as VARs and system integrators, and capitalize on new 
multimedia and connectivity product categories such as entertainment 3D 
animation and NT workstation 3D graphics, digital ADSL (G.Lite) and 
cable modems, digital video and digital audio media players, an Internet 
music portal and Internet music players, and home networking products.

Products

        The Company operates in a single industry segment encompassing the 
design, development, manufacture, marketing and support of computer 
subsystems and appliances that accelerate multimedia on the PC platform, 
connect the PC platform to the Internet or play back digital media 
content. All the Company's products share certain characteristics such 
as common customers, common sales channels and common Company 
infrastructure requirements.

        Video Accelerators.  The Company's mainstream video/graphics 
accelerators enhance system performance by increasing the speed at which 
video and graphics are displayed while also improving resolution, image 
stability and color depth. The Company's Stealth and Viper series of 
multimedia accelerators offer mainstream 2D and 3D graphics acceleration 
with full-screen, full-motion digital video playback. Some products also 
offer optional TV-In, TV-Out, and/or TV tuner capabilities. 

        Gaming Accelerators.  The Company offers two types of 3D gaming 
accelerators. The Company's Monster 3D line of graphics accelerators is 
aimed at the interactive entertainment 3D market and accelerates a large 
and growing number of 3D games on the PC. The Company's Monster Sound 
line of 3D audio accelerators is aimed at the same interactive gaming 
market, but provides positional 3D audio capabilities to the PC. 

        NT Workstation Graphics. The Company's Fire GL series of graphics 
accelerators is aimed at the professional workstation 3D market for such 
applications as content creation, 3D animation, website creation, Open 
GL acceleration and CAD on the Intel Architecture/Windows NT platform.

System Boards. The Company is developing a limited line of integrated 
multimedia system boards incorporating based motherboard technology 
obtained in the Micronics acquisition, combined with the Company's 
existing graphics and audio technology. The Company intends to introduce 
the first of these products during the first half of 1999.   

        Communications.  Under the Supra brand name, the Company markets a 
line of dial-up analog fax/modems. The Company has also launched an 
effort to bring broadband digital modems to market, including a line of 
DSL and cable modems.

        Home Networking.   The Company shipped its first wireless home 
networking products in November 1998 and its first phoneline based home 
network products in January 1998. HomeFree Wireless allows customers to 
connect two or more computers within a home or small office using radio 
frequency transmission. HomeFree Phoneline allows consumers to connect 
two or more computers within a home using their existing telephone 
wires.

        Internet Appliances.   In November 1998, the Company shipped its 
first Internet appliance. The Rio is a playback device for near-CD 
quality music that has been downloaded from the Internet to a PC's hard 
drive in compressed form. Software is also provided to allow the 
compression and transfer of music from personal CD collections to a PC 
storage device for subsequent playback using the Rio. The Rio is flash 
memory based and battery powered allowing the portable play back of 
computer based music using the MP3 format. 

        Internet Audio Portal.  In January 1999, the Company launched 
RioPort.com, a portal for information about and access to legal music 
and other downloads from the Internet as well as to provide information 
on Internet based audio content. Current plans call for the expansion of 
RioPort.com to include revenue generation through advertising banners, 
links to other commercial audio web sites and the aggregation of 
Internet-based music content.

        See "Certain Factors That May Affect Future Performance - Short 
Product Life Cycles; Dependence on New Products,"  "-New Operating 
Systems," "-Market Anticipation of New Products, New Technologies or 
Lower Prices,"  "-Migration to Personal Computer Motherboards" and "-
Rapid Technological Change".

Sales, Distribution and Customer Support

The Company sells its products through independent domestic and 
international distributors and directly to larger computer retailers, 
mass merchants, system integrators, VAR and OEMs. In addition, the 
Company sells its products in the United States through e-commerce 
websites, including its own on-line store at www.diamondmm.com,  mail-
order catalog organizations and national reseller organizations.  The 
Company is currently seeking to expand its penetration of e-commerce, 
consumer electronics retail/mass merchant channels, and NRO/VAR 
channels, including programs to address the large and growing channel 
assembly business, and to increase its sales to large PC systems 
manufacturers.  See "Certain Factors That May  Affect  Future  
Performance -OEM  Customer Risks,"  "-Product Returns;  Price  
Protection"  and "-Distribution Risks."

The Company has built a customer service and technical support 
organization focused on providing value to the Company's customers 
beyond the purchase of the Company's products.  In this regard, the 
Company provides on-line customer service and technical support to 
customers via email and an artificial intelligence "wizard" accessible 
through the Company's website, as well as through facsimile and direct 
telephonic communication. The Company supports the online community 
through its presence on the World Wide Web, where technical support, 
frequently asked questions and a searchable knowledge base can be found.  
More than 80% of the Company's customer support contacts are currently 
handled by automated systems. 

The Company continues to undertake significant efforts to expand its 
sales channels through international penetration.  The Company has 
expanded its sales and support organizations in Europe, including 
Eastern Europe, Latin America, and Asia-Pacific, including Japan.  The 
requirements of these regions are, however, substantially different from 
one another and from the North American market. Any inability of the 
Company to successfully penetrate these new channels or to manage them 
on a profitable basis could have a material adverse effect on operating 
results. See "Certain Factors That May Affect Future Performance - Risks 
of International Sales."

Products sold to OEM customers in bulk-packaged format typically 
consist of board-level hardware accompanied by software drivers, 
multimedia utility applications and a manual, all frequently implemented 
on a CD-ROM to reduce cost and package size. Products sold to computer 
retailers and mass merchants typically consist of the hardware, the 
software and the manuals that are incorporated into the OEM products 
and, in many cases, additional bundled hardware and software components 
and installation aids, all in packaging appropriate for consumer sale. 
Distributors and NROs purchase products both packaged for resale to 
retail outlets, typically for the installed-base upgrade market, and 
bulk packaged for resale to systems integrators and VARs for 
incorporation into original-sale PC systems.

Research and Development

        The Company believes that continued investment in research and 
development will be critical to the ability of the Company to continue 
to introduce, on a timely basis and at competitive prices, new and 
enhanced products incorporating the latest technology and addressing 
emerging market needs. The Company's research and development staff 
consisted of 205 employees at December 31, 1998. The Company's software 
engineers are engaged in ongoing development of software and firmware 
drivers to enhance the performance of graphics, video and audio 
accelerators, analog and digital modems, and various PC/Internet 
appliances, as well as upgrades to the Company's proprietary software 
utility applications. The Company's engineers are also engaged in the 
development of new products such as multimedia system boards, that will 
offer various combinations of 3D graphics, digital video, 3D sound, and 
other emerging PC and Internet multimedia functions, as well as in the 
development of RioPort.com. Research and development expenses were 
$29,923,000, $24,886,000, and $18,824,000 in the years ended December 
31, 1998, 1997, and 1996, respectively. See "Certain Factors That May 
Affect Future Performance - Short Product Life Cycles; Dependence on New 
Products," "-Market Anticipation of New Products, New Technologies or 
Lower Prices," "-New Operating Systems" and "-Rapid Technological 
Change".

The Company also endeavors to work closely with third parties that 
are strategic to the Company's business. The Company works with 
suppliers of 3D graphics, digital video, audio, modem, and other 
multimedia chipsets in an effort to select the appropriate advanced 
components for the Company's new PC multimedia products. The Company 
seeks to develop in a timely manner the software required to incorporate 
the chipsets into the Company's products, and the Company's products 
into the evolving architecture and capabilities of the PC and the 
Internet. The Company also works with leading personal computer 
hardware, operating system and software applications suppliers in order 
to stay abreast of emerging opportunities and new standards in the 
market. There can be no assurance that the Company's development efforts 
will be successful, or that the Company will be able to introduce 
competitive new products into the marketplace in a timely manner.

Manufacturing

        The Company uses an international network of independent printed 
circuit board assembly subcontractors, principally located in Asia, to 
assemble and test the boards that are the principal hardware component 
of the Company's products. The Company generally procures boards on a 
turnkey basis from it subcontract manufacturing suppliers, but may 
procure architectural components and consign these to its subcontractors 
for assembly and board-level testing. The Company performs quality 
assurance on its products, but subcontracts production level product 
testing.  In 1997, the Company started to the use of full turnkey 
offshore subcontractors. In 1998, the proportion of products 
manufactured by full turnkey subcontractors increased, and the Company 
expects to further expand the portion of its procurement, manufacturing 
and test that is conducted in this manner. The Company's expectation is 
that after the first quarter of 1999, the only products not being 
procured primarily on a turnkey basis will be new products in their 
launch phase.

        The Company packages the assembled boards its receives from its 
subcontractors with software, manuals and additional hardware 
components, placing such materials in retail packaging for the 
retail/mass merchant channel and in bulk packaging for the OEM and 
system integrator channels. While the Company uses several electronics 
assembly subcontractors to minimize the risk of business interruption, 
there can be no assurance that a problem will not arise with one or more 
of these suppliers that could adversely affect operating results. See 
"Certain Factors That May Affect Future Performance - Component 
Shortages; Reliance on Sole or Limited Source Suppliers," and "-Rapid 
Technological Change".

Proprietary Rights

        While the Company had 14 issued U.S. Patents and 23 pending U.S. 
Patent Applications at December 31, 1998, it relies primarily on a 
combination of trademark, copyright and trade secret protection together 
with licensing arrangements and nondisclosure and confidentiality 
agreements to establish and protect its proprietary rights. See "Certain 
Factors That May Affect Future Performance - Proprietary Rights."

Competition

        The market for the Company's products is highly competitive. The 
Company competes directly against a large number of suppliers of PC add-
in visual and audio subsystems, Internet appliances, home networking 
products, and PC communications products, as well as indirectly against 
OEMs and semiconductor suppliers to the extent they manufacture their 
own add-in subsystems or incorporate on their personal computer 
motherboards the functionality provided by the Company's add-in or add-
on products. In addition, the Company's markets are expected to become 
increasingly competitive as multimedia and connectivity functions 
continue to converge, the price of the average PC drops and companies 
that previously supplied products providing distinct functions (for 
example, companies in the graphics, video, sound, modem and networking 
markets) emerge as competitors across broader product categories and in 
the emerging category of PC and Internet appliances. See "Certain 
Factors That May Affect Future Performance - Competition."

Employees

As of December 31, 1998, the Company had 890 full-time employees, 210 
of whom were engaged in manufacturing (including test, quality 
assurance, procurement and materials functions), 205 in development 
engineering, 210 in marketing, field applications support and sales, 140 
in technical support and customer service, and 125 in finance, IT and 
administration. The Company's employees are not represented by any 
collective bargaining agreements and the Company has never experienced a 
work stoppage. The Company believes that its employee relations are 
good.

EXECUTIVE OFFICERS
    The following table sets forth the names, ages and office of all of the
executive officers of the Company:

<TABLE>
<CAPTION>
          Name              Age                 Office Held
-------------------------  -----  ---------------------------------------
<S>                        <C>    <C>
William J. Schroeder         54   President and Chief Executive Officer,
                                    Director
James M. Walker              50   Senior Vice President and Chief
                                    Financial Officer
Franz Fichtner               46   President, Diamond Europe
C. Scott Holt                57   Senior Vice President, Worldwide Sales
Hyung Hwe Huh                46   Senior Vice President and Chief
                                    Technical Officer
Wade Meyercord               58   Senior Vice President, Management
                                    Systems and Continuous Improvement
Dennis D. Praske             51   Senior Vice President, Worldwide
                                    Operations
</TABLE>


There are no family relationships between any of the executive 
officers and directors.

        Mr. Schroeder has served as President and Chief Executive Officer of 
the Company and as a member of the Board of Directors since May 1994, 
and as Chairman of the Board since May 1998. Mr. Schroeder was employed 
by Conner Peripherals, Inc. ("Conner") from 1986 to 1994, initially as 
President and, from 1989, as Vice Chairman of the Board of Directors. He 
was also President of Conner's New Products Group from 1989 to 1990, 
President of Archive Corporation (a Conner subsidiary) from January 1993 
to November 1993, and CEO of Arcada Software, Inc. (a Conner subsidiary) 
from November 1993 to May 1994. Mr. Schroeder is also a director of 
Xircom, Inc., Sync Research, Inc., and CNF Transportation, Inc.

        Mr. Walker joined the Company in December 1996 as Senior Vice 
President and Chief Financial Officer. Mr. Walker was formerly employed 
by Global Village Communication as Vice President and Chief Financial 
Officer from 1993 to 1996. Previously, Mr. Walker served as Chief 
Operating Officer for Fujitsu Computer Products from 1990 to 1993 and as 
Vice President of Finance for its parent company, Fujitsu America, from 
1987 to 1990. Mr. Walker is Chairman of the Board of Alara, Inc., a 
privately-held medical imaging technology firm. 

        Mr. Fichtner joined the Company in October 1997 as President, Diamond 
Europe. Mr. Fichtner was formerly employed by 3Com from 1990 to 1997, 
most recently as President Europe, Middle East and Africa from 1995 to 
1997, as Managing Director 3Com Gmbh, Central Europe from 1991 to 1994, 
and as Technical Manager for the Central European Sales Region from 1990 
to 1991.

        Mr. Holt joined the Company in January 1995 as Senior Vice President, 
Worldwide Sales. From 1986 to 1994, Mr. Holt was employed by Conner, 
most recently as Executive Vice President, Corporate Accounts and 
Americas Sales. Mr. Holt was the Executive Vice President of Sales and 
Marketing at Conner from 1986 until 1992.

        Mr. Huh joined the Company in 1983 as Engineering Manager and was 
promoted to Chief Engineer in 1985, to Vice President of Engineering in 
1989, and to the position of Senior Vice President and Chief Technical 
Officer in 1994. Mr. Huh was a member of the Board of Directors of the 
Company from 1985 to January 1995. 

        Mr. Meyercord joined the Company in November 1997 as Senior Vice 
President, Management Systems and Continuous Improvement, and 
transitioned to Senior Vice President, E-Commerce and Quality Assurance 
during the fourth quarter of 1998. Mr. Meyercord was formerly employed 
as President of the consulting firm, Meyercord and Associates, from 1987 
to 1997. Mr. Meyercord is Chairman of the Board of California Micro 
Devices and a director of ADFlex Solutions.

        Mr. Praske joined the Company in October 1995 as Vice President of 
Worldwide Operations and was promoted to Senior Vice President in April 
1997.  Prior to joining the Company, Mr. Praske was the Vice President 
of Worldwide Materials for the Storage Division of International 
Business Machines (IBM).  Previously, Mr. Praske served as Vice 
President of Commodity Management at Conner Peripherals, Inc. from 1988 
to 1993.

ITEM 2. Properties

        The Company's headquarters facility in San Jose, CA consists of one 
building of approximately 80,000 square feet which is leased by the 
Company through January 2002, and another building of approximately 
30,000 square feet which is leased by the Company through January 2003. 
Additionally, the Company has an 83,000 square foot facility in 
Milpitas, California, primarily for manufacturing and logistics which is 
leased through January 2001. The Company's facilities in Vancouver, 
Washington and Albany, Oregon consist of three buildings comprising 
approximately 22,100, 21,000 and 35,800 square feet, respectively. The 
22,100 square foot facility expires in November 2000 and the 21,000 
square foot facility lease expires June 1999 and is currently subleased 
through the remaining term. The Albany property was purchased in 1991. 
The Company's facilities in Europe encompass a 26,000 square foot 
building in Winnersh, U.K. with a lease commencement date of May 1996. 
The lease is a fifteen-year term with 3, 5 and 10-year cancellation 
options. Facilities in Germany consist of a 22,000 square foot building 
in Starnberg which is leased through 2001. The Company also leases sales 
or technical support offices in the metropolitan areas of Tokyo, Japan; 
Paris, France; Seoul, South Korea, Sydney, Australia; Ontario, Canada 
and Singapore. The Company also leases sales or software development 
offices in Atlanta, Georgia; Dallas and Houston Texas; Chicago, 
Illinois; Huntsville, Alabama; Miami and Coral Springs, Florida; San 
Francisco, CA and Red Bank, New Jersey and Raleigh, North Carolina. The 
Company recently opened a logistics center in Kowloon Bay, Hong Kong to 
support offshore turnkey operations and sales in Asia. The facility is 
owned and run by a third party service provider on a service contract 
that expires in September 2000. The Company believes that its existing 
facilities are adequate to meet its facilities requirements for the near 
term.

ITEM 3. Legal Proceedings

The Company has been named as a defendant in several putative class 
action lawsuits which were filed in June and July, 1996 and June, 1997 
in the California Superior Court for Santa Clara County and the U.S. 
District Court for the Northern District of California. Certain 
executive officers and directors of the Company are also named as 
defendants. The plaintiffs purport to represent a class of all persons 
who purchased the Company's Common Stock between October 18, 1995 and 
June 20, 1996 (the "Class Period"). The complaints allege claims under 
the federal securities law and California law. The plaintiffs allege 
that the Company and the other defendants made various material 
misrepresentations and omissions during the Class Period. The complaints 
do not specify the amount of damages sought. The Company believes that 
it has good defenses to the claims alleged in the lawsuits and will 
defend itself vigorously against these actions. No trial date has been 
set for any of these actions. The ultimate outcome of these actions 
cannot be presently determined. Accordingly, no provision for any 
liability or loss that may result from adjudication or settlement 
thereof has been made in the accompanying consolidated financial 
statements.

The Company has been named as a defendant in a lawsuit filed on October 
9, 1998 in the United States District Court for the Central District of 
California.  Plaintiffs are the Recording Industry Association of America, 
Inc. (the "RIAA"), a trade organization representing recording companies 
and the Alliance of Artists and Recording Companies (the "AARC") an 
organization controlled by the RIAA which exists to distribute royalties 
collected by the copyright office.  The complaint alleges that the 
Company's Rio product, a portable music player, is subject to regulation 
under the Audio Home Recording Act (the "AHRA") and that the device does 
not comply with the requirements of the AHRA.  On October 16, 1998 a 
hearing was held and the Court issued a Temporary Restraining Order 
preventing the Company from manufacturing or distributing the Rio product 
for a period of ten days.  On October 26, 1998 a hearing was held to 
determine if a Preliminary Injunction should issue to further restrain the 
Company until the conclusion of the suit.  The court denied the motion and 
refused to restrain the Company from manufacturing and distributing the Rio 
product.  The RIAA has filed a notice that it intends to appeal the Court's 
ruling to the United States Court of Appeals for the Ninth Circuit.  No 
schedule has been set for any briefing or other action on the appeal. No 
provision for any liability or loss that may result from adjudication or 
settlement of this action has been made in the accompanying consolidated 
financial statements.

The Company is also party to other claims and pending legal 
proceedings that generally involve employment and trademark issues.  
These cases are, in the opinion of management, ordinary and routine 
matters incidental to the normal business conducted by the Company.  In 
the opinion of management, the ultimate disposition of such proceedings 
will not have a materially adverse effect on the Company's consolidated 
financial position or future results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.


        MATTERS
==========================================================================
<TABLE>
<CAPTION>
Closing price:
                                                        High       Low
                                                     ---------- ----------
<S>                                                  <C>        <C>
Fiscal Year 1998:
 First quarter....................................   $ 16-1/4   $  8-7/8
 Second quarter...................................   $ 15-1/4   $  5-7/8
 Third quarter....................................   $ 7        $  3-1/2
 Fourth quarter...................................   $ 7-3/16   $  3-1/32

Fiscal Year 1997:
 March 31, .......................................   $ 17       $  9-3/4
 June 30, ........................................   $ 9-1/8    $  6-5/8
 September 30, ...................................   $ 11-3/4   $  6-15/16
 December 31, ....................................   $ 13-13/16 $  8-13/16
</TABLE>


The Company's common stock trades on the Nasdaq Stock Market under 
the symbol "DIMD". The price range per share reflected in the above 
table is the highest and lowest closing prices for the Company's stock 
as reported by the Nasdaq, during each quarter. The Company's present 
policy is to retain its earnings to finance future growth. The Company 
has never declared or paid cash dividends and has no present intention 
to declare or pay cash dividends. At December 31, 1998 there were 
approximately 570 stockholders of record including nominees and brokers 
holding street name accounts.

ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                             --------------------------------------- ---------
                                               1998      1997      1996      1995      1994
                                             --------- --------- --------- --------- ---------
                                                  (in thousands, except per share data)
<S>                                          <C>       <C>       <C>       <C>       <C>
  Net sales................................  $608,581  $443,281  $598,050  $467,635  $203,297
  Gross profit.............................    66,687    55,795   112,766   108,350    57,983
  Write-off of in-process technology.......       --        --        --     76,710       --
  Income (loss) from operations............   (66,418)  (67,719)   22,708   (19,273)   33,137
  Net income (loss)........................   (39,489)  (45,605)   16,337   (41,347)   20,116
  Net income (loss) per share:
        Basic..............................    ($1.13)   ($1.33)    $0.48    ($1.55)    $1.62
        Diluted............................    ($1.13)   ($1.33)    $0.46    ($1.55)    $1.12
  Total assets.............................   306,910   337,554   332,438   351,729   120,854
  Current portion of long-term debt........    45,516    36,455    18,068    18,077    82,664
  Long-term debt, net of current portion...     1,550     1,873     2,730    11,705    34,167
  Mandatorily redeemable preferred stock...       --        --        --        --     29,174
  Total shareholders' equity (deficit).....   146,370   180,521   224,295   208,610   (55,949)


<CAPTION>

     SELECTED QUARTERLY FINANCIAL DATA
                                               First    Second     Third    Fourth
                                              Quarter   Quarter   Quarter   Quarter
                                             --------- --------- --------- ---------
(Unaudited & in thousands except per share data)
<S>                                          <C>       <C>       <C>       <C>
     YEAR ENDED DECEMBER 31, 1998
  Net sales................................  $186,196  $172,347  $123,200  $126,838
  Gross profit.............................    41,626    20,463       383     4,216
  Income (loss) from operations............    11,132   (12,080)  (31,227)  (34,243)
  Net income (loss)........................    $7,927   ($8,284) ($22,176)  (16,983)
  Net income (loss) per share:
        Basic..............................     $0.23    ($0.24)   ($0.63)   ($0.48)
        Diluted............................     $0.22    ($0.24)   ($0.63)   ($0.48)


     YEAR ENDED DECEMBER 31, 1997
  Net sales................................  $112,402   $52,982   $92,028  $185,869
  Gross profit.............................    19,585   (23,118)   18,178    41,150
  Income (loss) from operations............    (9,934)  (63,500)   (4,367)   10,082
  Net income (loss)........................   ($5,951) ($44,109)  ($2,553)   $7,008
  Net income (loss) per share:
        Basic..............................    ($0.17)   ($1.29)   ($0.07)    $0.20
        Diluted............................    ($0.17)   ($1.29)   ($0.07)    $0.20
</TABLE>

No dividends have been declared in any of the periods presented. See 
"Item 5" for a discussion of the Company's dividend history. Data for 
1995 includes acquisitions of Supra and Spea completed during the year, 
and data for 1998 includes the acquisitions of Micronics and DigitalCast 
completed during the year, all of which were accounted for as purchase 
business combinations. "See Management's Discussion and Analysis of 
Financial Condition and Results of Operations".



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

        The discussion and analysis below contains trend analysis and other 
forward-looking statements within the meaning of Section 27A of the 
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 
1934. Actual results could differ materially from those projected in the 
forward-looking statements as a result of the risk factors set forth 
under "Certain Factors That May Affect Future Performance" and elsewhere 
in this report.

        The following discussion should be read in conjunction with the five-
year summary of selected financial data and the Company's consolidated 
financial statements and the notes thereto.  All references to years 
represent fiscal years unless otherwise noted. 

Overview

        Diamond Multimedia Systems, Inc. ("Diamond" or the "Company") 
designs, develops, manufactures and markets multimedia and connectivity 
products for personal computers ("PCs"). The Company is a leading 
supplier of graphics and multimedia accelerator subsystems for PCs, and 
is expanding its position as a leader in multimedia and connectivity 
products for the digital home, enabling consumers to create, access and 
experience compelling new media content from their desktops and through 
the Internet. Diamond products include the Rio line of Internet music 
players, the Stealth and Viper series of video accelerators, the Monster 
series of gaming accelerators, the Fire series of NT workstation 3D 
graphics accelerators, the Supra? series of modems, and the HomeFree 
line of home networking products. Headquartered in San Jose, CA, Diamond 
has sales, marketing and technical facilities in several locations 
including Vancouver (Wash.), Singapore, Sydney, Hong Kong, Seoul, Tokyo, 
Starnberg (Germany), Saarbruecken (Germany), Paris, and Winnersh (U.K.). 
Diamond's products are sold through regional, national and international 
distributors as well as directly to major computer retailers, mass 
merchants, VARs and OEMs worldwide. In addition, the Company sells its 
products through e-commerce websites, including its own on-line store at 
www.diamondmm.com, mail order catalog organizations and national 
reseller organizations. The Company has been engaged in expanding its 
product offerings and distribution channels through internal development 
and acquisitions. In September 1995, the Company acquired Supra 
Corporation ("Supra"), which designs, develops, manufactures and markets 
fax/modem products. In November 1995, the Company acquired SPEA Software 
AG ("Spea"), a German corporation that designs, develops and markets 
professional 3D graphics accelerators for Windows NT workstations. In 
June 1998, the Company acquired Micronics Computers, Inc. ("Micronics"), 
which designs, develops and markets graphics and audio accelerators and 
motherboards. In September 1998, the Company acquired DigitalCast, a 
Korean corporation that designed and developed the Company's initial 
Internet appliance sold under the Rio brand name.

Net Sales

Net sales were $608.6 million, $443.3 million, and $598.1 million in 
1998, 1997, and 1996, respectively. Net sales increased in 1998 by 
$165.3 million or 37% compared to 1997, primarily due to an expanded 
product line-up, including two brand new product lines released in the 
latter half of the year, Rio and HomeFree, increased demand for 56K 
modems, and strong first half demand for graphics accelerators. Net 
sales decreased in the latter half of the year due to significant price 
erosion and price protection charges for graphics accelerator cards.  
Net sales decreased in 1997 by $154.8 million or 26% compared to 1996, 
primarily due to significant price erosion and lower unit demand in the 
Company's base business of multimedia accelerator systems and modems, 
particularly during the first and second quarters of 1997 in which large 
price protection charges were triggered.  The demand for the Company's 
products increased in the latter half of the year as new products such 
as the Monster 3D and Viper series of graphics accelerator cards were 
introduced and began shipping in volume.  Also during the fourth quarter 
of 1997, there was strong demand for the Fire GL 1000 and 4000 series of 
professional 3D graphics accelerator cards, as well as the 56K modems. 

Net sales increased in 1998 by 18% in North America, 87% in Europe 
and 26% in other international markets (Asia and Latin America) 
following 1997 declines of 25%, 13% and 46%, respectively. Net sales in 
North America accounted for 54%, 62% and 62% of total net sales during 
1998, 1997 and 1996, respectively. Net sales in Europe accounted for 
36%, 26% and 22% of total net sales during 1998, 1997 and 1996, 
respectively. Other international net sales accounted for 10%, 12% and 
16% of total net sales during 1998, 1997 and 1996, respectively. The 
continued increase in revenues from Europe is a result of stronger 
selling efforts and relatively stronger European economies. Declines in 
other international sales since 1996 resulted primarily from weaker 
national economies and financial instability. Although the Company's 
international sales are primarily denominated in U.S. dollars, these 
sales are subject to a number of risks generally associated with 
international sales, including the effect of currency fluctuations, 
state-imposed restrictions on the repatriation of funds, import and 
export restrictions, and the logistical difficulties of managing 
international operations.  

Gross Profit

Gross margin (gross profit as a percentage of sales) was 11.0%, 
12.6%, and 18.9% in 1998, 1997, and 1996, respectively. Gross margin 
declined to 11.0% of net sales in 1998 from 12.6% of net sales in 1997 
primarily due to the absorption in the third and fourth quarters of 1998 
of large price protection credits granted to customers as a result of 
sales price decreases, inventory write-down charges to record inventory 
at lower-of-cost or market value, sales rebate deductions, and 
competitive pricing pressures across most product lines. In the third 
quarter of 1998, these charges were primarily associated with 
competitive pressures.  In the fourth quarter of 1998, these charges 
were related to the Company's announced restructuring of its graphics 
accelerator business to reduce the number of chipset architectures it 
would support in the future and reduce the number of models of each 
supported architecture. At the same time, the Company determined to 
change its strategy with respect to distribution channels by controlling 
channel inventory levels and reserving against any financial benefit of 
shipments into the distribution channel that exceeded four weeks of 
demand. This resulted in reduced margins due to the restriction of 
shipments of higher margin products compared to prior years as well as 
an increase in the reserves against revenue. Gross margin declined to 
12.6% of net sales in 1997 from 18.9% of net sales in 1996 particularly 
due to absorbing in the second quarter of 1997 large price protection 
credits granted to customers as a result of sales price decreases, 
inventory write-down charges to record inventory at lower-of-cost or 
market value, sales rebate deductions, and competitive pricing pressures 
across most product lines. Further, gross margin was adversely impacted 
by significantly lower sales volume levels over which indirect 
manufacturing costs could be absorbed.  

Research and Development

Research and development expenses, primarily consisting of personnel 
expenses, were $29.9 million, $24.9 million, and $18.8 million in 1998, 
1997, and 1996, respectively, constituting 4.9%, 5.6%, and 3.1% of net 
sales, respectively.  The increases in research and development expenses 
for 1998 compared to 1997 and 1997 compared to 1996 were primarily due 
to continued increases in headcount (from 150 at the end of 1996 to 196 
at the end of 1997 to 205 at the end of 1998), and increases in 
occupancy costs, material costs and outside service costs These 
headcount related and other expenses were associated with new product 
development on an increasing number of graphics architectures, and in 
1998, investment in the development of new product lines such Rio, 
HomeFree and DSL modems. For 1998, the decrease in expense as a percent 
of net sales was primarily due to more normalized revenue levels 
compared with 1997. For 1997, the increase in expense as a percentage of 
net sales was primarily due to a significant decline in net sales during 
1997. The Company anticipates that its research and development expenses 
will continue to increase in absolute dollars and may increase as a 
percentage of sales. The Company has not capitalized any software 
development costs to date.

Selling, General and Administrative

Selling, general and administrative expenses were $97.7 million, 
$85.7 million, and $66.2 million in 1998, 1997, and 1996, respectively, 
and constituted 16.1%, 19.3%, and 11.1% of net sales, respectively. The 
increase in actual dollar terms in 1998 compared to 1997 reflects higher 
marketing expenses, higher depreciation expenses, higher facility and 
related office expenses, increased personnel related expenses associated 
with the Company's acquisitions of Micronics and DigitalCast, higher 
outside professional fees related, in part, to certain ongoing 
litigation and tax consulting services, and higher travel expenses 
associated with selling and administrative efforts. Expenses relating to 
channel incentive programs declined in 1998. The increase in expenses in 
1997 compared to 1996 reflected higher sales and marketing promotional 
programs, higher depreciation expense and increased personnel-related 
expenses associated with increased sales and marketing efforts. 

Selling, general and administrative costs decreased as a percentage 
of net sales in 1998 due to the significant increase in net sales as 
compared to 1997. Selling, general and administrative costs increased 
significantly as a percentage of net sales in 1997 as compared to 1996 
due to higher selling and marketing costs and also due to the large 
decline in net sales that occurred in 1997 as compared to 1996. 

The Company anticipates that its selling, general and administrative 
expenses will increase slightly in absolute dollars as the Company 
continues efforts at penetrating certain sales channels and regions, and 
continues to strengthen management information and telecommunications 
systems to support its existing and acquired businesses and the 
anticipated growth in the scope of its operations.

Amortization of Intangible Assets

The Company wrote-off $9.9 million of intangible assets in the second 
quarter of 1997 to reflect an impairment in the value of goodwill 
and existing technology associated with the acquisitions of Supra and 
Spea.  The anticipated cash flows related to those products indicated 
that the recoverability of those assets was not reasonably assured. The 
Company also incurred amortization expense of $2.6 million and $3.0 
million in 1998 and 1997, respectively, related to amortization of 
purchased technology and goodwill from the Supra, Spea, Micronics and 
DigitalCast acquisitions. As a result of the Company's acquisitions, the 
Company expects to incur aggregate amortization expense of approximately 
$4.4 million annually for 1999, 2000, and 2001, $4.2 million in 2002, 
$3.7 million in 2003, $3.6 million in 2004 and $1.8 million in 2005.

Interest Income and Expense

      Interest income was $2.9 million, $2.9 million and $3.6 million 
for 1998, 1997 and 1996, respectively, and resulted from cash available 
for investment. Interest income declined from 1996 to 1997 due to lower 
available cash balances available for investing. Interest income was 
flat from 1997 to 1998. Interest expense was $2.7 million, $1.2 million 
and $1.7 million for 1998, 1997 and 1996, respectively. Interest expense 
declined from 1996 to 1997 due to lower use of available credit lines. 
Interest expense increase from 1997 to1998 due to an increase in the use 
of available credit lines. 

Other Income 

        The Company recorded other expense of $2.7 million during 1998, 
primarily due to the sale of equity interest in SP3D, which was acquired 
as a result of its acquisition of Spea in 1995. Additional significant 
components of other expense included foreign currency translation losses 
and loss on the final settlement of a lawsuit. The Company recorded 
other income of $0.9 million in 1997 due primarily from a gain on final 
settlement of a lawsuit.  The Company recorded other income in 1996 of 
$1.2 million primarily related to Value Added Tax (VAT) refunds and 
foreign currency translation gains.

Provision (Benefit) for Income Taxes

        The Company's effective tax rate was (30.0%) for 1998 excluding the 
impact of the recognition of a foreign tax benefit resulting from a tax 
audit which has been closed. The Company's effective tax rate was 
(35.4%) in 1997 excluding the impact of the write-off of $9.9 million of 
intangibles during 1997 which were not deductible for income tax 
purposes.  For 1996, the effective tax rate was 37.0%. For 1996 through 
1998, differences from the statutory rates consisted principally of the 
effect of state income taxes, foreign income taxes, federal tax-exempt 
interest income, the amortization of intangibles, and the research and 
development tax credit. 

LIQUIDITY AND CAPITAL RESOURCES

        During 1998, the Company used $32.4 million in cash from operating 
activities primarily due to a net loss of $39.5 million, an increase in 
deferred income taxes of $35.4 million, a reduction of trade payables 
and other accrued liabilities of $24.2 million, and the non-cash effects 
of the provision of excess and obsolete inventories of $9.1 million. 
These were partially offset by a decrease in inventories of $43.1 
million, a decrease in income tax receivable of $15.5 million, a 
decrease in trade accounts receivable of $7.2 million, the establishment 
of a new deferred income liability of $7.2 million, and depreciation and 
amortization expenses of $9.2 million. Net cash used in investing 
activities was $37.1 million and consisted primarily of the acquisitions 
of Micronics and DigitalCast totaling $23.9 million net of cash 
acquired, $18.3 million for purchases of property and equipment, the 
majority of which was related to the installation of the Company's new 
global enterprise wide computer system, the purchase of $1.8 million in 
short-term investments, and an equity investment in a technology partner 
in the amount of $1.2 million. This was partially offset by the sale of 
a building owned by Micronics, and proceeds from the sale of the 
Company's equity interest in a joint venture. Net cash provided by 
financing activities was $8.2 million and was comprised primarily of 
proceeds from term loans and revolving credit facilities of $89.0 
million and proceeds from the issuance of common stock under the 
Company's stock option and stock purchase programs of $5.3 million. This 
was partially offset by payments and maturities of term loans and 
revolving credit facilities of $79.9 million, and the investment of $5.5 
million in restricted certificates of deposit as collateral for certain 
lines of credit. 

At December 31, 1998, the Company had two domestic bank credit 
facilities: a $30 million line of credit permitting borrowings at the 
bank's reference rate or a formula Libor based rate and a $15 million 
line of credit permitting borrowings at the bank reference rate or a 
formula Libor based rate.  Borrowings under these lines at December 31, 
1998 were $25 million and $10 million, respectively. The Company was in 
violation of certain covenants with regard to the credit facilities at 
December 31, 1998. Further, the agreements for these lines of credit 
expire in May 1999 and January 1999, respectively. In January 1999, the 
Company closed a new $50 million domestic bank credit facility and the 
previous facilities were paid in full and closed. 

Additionally, the Company has credit facilities under foreign lines 
of credit. At December 31, 1998, the Company's Japanese subsidiary had a 
Japanese line of credit entitling it to borrow up to approximately   
$3.0 million.  The line of credit is collaterized by a stand-by letter 
of credit from the Company and accrues interest at the bank's variable 
rate. Borrowings were $2.7 million under this facility at December 31, 
1998.  At December 31, 1998, the Company's Spea subsidiary had a 5 
million DeustcheMark line of credit (approximately $3.0 million at 
December 31, 1998) with a German bank.  Additionally, the Company had a 
foreign line of credit of 10 million DeustcheMarks (approximately $6.0 
million at December 31, 1998). Of the $9.0 million available under these 
lines, $5.7 million was being used as of December 31, 1998. These 
agreements expired January 31, 1999. The bank has extended an open line 
of credit for a total of 10 million DeustcheMarks (approximately $6.0 
million at December 31, 1998). 

        The Company expects to spend approximately $15 million for capital 
equipment in 1999, including enhancements to the enterprise-wide 
business management, resource planning and decision support application 
implemented in 1998.

        The Company believes that its cash balances and available credit 
under existing bank lines will be sufficient to meet anticipated 
operating and investing requirements for the short term. There can be no 
assurance that additional capital beyond the amounts currently 
forecasted by the Company will not be required nor that any such 
required additional capital will be available on reasonable terms, if at 
all, at such time or times as required by the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 133, "Accounting for 
Derivative Investments and Hedging Activities" (SFAS 133) which 
establishes accounting and reporting standards requiring that every 
derivative instrument be recorded in the balance sheet as either an 
asset or liability measured at its fair value. The statement also 
requires that changes in the derivative's fair value be recognized 
currently in earnings unless specific hedge accounting criteria are met. 
SFAS 133 is effective for fiscal years beginning after June 15, 1999. 
The Company does not expect the adoption of SFAS 133 to have a material 
effect on the Company's consolidated financial statements. 

Year 2000 Compliance

Many existing computer systems and applications, as well as numerous 
embedded control devices, use only two digits to identify a year in the 
date field without considering the impact of the upcoming change in the 
century.  As a result, such systems, applications or control devices 
could fail or create erroneous results unless corrected so that they can 
process data related to the year 2000.  The Company relies on its 
systems, applications and devices in operating and monitoring all major 
aspects of its business, including financial systems (such as general 
ledger, accounts payable and payroll modules), customer services, 
infrastructure, embedded computer chips, networks and telecommunications 
equipment and end products.  The Company also relies, directly and 
indirectly, on external systems of business enterprises such as 
customers, suppliers, creditors, financial organizations, and of 
governmental entities, both domestic and international, for accurate 
exchange of data and movement of both components and products. The 
Company recently completed the first phase of a project to upgrade the 
computer hardware and software it uses to operate, monitor and manage 
its business on a day to day basis. At the end of the third quarter, the 
Company's operations were converted to this system on an integrated, 
world-wide basis. This effort was undertaken to significantly improve 
the tools and information available to manage the Company. These tools 
have the added benefit of managing data with dates beyond December 31, 
1999 as indicated by the vendors. The Company continues to test such 
capabilities as part of its post-implementation process. This testing is 
expected to be completed during the first half of 1999. The Company's 
current estimate is that the costs specifically associated with this 
testing and validation process will not have a material adverse effect 
on the result of operations or financial position of the Company in any 
given year. Despite the Company's efforts to address the year 2000 
impact on its internal systems, it is impossible to know with certainty 
the impact the year 2000 issue will have on the business and what 
additional expenses may be incurred. See "-Information Technology and 
Telecommunications Systems."

In addition, even if the internal systems of the Company are not 
materially affected by the year 2000 issue, the Company could be 
affected through disruption in the operation of the enterprises with 
which the Company interacts.  The Company is in the process of 
identifying significant external agents such as service providers, 
vendors, suppliers and customers and attempting to reasonably determine 
their ability to manage year 2000 issues.  

The total costs associated with year 2000 compliance is not expected 
to be material to the company's financial position. The most significant 
cost was averted by the Company's otherwise planned ERP installation. 
Ongoing compliance efforts including IT systems testing and the review 
of external agents will be carried out in the normal course of business. 

It is not possible for the Company to determine with certainty the 
impact of the year 2000 problem due to internal computer systems or 
external agents. The failure to correct a material year 2000 problem or 
to anticipate and mitigate a problem with an external agent could result 
in an interruption in or failure of normal business activities or 
operations. Such failures could materially and adversely affect the 
company's results of operations, liquidity and financial condition. 
Contingency plans will be developed if it appears the Company or its key 
external agents will not be year 2000 compliant, and such compliance is 
expected to have a material adverse impact on the Company's operations.


CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

In addition to other information in this Form 10-K, the following are 
important factors that should be considered carefully in evaluating the 
Company and its business.

Potential Fluctuations in Future Operating Results

The Company's operating results have fluctuated significantly in the 
past on a quarterly and an annual basis and are likely to continue to 
fluctuate significantly in the future depending on a number of factors. The 
accompanying sections explain in greater detail certain important factors 
that the Company has identified which may affect the future performance of 
the Company.  

The Company develops products in the highly competitive PC multimedia, 
and communications markets, including the graphics, video, sound, portable 
audio device, modem, system boards and home networking segments.  These 
products are very susceptible to product obsolescence and typically exhibit 
a high degree of volatility of shipment volumes over relatively short 
product life cycles.  The timing of introductions of new products in one 
calendar quarter as opposed to an adjacent quarter can materially affect 
the relative sales volumes in those quarters.  In addition, product 
releases by competitors and accompanying pricing actions can materially and 
adversely affect the Company's revenues and gross margins.

The Company sells its products to retail customers (mass merchandisers 
and large chains who sell products primarily off-the-shelf directly to end 
users), retail distribution customers (distributors which resell to smaller 
retail chains and other resellers), system integrators, OEM customers 
(customers which use the Company's products in conjunction with other 
products to produce complete computer systems for sales through both direct 
and indirect distribution channels to end users), and directly to end users 
via e-commerce.  Reliance on indirect channels of distribution means that 
the Company typically has little or no direct visibility into end user 
customer demand.  OEM customers tend to provide the Company with forecasts 
for product requirements, but actual order lead times remain less than 90 
days.  Retail and retail distribution customers typically do not forecast 
product requirements and order lead times are typically very short, as 
these customers tend to reorder for stock in quantities that approximate 
recent sales volumes.  Accordingly, this means that future operating 
results are dependent on continued sales to customers where the vast 
majority of the normal volume of orders are placed with the Company within 
the same calendar quarter as, and frequently within a few days of, the 
customer's requested date of shipment by the Company.

Because the lead times of firm orders are typically short, the Company 
does not have the ability to predict future operating results with any 
certainty. Therefore, sudden changes that are out of the control of the 
Company such as general economic conditions, the actions or inaction of 
competitors, customers, third-party vendors of operating system software 
and central processing unit hardware, and independent software application 
vendors can have and have had material adverse effects on the Company's 
performance.  

Other factors which may have a material adverse effect on the Company's 
future performance include the management of growth of the Company, rapid 
declines in the price of components used by the Company, latent defects 
that can exist in the Company's products, competition for the available 
supply of components, dependence on subcontract manufacturers, dependence 
on and development of adequate information technology systems, intellectual 
property rights and dependence on key personnel.

Each of these factors is discussed more thoroughly in the accompanying 
sections, and all of these sections should be read carefully together to 
evaluate the risks associated with the Company's Common Stock.  Due to 
these factors, it is likely that the operating results of the Company in 
some future quarter or quarters will fall below the expectations of 
securities analysts and investors.  In such an event, the trading price of 
the Company's Common Stock could be materially and adversely affected.

Revenue Volatility and Dependence on Orders Received and Shipped in a 
Quarter

The volume and timing of orders received during a quarter are difficult 
to forecast. Retail and retail distribution customers generally order 
without forecasts on an as-needed basis and, accordingly, the Company has 
historically operated with a relatively small backlog. Moreover, the 
Company has emphasized its ability to respond quickly to customer orders as 
part of its competitive strategy. This strategy, combined with current 
industry supply and demand conditions as well as the Company's emphasis on 
minimizing inventory levels, has resulted in customers placing orders with 
relatively short delivery schedules and increased demand on the Company to 
carry inventory for its customer base, particularly for large OEM 
customers. This has the effect of increasing short lead-time orders as a 
portion of the Company's business and reducing the Company's ability to 
accurately forecast net sales. Because retail and retail distribution 
customers' orders are more difficult to predict, there can be no assurance 
that the combination of these orders, OEM orders, and backlog in any 
quarter will be sufficient to achieve either sequential or year-over-year 
growth in net sales during that quarter. If the Company does not achieve a 
sufficient level of retail and retail distribution orders in a particular 
quarter, the Company's revenues and operating results would be materially 
adversely affected.

Also, at any time and with no advance notice, during periods of 
uncertainty in the personal computer industry's outlook for future demand 
or pricing, the Company's customers may choose to draw down their inventory 
levels thereby adversely impacting the Company's revenue during the period 
of adjustment. The second and third quarters of 1997 comprised such a 
period due to the transition from older slower speed modems and 2D graphics 
products to new higher speed modems and 3D graphics products. In the 
current transition of mainstream PC graphics subsystem architectures from 
2D graphics and the PCI bus to 3D graphics and the accelerated graphics 
port (AGP), which began in 1997 and continued through 1998, controller and 
memory chip selection and the timely introduction of new products were and 
will continue to be critical factors.  The Company was significantly 
affected by the PCI-to-AGP transition and the SGRAM-to-SDRAM memory 
transition in 1998, which resulted in significant pricing pressures on the 
Company's remaining PCI-based and SGRAM-based graphics inventory and by 
significant price protection claims associated with such price declines. 
Also, as is common in the personal computer industry, a disproportionate 
percentage of the Company's net sales in any quarter may be generated in 
the last month or weeks of a quarter. As a result, a shortfall in net sales 
in any quarter as compared to expectations may not be identifiable until at 
or near the end of the quarter.  In this regard, the Company's net sales 
for the second quarter of 1998 were lower than expected because of less 
than expected shipments of the Monster 3D II product at the end of that 
quarter due principally to sudden order cancellations during the final week 
of the quarter. In addition, from time to time, a significant portion of 
the Company's net sales may be derived from a limited number of customers, 
the loss of one or more of which could adversely impact operating results.

Notwithstanding the difficulty in forecasting future sales and the 
relatively small level of backlog at any given time, the Company generally 
must plan production, order components and undertake its development, sales 
and marketing activities and other commitments months in advance. 
Accordingly, any shortfall in net sales in a given quarter may materially 
impact the Company's operating results and cash balances in a magnified way 
due to the Company's inability to adjust expenses or inventory levels 
during the quarter to match the level of net sales for the quarter. Excess 
inventory could also result in cash flow difficulties as well as added 
costs of goods sold and expenses associated with inventory write-offs or 
sell-offs. Conversely, in its efforts to adjust inventory levels to a 
slower order rate, the Company may overcorrect its component purchases and 
inventory levels, thereby experiencing periodic shortages of inventory and 
delivery delays, and negatively impacting its net sales, market share and 
customer satisfaction levels in the current quarter or in future quarters. 
There can be no assurances that such an occurrence will not adversely 
impact the Company operating results.

Recently, the Company announced a shift to a short cycle inventory model 
in an effort to reduce price protection and inventory value deflation as a 
result of rapid downturns in customer orders, competitors' actions or 
industry price trends. This is expected to result in less inventory being 
carried in Company warehouses and by distribution customers.  Consequently, 
the Company may not be able to react quickly enough to sudden increases or 
shifts in demand for a given product with the result that revenue may 
suffer in relation to expectations or in relation to the market 
opportunity. 

Declining Selling Prices and Other Factors Affecting Gross Margins

The Company's markets are characterized by intense ongoing competition 
coupled with a past history, as well as a current trend, of declining 
average selling prices. A decline in selling prices may cause the net sales 
in a quarter to be lower than those of a preceding quarter or corresponding 
prior year's quarter even if more units were sold during such quarter than 
in the preceding or corresponding prior year's quarter. Accordingly, it is 
likely that the Company's average selling prices will decline, and that the 
Company's net sales and margins may decline in the future, from the levels 
experienced to date. (See also "-Short Product Life Cycles; Dependence on 
New Products") The Company's gross margins may also be adversely affected 
by shortages of, or higher prices for, key components for the Company's 
products, including its modems, 3D graphics accelerators, home networking 
adapters, Internet music players and 3D audio accelerators, some of which 
have been impacted from time-to-time by a scarcity in the supply of 
associated chipsets and other components.  The availability of new products 
is typically restricted in volume early in a product's life cycle and, 
should customers choose to wait for the new version of a product rather 
than to purchase the current version, the ability of the Company to procure 
sufficient volumes of such new products to meet higher customer demand is 
limited.  Such a failure to meet demand for new products may have a 
material adverse effect on the revenues and operating margins of the 
Company.

In addition, the Company's net sales, average selling prices and gross 
margins will be adversely affected if the market prices for certain 
components used or expected to be used by the Company, such as DRAM, SDRAM, 
SGRAM, RDRAM or flash memory, multimedia, communications, or networking 
controller chips or bundled third-party software applications decline more 
rapidly than the Company is able to process component inventory bought 
earlier at higher prices into finished products, book and ship the related 
orders, and move such products through third-party distribution channels, 
some of which may be price protected, to the final end-user customer. The 
Company experienced such declining prices and reduced margins in the second 
and third quarters of 1998 due to the effect of product transitions, 
including the PCI-to-AGP transition and the SGRAM-to-SDRAM memory 
transition, as well as the effect of an oversupply of SDRAM memory in the 
market.  Competition from products based on SDRAM memory, which has lower 
manufacturing costs than SGRAM-based products, resulted in sharply 
declining selling prices for SGRAM-based products.  This led to material 
charges for declining inventory values and price protection for channel 
inventory.  These charges had a material adverse effect on revenues, 
operating margins and operating results.  Conversely, an increase in the 
price of semiconductor components that are in scarce supply, such as high-
speed DRAMs, may adversely impact the Company's gross margin due to higher 
unit costs, and a decrease in the supply of such semiconductor components 
may adversely impact the Company's net sales due to lower unit shipments.

Seasonality

The Company believes that, due to industry seasonality, demand for its 
products is strongest during the fourth quarter of each year and is 
generally slower in the period from April through August. This seasonality 
may become more pronounced and material in the future to the extent that a 
greater proportion of the Company's sales consist of sales into the 
retail/mass merchant channel, that PCs become more consumer-oriented or 
entertainment-driven products, or that the Company's net revenue becomes 
increasingly based on entertainment-related products. Also, to the extent 
the Company is successful in expanding its European operations, it may 
experience relatively weak demand in third calendar quarters due to 
historically weak summer sales in Europe. 

Management of Growth

In recent years, the Company has experienced a significant expansion in 
the overall level of its business and the scope of its operations, 
including manufacturing, research and development, marketing, technical 
support, customer service, sales and logistics.  This expansion in scope 
has resulted in a need for significant investment in infrastructure, 
process development and information systems. This requirement includes, 
without limitation: securing adequate financial resources to successfully 
integrate and manage the growing businesses and acquired companies; 
retention of key employees; integration of management information, product 
data management, control, accounting, telecommunications and networking 
systems; establishment of a significant worldwide web and e-commerce 
presence; consolidation of geographically dispersed manufacturing and 
distribution facilities; coordination of suppliers; rationalization of 
distribution channels; establishment and documentation of business 
processes and procedures; and integration of various functions and groups 
of employees. Each of these requirements poses significant, material 
challenges. 

The Company completed a tender offer for Micronics Computers, Inc. 
during the second quarter of 1998.  In addition to managing the growing 
business of the Company and its previous acquisitions, the Company will be 
required to integrate and manage the business of Micronics with that of the 
Company.  Furthermore, Micronics is primarily a manufacturer of computer 
motherboards, a line of products that the Company has not previously 
offered for sale.  The Company faces significant challenges in terms of 
manufacturing, engineering, sales, marketing, and logistics with respect to 
integrating the products and business of Micronics with similar functions 
of the Company.  There can be no assurance that the Company will be able to 
successfully integrate the operations of Micronics.  If the Company fails 
to successfully integrate Micronics into the operations of the Company, 
there will likely be a material adverse impact on the operating results of 
the Company.  Even if the integration is successfully achieved, there can 
be no assurance that the cost of such integration will not materially and 
adversely affect the Company's operating results, or that the Company will 
be able to make a satisfactory return on such costs. 

In the fourth quarter of 1998, the Company commenced manufacturing and 
shipping its first finished consumer electronics product, Rio, a portable 
Internet music player.  Also during the fourth quarter of 1998, the Company 
commenced manufacturing and shipping the HomeFree line of wireless home 
networking products. The Company commenced manufacturing and shipping the 
HomeFree phoneline-based home networking products in January 1999. These 
products will pose new design, manufacturing and customer support issues to 
the Company and there can be no assurance that the Company can successfully 
meet these challenges, generate customer demand for such products or 
satisfy customer demand for the products. There can also be no assurance 
that the cost associated with of meeting such challenges and satisfying 
demand will not have a material adverse impact on the Company's operating 
results in future periods.

The Company's future operating results will depend in large measure on 
its success in implementing operating, manufacturing and financial 
procedures and controls, improving communication and coordination among the 
different operating functions, integrating certain functions such as sales, 
procurement and operations, strengthening management information and 
telecommunications systems, and continuing to hire additional qualified 
personnel in certain areas. Moreover, the Company has completed the first 
implementation phase of a new enterprise resource planning (ERP) system to 
better manage the increasing complexity of its international multi-product 
business. This system, along with subsequent planned implementation phases, 
also supports the Company's efforts to avert potential Year 2000 issues 
with its previous management information systems. There can be no assurance 
that the Company will be able to manage these activities and implement 
these additional systems, procedures and controls successfully, and any 
failure to do so could have a material adverse effect upon the Company's 
short-term and long-term operating results. 

Short Product Life Cycles; Dependence on New Products

The market for the Company's products is characterized by frequent new 
product introductions and rapid product obsolescence. These factors 
typically result in short product life cycles, frequently ranging from six 
to twelve months. The Company must develop and introduce new products in a 
timely manner that compete effectively on the basis of price and 
performance and that address customer requirements. To do this, the Company 
must continually monitor industry trends and make difficult choices 
regarding the selection of new technologies and features to incorporate 
into its new products, as well as the timing of the introduction of such 
new products, all of which may impair the orders for or the prices of the 
Company's existing products. The success of new product introductions 
depends on various factors, some of which are outside the Company's direct 
control.  Such factors may include: selection of new products; selection of 
controller or memory chip architectures; implementation of the appropriate 
standards or protocols; timely completion and introduction of new product 
designs; trade-offs between the time of first customer shipment and the 
optimization of software drivers and hardware for speed, stability and 
compatibility; development of supporting content by independent software 
application vendors; development and production of collateral product 
literature; prompt delivery to OEM accounts of prototypes; support of OEM 
prototypes; ability to rapidly ramp manufacturing volumes to meet customer 
demand in a timely fashion; and coordination of advertising, press 
relations, channel promotion and VAR evaluation programs with the 
availability of new products.  For example, selection of the appropriate 
standards and protocols will be a key factor in determining the future 
success of the Company's new home networking and Internet music player 
products.

In the transition of mainstream PC graphics subsystem architectures 
from 2D graphics and the PCI bus to 3D graphics and the accelerated 
graphics port (AGP), which began in 1997 and continued through 1998, 
controller and memory chip selection and the timely introduction of new 
products have been and will continue to be critical factors.  The Company 
saw the effects of the PCI-to-AGP graphics bus transition and the SGRAM-to-
SDRAM memory transition in the second and third quarters of 1998, which 
resulted in significant price reductions for the Company's PCI-based and 
SGRAM-based graphics inventory and the inventory of such products in the 
distribution channel.  As a result, the net sales and gross margins of the 
Company were materially and adversely affected by declining prices for the 
PCI-based and SGRAM-based products, and there were significant price 
protection claims associated with such price declines. In the transition 
from the proprietary K56flex and x2 protocols (56Kbps) to the international 
standard V.90 protocol (56Kbps), the chip selection to implement and deploy 
such standard and the industry alliances to generate revenue and market 
share have been critical factors. The Company currently faces similar 
standards-setting issues in the areas of home networking, broadband modems 
and Internet audio. There can be no assurance that the Company will select 
the proper chips, software and protocols to implement and support its 
efforts in developing new products or targeting new markets or that the 
Company will execute its strategies in a timely manner.

Each new product cycle presents new opportunities for current or 
prospective competitors of the Company to gain a product advantage or 
increase their market share. If the Company does not successfully introduce 
new products within a given product cycle, the Company's sales will be 
adversely affected for that cycle and possibly for subsequent cycles. Any 
such failure could also impair the Company's brand name and ability to 
command retail shelf space and OEM design wins in future periods. Moreover, 
because of the short product life cycles coupled with the long lead times 
for procuring many of the components used in the Company's products, the 
Company may not be able, in a timely manner, or at all, to reduce its 
component procurement commitments, software license commitments, production 
rates or inventory levels in response to unexpected delays in product 
launch, shortfalls in sales, technological obsolescence or declines in 
prices or, conversely, to increase production in response to unexpected 
increases in demand, particularly if such demand increases are in a new 
product or new technology area where component supply may be hard to 
secure. Therefore, changes in actual or expected demand could result in 
excess inventory, inventory write downs, price protection and gross margin 
compression or, conversely, in lost sales and revenue compression due to 
product or component unavailability. For example, the timing and speed of 
the PCI-to-AGP bus transition and the SGRAM-to-SDRAM memory transition led 
to an excess inventory of PCI and SGRAM-based products at the Company and 
in the distribution channel which in turn resulted in lower average selling 
prices, lower gross margins, end-of-life inventory write-offs, and higher 
price protection charges during the second and third quarters of 1998. 
Further, the falling demand for and excess supply of Monster 3D II and 
competitive 3D gaming products in the channel during the third quarter of 
1998 resulted in rapidly declining revenue and prices vis-a-vis the second 
quarter of 1998, and the resulting price protection for this class of 
product in the third quarter of 1998. The Company estimates and accrues for 
potential inventory write-offs and price protection charges.  There can be 
no assurance that these estimates and accruals will be sufficient in future 
periods, or that additional inventory write-offs and price protection 
charges will not be required.  The impact of these charges on the Company's 
operating results in the second, third and fourth quarters of 1998 were 
material and adverse.  Any similar occurrence in the future could have a 
material effect on operating results in such future operating periods.

New Operating Systems

The PC industry has been characterized by significant operating system 
changes, such as the introduction of Windows 95 in 1995 and Windows NT 4.0 
in 1996, and the introduction of significant new operating system 
components, such as Microsoft's Direct X and ActiveX for Windows 95. During 
the second quarter of 1998, Microsoft introduced Windows 98.  In 
anticipation of the release of Windows 98 a significant portion of new 
computer purchasers delayed purchase of a new system until after the 
release of Windows 98. The effects of this consumer resistance were 
compounded by the delay and uncertainty of the release due to legal 
challenges. Additionally, further purchases were delayed to ensure that the 
new operating system would be compatible with older applications and would 
operate at least as reliably as Windows 95.  The Company believes that this 
forward shift in time of a significant number of computer purchasers had an 
adverse impact on the revenues of the Company in the second quarter of 
1998.  

In addition, while new operating systems can provide new market 
opportunities, such as the growing market for graphical user interface 
(GUI) accelerators that occurred with the introduction of Windows 3.0 and 
the growth in the PC games market with the introduction of Windows 95, new 
operating systems and operating system components also place a significant 
research and development burden on the Company. New drivers, applications 
and user interfaces must be developed for new operating systems and 
operating system components in order to maintain net sales levels and 
customer satisfaction. Perhaps more significantly, such drivers, 
applications and interfaces customarily are ported to the recently shipped 
portion of the Company's installed base. This effort involves a substantial 
investment in software engineering, compatibility testing and customer 
technical support with only limited near-term incremental revenue return 
since these driver updates are usually provided via electronic distribution 
at no cost to the Company's installed customer base. In addition, the 
installation of this software may result in technical support calls, 
thereby generating expenses that do not have offsetting revenue. Moreover, 
during the introductory period of a major new operating system release such 
as Windows 95 or Windows 98, such installed base support may reduce the 
research and development and customer technical support resources available 
for launching new products. For example, after substantial investment in 
porting the Company's software, graphics accelerator and modem products to 
Windows 95, the Company was at year-end 1996 still developing for final 
release improved, accelerated Windows 95 drivers for the Viper Pro Video 
series of accelerator add-in cards. While this product line did not at that 
time represent a revenue opportunity for the Company, the Company 
nevertheless believed that it was important to make the significant 
software development investment represented by this effort in order to 
maintain relations with its installed customer base and its reputation for 
reliable on-going product support. Furthermore, new operating systems for 
which the Company prospectively develops driver support may not be 
successful, or the drivers themselves may not be successful or accepted by 
customers, and a reasonable financial return on the corollary research and 
development investment may never be achieved.

