<PAGE>   1
                                                                  EXHIBIT 10.13



                                 S3 INCORPORATED
                                 P. O. BOX 58058
                           2801 MISSION COLLEGE BLVD.
                           SANTA CLARA, CA 95052-8058
                            TELEPHONE: (408) 588-8000
                            FACSIMILE: (408) 980-5445



                                October 30, 1998


Mr. Kenneth Potashner
16452 Avenida de los Olivos
Rancho Santa Fe, CA 92067

Dear Ken:

         This letter agreement (the "Agreement") sets forth the terms and
conditions of your employment with S3 Incorporated (the "Company").

         In consideration of the mutual covenants and promises made in this
Agreement, you and the Company agree as follows:

         1. Employment. Commencing as of October 30, 1998 (the "Effective Date")
and during the Term, you will be employed on a full-time basis as President and
Chief Executive Officer of the Company. The Company's Board of Directors (the
"Board") has also elected you to serve as a director and as its Chairman,
effective as of such date. During the Term, you will be given such duties,
responsibilities and authority as are appropriate to such positions. During the
Term, you will perform and discharge well and faithfully such duties for the
Company as are set forth in the bylaws of the Company regarding its Chairman of
the Board, President and Chief Executive Officer and such other duties relating
to the Company's business, administration and policies as may be reasonably
assigned or requested from time to time by the Company's Board of Directors (the
"Board"). You will devote your full working time, attention and efforts to the
affairs of the Company during the Term; provided, however, (i) you may continue
to serve as a member of the Board of Directors of Maxwell Technologies, Inc.
("Maxwell") during your employment with the Company, and (ii) you may provide
transition services of limited duration to Maxwell following the termination of
your employment with Maxwell, provided that such services will in no event
interfere in any material respect with your obligations to provide full-time
services to the Company. You agree and understand that your obligations to the
Company under this Agreement will require your highest level of attention and
commitment.

         2. Term. The term of this Agreement will commence on the Effective Date
and will continue for three years thereafter, unless earlier terminated as
provided herein (the "Term"). Either you or the Company can terminate your
employment hereunder, and your services as an officer and employee of the
Company and Chairman of its Board, at any time and for any reason, with or
without cause and with or without notice. Under certain circumstances you will
be entitled to certain payments and other consideration on such termination,
pursuant to the terms and provisions of paragraph 10 below.
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Mr. Kenneth Potashner
October 30, 1998
Page 2


         3. Base Salary. For your services to the Company, you will be paid a
base salary, payable in accordance with the Company's usual payroll practices
during your full-time employment as President and Chief Executive Officer, at an
annualized rate of $500,000 per year. The Board may, in its sole discretion,
increase but not decrease, your base salary each year after review of your
performance.

         4. Regular Bonus. You will be eligible to receive an annual bonus of up
to 200% of your base salary subject to your achievement of performance goals to
be mutually determined and your continued full-time employment as President and
Chief Executive Officer though the end of each relevant bonus period (typically,
a calendar year). The performance goals for the first year will be determined in
the first three months following the Effective Date. Your minimum bonus payable
immediately following the first anniversary of the Effective Date will be
$250,000. No minimum bonus shall be payable with respect to other periods.

         5. Definitions. For purposes of this Agreement:

         "Change in Control" means: (i) the consummation of a merger or
consolidation of the Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the continuing
or surviving entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
stockholders of the Company immediately prior to such merger, consolidation or
other reorganization; or (ii) the sale, transfer or other disposition of all or
substantially all of the Company's assets. A transaction will not constitute a
Change in Control if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company's securities
immediately before such transaction.

         "Cause" for termination of your employment with the Company will exist
when one or more of the following events has occurred: (i) your fraud or
criminal conduct affecting your employment or toward the Company, (ii) your
willful gross misconduct, willful gross neglect of duties or failure to act
which materially and adversely affects the business of the Company, or (iii)
your engaging in any activity in competition with Company in a material manner
(excluding a less than 5% investment in any public company, and excluding your
ongoing services as a director of Maxwell if it remains in substantially the
same business or another business that does not compete with the Company).

