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                                                                   EXHIBIT 10.17




S3 INCORPORATED                                           [S3 Incorporated Logo]
2801 Mission College Blvd.
P.O. Box 58058
Santa Clara, CA 95052-8058

September 22, 1998

TO:      Dan Karr

Re:      Agreement Regarding Severance

Dear Dan,

         This letter agreement sets forth the terms and conditions of severance
that will be paid to you in the event your employment with S3 Incorporated (the
"Company") is involuntarily terminated other than for Cause.

         By signing below, you and the Company agree as follows:

         1. Severance Payment. Subject to the release requirement of paragraph
2, if your employment is terminated at the behest of the company other than for
Cause, you will be paid a lump sum payment equal to six months of your base
salary, plus one month of base salary for every full year of your service to the
Company. In addition, the term for exercise of your outstanding options will be
extended until six months after your termination (although you will not continue
to vest after your termination). You should be aware that the extension of your
option exercise term will cause an incentive stock option to become a
nonstatutory stock option, which means that you could be taxed at exercise.
Please advise the Company if you have any concerns about this consequence before
signing below. Your severance will be reduced for applicable withholding.

         2. Release Requirement. No severance will be paid, and your option
exercise term will not be extended, unless you execute and deliver to the
Company a full and complete release and covenant not to sue (prepared by, and in
form and substance acceptable to, the Company (the "Release") of all past,
present and future claims you may have against the Company or any of its
officers, directors, shareholders, employees, consultants and agents arising
directly or indirectly from your employment relationship with the Company, this
letter agreement or any act or omission predating the execution of the Release
and thereafter take no action to void or otherwise limit or terminate the
Release within any applicable statutory periods providing such rights.

         3. Cause. For purposes of this letter agreement, "Cause" means: (i)
failure to substantially perform the duties and obligations of your employment,
(ii) misconduct which could reasonably be expected to cause substantial injury
to the Company or any of its affiliates, (iii) material breach of any agreement
between you and the Company or any of its affiliates, or (iv) violation or
breach of any obligation under any confidentiality, assignment of inventions, or
non-solicitation agreement between you and the Company.
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Dan Karr
September 22, 1998
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         4. Adjustments to Minimize Taxes Under Golden Parachute Rules. In the
event that any severance payments hereunder are determined to be "excess
parachute payments" pursuant to Section 28OG of the Internal Revenue Code of
1986, as amended, such severance payments shall be reduced to the extent
necessary to maximize your after-tax income.

         5. Binding On Successors. This letter agreement will be binding upon
you and any person who is a successor by merger, acquisition, consolidation or
otherwise to the business formerly carried on by the Company, or an affiliate of
any such person, and becomes your employer by reason of (or as the direct result
of) any direct or indirect sale or other disposition of the Company or
substantially all of the assets of the business currently carried on by the
Company, without regard to whether or not such person actively adopts this
letter agreement.

         6. Nonassignability. You may not sell, assign or otherwise transfer any
right or interest you may have under this letter agreement other than by will or
by operation of law.

         7. Dispute Resolution. You and the Company agree to be bound by the
Dispute Resolution procedures attached hereto.

         8. Severability. If any provision of this letter agreement is held
invalid or unenforceable, its invalidity or unenforceability will not affect any
other provision of the letter agreement, and the letter agreement will be
construed and enforced as if such provision had not been included.

         9. Governing Law. This letter agreement will be deemed a contract made
under, and for all purposes shall be construed in accordance with, the laws of
California (without regard to its choice of law provisions).

Sincerely,


 /s/ Terry Holdt                    
-----------------------------
Terry Holdt
President, CEO and Chairman
S3 Incorporated
Dated:  September 22, 1998

ACKNOWLEDGED AND AGREED


 /s/ Dan Karr                       
------------------------------
Dated: October 29, 1998


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DISPUTE RESOLUTION

Any disputes between you and the Company, including but not limited to disputes
arising out of or related to the letter agreement shall be resolved by using the
following procedures, except that paragraphs (c) and (d) will not be followed in
cases where the law specifically forbids the use of arbitration as a final and
binding remedy, or where paragraph (d) below specifically allows a different
remedy.

(a) The party claiming to be aggrieved shall furnish to the other party a
written statement of the grievance identifying any witnesses or documents that
support the grievance and the relief requested or proposed.

(b) If the other party does not agree to furnish the relief requested or
proposed, or otherwise does not satisfy the demand of the party claiming to be
aggrieved, the parties shall submit the dispute to nonbinding mediation before a
mediator to be jointly selected by the parties. The Company will pay the cost of
the mediation.

(c) If the mediation does not produce a resolution of the dispute, the parties
agree that the dispute shall be resolved by final and binding arbitration. The
parties shall attempt to agree to the identity of an arbitrator, and, if they
are unable to do so, they will obtain a list of arbitrators from the Federal
Mediation and Conciliation Service and select an arbitrator by striking names
from that list. The arbitrator shall have the authority to determine whether the
conduct complained of in paragraph (a) violates the rights of the complaining
party and, if so, to grant any relief authorized by law; subject to the
exclusions of paragraph (d) below. The arbitrator shall not have the authority
to modify, change or refuse to enforce the terms of this letter agreement.

The hearing shall be transcribed. The Company shall bear the costs of the
arbitration if you prevail. If the Company prevails, you will pay half the cost
of the arbitration or $500, whichever is less. Each party shall be responsible
for paying its own attorneys' fees, unless the arbitrator orders otherwise,
pursuant to applicable law.

(d) Arbitration shall be the exclusive final remedy for any dispute between the
parties, and the parties agree that no dispute shall be submitted to arbitration
where the party claiming to be aggrieved has not complied with the preliminary
steps provided for above. The parties agree that the arbitration award shall be
enforceable in any court having jurisdiction to enforce this letter agreement,
so long as the arbitrator's findings of fact are supported by substantial
evidence on the whole and the arbitrator has not made errors of law; provided
however, that either party may bring an action, including but not limited to an
action for injunctive relief, in a court of competent jurisdiction, regarding or
related to matters involving the Company's confidential, proprietary or trade
secret information, or regarding or related to inventions that you may claim to
have developed prior to joining the Company or after joining the Company,
pursuant to California Labor Code 2870. The parties further agree that for
violations of any confidential, proprietary information or trade secret
obligations which the parties have elected to submit to arbitration, the Company
retains the right to seek preliminary injunctive relief in court in order to
preserve the status quo or prevent irreparable injury before the matter can be
heard in arbitration.