Dependence on Third Party Software Developers 

The Company's business strategy includes developing relationships with 
major independent software application vendors that serve the 3D graphics 
and 3D audio markets, including the 3D computer games market and the 
professional 3D graphics applications market.  The Company believes that 
the availability of a sufficient number of high quality, commercially 
successful entertainment 3D software titles will be a significant factor in 
the sale of multimedia hardware to the PC-based interactive 3D 
entertainment market.  The Company also believes that compelling 
professional 3D graphics applications developed for PCs or ported from 
traditional UNIX-based workstations, such as those supplied by Silicon 
Graphics, IBM and Sun Microsystems, to PCs based on advanced Intel 
microprocessors and the Microsoft NT operating system will be significant 
factors in the sale of 3D graphics hardware to the PC-based NT workstation 
market.  The Company depends on independent software application developers 
and publishers to create, produce and market software entertainment titles 
and professional graphics applications that will operate with the Company's 
3D products, such as the Viper and Fire GL series of graphics accelerators.  
Only a limited number of software developers are capable of creating high 
quality professional 3D and entertainment 3D software.  Competition for 
these resources is intense and is expected to increase.  There can be no 
assurance that the Company will be able to attract the number and quality 
of software developers and publishers necessary to develop a sufficient 
number of high quality, commercially successful software titles and 
applications that are compatible with the Company's 3D graphics and audio 
platforms.

Further, in the case of the Company's entertainment 3D products, there 
can be no assurance that third parties will publish a substantial number of 
entertainment 3D software titles or, if entertainment 3D software titles 
are available, that they will be of high quality or that they will achieve 
market acceptance.  The development and marketing of game titles that do 
not fully demonstrate the technical capabilities of the Company's 
entertainment 3D products could create the impression that the Company's 
products offer less compelling performance over competing 3D graphics 
accelerators or 3D games platforms, such as TV games consoles.  This may 
slow or stop any migration from the current widespread use of TV games 
consoles to the use of computer games on PCs, or the enhancement of PCs to 
operate such games.  Further, because the Company has no control over the 
content of the entertainment titles produced by software developers and 
publishers, the entertainment 3D software titles developed may represent 
only a limited number of game categories vis-a-vis those available for TV 
game consoles and are likely to be of varying quality.

Semiconductor or Software Defects

Product components may contain undetected errors or "bugs" when first 
supplied to the Company that, despite testing by the Company, are 
discovered only after certain of the Company's products have been installed 
and used by customers.  There can be no assurance that errors will not be 
found in the Company's products due to errors in such products' components, 
or that any such errors will not impair the market acceptance of these 
products or require significant product recalls.  Problems encountered by 
customers or product recalls could materially adversely affect the 
Company's business, financial condition and results of operations.  
Further, the Company continues to upgrade the firmware, software drivers 
and software utilities that are incorporated into or included with its 
hardware products.  The Company's software products, and its hardware 
products incorporating such software, are extremely complex due to a number 
of factors, including the products' advanced functionality, the diverse 
operating environments in which the products may be deployed, the rapid 
pace of technology development and change in the Company's target product 
categories, the need for interoperability, and the multiple versions of 
such products that must be supported for diverse operating platforms, 
languages and standards.  These products may contain undetected errors or 
failures when first introduced or as new versions are released.  The 
Company generally provides a five-year warranty for its products and, in 
general, the Company's return policies permit return for full credit within 
thirty days after receipt of products that do not meet product 
specifications.  There can be no assurance that, despite testing by the 
Company, by its suppliers and by current or potential customers, errors 
will not be found in new products after commencement of commercial 
shipments, resulting in loss of or delay in market acceptance or product 
acceptance or in warranty returns.  Such loss or delay would likely have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  

Additionally, new versions or upgrades to operating systems, 
independent software vendor titles or applications may require upgrades to 
the Company's software products to maintain compatibility with such new 
versions or upgrades.  There can be no assurance that the Company will be 
successful in developing new versions or enhancements to its software or 
that the Company will not experience delays in the upgrade of its software 
products.  In the event that the Company experiences delays or is unable to 
maintain compatibility with operating systems and independent software 
vendor titles or applications, the Company's business, financial condition 
and results of operations could be materially adversely affected.

Market Anticipation of New Products, New Technologies or Lower Prices

Since the environment in which the Company operates is characterized by 
rapid new product and technology introductions and generally declining 
prices for existing products, the Company's customers may from time to time 
postpone purchases in anticipation of such new product introductions or 
lower prices. If such anticipated changes are viewed as significant by the 
market, such as the introduction of a new operating system or 
microprocessor architecture, then this may have the effect of temporarily 
slowing overall market demand and negatively impacting the Company's 
operating results. For example, the substantial pre-release publicity 
surrounding the release of Windows 95 may have contributed to a slowing of 
the consumer PC market in the summer of 1995. Moreover, a similar reaction 
occurred in the modem market as a result of the announcements of modems 
based on 56 Kbps technology, which became available in 1997, and in the 
overall PC market in anticipation of Intel Corporation's transition to MMX-
based microprocessors during 1997.  Additionally, the substantial publicity 
by Intel Corporation for its MMX technology may have confused and slowed 
the market for add-in multimedia accelerators, such as those sold by the 
Company, during the first half of 1997.  Similarly, Microsoft's launch of 
Windows 98 combined with the uncertainties surrounding such a launch was a 
factor in slower PC sales in the second quarter of 1998.  These effects may 
continue into future periods for these or similar events. Other new product 
releases that may influence future market growth or the timing of such 
growth include Intel's release of its Pentium III CPU and the associated 
chipsets supporting the 2x AGP and 4x AGP architectures, Intel's release of 
its "Merced" workstation CPU, and the anticipated release of Microsoft's 
Windows 2000. Further, slippage in the actual volume shipment of such new 
products could have the effect of prolonging any market slowdown due to the 
anticipation of the new products.

The potential negative impact on the Company's operating results as a 
result of customer decisions to postpone purchases in favor of new and 
"publicized" technologies, including the Company's own new technologies, 
can be further magnified if products or components based on such new 
technology are not available in a timely manner or in sufficient supply to 
meet the demand caused by the market's shift to the new technology from an 
older technology. For example, the Company believes that the PC market may 
have slowed in early 1997 in part as customers waited for the availability 
of Intel's new MMX-enabled Pentium CPUs.  Further, the Company's operating 
results could be adversely affected if the Company makes poor selections of 
chip architectures or chip suppliers to pursue 3D graphics, AGP or 56Kbps 
modem market opportunities and, as a result, is unable to achieve market 
acceptance of its new products or is unable to secure a sufficient supply 
of such components.

If the Company or any of its competitors were to announce a product that 
the market viewed as having more desirable features or pricing than the 
Company's existing products, demand for the Company's existing products 
could be curtailed, even though the new product is not yet available. For 
example, in the second quarter of 1998, the Company's next-generation 
SDRAM-based graphics accelerators had a memory cost component roughly half 
that of SGRAM-based graphics accelerators.  Market anticipation of new 
product releases such as these, as well as similar competitive releases, 
reduced demand for the Company's SGRAM based graphics products and 
materially and adversely affected the Company's operating results for the 
second and third quarters of 1998. Similar results may occur during the 
second quarter of 1999 as the market anticipates new 32-megabyte graphics 
accelerators. Similarly, if the Company's customers anticipate that the 
Company may reduce its prices in the near term, they might postpone their 
purchases until such price reductions are effected, reducing the Company's 
near-term shipments and revenue.  In general, market anticipation of new 
products, new technologies or lower prices, although potentially positive 
in the longer term, can negatively impact the Company's operating results 
in the short term. This factor constitutes an exceptionally difficult-to-
manage characteristic of the Company's graphics business due to the rapid 
six-month product cycles that typify the current 3D graphics market. 

Component Shortages; Reliance on Sole or Limited Source Suppliers

The Company is dependent on sole or limited source suppliers for certain 
key components used in its products, particularly chipsets and software 
that provide graphics, digital video, DVD, television (TV), sound or other 
multimedia functions, random access memory (including DRAM, RDRAM, SDRAM, 
SGRAM and flash) chips, and speakerphone/modem and softmodem chipsets and 
algorithms. Although the price and availability of many semiconductor 
components improved during 1997 and 1998, these components are periodically 
in short supply and on allocation by semiconductor manufacturers. For 
example, it is expected that the Company may experience constraints in the 
supply of high-performance SGRAMs, SDRAMs and flash memory and new 
technology, high-performance 3D graphics chips for the foreseeable future.  
There can be no assurances that the Company can obtain adequate supplies of 
such components, or that such shortages or the costs of these components 
will not adversely affect future operating results.  The Company's 
dependence on sole or limited source suppliers, and the risks associated 
with any delay or shortfall in supply, can be exacerbated by the short life 
cycles that characterize multimedia and communications ASIC chipsets and 
the Company's products in general. Although the Company maintains ongoing 
efforts to obtain required supplies of components, including working 
closely with vendors and periodically qualifying alternative components for 
inclusion in the Company's products, component shortages continue to exist 
from time to time, and there can be no assurances that the Company can 
continue to obtain adequate supplies or obtain such supplies at their 
historical or competitive cost levels. Further, the Company has as an 
objective to reduce the number of chip architecture suppliers with which it 
works, potentially raising "single-source" supply risks. Conversely, in its 
attempt to counter actual or perceived component shortages, the Company may 
over-purchase certain components or pay unnecessary expediting or other 
surcharges, resulting in excess inventory or inventory at higher than 
normal costs and reducing the Company's liquidity, or in the event of 
unexpected inventory obsolescence or a decline in the market value of such 
inventory, causing inventory write-offs or sell-offs that adversely affect 
the Company's gross margin and profitability.  Such a condition existed in 
the first quarter of 1998, and the Company's perception of component 
shortages caused the Company to over purchase components and pay surcharges 
for components that subsequently declined in value in the second, third and 
fourth quarters of 1998.  In addition, such inventory sell-offs by the 
Company or its competitors could trigger channel price protection charges, 
further reducing the Company's gross margins and profitability, such as 
occurred with the Monster 3D II product line in the third and fourth 
quarters of 1998.

As noted above, supply and demand conditions for semiconductor 
components are unpredictable and may change from time to time. During 
periods of oversupply, prices are likely to fall and certain vendors of 
such semiconductor chips may liquidate their inventories in a rapid manner. 
If such semiconductor vendors are suppliers to the Company's competitors, 
then such actions could enable competitors of the Company to enjoy a cost 
advantage vis-a-vis the Company, and any resulting price reduction for such 
competitors' products could force the Company to reduce its prices, thereby 
depressing the Company's net sales and gross margins in one or more 
operating periods. 

During periods of component oversupply and associated price deflation, 
customers of the Company, particularly those comprising channels that do 
not receive price protection from the Company, may seek to draw down the 
inventory that they hold since such inventory likely would bear a price 
deflation risk. As a consequence, the Company may see its orders, unit 
shipments or average selling prices depressed from time to time during such 
price-deflation and inventory-reduction periods. This occurred during the 
second and third quarters of 1998, which adversely affected net sales and 
gross margin during such periods, and this may occur again in future 
periods. 

When the PC or PC peripherals markets emerge from a period of 
oversupply, such as that experienced in the second quarters of 1997 and 
1998, certain manufacturers, distributors and resellers may be unprepared 
for a possible rapid increase in market demand. Accordingly, the Company 
may not have sufficient inventory, scheduled component purchase orders or 
available manufacturing capacity to meet any rapid increase in market 
demand, thereby missing orders and revenue opportunities, causing customer 
dissatisfaction and losing market share. The Company experienced such a 
situation in the second half of 1997 and in the second half of 1998 as the 
Company experienced a shortage of various components, restricting the 
Company's ability to manufacture certain products in sufficient quantities 
or in a linear fashion to meet market demand. In addition, the Company 
believes that in the near term the Company will continue to be subjected to 
restricted supply and increasing prices on certain semiconductor components 
including newly introduced graphics controllers and random access memories.  
The inability of the Company to obtain product components at their 
historical or planned cost levels, resulting in the Company being forced to 
pay higher prices to achieve timely delivery, would directly affect the 
cost of the Company's products and could materially and adversely affect 
the Company's gross margin.  There can be no assurance that the Company 
will be able to obtain adequate supplies of components or that such 
shortages or the costs of these components will not adversely impact the 
Company's future operating results.  Conversely, there can be no assurance 
that the Company will not see the value of its inventory depreciate if 
components in a shortage condition emerge from that condition and 
experience a significant oversupply condition.  For example, this situation 
occurred during the second and third quarters of 1998 with certain graphics 
chips that support only SGRAM memory, and in the third and fourth quarters 
of 1998 with components associated with the Company's Monster 3D II product 
line.

Dependence on Subcontractors

The Company relies on independent surface mount technology ("SMT") 
subcontractors to manufacture, assemble or test the Company's board level 
products, as well as its first "finished" consumer electronics product, 
Rio, an Internet music player.  The Company typically procures its 
components, assembly and test services and assembled products through 
purchase orders and does not have specific volume purchase agreements with 
each of its subcontractors.  Most of the Company's subcontractors could 
cease supplying the services, products or components at any time with 
limited or no penalty.  In the event that it becomes necessary for the 
Company to replace a key subcontractor, the Company could incur significant 
manufacturing set-up costs and delays.  There can be no assurance that the 
Company would be able to find suitable replacement subcontractors.  The 
Company's emphasis on maintaining low internal and channel inventory levels 
may exacerbate the effects of any shortage that may result from the use of 
sole-source subcontractors during periods of tight supply or rapid order 
growth.  The Company's ability to respond to greater than anticipated 
market demand may be constrained by the availability of SMT or finished 
product subcontracting services.  Further, various of the Company's 
subcontractors are located in international locations that, while offering 
low labor costs, may present heightened process control, quality control, 
political, infrastructure, transportation, tariff, regulatory, legal, 
import, export, economic or supply chain management risks.

Dependence on Graphics and Multimedia Accelerator Market

Sales of graphics and video accelerator subsystems accounted for greater 
than 77% and 75% of the Company's net sales in 1998 and 1997, respectively.  
Although the Company has introduced audio subsystems, has entered the PC 
modem and home networking markets, and has entered into the PC consumer 
electronics market with its Rio Internet music player, graphics and video 
accelerator subsystems are expected to continue to account for a majority 
of the Company's sales for the foreseeable future. A decline in demand or 
average selling prices for graphics and video accelerator subsystems, 
whether as a result of new competitive product introductions, price 
competition, excess supply, widespread cost reduction, technological 
change, incorporation of the products' functionality onto personal computer 
motherboards or otherwise, would have a material adverse effect on the 
Company's sales and operating results.

Migration to Personal Computer Motherboards

The Company's graphics and multimedia accelerator subsystems are 
individual products that function within personal computers to provide 
additional multimedia functionality. Historically, as a given functionality 
becomes technologically stable and widely accepted by personal computer 
users, the cost of providing such functionality is typically reduced by 
means of large scale integration into semiconductor chips, which can be 
subsequently incorporated onto personal computer motherboards. While the 
Company expects that such migration will not occur in a substantial way 
with 3D graphics or Intel's accelerated graphics port (AGP) in the near 
term due to the new, rapidly changing technologies in these areas, the 
Company recognizes that such migration could occur with respect to the 
functionality provided by some of the Company's current products, and with 
3D graphics and the AGP bus over the longer term. While the Company 
believes that a market will continue to exist for add-in subsystems that 
provide advanced or multiple functions and offer flexibility in systems and 
connectivity configuration, such as 3D graphics, 3D audio, and 
communications, there can be no assurance that the incorporation of new 
multimedia functions onto personal computer motherboards or into CPU 
microprocessors, such as under Intel's MMX, Whitney or AGP technologies, 
will not adversely affect the future market for the Company's products.  In 
large part, the continuation of a robust market for add-in graphics and 
video subsystems may depend on the timing and market acceptance of 3D 
graphics and digital video acceleration. This, in turn, may depend on the 
availability of compelling 3D and digital video content, including games 
and entertainment, broadcast digital video, PC videophones, desktop video 
conferencing, and digital video, audio and 3D VRML graphics on the 
Internet.   Similarly, the robustness of the communications market may 
depend largely on the widespread adoption of digital subscriber line (xDSL) 
and cable modem technologies in both client-side modems attached to the PC 
and server-side modems provided by Internet Service Providers and telephone 
network central offices, and the emergence of a robust, growing home 
networking market. The timing of major xDSL, cable modem and home 
networking technology introductions, and the market acceptance of these new 
technologies and standards, are largely out of the control of the Company. 

The Company believes that a large portion of the growth in the sales of 
personal computers may be in sealed systems which contain most 
functionality on a single systems board and are not able to be upgraded in 
the manner most current personal computers can be upgraded.  These sealed 
computers would contain a systems board that could include CPU, system 
memory, graphics, audio, and connectivity functionality on a single board.  
The Company recently acquired Micronics for the purpose of obtaining 
technical and marketing expertise and brand acceptance in CPU motherboard 
design and to develop integrated multimedia system board products.  
However, there can be no assurance that a significant market will exist for 
low-cost fixed system boards or that the acquisition of Micronics will 
enable the Company to successfully compete in such an emerging market or in 
the current motherboard market.

Risks Associated with Industry Consolidation

The Company pursues a strategy of "silicon agility" which entails 
continuous evaluation of outside sources of graphics, modem, home 
networking, and audio chipsets.  This strategy depends on a number of 
competitive suppliers of each of these products in order to ensure that the 
Company is offering leading edge technology in each product line at prices 
with which the Company can compete with competitors who design their own 
chipsets.  In the recent past there have been instances of chipset 
suppliers acquiring their own add-in card manufacturing, marketing and 
distribution (for example, Evans & Sutherland Corp's purchase of Accel 
Graphics, 3Dfx's purchase of STB Systems, or the 3Dlabs Inc. acquisition of 
Dynamic Pictures Inc.).  While these acquisitions in and of themselves are 
not material to the operations of the Company, vertical integration 
acquisitions restrict the choices of chipset suppliers available to the 
Company and thereby may reduce the likelihood that the Company will have 
access to leading edge technology at prices which allow the Company to 
compete with vertically integrated competitors such as ATI Technologies 
Inc., Matrox Graphics Inc., 3Com Corporation, and Creative Technologies, 
Inc.

Competition

The market for the Company's products is highly competitive. The Company 
competes directly against a large number of suppliers of multimedia and 
connectivity products for the PC such as Matrox Graphics Inc., 3Dfx, 
Creative Technologies Inc., 3COM Corporation, and ATI Technologies Inc., 
and indirectly against PC systems OEMs to the extent that they manufacture 
their own add-in subsystems or incorporate on PC motherboards the 
functionality provided by the Company's products. In certain markets where 
the Company is a relatively new entrant, such as modems, home networking, 
sound cards, and consumer electronics Internet music players, the Company 
may face dominant competitors including 3Com (home networking and modems), 
Creative Technologies, Inc. (sound cards, modems and Internet music 
players) and Sony Corp. (consumer electronic music players). In addition, 
the Company's markets are expected to become increasingly competitive as 
multimedia functions continue to converge and companies that previously 
supplied products providing distinct functions (for example, companies 
today primarily in the sound, modem, CPU or motherboard markets) emerge as 
competitors across broader or more integrated product categories.

In addition, manufacturers of chipsets or other components used in the 
Company's products could become future competitors of the Company to the 
extent that such manufacturers elect to integrate forward into the add-in 
subsystem or value-added software market (for example, the acquisition of 
STB Systems by 3Dfx), or as multimedia chipset manufacturers provide 
increasingly higher quality and more sophisticated software to their 
chipset customers, including subsystem suppliers competitive to the 
Company. Also, certain of the Company's current and potential competitors 
have significantly greater market presence, name recognition and financial 
and technical resources relative to the Company, and many have long-
standing market positions and established brand names in their respective 
markets. In addition, certain of the Company's current and potential 
competitors also have a competitive cost advantage as a result of being 
located in areas that impose significantly lower taxes than the United 
States or offer a substantially lower cost of labor or provide governmental 
subsidies, such as research and development and training funds. Many of the 
Company's current and potential competitors also design and manufacture 
their own graphics, video, sound, modem, home networking, or other 
multimedia and connectivity processing chipsets. While the Company believes 
that its semiconductor vendor flexibility enables it to select, within 
certain limits, from among the most advanced and price competitive chipsets 
available on the open market, the captive semiconductor operations of 
certain of the Company's current and potential competitors could provide 
them with significant advantages, including greater control over 
semiconductor architecture and technology, component design, component 
performance, systems and software design, time to market, availability and 
cost.