         "Constructive Termination" means your termination of your employment
with the Company following the occurrence, without your written consent, of one
or more of the following events: (i) a diminution in your duties or the
assignment to you of duties which are materially inconsistent with your position
or which significantly impair your ability to function in your then current
position, provided that you provide notice of your objection in writing to such
diminution or assignment and the Company fails to rescind the same within two
(2) weeks after receipt of your notice; (ii) a reduction in compensation or
material reduction in benefits under this Agreement, which reduction is not
cured within two (2) weeks following written notice thereof from you; (iii) the
Company's requiring you to relocate your residence without your prior written
consent from the San Francisco Bay Area, or from any other area to which 


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Mr. Kenneth Potashner
October 30, 1998
Page 3



you may voluntarily move with the Company's prior written consent during the
Term; or (iv) the unconsented (by you) relocation of the principal place for the
rendering of services hereunder to a location more than fifty (50) miles from
the present location of the principal executive office of Company.

None of the foregoing will constitute a Constructive Termination to the extent
mutually agreed upon in writing by you and the Company in advance of the
occurrence thereof. A Constructive Termination will be treated as an involuntary
termination by the Company without Cause.

         "Disability" means your failure to effectively discharge your duties
and to render the services required hereunder due to physical or mental injury,
illness or disability for six (6) or more consecutive months or for more than
six (6) months in the aggregate during any period of twelve (12) calendar months
following the commencement of employment hereunder.

         6. Stock Options. You will be granted two stock options. First, you
will be granted a nonstatutory stock option (the "1,500,000 Share Option"), in
substantially the form of Exhibit A attached hereto, to purchase 1,500,000
shares of the Common Stock of the Company (the "Common Stock") with an exercise
price per share equal to the closing price of the Common Stock on the Effective
Date. The 1,500,000 Share Option will be fully vested and exercisable upon the
earliest of (i) the six month anniversary of the Effective Date if you are then
employed by the Company on a full-time basis, (ii) upon the consummation of a
Change in Control if you are employed by the Company immediately prior to such
Change in Control on a full-time basis, (iii) the Company's termination of your
full-time employment without Cause, or (iv) a Constructive Termination. The
1,500,000 Share Option will terminate on the earlier of the third anniversary of
the Effective Date (the Payment Date defined in Section 7 below) or 90 days
after termination of your full-time employment by the Company.

         Second, you will be granted an incentive stock option (to the extent
incentive stock option treatment is available under the annual $100,000 limit of
Section 422(d) of the Internal Revenue Code) in substantially the form attached
hereto as Exhibit B to purchase 3,000,000 shares of the Common Stock (the
"3,000,000 Share Option") with an exercise price per share equal to the closing
price of the Common Stock on the Effective Date. An example of the effect of
Section 422(d) of the Internal Revenue Code is set forth on Exhibit C. Subject
to the provisions of paragraph 10(b)(iii) and 10(c)(iii) below (which provide
for vesting continuation under certain circumstances following a termination
without Cause or by Constructive Termination) the 3,000,000 Share Option will
vest and become fully exercisable as to 750,000 shares on the first anniversary
of the Effective Date if you are then employed by the Company on a full-time
basis, and so long as you are so employed by the Company will vest thereafter in
equal monthly installments of 62,500 shares, resulting in full vesting in four
years if you are still employed on a full-time basis by the Company on the
fourth anniversary of the Effective Date. Subject to the aforesaid provisions of
paragraph 10(b)(iii) and 10(c)(iii), the 3,000,000 Share Option will terminate
on the earlier of the tenth anniversary of the Effective Date or 90 days after
termination of your full-time employment by the Company.

         7. Special Cash Bonus. On the third anniversary of the Effective Date
(or, if applicable, on the date specified in Section 10) (the "Payment Date")
you will be paid a "Special Cash Bonus" if:
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Mr. Kenneth Potashner
October 30, 1998
Page 4


         (a) Minimum Per Share Spread Not Achieved at End of Applicable Term.
         The average closing price of the Common Stock over the last 10 trading
         days immediately preceding the Payment Date is less than the sum of:
         (i) $4.67 ($7,000,000 divided by 1,500,000) plus (ii) the exercise
         price per share of the 1,500,000 Share Option; and