The Company also believes that the strategy of certain of its current 
and potential competitors is to compete largely on the basis of price, 
which may result in lower prices and lower margins for the Company's 
products or otherwise adversely affect the market for the Company's 
products. To the extent that semiconductor availability is relatively 
robust and software drivers and reference hardware designs from multimedia 
chipset manufacturers are of high quality and sophistication, then 
competitors who sell such reference designs and compete largely on price 
with little value-added engineering may have a competitive cost or expense 
advantage relative to the Company.  There can be no assurance that the 
Company will be able to continue to compete successfully in its current and 
future markets, or will be able to compete successfully against current and 
new competitors, as the Company's technology, markets and products continue 
to evolve.

Distribution Risks

The Company sells its products through a network of domestic and 
international distributors, and directly to major retailers/mass merchants, 
VARs and OEM customers. The Company's future success is dependent on the 
continued viability and financial stability of its customer base. The 
computer distribution and retail channels historically have been 
characterized by rapid change, including periods of widespread financial 
difficulties and consolidation and the emergence of alternative sales 
channels, such as direct mail order, telephone sales by PC manufacturers 
and electronic commerce on the worldwide web. The loss of, or reduction in, 
sales to certain of the Company's key customers as a result of changing 
market conditions, competition, or customer credit problems could have a 
material adverse effect on the Company's operating results. Likewise, 
changes in distribution channel patterns, such as increased commerce on the 
Internet, increased use of mail-order catalogues, increased use of 
consumer-electronics channels for personal computer sales, or increased use 
of channel assembly to configure PC systems to fit customers' requirements 
could affect the Company in ways not yet known. For example, the rapid 
emergence of Internet-based e-commerce is putting substantial strain on 
some of the Company's traditional channels. Moreover, additions to or 
changes in the types of products the Company sells, such as the 
introduction of professional-grade products or the migration toward more 
communications-centric products, such as home networking, may require 
specialized value-added reseller channels, relations with which the Company 
has only begun to establish.

Inventory levels of the Company's products in the two-tier distribution 
channels used by the Company ("Channel Inventory Levels") generally are 
maintained in a range of one to two months of customer demand.  Channel 
Inventory Levels tend toward the low end of the months-of-supply range when 
demand is stronger, sales are higher and products are in short supply.  
Conversely, when demand is slower, sales are lower and products are 
abundant, then Channel Inventory Levels tend toward the high end of the 
months-of-supply range.  Frequently, in such situations, the Company 
attempts to ensure that distributors devote their working capital, sales 
and logistics resources to the Company's products to a greater degree than 
to those of competitors.  Similarly, the Company's competitors attempt to 
ensure that their own products are receiving a disproportionately higher 
share of the distributors' working capital and logistics resources. In an 
environment of slower demand and abundant supply of products, price 
declines are more likely to occur and, should they occur, are more likely 
to be severe. Further, in such an event, high Channel Inventory Levels may 
result in substantial price protection charges. Such price protection 
charges have the effect of reducing net sales and gross profit. 
Consequently, the Company, in taking steps to bring its Channel Inventory 
Levels down to a more desirable level, may cause a shortfall in net sales 
during one or more accounting periods. This was the case in the third 
quarter of 1998 as the company reduced channel inventory levels as part of 
its new short-cycle inventory model. While this is expected to reduce the 
Company's exposure to future charges for price protection and excess 
inventory, it materially and adversely affected revenues for the third and 
fourth quarters. Such efforts to reduce channel inventory might also result 
in price protection charges if prices are decreased to move product out to 
final consumers, having an adverse impact on operating results. While the 
Company believes that its Channel Inventory Levels for many of its products 
are appropriate at this time, there are certain products which have a 
Channel Inventory Level that is higher than desirable. The Company accrues 
for potential price protection charges on unsold channel inventory.  
However, there can be no assurance that any estimates, reserves or accruals 
will be sufficient or that any future price reductions will not have a 
material adverse effect on operating results. 

Product Returns; Price Protection

The Company frequently grants limited rights to customers to return 
certain unsold inventories of the Company's products in exchange for new 
purchases ("Stock Rotation"), as well as price protection on unsold 
inventory. Moreover, certain of the Company's retail customers will readily 
accept returned products from their own retail customers, and these 
returned products are, in turn, returned to the Company for credit. The 
Company estimates returns and potential price protection on unsold channel 
inventory. The Company accrues reserves for estimated returns, including 
warranty returns, and price protection, and since the fourth quarter of 
1998, reserves the gross margin associated with channel inventory levels 
that exceed four weeks of demand. The Company experienced significant price 
protection charges due to the transition from PCI to AGP-based graphics 
accelerators and from SGRAM to SDRAM-based graphics accelerators during the 
second, third and fourth quarters of 1998. Moreover, the Company 
experienced significant price and revenue erosion and associated price 
protection on its Monster 3D II product line in the third and fourth 
quarter of 1998 as demand for that class of product declined, and market 
prices also declined significantly.  The Company may be faced with further 
significant price protection charges as the Company and its competitors 
move to reduce channel inventory levels of current products, such as the 
Viper V550, as new product introductions are made.  However, there can be 
no assurance that any estimates, reserves or accruals will be sufficient or 
that any future returns or price reductions will not have a material 
adverse effect on operating results, including through the mechanisms of 
Stock Rotation or price protection, particularly in light of the rapid 
product obsolescence which often occurs during product transitions. The 
short product life cycles of the Company's products, the evolving markets 
for new multimedia and connectivity technologies such as cable or xDSL 
modems and 3D graphics technologies, and the difficulty in predicting 
future sales through the distribution channels to the final end customer 
all increase the risk that new product introductions, price reductions by 
the Company or its competitors, or other factors affecting the personal 
computer and add-in subsystems industry could result in significant and 
unforeseen product returns, with such returns creating a material adverse 
effect on the Company's financial performance.  In addition, there can be 
no assurance that new product introductions by competitors or other market 
factors, such as the integration of graphics and video acceleration or 
connectivity by OEMs onto system motherboards, will not require the Company 
to reduce prices in a manner or at a time that gives rise to significant 
price protection charges and has a material adverse impact upon the 
Company's gross margins.  

Furthermore, the markets that the Company serves include end users that 
buy from computer retail and consumer electronics mass merchant outlets to 
upgrade their existing PCs.  Such customers frequently decide to return 
products to the retail outlets from which they earlier purchased the 
product.  Such returns are made for a variety of reasons, including the 
customer changing his or her mind regarding his or her purchase decision, 
the customer having difficulty with the installation or use of the product, 
the product not offering the features, functions, or performance that the 
customer expected or the customer experiencing incompatibilities between 
the product and his or her existing PC hardware or software.  Since many of 
the products that the Company sells incorporate advanced computer 
technology, the Company expects that end-user customer returns, including 
warranty returns, will be a continuing negative attribute of supplying to 
the PC installed-base upgrade market.  There can be no assurance that the 
Company will be able to achieve gross margins in the PC installed-base 
upgrade market that will be high enough to offset the expenses of end-user 
customer returns and still generate an acceptable return on sales to the 
Company.

OEM Customer Risks

The Company currently has a limited number of OEM customers. While the 
Company is seeking to increase its sales to OEMs, certain OEMs maintain 
internal add-in subsystem design and manufacturing capabilities or have 
long-standing relationships with competitors of the Company, and there can 
be no assurance that the Company will be successful in its efforts to 
increase its OEM sales. Moreover, developing supplier relationships with 
major PC systems OEMs and installing the processes, procedures and controls 
required by such OEMs can be an expensive and time-consuming process, and 
there can be no assurance that the Company will achieve an acceptable 
financial return on this investment. Further, to the extent that PC systems 
OEMs selection criteria are weighted toward multimedia subsystem suppliers 
that have their own captive SMT manufacturing operations, then the 
Company's sole reliance on outside SMT subcontract manufacturers may be a 
negative factor in winning such PC systems suppliers' OEM contracts.

It is expected that OEM revenue will carry a lower gross margin 
percentage compared to sales to other channels due to perceived lower 
expenses to support such OEM revenue and the buying power exercised by 
large OEMs. Furthermore, many large OEMs require that distribution hubs be 
established local to their factories to supply such factories on very short 
notice. Such hubs represent a cash drain on the Company to support the 
required inventory, and a product obsolescence and inventory write-off risk 
as the price of such inventory may decline or reach the end of its useful 
life or the design-in life at the OEM before such inventory, which may be 
specific to a certain OEM, is completely consumed.   The Company's 
contractual relationships with Dell, Micron and Compaq regarding such hubs 
may represent such product obsolescence and inventory write-off risks.

The Company's products are priced for and generally aimed at the higher 
performance and higher quality segment of the market. Therefore, to the 
extent that OEMs focus on low-cost solutions rather than high-performance 
solutions, an increase in the proportion of the Company's sales to OEMs may 
result in an increase in the proportion of the Company's revenue that is 
generated by lower-selling-price and lower-gross-margin products, 
particularly with respect to the Company's audio and modem products, which 
could adversely affect future gross margins and operating results of the 
Company. 

Rapid Technological Change

The markets for the Company's products are characterized by rapidly 
changing technology, evolving industry standards, frequent new product 
introductions and rapid product obsolescence. For example, 3D technology is 
evolving rapidly in the graphics and audio markets, memory architectures 
and speeds are changing rapidly, and DVD and MPEG-2 decryption techniques 
and navigation technologies are still being refined and moving from 
hardware-centric to software-centric implementations. Product life cycles 
in the Company's markets frequently range from six to twelve months. The 
Company's success will be substantially dependent upon its ability to 
continue to develop and introduce competitive products and technologies on 
a timely basis with features and functions that meet changing customer 
requirements in a cost-effective manner. Further, if the Company is 
successful in the development and market introduction of new products, it 
must still correctly forecast customer demand for such new products so as 
to avoid either excessive unsold inventory or excessive unfilled orders 
related to the products. The task of forecasting such customer demand is 
unusually difficult for new products, for which there is little sales 
history, and for indirect channels, where the Company's customers are not 
the final end customers. Moreover, whenever the Company launches new 
products, it must also successfully manage the corollary obsolescence and 
price erosion of those of its older products that are impacted by such new 
products, as well as any resulting price protection charges and Stock 
Rotations from its distribution channels.  During the second quarter of 
1998, the Company experienced large price protection charges with respect 
to the decline in average selling prices of graphics accelerators due to 
the SGRAM to SDRAM transition of mainstream graphics accelerators and other 
competitive pressures.  Due to the much lower cost of SDRAM solutions SGRAM 
prices fell in competition thereby lowering manufacturing costs of graphics 
accelerators.  The Company, forced to meet the pricing actions of its 
competitors, lowered prices, triggering larger than normal or expected 
price protection and eroding the value of some of the Company's on hand 
inventory.  A similar phenomenon occurred in the third and fourth quarters 
of 1998 relative to the Company's Monster 3D II product line.

Risks of International Sales

The Company's international sales are subject to a number of risks 
generally associated with international business operations, including the 
effect on demand for the Company's products in international markets as a 
result of a strengthening or weakening U.S. dollar, the effect of currency 
fluctuations on consolidated multinational financial results, any state-
imposed restrictions on the repatriation of funds, any import and export 
duties and restrictions, certain international economic conditions, the 
expenses, time and technical resources required to localize the Company's 
various products and to support local languages, the logistical 
difficulties of managing multinational operations and dispersed product 
inventory designed or manufactured to meet specific countries' 
requirements, and the delays and expenses associated with homologating the 
Company's telecommunications products and securing the necessary 
governmental approvals for shipment to various countries.  

The Company's international sales can also be affected if inventory sold 
by the Company to its international distributors and OEMs and held by them 
or their customers does not sell through to final end customers, which may 
impact international distributor or OEM orders in the succeeding periods. 
The Company believes that it generally has less information with respect to 
the inventory levels held by its international OEMs and distributors as 
compared to their domestic counterparts, and that the supply chain to such 
international customers is longer, and that therefore the Company generally 
has less visibility on how this held inventory might affect future orders 
to and sales by the Company.  In the event that international OEMs or 
distributors change their desired inventory levels, there can be no 
assurance that the Company's net sales to such customers will not decline 
at such time or in future periods, or that the Company will not incur price 
protection charges with respect to such customers.

During the first three quarters of 1998, sales in Asia and Southeast 
Asia were below expected levels.  The lack of sales in the Asian market 
were primarily related to the lack of credit facilities available to 
customers in those markets for the Company's products and other products 
necessary for those customers to sell complete products. While Asian 
markets have begun to recover, the Company expects continued volatility and 
sluggishness in sales to Asia and Southeast Asia during 1999 as well as 
very slow sales to Latin America for the foreseeable future.

Information Technology and Telecommunications Systems

The Company is currently making significant investments in establishing 
systems, processes and procedures to more efficiently and effectively 
manage its worldwide business and enable communications and data sharing 
among its employees and various business units. This effort comprises a 
significant investment of expense and capital funds, as well as a drain on 
management resources, for the installation of information technology 
("IT"), network and telecommunications equipment and IT applications. As 
part of this program to install IT systems throughout the Company, 
management has begun installation of an enhanced enterprise-wide business 
management, resource planning and decision support application. Further, in 
order to more effectively manage the Company's business and avert Year 2000 
issues, the Company is implementing this new ERP application and the 
associated processes and procedures and installing the associated IT 
equipment in order for it to be fully operational no later than by the 
middle of 1999. Such an effort is expected to comprise a further 
substantial investment of expenses and management resources by the Company.

Year 2000 Compliance

Many existing computer systems and applications, as well as numerous 
embedded control devices, use only two digits to identify a year in the 
date field without considering the impact of the upcoming change in the 
century.  As a result, such systems, applications or control devices 
could fail or create erroneous results unless corrected so that they can 
process data related to the year 2000.  The Company relies on its 
systems, applications and devices in operating and monitoring all major 
aspects of its business, including financial systems (such as general 
ledger, accounts payable and payroll modules), customer services, 
infrastructure, embedded computer chips, networks and telecommunications 
equipment and end products.  The Company also relies, directly and 
indirectly, on external systems of business enterprises such as 
customers, suppliers, creditors, financial organizations, and of 
governmental entities, both domestic and international, for accurate 
exchange of data and movement of both components and products. The 
Company recently completed the first phase of a project to upgrade the 
computer hardware and software it uses to operate, monitor and manage 
its business on a day to day basis. At the end of the third quarter, the 
Company's operations were converted to this system on an integrated, 
world-wide basis. This effort was undertaken to significantly improve 
the tools and information available to manage the Company. These tools 
have the added benefit of managing data with dates beyond December 31, 
1999 as indicated by the vendors. The Company continues to test such 
capabilities as part of its post-implementation process. This testing is 
expected to be completed during the first half of 1999. The Company's 
current estimate is that the costs specifically associated with this 
testing and validation process will not have a material adverse effect 
on the result of operations or financial position of the Company in any 
given year. Despite the Company's efforts to address the year 2000 
impact on its internal systems, it is impossible to know with certainty 
the impact the year 2000 issue will have on the business and what 
additional expenses may be incurred. See "-Information Technology and 
Telecommunications Systems."

In addition, even if the internal systems of the Company are not 
materially affected by the year 2000 issue, the Company could be 
affected through disruption in the operation of the enterprises with 
which the Company interacts.  The Company is in the process of 
identifying significant external agents such as service providers, 
vendors, suppliers and customers and attempting to reasonably determine 
their ability to manage year 2000 issues.  

The total costs associated with year 2000 compliance is not expected 
to be material to the company's financial position. The most significant 
cost was averted by the Company's otherwise planned ERP installation. 
Ongoing compliance efforts including IT systems testing and the review 
of external agents will be carried out in the normal course of business. 

It is not possible for the Company to determine with certainty the 
impact of the year 2000 problem due to internal computer systems or 
external agents. The failure to correct a material year 2000 problem or 
to anticipate and mitigate a problem with an external agent could result 
in an interruption in or failure of normal business activities or 
operations. Such failures could materially and adversely affect the 
company's results of operations, liquidity and financial condition. 
Contingency plans will be developed if it appears the Company or its key 
external agents will not be year 2000 compliant, and such compliance is 
expected to have a material adverse impact on the Company's operations. 


Capital Needs

There can be no assurance that additional capital beyond the amounts 
currently forecasted by the Company will not be required or that any 
required additional capital will be available on reasonable terms, if at 
all, at such time or times as required by the Company. Any shortfall in 
capital resources compared to the Company's level of operations or any 
inability to secure additional capital as needed could impair the Company's 
ability to finance inventory, accounts receivable and other operational 
needs. Such capital limitations could also impair the Company's ability to 
invest in research and development, improve customer service and support, 
deploy information technology systems, and expand manufacturing and other 
operations. Failure to keep pace with competitive requirements in any of 
these areas could have a material adverse effect on the Company's business 
and operating results. Moreover, any need to raise additional capital 
through the issuance of equity or debt securities may result in additional 
dilution to earnings per share.

Proprietary Rights

While the Company had 14 issued U.S. Patents and 23 pending U.S. Patent 
Applications at December 31, 1998, it nonetheless relies primarily on a 
combination of trademark, copyright and trade secret protection together 
with licensing arrangements and nondisclosure and confidentiality 
agreements to establish and protect its proprietary rights. There can be no 
assurance that the Company's measures to protect its proprietary rights 
will deter or prevent unauthorized use of the Company's technology, brand 
or other proprietary or intellectual property. In addition, the laws of 
certain foreign countries may not protect the Company's proprietary rights 
to the same extent as do the laws of the United States or the EC. As is 
typical in its industry, the Company from time to time is subject to legal 
claims asserting that the Company has violated the proprietary 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 and diversion of the resources of the Company, may also be 
necessary to enforce proprietary rights of the Company or to defend the 
Company against claimed infringement of the proprietary rights of others. 

Stock Price Volatility

The trading price of the Company's Common Stock has been subject to 
significant fluctuations to date, and could be subject to wide fluctuations 
in the future in response to quarter-to-quarter variations in operating 
results, announcements of technological innovations, new products or 
significant OEM systems design wins by the Company or its competitors, 
general conditions in the markets for the Company's products or the 
computer industry, the price and availability of purchased components, 
general financial market conditions, market conditions for PC or 
semiconductor stocks, changes in earnings estimates by analysts, or other 
events or factors. In this regard, the Company does not endorse and accepts 
no responsibility for the estimates or recommendations issued by stock 
research analysts from time to time. In addition, the public stock markets 
in general, and technology stocks in particular, have experienced extreme 
price and trading volume volatility. This volatility has significantly 
affected the market prices of securities of many high technology companies 
for reasons frequently unrelated to the operating performance of the 
specific companies. These broad market fluctuations may adversely affect 
the market price of the Company's Common Stock.

Dependence on Key Personnel

The Company's future success will depend to a significant extent upon 
the efforts and abilities of its senior management and professional, 
technical, sales and marketing personnel. The competition for such 
personnel is intense, particularly in the San Jose, California area 
("Silicon Valley"). There can be no assurance that the Company will be 
successful in retaining its existing key personnel or in attracting and 
retaining the additional key personnel that it requires. The loss of 
services of one or more of its key personnel or the inability to add or 
replace key personnel could have a material adverse effect on the Company. 
The salary, performance bonus and stock option packages necessary to 
recruit or retain key personnel, particularly in Silicon Valley, may 
significantly increase the Company's expense levels or result in dilution 
to the Company's earnings per share.  The Company does not carry "key 
person" life insurance on any of its employees. 

Legal Matters

The Company has been named as a defendant in several putative class 
action lawsuits which were filed in June and July, 1996 and June, 1997 in 
the California Superior Court for Santa Clara County and the U.S. District 
Court for the Northern District of California. Certain executive officers 
and directors of the Company are also named as defendants. The plaintiffs 
purport to represent a class of all persons who purchased the Company's 
Common Stock between October 18, 1995 and June 20, 1996 (the "Class 
Period"). The complaints allege claims under the federal securities laws 
and California law. The plaintiffs allege that the Company and the other 
defendants made various material misrepresentations and omissions during 
the Class Period. The complaints do not specify the amount of damages 
sought. The Company believes that it has good defenses to the claims 
alleged in the lawsuits and will defend itself vigorously against these 
actions. No trial date has been set for any of these actions. The ultimate 
outcome of these actions cannot be presently determined. Accordingly, no 
provision for any liability or loss that may result from adjudication or 
settlement thereof has been made in the accompanying consolidated financial 
statements.

The Company has been named as a defendant in a lawsuit filed on October 
9, 1998 in the United States District Court for the Central District of 
California.  Plaintiffs are the Recording Industry Association of America, 
Inc. (the "RIAA"), a trade organization representing recording companies 
and the Alliance of Artists and Recording Companies (the "AARC") an 
organization controlled by the RIAA which exists to distribute royalties 
collected by the copyright office.  The complaint alleges that the 
Company's Rio product, a portable music player, is subject to regulation 
under the Audio Home Recording Act (the "AHRA") and that the device does 
not comply with the requirements of the AHRA.  On October 16, 1998 a 
hearing was held and the Court issued a Temporary Restraining Order 
preventing the Company from manufacturing or distributing the Rio product 
for a period of ten days.  On October 26, 1998 a hearing was held to 
determine if a Preliminary Injunction should issue to further restrain the 
Company until the conclusion of the suit.  The court denied the motion and 
refused to restrain the Company from manufacturing and distributing the Rio 
product.  The RIAA has filed a notice that it intends to appeal the Court's 
ruling to the United States Court of Appeals for the Ninth Circuit.  No 
schedule has been set for any briefing or other action on the appeal. No 
provision for any liability or loss that may result from adjudication or 
settlement of this action has been made in the accompanying consolidated 
financial statements.

The Company is also party to other claims and pending legal 
proceedings that generally involve employment and patent issues.  These 
cases are, in the opinion of management, ordinary and routine matters 
incidental to the normal business conducted by the Company.  In the opinion 
of management, the ultimate disposition of such proceedings will not have a 
materially adverse effect on the Company's consolidated financial position 
or future results of operations.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to financial market risks due primarily to 
changes in interest rates. The Company does not use derivatives to alter 
the interest characteristics of its investment securities or its debt 
instruments. The Company has no holdings of derivative or commodity 
instruments and does not conduct business in foreign currencies. 

The fair value of the Company's investment portfolio or related income 
would not be significantly impacted by changes in interest rates since the 
investment maturities are short. The Company has limited long term debt, 
principally in the form of two building mortgages, one of which has a 
balloon payoff in 2001. The weighted average interest rate on the mortgages 
is 8.26%. The Company's other notes payable against its lines of credit as 
of December 31, 1998 carried a variable interest rate of the Libor rate 
plus a margin with interest payments due monthly. The Company's new credit 
line carries a variable interest rate of the prime rate plus a margin with 
interest payments due monthly.

The table below presents principal amounts and related weighted average 
interest rates by year for the Company's cash, cash equivalent, and short-
term investment accounts, and its debt obligations.

The table below presents principal amounts and related weighted average
interest rates by year for the Company's cash, cash equivalent, and
short-term investment accounts, and its debt obligations.

<TABLE>
<CAPTION>
                                                                                 There-
                                 1999     2000      2001      2002      2003      after     Total
                               -------- --------- --------- --------- --------- --------- ---------
                                                  (dollars in thousands)
<S>                            <C>      <C>       <C>       <C>       <C>       <C>       <C>
Assets:
Cash, cash equivalents and
  short-term investments.......$36,072     $ --      $ --      $ --      $ --      $ --    $36,072
Weighted average interest rate.   4.80%

Liabilities:
Fixed rate debt................     85        92       555        33        36       404     1,205
Variable rate debt............. 45,437       107        26        28        31       232    45,861
</TABLE>


PART III

ITEM 10.  Directors and Executive Officers of the Registrant

        Information regarding Registrant's directors will be set forth under 
the caption "Election of Directors" in Registrant's proxy statement for 
use in connection with the Annual Meeting of Shareholders to be held in 
May 1999, (the "Proxy Statement") and is incorporated herein by 
reference. The Proxy Statement will be filed with the Securities and 
Exchange Commission within 120 days after December 31, 1998.

        Information with respect to the Registrant's executive officers is 
included at the end of Part I, Item 1, of this report under the caption 
"Executive Officers".

ITEM 11. Executive Compensation

        Information regarding remuneration of Registrant's directors and 
executive officers will be set forth under the caption "Executive 
Compensation" in Registrant's Proxy Statement and is incorporated herein 
by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

        Information regarding security ownership of certain beneficial owners 
and management will be set forth under the caption "Share Ownership of 
Certain Beneficial Owners and Management" in Registrant's Proxy 
Statement and is incorporated herein by reference.


ITEM 13. Certain Relationships and Related Transactions

        Information regarding certain relationships and related transactions 
will be set forth under the caption "Certain Transactions" in 
Registrant's  Proxy Statement and is incorporated herein by reference.


PART IV

ITEM 14. Exhibits, Financial Statement Schedules 

(a)             1.  Financial Statements

        The following Consolidated Financial Statements of Diamond Multimedia 
Systems, Inc., and its subsidiaries are filed as part of this report on 
Form 10-K


        Report of Independent Accountants

        Consolidated Balance Sheets as of December 31, 1998 and 1997    

        Consolidated Statements of Operations for the three years ended 
        December 31, 1998       

        Consolidated Statements of Shareholders' Equity (Deficit) for the 
        three years ended December 31, 1998

        Consolidated Statements of Cash Flows for the three years ended 
        December 31, 1998       

        Notes to Consolidated Financial Statements      


        2.  Consolidated Financial Statement Schedules

        Schedule II-Valuation and Qualifying Accounts   

        Schedule I through V not listed above have been omitted because 
        the matter or conditions are not present or the information 
        required to be set forth therein is included in the Consolidated
        Financial Statements hereto.


3.  EXHIBITS
<TABLE>
<CAPTION>
 Exhibit
  Number                         Exhibit Description
----------  --------------------------------------------------------------
<C>         <S>
   3.1(1)   Certificate of Incorporation.

   3.2(1)   Bylaws of Registrant.

   4.1(1)   Form of Common Stock Certificate.

  10.1(1)   Form of Indemnification Agreement for officers and directors.

  10.2(1)   Form of Indemnification Agreement with certain stockholders.

  10.3(1)   1992 Stock Plan and form of Stock Option Agreement.

  10.4(1)   1994 Stock Plan and form of Stock Option Agreement.

  10.5(5)   1995 Employee Stock Purchase Plan and form of Subscription
            Agreement.

  10.6(1)   1995 Director Option Plan and form of Stock Option Agreement.

  10.8(1)   Stock Purchase Agreement by and among the Registrant, Diamond
            Multimedia Systems, Inc., a California corporation, and the
            investors and shareholders named therein.

  10.9(1)   Stock and Subordinated Notes Purchase Agreement by and among the
            Registrant and the investors name therein.

  10.10(1)  Shareholders' Agreement by and among the Registrant and the
            investors, management shareholders and shareholders named therein.

  10.11(1)  Registration Rights Agreement by and among the Registrant and the
            investors, management shareholders and shareholders named therein.

  10.12(1)  Employment Agreement between the Registrant and Mr. Hyung Hwe Huh.

  10.13(1)  Consulting Agreement between the Registrant and Mr. Chong-Moon Lee.

  10.14(1)  Mutual Release among the registrant, Messrs. Lee and Huh, and
            certain other parties.

  10.15(1)  Facility Lease (2880 Junction Avenue, San Jose, CA).

  10.16(1)  Facility Lease (835  Sinclair Frontage Road Drive, Milpitas, CA).

  10.17     Facility Lease (2895 Zanker Road, San Jose, CA).

  10.18(2)  Agreement and Plan of Reorganization among the Registrant,
            Shakespeare Acquisition Corporation and Supra Corporation dated as
            of August 7, 1995.

  10.19(4)  Stock Purchase Agreement by and among the Registrant, SPEA
            Software AG and the Stockholders of SPEA Software AG dated as of
            October 24, 1995.

  10.20(8)  Agreement and Plan of Merger by and among the Registrant, Boardwalk
            Acquisition Corporation and Micronics Computers, Inc., dated as of
            May 11, 1998.

  10.21(3)  1993 Stock Incentive Plan.

  10.22(4)  Amendment No. 1 to Stock Purchase Agreement dated as of November 15,
            1995 by and among the Registrant; Supra (Deutschland) GmbH; SPEA
            Software AG; Spea-Beheer C.V.,TVM, Glenwood and Ulrich Seng for and
            on behalf of the Selling Stockholders; and David Gill.

 10.23*(7)  Form of Change of Control Severance Agreement between the Registrant
            and the executive officers listed below:
              Franz Fichtner
              C. Scott Holt
              Hyung Hwe Huh
              Wade Meyercord
              Dennis D. Praske
              James M. Walker

  10.24(6)  Employment Agreement between the Registrant and Mr. James M. Walker.

  21.1(4)   List of Significant Subsidiaries.

  23.1      Consent of PricewaterhousCoopers L.L.P., Independent Accountants.

  24.1      Power of Attorney (included in this report under the caption 
            signatures).

  27.1      Financial Data Schedule

</TABLE>

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

    *   Management contract or compensation plan or arrangement required to be
        filed as an exhibit to this report on Form 10-K pursuant to Item 14 (c)
        of this report.

    (1) Incorporated by reference to the Registration Statement on Form S-1
        (File No. 33-89386), as amended, filed pursuant to the Securities Act
        of 1933, as amended, relating to the initial public offering of Common
        Stock.

    (2) Incorporated by reference to the Registrant's current report on Form 8-K
        (File No. 0-25580) filed pursuant to the Securities Exchange Act of
        1934, as amended, on October 5, 1995.

    (3) Incorporated by reference to the Registration Statement on Form S-8 (
        File No. 33-98470) filed pursuant to the Securities Act of 1933, as
        amended, on October 24, 1995.

    (4) Incorporated by reference to Registration Statement on Form S-1 (File
        No. 33-98618), as amended, filed pursuant to the Securities Act of 1933,
        as amended.

    (5) Incorporated by reference to the Registration Statement on Form S-8
        (File No. 333-11147) filed pursuant to the Securities Act of 1933, as 
        amended, on August 11, 1998.

    (6) Incorporated by reference to Form 10-K for the year 1996 (File No.
        000-25580) filed pursuant to the Securities Exchange Act of 1934, as
        amended, on March 28, 1997. 

    (7) Incorporated by reference to Form 10-K for the year 1997 (File No.
        000-25580) filed pursuant to the Securities Exchange Act of 1934, as
        amended, on March 24, 1998. 

    (8) Incorporated by reference to the Registrant's Tender Offer Statement 
        on Schedule 14D-1 filed with the COmmission on May 15, 1998, as amended.


(b)     Reports on Form 8-K

1.      A report on Form 8-K (File No. 0-25580) was filed by the 
Registrant pursuant to the Securities Exchange Act of 1934, 
as amended, on November 16, 1998, relating to a press 
release issued on November 12, 1998.

(c)     Exhibits

        See (a) above

(d)    Financial Statement Schedules

        See (a) above



                                   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 on March 30, 1999.

DIAMOND MULTIMEDIA SYSTEMS, INC


        /s/  William J. Schroeder
           ----------------------
By:          William J. Schroeder
President and Chief Executive Officer


                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints William J. Schroeder and James M. Walker, jointly and
severally, his attorneys-in-fact, each with the power of substitution for him in
any and all capacities, to sign any amendments to this report, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>

         Signature                         Title                      Date
---------------------------  ----------------------------------  --------------
<S>                          <C>                                 <C>
/s/  William J. Schroeder    Director, Chief Executive Officer   March 31, 1999
---------------------------  and President (Principal Executive
     William J. Schroeder    Officer)


/s/  James M. Walker         Chief Financial Officer (Principal  March 31, 1999
---------------------------  Financial  and Accounting Officer)
     James M. Walker

/s/  Bruce C. Edwards        Director                            March 31, 1999
---------------------------
     Bruce C. Edwards

/s/  Carl W. Nuen           Director                             March 31, 1999
---------------------------
     Carl W. Nuen

/s/  Gregorio Reyes          Director                            March 31, 1999
---------------------------
     Gregorio Reyes

/s/  Jeffrey D. Saper        Director                            March 31, 1999
---------------------------
     Jeffrey D. Saper

/s/  James T. Schraith      Director                             March 31, 1999
---------------------------
     James T. Schraith
</TABLE>


REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders
Diamond Multimedia Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the 
related consolidated statements of operations, cash flows, and 
stockholders' equity (deficit) present fairly, in all material respects, 
the financial position of Diamond Multimedia Systems, Inc. and its 
subsidiaries at December 31, 1998 and 1997, and the results of their 
operations and their cash flows for each of the three years in the 
period ended December 31, 1998, in conformity with generally accepted 
accounting principles. 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 of these statements in accordance with generally accepted 
auditing standards, which 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, assessing the accounting principles used and significant 
estimates made by management, and evaluating the overall financial 
statement presentation. We believe that our audits provide a reasonable 
basis for the opinion expressed above.

/S/ PricewaterhouseCoopers LLP
San Jose, California
January 29, 1999




               DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                             December 31,
                                                        ----------------------
                                                           1998        1997
                                                        ----------  ----------
<S>                                                     <C>         <C>
                            ASSETS
Current assets:
  Cash and cash equivalents...........................    $24,621     $85,929
  Restricted cash.....................................      5,500           0
  Short-term investments..............................      5,951       4,136
  Trade accounts receivable, net of allowance for
    doubtful accounts of $2,096 and $2,440 in 1998
    and 1997, respectively............................     94,027      98,777
  Inventories.........................................     48,892      78,647
  Prepaid expenses and other current assets...........     13,041       6,350
  Income taxes receivable.............................      9,735      24,929
  Deferred income taxes...............................     50,071      14,679
                                                        ----------  ----------
    Total current assets..............................    251,838     313,447
  Property, plant and equipment, net..................     27,288      15,216
  Other assets........................................      1,415       3,616
  Goodwill, net.......................................     26,369       5,275
                                                        ----------  ----------
         Total assets.................................   $306,910    $337,554
                                                        ==========  ==========
                               LIABILITIES
Current liabilities:
  Current portion of long-term debt...................    $45,516     $36,455
  Trade accounts payable..............................     75,727      98,764
  Accrued liabilities.................................     21,979      17,667
  Deferred income.....................................      7,200           0
  Income taxes payable................................      8,568       2,274
                                                        ----------  ----------
         Total current liabilities....................    158,990     155,160
Long-term debt, net of current portion................      1,550       1,873
                                                        ----------  ----------
         Total liabilities............................    160,540     157,033
                                                        ----------  ----------
Commitments and contingencies (Notes 4, 5 and 10)
  Inventories, net
                          SHAREHOLDERS' EQUITY
Preferred stock, par value $.001; Authorized -
   8,000 shares in 1998 and 1997, none issued
   and outstanding....................................         --          --
Common stock, par value $.001; Authorized -
   75,000 in 1998 and 1997; issued and
   outstanding - 35,244 in 1998 and
   34,491 in 1997.....................................         35          34
Additional paid-in capital............................    313,214     307,877
Distributions in excess of net book value (Note 1)....    (56,775)    (56,775)
Accumulated deficit                                      (110,104)    (70,615)
                                                        ----------  ----------
Total shareholders' equity............................    146,370     180,521
                                                        ----------  ----------
       Total liabilities and shareholders' equity.....   $306,910    $337,554
                                                        ==========  ==========
</TABLE>
   The accompanying notes are an integral part of these
           consolidated financial statements.
<PAGE>


               DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE> 
<CAPTION> 
                                                   Years Ended December 31,
                                              --------------------------------
                                                 1998       1997       1996
                                              ---------- ---------- ----------
<S>                                           <C>        <C>        <C>
Net sales.................................     $608,581   $443,281   $598,050
Cost of sales.............................      541,894    387,486    485,284
                                              ---------- ---------- ----------
  Gross profit............................       66,687     55,795    112,766
                                              ---------- ---------- ----------
Operating expenses:
  Research and development................       29,923     24,886     18,824
  Selling, general and administrative.....       97,656     85,684     66,209
  Amortization of intangibles.............        2,587      3,006      5,025
  Write-off of intangibles................          --       9,938        --
  Restructuring expenses..................        2,939        --         --
                                              ---------- ---------- ----------
          Total operating expenses........      133,105    123,514     90,058
                                              ---------- ---------- ----------
Income (loss) from operations.............      (66,418)   (67,719)    22,708
Interest income (expense), net............          277      1,696      1,979
Other income, net.........................       (2,716)       873      1,245
                                              ---------- ---------- ----------
Income (loss) before provision
       (benefit) for income taxes.........      (68,857)   (65,150)    25,932
Provision (benefit) for income taxes......      (29,368)   (19,545)     9,595
                                              ---------- ---------- ----------
Net income (loss).........................     ($39,489)  ($45,605)   $16,337
                                              ========== ========== ==========
Net income (loss) per share:
       Basic..............................       ($1.13)    ($1.33)     $0.48
                                              ========== ========== ==========
       Diluted............................       ($1.13)    ($1.33)     $0.46
                                              ========== ========== ==========
  Accrued liabilities
Shares used in per share calculations:
       Basic..............................       34,863     34,322     34,351
       Diluted............................       34,863     34,322     35,194
</TABLE>
   The accompanying notes are an integral part of these
           consolidated financial statements.
<PAGE>


               DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                              (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  Distributions
                                       Common Stock    Additional   in Excess
                                   -------------------  Paid-In    of Net Book  Accumulated
                                    Shares    Amount    Capital       Value       Deficit       Total
                                   --------- --------- ---------- ------------- ------------ ------------
<S>                                <C>       <C>       <C>        <C>           <C>          <C>
BALANCES, JANUARY 31, 1996........   34,673       $35   $306,697      ($56,775)    ($41,347)    $208,610
  Stock options exercised.........      273                  969           --           --           969
  Repurchase of common stock......     (702)       (1)       (34)          --           --           (35)
  Payment of note receivable
   from Shareholder...............     (109)      --      (3,196)          --           --        (3,196)
  Sale of shares under
   Employee Stock Purchase Plan...       28       --       1,167           --           --         1,167
  Tax benefit of stock options....                           443           --           --           443
  Net income......................      --        --        --             --        16,337       16,337
                                   --------- --------- ---------- ------------- ------------ ------------
BALANCES, DECEMBER 31, 1996.......   34,163        34    306,046       (56,775)     (25,010)     224,295
  Stock options exercised.........      339       --       1,232           --           --         1,232
  Repurchase of common stock......     (115)      --          (7)          --           --            (7)
  Sale of shares under
   Employee Stock Purchase Plan...      104       --         606           --           --           606
  Net loss........................      --        --        --             --       (45,605)     (45,605)
                                   --------- --------- ---------- ------------- ------------ ------------
BALANCES, DECEMBER 31, 1997.......   34,491        34    307,877       (56,775)     (70,615)     180,521
  Stock options exercised.........      508         1      3,299           --           --         3,300
  Repurchase of common stock......      (55)      --          (5)          --           --            (5)
  Sale of shares under
   Employee Stock Purchase Plan...      300       --       1,783           --           --         1,783
  Tax benefit of stock options....      --        --         260           --           --           260
  Net loss........................      --        --        --             --       (39,489)     (39,489)
                                   --------- --------- ---------- ------------- ------------ ------------
BALANCES, DECEMBER 31, 1998.......   35,244       $35   $313,214      ($56,775)   ($110,104)    $146,370
                                   ========= ========= ========== ============= ============ ============
</TABLE>
   The accompanying notes are an integral part of these
           consolidated financial statements.
<PAGE>


               DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                   -----------------------------
                                                     1998      1997      1996
                                                   --------- --------- ---------
<S>                                                <C>       <C>       <C>
Cash flows from operating activities:
   Net income (loss).............................. ($39,489) ($45,605)  $16,337
   Adjustments to reconcile net income (loss)
     to net cash provided by (used in)
     operating activities:
   Write-off of in-process technology and
     intangibles..................................      --      9,938       --
   Depreciation and amortization..................    9,188     8,224     8,371
   Provision for doubtful accounts................        0       952     1,026
   Provision for excess and obsolete
     inventories..................................   13,048    11,580    14,249
   Deferred income taxes..........................  (35,392)    6,430    (5,415)
   Loss on sale of equity interest................    1,205       --        --
   Loss on disposal of property and equipment.....       79       332       --
   Changes in assets and liabilities:
   Trade accounts.................................    5,991   (14,461)   17,475
   Income taxes receivable........................   15,454   (24,929)      --
   Inventories....................................   20,966   (26,523)    2,981
   Trade accounts payable and other liabilities...  (24,197)   32,195   (24,524)
   Deferred income................................    7,200       --        --
   Prepaid expenses and other assets..............   (5,415)     (357)   (3,596)
                                                   --------- --------- ---------
Net cash provided by (used in) operating
   activities.....................................  (31,362)  (42,224)   26,904
                                                   --------- --------- ---------
Cash flows from investing activities:
   Sale of Micronics building.....................    6,310       --        --
   Purchase of Micronics, net of cash acquired....  (21,626)      --        --
   Purchase of DigitalCast, net of cash acquired..   (2,234)      --        --
   Purchases of property and equipment............  (18,269)   (7,219)   (6,077)
   Other equity investments.......................   (1,150)      --        --
   Proceeds from sale of equity interest..........    1,642       --        --
   Purchases and proceeds from maturities of 
     short-term investments.......................   (1,815)   (4,136)   12,232
                                                   --------- --------- ---------
Net cash provided by (used in) investing
   activities.....................................  (37,142)  (11,355)    6,155
                                                   --------- --------- ---------
Cash flows from financing activities:
   Proceeds from issuance of common stock.........    5,344     1,838     2,136
   Proceeds from term loans and revolving
     credit facilities............................   89,028   153,415    46,778
   Payments and maturities of term loans and 
     revolving credit facilities..................  (79,911) (135,059)  (55,177)
   Maturities of term loans and revolving
   Investment in restricted certificates of deposit  (5,500)      --        --
   Proceeds from capital lease financing..........      --        --        197
   Repayments of capital lease financing..........     (760)     (826)     (782)
   Repurchases of common stock....................       (5)       (7)      (35)
                                                   --------- --------- ---------
Net cash provided by (used in) financing
   activities.....................................    8,196    19,361    (6,883)
                                                   --------- --------- ---------
Net increase (decrease) in cash and cash
   equivalents....................................  (60,308)  (34,218)   26,176
Cash and cash equivalents at beginning of period..   85,929   120,147    93,971
                                                   --------- --------- ---------
Cash and cash equivalents at end of period........  $25,621   $85,929  $120,147
                                                   ========= ========= =========
</TABLE>
   The accompanying notes are an integral part of these
           consolidated financial statements.
<PAGE>


DIAMOND MULTIMEDIA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation; Reorganization; Public Offerings;
     Acquisition of Supra, Spea, Micronics, and DigitalCast

Diamond Multimedia Systems, Inc. a Delaware Corporation, (the 
"Company") designs, develops, manufacturers and markets multimedia add-
in subsystems for IBM-compatible personal computers and fax/modem 
products for the PC and Macintosh markets.

The Company was formed in December 1994 and acquired substantially 
all of the outstanding common stock of Diamond Multimedia Systems, Inc., 
a California Corporation ("Diamond CA"), on January 1, 1995, the last 
day of the 1994 fiscal year (the "Reorganization"). The total 
acquisition price was approximately $99,192,000 which consisted of 
$82,664,000 of cash paid after the end of fiscal 1994 on January 3, 
1995, $8,800,000 of subordinated promissory notes, $7,517,000 of 
mandatorily-redeemable preferred stock and $211,000 of common stock. In 
connection with this transaction, the Company issued $34,167,000 of 
subordinated promissory notes (including the $8,800,000 issued to the 
Diamond CA shareholders); $29,174,000 of mandatorily redeemable 
preferred stock (including, $7,517,000 issued to the Diamond CA 
shareholders) and $826,000 of common stock (including $211,000 issued to 
the Diamond CA shareholders). On January 3, 1995, Diamond CA was merged 
into the Company.

The transaction has been accounted for as a recapitalization, and 
accordingly, no change in the accounting basis of Diamond CA's assets 
has been made in the accompanying consolidated financial statements. The 
amount of cash paid and securities issued to the shareholders of Diamond 
CA of $99,192,000 exceeded Diamond CA's net assets of approximately 
$42,417,000 on the date of the transaction by $56,775,000. This amount 
has been recorded in the equity section as distributions in excess of 
net book value.

On April 19, 1995, the Company completed an initial public offering 
of 7,475,000 shares of common stock at a price of $17.00 per share, all 
of which shares were sold by the Company. The net proceeds realized by 
the Company from this offering were approximately $117,188,000 which 
were used by the Company to repay all of the Company's senior debt and 
subordinated promissory notes payable and to redeem the Company's 
mandatorily redeemable preferred stock.

The Company acquired all of the outstanding common stock of Supra 
Corporation ("Supra") and SPEA Software AG ("Spea") on September 20, 
1995 and November 15, 1995, respectively, in two purchase business 
combination transactions.

In November, 1995, the Company sold 3,150,000 shares of common stock 
in a Public Offering at a price of $31.25 per share raising net proceeds 
of approximately $93,494,000.

The Company acquired all of the outstanding common stock of Micronics 
Computers, Inc. ("Micronics") and DigitalCast, Inc. ("DigitalCast") on 
June 26, 1998 and September 4, 1998, respectively, in two purchase 
business combination transactions. 

2.  Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying consolidated financial statements include the 
accounts of the Company and its wholly owned subsidiaries. The accounts 
of the Company's wholly owned subsidiaries, Supra, SPEA, Micronics and 
DigitalCast, have been included in the accompanying consolidated 
financial statements as of the date of acquisition, September 20, 1995, 
November 15, 1995, June 26, 1998, and September 4, 1998, respectively. 
All intercompany transactions and balances have been eliminated in 
consolidation.


 Fiscal Year-End

During 1996 and prior years, the Company operated under a 52-53 week 
fiscal year which ended on the Sunday closest to December 31. As a 
result, the fiscal year may not have ended as of the same day as the 
calendar year. Fiscal 1996 was a 52 week year. For convenience of 
presentation, the accompanying consolidated financial statements of the 
Company for 1996 and 1995 have been shown as ending on December 31 of 
each year. During 1997, the Company changed its fiscal year end to a 
calendar year.  Net sales for 1997 include approximately $29,000,000 due 
to the change in year-end.

Cash and Cash Equivalents 

All highly liquid investments with an original maturity of three 
months or less from the date of purchase and money market funds are 
considered cash equivalents. Cash and cash equivalents consist primarily 
of commercial paper held by investment banks in the U.S. along with a 
lesser amount of cash deposits in banks in the U.S., Japan, Germany and 
the United Kingdom.

Restricted Cash  

At December 31, 1998, restricted cash consisted of $5.5 million in 
certificates of deposit principally used as collateral for standby 
letters of credit. 

Short-Term Investments 

At December 31, 1998, short-term investments consisted of debt 
securities with a remaining maturity of more than three months and less 
than one year from the date of purchase. The Company had determined that 
all of its debt securities should be classified as available-for-sale. 
The difference between the cost basis and the market value of the 
Company's investments was not material at December 31, 1998 and 1997. 
The Company's short-term investments consisted of corporate bonds at 
December 31, 1998 and municipal bonds at December 31, 1997.  

Accounts Receivable

The Company participates in cooperative advertising and similar 
programs with certain distributors and retailers. These programs are 
utilized on a pre-approved basis and result in credits against the 
customers' trade accounts. The Company offers limited price protection 
to its customers. Accruals based on estimated costs of future claims are 
reflected in the accompanying consolidated financial statements.

Inventories 

Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
                                                December 31,
                                           ---------------------
                                              1998       1997
                                           ---------- ----------
<S>                                        <C>        <C>
  Raw material...........................    $17,388    $29,876
  Work in process........................     20,739     40,286
  Finished goods.........................     10,765      8,485
                                           ---------- ----------
                                             $48,892    $78,647
                                           ========== ==========
</TABLE>


The Company is currently dependent on sole or limited suppliers for 
certain key components used in its products, particularly VRAM and DRAM 
memory and other chipsets, which may cause shortages that limit 
production capacity. There can be no assurance that such shortages will 
not adversely affect future operating results. The Company may purchase 
certain components, resulting in excess inventory and reducing the 
Company's liquidity or, in the event of inventory obsolescence or a 
decline in the market value of such inventory, causing inventory write-
offs against the Company's operating results.

The Company has approximately $5 million of inventory in excess of 
its normal short-term needs for certain product lines at December 31, 
1998. Management has developed a program to reduce this inventory to 
desired levels over the near term; however, it is reasonably possible 
that the program will not be wholly successful and a material loss could 
ultimately result on the disposal of this inventory. No estimate can be 
made of the range of amounts of such loss.

Property, Plant and Equipment  

Property, plant and equipment are stated at cost and are depreciated 
using the straight-line and double declining balance methods over their 
estimated useful lives ranging from three to thirty and one-half years. 
Upon disposal, the assets and related accumulated depreciation are 
removed from the Company's accounts, and the resulting gains or losses 
are reflected in operations. Property, plant and equipment consisted of 
the following (in thousands):


<TABLE>
<CAPTION>
                                                December 31,
                                           ---------------------
                                              1998       1997
                                           ---------- ----------
<S>                                        <C>        <C>
  Furniture and equipment................    $35,023    $20,732
  Building, land and leasehold
    improvements.........................      6,969      3,912
                                           ---------- ----------
                                              41,992     24,644
  Less accumulated depreciation..........     14,704      9,428
                                           ---------- ----------
                                             $27,288    $15,216
                                           ========== ==========
</TABLE>

The Company incurred non-cash depreciation expense of $6.6 million, $5.2 
million and $3.3 million in 1998, 1997 and 1996, respectively, the 
majority of which was related to computer equipment and software. 
Disposals were immaterial.      

Goodwill and Other Intangible Assets

Goodwill and other intangible assets arose primarily from a series of 
equity acquisitions. These include Supra on September 20, 1995, Spea on 
November 15, 1995, Binar Graphics, Inc.  on November 15, 1997, Micronics 
on June 26, 1998, and DigitalCast on September 4, 1998.  Goodwill is 
being amortized on a straight-line basis over seven years. The Company 
assesses the recoverability of intangible assets by determining whether 
the amortization of the asset's net book value over its remaining life 
can be recovered through projected undiscounted future cash flows. 
Accordingly, the Company wrote-off $9.9 million of intangible assets in 
the second quarter of 1997 to reflect an impairment in the value 
of goodwill and existing technology associated with the acquisitions of 
Supra and Spea.  The anticipated cash flows related to those products 
indicated that the recoverability of those assets was not reasonably 
assured.  

Intangible assets consist of the following at December 31, 1998 and 1997,
respectively (in thousands):
<TABLE>
<CAPTION>
                                                December 31,
                                           ---------------------
                                              1998       1997
                                           ---------- ----------
<S>                                        <C>        <C>
  Goodwill...............................     42,198     18,328
  Less accumulated amortization               15,829     13,053
                                           ---------- ----------
                                             $26,369     $5,275
                                           ========== ==========
</TABLE>

Warranties

The Company's products are generally warranted for one to five years. 
Estimated future costs of repair, replacement, or customer 
accommodations are reflected in the accompanying consolidated financial 
statements.

Revenue Recognition

Revenue is recognized upon shipment of the product to the customer. 
Certain of the Company's sales are subject to a limited right of return. 
The Company estimates product returns and reduces sales to reflect 
anticipated product returns. 

Research and Development

Research and development expenditures are charged to operations as 
incurred.

Advertising Costs

Advertising costs are charged to operations as incurred. Advertising 
costs were $14,935,000 $11,233,000, and $11,555,000 in 1998, 1997, and 
1996 respectively.

Income Taxes

The Company uses the liability method to calculate deferred income 
taxes. The realization of deferred tax assets is based on historical tax 
positions and expectations about future taxable income.

Fair Value of Financial Instruments

Carrying amounts of certain of the Company's financial instruments 
including cash and cash equivalents, accounts receivable, accounts 
payable and other accrued liabilities approximate fair value due to 
their short maturities. Based on borrowing rates currently available to 
the Company for loans with similar terms, the carrying value of its debt 
obligations approximates fair value. Estimated fair values for 
marketable securities which are separately disclosed elsewhere, are 
based on quoted market prices for the same or similar instruments (see 
Short-Term Investments above). The estimated fair value of the Company's
equity investments could not be made without incurring excessive cost.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to 
concentration of credit risk are primarily accounts receivable and cash 
equivalents.

The Company sells its products through distributors, OEMs and 
retail/mass merchant outlets primarily in the regions of North America, 
Europe and Asia. The Company performs ongoing credit evaluations of its 
customers and, generally, does not require collateral for its 
receivables and maintains an allowance for potential credit losses. The 
allowance for non-collection of accounts receivable is maintained for 
potential credit losses and is based upon the expected collectibility of 
accounts receivable. 

Cash and cash equivalents are invested primarily in deposits with 
several banks in the United States, United Kingdom, Germany and Japan. 
Deposits in these banks may exceed the amount of insurance, if any, 
provided on such deposits. The Company places its cash equivalents in 
investment grade, short-term debt instruments and limits its amount of 
credit exposure to any one issuer. The Company has not experienced any 
losses on its cash and cash equivalents.

Foreign Currency Accounting

Substantially all of the Company's sales are denominated in U.S. 
dollars and the U.S. dollar is the functional currency for all foreign 
operations. Foreign exchange gains and losses, which result from the 
process of remeasuring foreign currency financial statements into U.S. 
dollars are included in the statement of operations. The Company 
recorded a net foreign currency translation loss in other expense of 
$668,000 in 1998 and net foreign currency translation gains in other 
income of $93,000 and $609,000 during 1997 and 1996, respectively.  

Computation of Net Income (Loss) Per Share

Basic EPS is computed as net income (loss) divided by the weighted 
average number of common shares outstanding for the period.  Diluted EPS 
reflects the potential dilution that could occur from common shares 
issuable through stock options, warrants and other convertible 
securities.  Common equivalent shares are excluded from the computation 
of net loss per share as their effect is anti-dilutive.

The following is a reconciliation of the numerator (net income) and
denominator (number of shares) used in the basic and diluted EPS calculation:

(Dollar amounts, in thousands)
<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                              --------------------------------
                                                 1998       1997       1996
                                              ---------- ---------- ----------
<S>                                           <C>        <C>        <C>
Basic EPS:
Net income (loss).........................     ($39,489)  ($45,605)   $16,337

Average Common Shares Outstanding.........       34,955     34,322     34,351
                                              ---------- ---------- ----------
Basic EPS                                        ($1.13)    ($1.33)     $0.48
                                              ========== ========== ==========
Diluted EPS:
Net income (loss).........................     ($39,489)  ($45,605)    16,337

Average Common Shares Outstanding.........       34,955     34,322     34,351
Stock options.............................           --         --        843

Total Shares..............................       34,955     34,322     35,194
                                              ---------- ---------- ----------
Diluted EPS                                      ($1.13)    ($1.33)     $0.46
                                              ========== ========== ==========
</TABLE>

For 1998 and 1997, approximately 1,668,000 stock options and 
1,158,000 stock options, respectively, were not included in the 
calculation of diluted EPS as their effect would be anti-dilutive.

Use of 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.

Comprehensive Income

The Company has adopted the Statement of Financial Accounting 
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) effective 
December 31, 1998. SFAS 130 establishes standards for reporting and 
display of comprehensive income and its components for general-purpose 
financial statements. Comprehensive income is defined as net income plus 
all revenues, expenses, gains and losses that are excluded from net 
income in accordance with generally accepted accounting principles. For 
the years ended December 31, 1996, 1997 and 1998, there are no material 
differences between comprehensive income and net income. 

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 133, "Accounting for 
Derivative Investments and Hedging Activities" (SFAS 133) which 
establishes accounting and reporting standards requiring that every 
derivative instrument be recorded in the balance sheet as either an 
asset or liability measured at its fair value. The statement also 
requires that changes in the derivative's fair value be recognized 
currently in earnings unless specific hedge accounting criteria are met. 
SFAS 133 is effective for fiscal years beginning after June 15, 1999. 
The Company does not expect the adoption of SFAS 133 to have a material 
effect on the Company's consolidated financial statements. 

3.  Accrued Liabilities

3.  ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                December 31,
                                           ---------------------
                                              1998       1997
                                           ---------- ----------
<S>                                        <C>        <C>
  Warranty...............................     $2,700     $4,110
  Accrued payroll and employee
    related costs........................      5,422      7,405
  Accrued royalties......................      2,526      3,542
  Tax refund reserve.....................      5,738          --
  Other..................................      5,593      2,610
                                           ---------- ----------
                                             $21,979    $17,667
                                           ========== ==========
</TABLE>


4.  Debt Agreements

   The following represents the Company's debt at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                December 31,
                                           ---------------------
                                              1998       1997
                                           ---------- ----------
<S>                                        <C>        <C>
  Domestic Lines of Credit...............    $35,000    $22,000
  Japanese Bank Line of Credit...........      2,743      4,536
  European Lines of Credit...............      7,068      8,338
  Capital Lease Obligations..............        310      1,070
  Other..................................      1,944      2,384
                                           ---------- ----------
                                              47,065     38,328
  Less current portion...................     45,516     36,455
                                           ---------- ----------
                                              $1,549     $1,873
                                           ========== ==========
</TABLE>


At December 31, 1998, the Company had two domestic bank credit 
facilities: a $30 million line of credit permitting borrowings at the 
bank's reference rate or a formula Libor based rate and a $15 million 
line of credit permitting borrowings at the bank reference rate or a 
formula Libor based rate.  Borrowings under these lines at December 31, 
1998 were $25 million and $10 million, respectively. Further, the 
agreements for these lines of credit expire in May 1999 and January 
1999, respectively. In January 1999 the Company closed a new $50 million 
domestic bank credit facility and the previous facilities were paid off 
and closed. The covenants covering this new debt agreement pertain to 
minimum levels of collateral coverage and tangible net worth, quarterly 
profitability beginning with the quarter ending March 31, 1999, and 
minimum levels of liquidity. 

Additionally, the Company has credit facilities under foreign lines 
of credit. At December 31, 1998, the Company's Japanese subsidiary had a 
Yen line of credit entitling it to borrow up to approximately   $3.0 
million.  The line of credit is collateralized by a stand-by letter of 
credit from the Company and accrues interest at the bank's variable 
rate. Borrowings were $2.7 million under this facility at December 31, 
1998.  At December 31, 1998, the Company's Spea subsidiary had a 5 
million DeustcheMark line of credit (approximately $3.0 million at 
December 31, 1998) with a German bank. Additionally, the Company had a 
foreign line of credit of 10 million DeustcheMarks (approximately $6.0 
million at December 31, 1998). Of the $9 million available under these 
lines, $5.7 million was being used as of December 31, 1998. These 
agreements expired January 31, 1999. The bank has extended an open line 
of credit for a total of 10 million DeustcheMarks (approximately $6.0 
million at December 31, 1998). 

At December 31, 1998, the Company's weighted average interest rate on 
short-term borrowings was 7.03%, versus 7.80% at December 31, 1997. 

The Company has various capital lease obligations payable through 
2000.

As of December 31, 1998, the Company's future payments on debt 
related to notes payable, lines of credit and capital lease obligations 
are $45,522,000, $199,000, $581,000, $61,000, $66,000 and $636,000 in 
fiscal years 1999, 2000, 2001, 2002, 2003 and thereafter, respectively. 

5.  Commitments

The Company occupies facilities in several countries including the 
U.S., England, France, Germany, Japan, and Singapore and is obligated 
under several leases expiring through 2001. Under the leases, the 
Company is responsible for insurance, maintenance and property taxes. 
The Company's headquarters facility lease agreement includes an option 
to extend the lease for one five year period. During the extension 
period, all terms and conditions under the agreement would remain the 
same, except that the monthly rental payments for the option period 
shall be the fair market value of the facility.

    Future annual minimum payments under the Company's operating leases are as
follows at December 31, 1998 (in thousands):

<TABLE>
<S>                                        <C>
  1999...................................     $3,418
  2000...................................      3,163
  2001...................................      2,173
  2002...................................        668
  2003...................................         57
  Thereafter.............................          --
                                           ----------
  Total                                       $9,479
                                           ==========
</TABLE>


6.  Shareholders' Equity

Preferred Stock

Under the Company's Articles of Incorporation, the Board of Directors 
may determine the rights, preferences and terms of the Company's 
undesignated preferred stock.

Stock Option Plans

The Company has four fixed stock option plans. Under the Company's 
stock option plans, options generally vest over a four year period and 
they expire five to ten years from the date of grant. Options may be 
granted to directors, officers, consultants and employees at prices not 
less than the fair market value at the date of grant. At December 31, 
1998, approximately 1,222,000 shares were available for future grants. 

On April 16, 1997, the Board of Directors approved the repricing of 
all employee stock options granted with exercise prices higher than 
$7.625 per share. Approximately 568,000 shares were repriced to $7.625 
per share. The Board of Directors approved the repricing with the 
general condition that these options cannot be exercised at the new 
price of $7.625 until April 1, 1998.

On October 14, 1998, the Board of Directors approved the further 
repricing of all employee stock options granted with exercise prices 
higher than $3.0625 per share. Approximately 4,387,000 shares were 
repriced to $3.0625 per share. The Board of Directors approved the 
repricing with the general condition that these options cannot be 
exercised until April 19, 1999.

In January 1995, the 1995 Director Option Plan (the "Director Plan") 
was adopted by the Board of Directors. The Director Plan provides for 
the grant of options to purchase the Company's common stock to directors 
who are not employees of the Company. A total of 175,000 shares of 
common stock have been authorized for issuance under the Director Plan. 
In May 1998, the shareholders approved changes to the plan increasing 
the number of shares reserved (i) for initial grants to non-employee 
directors from 30,000 shares to 40,000 shares and (ii) the subsequent 
annual grants to non-employee directors from 7,500 shares to 10,000 
shares. Further, the stockholders approved one special grant of 7,500 
shares to each of three non-employee directors then existing. Each 
nonemployee director who joins the board will automatically be granted 
an option to purchase 40,000 shares of common stock at a price equal to 
the fair market value on the date of grant and upon each reelection to 
the Board will be granted an additional option to purchase 10,000 shares 
of common stock at a price equal to the fair market value on the date of 
grant. The 40,000 share grants vest at the rate of 25% of the option 
shares upon the first anniversary of the date of grant and 1/48th of the 
option shares per month thereafter, and the 10,000 share grants vest 
four years after grant, in each case unless terminated sooner upon the 
termination of the optionee's status as a director or otherwise pursuant 
to the Director Plan. In the event of a merger of the Company with or 
into another corporation or a consolidation, acquisition of assets or 
other change in control transaction involving the Company, each option 
becomes exercisable in full or will be assumed for an equivalent option 
substituted by the successor corporation. The Director Plan expires in 
2005, unless terminated earlier by the Board of Directors.  As of 
December 31, 1998, approximately 157,500 shares have been issued under 
the Director Plan.

In connection with the acquisition of Supra, the Company assumed the 
Supra 1993 Stock Incentive Plan. Under the Plan the equivalent of 
381,000 shares of the Company's common stock were granted to employees 
of Supra upon the acquisition of Supra by the Company at an exercise 
price determined pursuant to a calculation described in the Plan 
document. These stock options generally vest over three years from the 
date of grant. Such options are included in the activity for the 
Company's stock options described above.

The Company has also issued options outside of the four fixed plans 
amounting to 241,497, 430,000, and 225,000 shares in 1998, 1997, and 
1996, respectively.  These options vest under various periods up to a 
maximum vesting period of 4 years.

The fair value of each option grant is estimated at the date of grant using
the Black-Scholes pricing model with the following weighted average assumptions
for grants in 1998, 1997 and 1996: 

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           --------------------------------
                                              1998       1997       1996
                                           ---------- ---------- ----------
<S>                                        <C>        <C>        <C>
  Risk-free Interest Rate................       4.55%      6.36%      5.57%
  Expected life..........................  4 years    4 years    2 years
  Volatility.............................       81.6%      61.0%      50.8%
  Dividend Yield.........................       --         --         --
</TABLE>


A summary of the Company's option activity as of December 31, 1998, 1997, and
1996 and changes during the year ending on those dates are as follows (amounts
in thousands, except share data):

<TABLE>
<CAPTION>
                                            Outstanding Options
                                           ---------------------
                                                       Weighted
                                                       Average
                                           Number of   Exercise
                                             Shares     Price
                                           ---------- ----------
<S>                                        <C>        <C>
Balance, December 31, 1995...............      2,376     $19.03
  Options granted........................      1,695      11.84
  Options exercised......................       (117)      3.21
  Options canceled.......................       (511)     20.41
                                           ----------
Balance, December 31, 1996...............      3,443       7.90
  Options granted........................      3,386       8.83
  Options exercised......................       (293)     (4.37)
  Options canceled.......................     (1,539)     10.92
                                           ----------
Balance, December 31, 1997...............      4,997       7.89
  Options granted........................      6,393       4.29
  Options exercised......................       (504)      6.47
  Options canceled.......................     (5,226)      8.59
                                           ----------
Balance, December 31, 1998...............      5,660      $3.45
                                           ========== ==========
</TABLE>

At December 31, 1998, 1997 and 1996 vested options to purchase 
2,124,000 shares, 1,232,000 shares, and 590,000 shares, respectively, 
were unexercised. The weighted average fair value of those options 
granted in 1998, 1997 and 1996 was $2.67 per share, $4.76 per share, and 
$3.78 per share, respectively.

The following table summarizes information about fixed stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                        Options Outstanding         Options Exercisable
                 ---------------------------------- ----------------------
                               Weighted-
                                Average   Weighted-              Weighted-
                    Number     Remaining   Average     Number     Average
   Range of      Outstanding  Contractual Exercise  Exercisable  Exercise
 Exercise Prices at 12/31/98  Life(Years)   Price   at 12/31/98    Price
---------------- ------------ ----------- --------- ------------ ---------
<S>              <C>          <C>         <C>       <C>          <C>
 $0.07 -  $3.01       74,055        4.62     $1.96       73,604     $1.97
 $3.06 -  $3.06    5,186,495        8.39     $3.06    1,959,525     $3.06
 $0.07 -  $3.01      399,762        8.72     $8.72       90,474     $9.99


                 ------------                       ------------
Total              5,660,312                          2,123,603
                 ============                       ============
</TABLE>


At December 31, 1998, the Shareholders have reserved 9,212,500 under 
the 1998, 1994 and 1992 Stock Option Plans and 175,000 shares under the 
Director Plan.

Employee Stock Purchase Plan

During 1995, the 1995 Employee Stock Purchase Plan (the "Purchase 
Plan") was adopted by the Board of Directors.  As of December 31, 1998, 
a total of 650,000 shares of common stock have been authorized for 
issuance under the Purchase Plan. The Purchase Plan provides for 
eligible employees to purchase common stock at a price equal to 85% of 
the fair market value at certain specified dates. During 1998 and 1997, 
the Company issued 300,000 and 104,000 shares of common stock, 
respectively, under this plan.

Fair value for the purchase rights issued under the Company's Employee Stock
Purchase Plan, described above, is determined under the Black-Scholes valuation
model using the following assumptions for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           --------------------------------
                                              1998       1997       1996
                                           ---------- ---------- ----------
<S>                                        <C>        <C>        <C>
  Risk-free Interest Rate................       5.05%      5.12%      5.44%
  Expected life..........................  6 months   6 months   6 months
  Volatility.............................       81.6%      61.0%      50.8%
  Dividend Yield.........................       --         --         --
</TABLE>



The weighted average fair market value of those purchase rights 
granted in 1998 and 1997 was $7.00 and $3.89 respectively.

The Company has adopted the disclosure-only provisions of the 
Statement of Financial Accounting Standards ("SFAS") No. 123, 
"Accounting for Stock-based Compensation." Accordingly, no compensation 
cost has been recognized for the Company's Stock Plans. Had compensation 
cost for the Stock Plans been determined based on the fair market value 
at the grant date for awards in 1998 and 1997, consistent with the 
provisions of SFAS No. 123, the Company's net income and net income per 
share for the years ended December 31, 1998 and 1997 would have been 
reduced as follows:

     (amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           --------------------------------
                                              1998       1997       1996
                                           ---------- ---------- ----------
<S>                                        <C>        <C>        <C>
Net income (loss) - as reported..........   ($39,489)  ($45,605)   $16,337

Net income (loss) - proforma.............   ($40,980)  ($54,420)   $11,307

Net income (loss) per share - as reported     ($1.13)    ($1.33)     $0.46

Net income (loss) per share - proforma...     ($1.17)    ($1.59)     $0.33
</TABLE>


Reorganization and Stock Repurchase Agreement

Effective with the Reorganization described in Note 1, all of the 
outstanding unexercised options of Diamond CA were canceled and new 
options were issued at $.07 per share, the fair market value of the 
Company's common stock immediately after the Reorganization. During the 
year ended December 31, 1995, certain option holders exercised their 
option to purchase 5,430,000 shares of the Company's common stock 
pursuant to restricted stock purchase agreements. Under the terms of the 
restricted stock purchase agreements, the Company's right to repurchase 
the stock expires monthly over four years from the date of grant of the 
original stock options.   In addition to the exercise of stock options 
described above, on January 3, 1995, the Company issued 2,615,000 shares 
of common stock to certain employees, officers, board members, and 
consultants under restricted stock purchase agreements. Under the terms 
of the restricted stock repurchase agreements, the right to repurchase 
this stock expires monthly over four years from the original date of 
grant as determined by the Board of Directors. Shares subject to 
repurchase may be repurchased by the Company at the end of each 
individual's association with the Company. As of December 31, 1998,  
29,000 shares of common stock were subject to repurchase by the Company.

Common Stock Dividends

The Company has never declared or paid cash dividends on its common 
stock. The Company's bank loan agreement prohibits the payment of cash 
dividends on the common stock without prior approval.

7.  Geographic Region and Major Customer Information 

In 1998, 1997, and 1996, no single customer accounted for greater 
than 10% of net sales. In addition, outside the United States, no one 
country accounted for more than 10% of net sales. Revenues to geographic 
regions reported below are based upon the customers' locations. 
Essentially all the Company's current shipments and invoices are 
denominated in U.S. dollars. The Company's foreign operations consist 
principally of its foreign subsidiaries in Germany, the United Kingdom 
and Japan. Long-lived assets, primarily fixed assets and unamortized 
goodwill, are reported below based upon the location of the asset. 

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           --------------------------------
                                              1998       1997       1996
                                           ---------- ---------- ----------
<S>                                        <C>        <C>        <C>
Net sales to geographic regions:
  United States..........................   $326,915   $271,311   $369,367
  Europe.................................    217,347    116,844    132,971
  Far East and other.....................     64,319     55,126     95,712
                                           ---------- ---------- ----------
  Net Sales..............................   $608,581   $443,281   $598,050
                                           ========== ========== ==========
Long-lived assets:
  United States..........................    $48,296    $17,390    $19,028
  Europe.................................      2,673      3,056     10,036
  Far East and other.....................      2,688         44         46
                                           ---------- ---------- ----------
  Total Assets...........................    $53,657    $20,490    $29,110
                                           ========== ========== ==========
</TABLE>


8.  Income Taxes:

   The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           --------------------------------
                                              1998       1997       1996
                                           ---------- ---------- ----------
<S>                                        <C>        <C>        <C>
Current:
  Federal................................         $0   ($18,873)   $12,779
  State..................................          0         73      2,231
  Foreign................................      1,550          0          0
                                           ---------- ---------- ----------
                                               1,550    (18,800)    15,010
                                           ---------- ---------- ----------
Deferred:
  Federal................................    (20,647)       138    (14,568)
  State..................................     (1,184)      (883)      (458)
  Foreign................................     (9,087)       --       9,611
                                           ---------- ---------- ----------
                                             (30,918)      (745)    (5,415)
                                           ---------- ---------- ----------
                                            ($29,368)  ($19,545)    $9,595
                                           ========== ========== ==========
</TABLE>

The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           --------------------------------
                                              1998       1997       1996
                                           ---------- ---------- ----------
<S>                                        <C>        <C>        <C>
Tax provision at federal statutory rate..      -35.0%     -35.0%      35.0%
State taxes, net of federal tax benefit..       -1.7%      -1.6%       3.4%
Tax provision at local country rates.....       -5.8%       --         --
Research and development tax credit......       -0.4%      -0.3%      -0.7%
Amortization of intangibles..............        1.2%       6.0%       1.7%
Other....................................       -1.0%       0.9%      -2.4%
                                           ---------- ---------- ----------
                                               -42.7%     -30.0%      37.0%
                                           ========== ========== ==========
</TABLE>

The components of the deferred tax asset are as follows (in thousands):

<TABLE>
<CAPTION>
                                                December 31,
                                           --------------------------------
                                              1998       1997         1996
                                           ---------- ---------------------
<S>                                        <C>        <C>        <C>
Deferred tax assets:
Net operating loss carryforwards.........    $51,118       $756        --
Loss carryforward valuation allowance....   ($10,511)       --         --
                                           ---------- ---------- ----------
                                             $40,607       $756         $0
Sales returns and receivables allowances.        --         --        4145
Inventory valuation allowances...........      3,268      7,060       6307
Deferred revenue.........................      1,803        --         --
Warranty accruals........................        534      1,465       1718
Compensation.............................        588        455        644
State taxes..............................          1        --        1019
Software amortization....................      2,246      4,695       7350
All other................................      1,430        248        761
Valuation allowance......................       (406)       --         --
                                           ---------- ---------- ----------

        Total deferred tax assets........    $50,071    $14,679    $21,944
                                           ========== ========== ==========
</TABLE>

The Company was not profitable in 1998 and has shown a cumulative 
loss over the past three years. However, significant new business 
contracts have been won over the past several months. These sales 
contracts cover a broad spectrum of the Company's products including 
core graphics accelerators, Window NT workstation graphics accelerators, 
modems and home networking. Based upon this incremental business and 
other measures, management has determined that no valuation allowance is 
necessary as the Company expects that its future taxable income will 
allow the deferred tax asset for federal, state and foreign tax purposes 
to be fully realized in future years. The valuation allowances presented 
in the above table pertain to pre-acquisition deferred tax assets of 
Micronics. 

The temporary non-deductible differences noted in the above table 
(excluding net operating losses) are  generally applicable to the 
following years taxable income. They will also be replaced by new 
temporary differences of a similar nature. The net operating loss 
component of the deferred tax asset will expire on the following 
schedule (in thousands):



Net operating loss carryforwards will expire as follows (in thousands);

<TABLE>
<CAPTION>
                      ---------------------------------------------
                        Federal      State    Foreign        Total
                      ---------------------------------------------
<S>                  <C>        <C>        <C>        <C>
                2002        --      $5,405        --        $5,405
                2003        --     $10,544        --       $10,544
                2007        --         --      $2,863       $2,863
                2018    $86,161        --         --       $85,161
       No expiration        --         --     $24,899      $24,899
                      ---------- ---------- ---------- ------------
               Total    $86,161    $15,949    $27,762     $129,872

</TABLE>

9.  Employee Benefit Plan

During 1993, the Company established a 401(k) tax-deferred savings 
plan under which all employees meeting certain age and service 
requirements may contribute up to 15% of their eligible compensation (up 
to a maximum allowed under IRS rules). Contributions may be made by the 
Company at the discretion of the Board of Directors. Contributions by 
the Company amounted to $825,000, $671,000, and $616,000 in 1998, 1997, 
and 1996, respectively.  

10.  Litigation

The Company has been named as a defendant in several putative class 
action lawsuits which were filed in June and July, 1996 and June, 1997 
in the California Superior Court for Santa Clara County and the U.S. 
District Court for the Northern District of California. Certain 
executive officers and directors of the Company are also named as 
defendants. The plaintiffs purport to represent a class of all persons 
who purchased the Company's Common Stock between October 18, 1995 and 
June 20, 1996 (the "Class Period"). The complaints allege claims under 
the federal securities laws and California law. The plaintiffs allege 
that the Company and the other defendants made various material 
misrepresentations and omissions during the Class Period. The complaints 
do not specify the amount of damages sought. The Company believes that 
it has good defenses to the claims alleged in the lawsuits and will 
defend itself vigorously against these actions. No trial date has been 
set for any of these actions. The ultimate outcome of these actions 
cannot be presently determined. Accordingly, no provision for any 
liability or loss that may result from adjudication or settlement 
thereof has been made in the accompanying consolidated financial 
statements.

The Company has been named as a defendant in a lawsuit filed on 
October 9, 1998 in the United States District Court for the Central 
District of California.  Plaintiffs are the Recording Industry 
Association of America, Inc. (the "RIAA"), a trade organization 
representing recording companies and the Alliance of Artists and 
Recording Companies (the "AARC") an organization controlled by the RIAA 
which exists to distribute royalties collected by the copyright office.  
The complaint alleges that the Company's Rio product, a portable music 
player, is subject to regulation under the Audio Home Recording Act (the 
"AHRA") and that the device does not comply with the requirements of the 
AHRA.  On October 16, 1998 a hearing was held and the Court issued a 
Temporary Restraining Order preventing the Company from manufacturing or 
distributing the Rio product for a period of ten days.  On October 26, 
1998 a hearing was held to determine if a Preliminary Injunction should 
issue to further restrain the Company until the conclusion of the suit.  
The court denied the motion and refused to restrain the Company from 
manufacturing and distributing the Rio product.  The RIAA has filed a 
notice that it intends to appeal the Court's ruling to the United States 
Court of Appeals for the Ninth Circuit.  No schedule has been set for 
any briefing or other action on the appeal. As the ultimate outcome of
these proceedings cannot be determined, no provision for any 
liability or loss that may result from adjudication or settlement of 
this action has been made in the accompanying consolidated financial 
statements.

The Company is also party to other claims and pending legal 
proceedings that generally involve employment and patent issues.  These 
cases are, in the opinion of management, ordinary and routine matters 
incidental to the normal business conducted by the Company.  In the 
opinion of management, the ultimate disposition of such proceedings will 
not have a materially adverse effect on the Company's consolidated 
financial position or future results of operations.

11. Acquisitions

In June 1998, the Company acquired all the outstanding stock of 
Micronics Computers, Inc. The acquisition was treated as a purchase and 
accounted for using the purchase method. Micronics results are included 
in the Company's financial statement from the date of acquisition. The 
purchase price for Micronics was $32,596,000 or $20,192,000 net of 
Micronics cash balances acquired. The following unaudited proforma 
consolidated statement of operations assumes Micronics had been 
purchased at the beginning of 1997. 

<TABLE>
<CAPTION>
                                                Years Ended
                                                December 31,
                                           ---------------------
Dollars in thousands                          1998       1997
                                           ---------- ----------
<S>                                        <C>        <C>
Net sales................................   $626,803   $525,828

Net income (loss)........................   ($63,690)  ($60,215)
                                           ========== ==========
Net income (loss) per share:                             
        Basic............................     ($1.82)    ($1.75)
                                           ========== ==========
        Diluted..........................     ($1.82)    ($1.75)
                                           ========== ==========

Shares used in per share calculations:
        Basic............................     34,955     34,322
        Diluted..........................     34,955     34,322

</TABLE>


DIAMOND MULTIMEDIA SYSTEMS, INC.
SCHEDULE II-Valuation and Qualifying Accounts 

DIAMOND MULTIMEDIA SYSTEMS, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (in thousands)
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                     Balance    Additions                            Balance
                                       at        Charged   Deductions                   at
                                    Beginning   to Costs      from                    End of
                                    of Period  & Expenses   Reserves  Adjustments(1)  Period
                                   ----------- ----------- ---------- ------------- ----------
<S>                                <C>         <C>         <C>        <C>           <C>
Year Ended December 31, 1998:
  Accounts Receivable Allowances...    $2,440           --    $2,189        $1,845       $251
  Inventory Allowances.............    $2,752     $13,048    $22,134       $12,201    ($6,334)

Year Ended December 31, 1997:
  Accounts Receivable Allowances...    $1,943        $952       $455          --       $2,440
  Inventory Allowances.............        $0     $11,580     $8,828          --       $2,752

Year Ended December 29, 1996:
  Accounts Receivable Allowances...    $1,959      $1,026     $1,042          --       $1,943
  Inventory Allowances.............    $5,063     $14,249     $5,557          --      $13,755

</TABLE>

(1) Adjustments consist of opening balance allowances related to the
    acquisitions of Micronics and DigitalCast.



INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE



Our report on the consolidated financial statements of 
Diamond Multimedia Systems, Inc. is included in this Form 10-K. 
In connection with our audits of such financial statements, we 
have also audited the related financial statement schedule 
listed in the index of this Form 10-K.

In our opinion, the financial statement schedule referred to 
above, when considered in relation to the basic financial 
statements taken as a whole, presents fairly, in all material 
respects, the information required to be included therein.



/s/ PricewaterhouseCoopers L.L.P.                                      

San Jose, California
January 29, 1999






DIAMOND MULTIMEDIA SYSTEMS, INC.
LIST OF EXHIBITS


Exhibit No.     Description                                               

10.17           Facilities Lease (2895 Zanker Road, San Jose, CA). 

23.1            Consent of Pricewaterhouse Coopers L.L.P. 
                Independent Accountants                                 

24.1            Power of Attorney (Included in this report under the caption
                signatures).

27.1            Financial Data Schedule