         (b) Minimum Per Share Spread Not Achieved During Each 10-day Period
         During Three-Year Term. The average closing price of the Common Stock
         during each and every 10 trading day period that occurs during an open
         officers' trading window and that commences six months after the
         Effective Date and ends on or before the Payment Date is less than the
         sum of (i) $4.67 ($7,000,000 divided by 1,500,000) plus (ii) the
         exercise price per share of the 1,500,000 Share Option. See Exhibit C
         for an example of this paragraph (b). For this purpose, an "open
         officers' trading window" means a period during which officers of the
         Company are permitted to trade in the Company's Common Stock under the
         Company's insider trading policy; and

         (c) No Hedging. You do not engage in any hedging transaction with
         respect to the Common Stock prior to the date the Special Cash Bonus
         would otherwise be payable. A hedging transaction for these purposes
         shall mean any transaction (other than the exercise of the options and
         any subsequent sale of any of the Common Stock issued upon exercise
         thereof) which offsets or reduces or is intended to offset or reduce,
         in whole or in part, any risk that the value of the Common Stock will
         decline, including but not limited to a short sale, hedging options and
         swaps, selling calls, costless calls (i.e., selling puts and using the
         proceeds to buy calls), pledging of shares of Company common stock to
         secure a loan on a nonrecourse (to your other assets) basis, or an
         equity swap; and

         (d) Employed For Three Years or Certain Terminations. Either (i) you
         are still employed by the Company on a full-time basis as its Chief
         Executive Officer and President on the day prior to the Payment Date,
         or (ii) your employment is terminated by the Company prior to the
         Payment Date without Cause or by Constructive Termination.

         The Special Cash Bonus, if payable, will be equal to $7,000,000, less
         the sum of:

                  (i)      the number of shares subject to the unexercised
                           portion of the 1,500,000 Share Option, multiplied by
                           the excess of the average closing price of the Common
                           Stock over the 10 trading days immediately preceding
                           the Payment Date over the exercise price per share of
                           the 1,500,000 Share Option; and

                  (ii)     the greater of (x) the amount of any net built-in
                           gain (closing price on the date(s) of exercise over
                           exercise price(s)) on any portions of the 1,500,000
                           Share Option which you exercised prior to the Payment
                           Date and (y) the number of shares that have been
                           issued under the exercised portion of the 1,500,000
                           Share Option, multiplied by the excess of the average
                           closing price of the Common Stock over the 10 trading
                           days 


<PAGE>   5


Mr. Kenneth Potashner
October 30, 1998
Page 5



                           immediately preceding the Payment Date over the
                           exercise price per share of the 1,500,000 Share
                           Option.

         The Special Cash Bonus will be payable through net exercise of the
1,500,000 Share Option (with the excess of the closing price of the Common Stock
on the trading day immediately preceding the Payment Date over the aggregate
exercise price for such shares being applied to reduce on a dollar for dollar
basis the Special Cash Bonus otherwise payable), and a lump sum cash payment by
the Company of the remainder of the Special Cash Bonus. All references to
"closing price" in this Agreement shall refer to such price on the applicable
day as quoted in the Wall Street Journal.

         (e) Rabbi Trust. In the event the cash and cash equivalents held by the
Company (determined in accordance with Generally Accepted Accounting Principles)
are valued at $25 million or less, the Company shall immediately contribute
$7,000,000 to a rabbi trust established for your benefit. The rabbi trust shall
be in substantially the form of the model rabbi trust prepared by the Internal
Revenue Service and shall be trusteed by a bank trustee. The Special Cash Bonus
shall be the sole benefit payable from such rabbi trust; provided that the
Company may, at its sole discretion, pay the Special Cash Bonus from other
sources, in which event the assets of the rabbi trust shall revert to the
Company. In no event shall the Special Cash Bonus paid to you from the rabbi
trust exceed the amounts due under paragraph (d) above after taking into account
the net exercise of the 1,500,000 Share Option. The rabbi trust shall terminate
following payment of the Special Cash Bonus, and any remainder left in the rabbi
trust following payment of the Special Cash Bonus shall revert to the Company.

         8. Relocation Assistance. Your primary residence is located in Southern
California. You will move your primary residence to the San Francisco Bay Area
by July 1, 1999. Until the relocation of your primary residence, the Company
will reimburse you for all reasonable travel expenses incurred in commuting from
your residence in Southern California to the Company's offices to provide
services hereunder, as well as the reasonable costs of maintaining a second
residence and a leased car in the San Francisco Bay Area, including up to two
trips a month for your family to the Bay Area. The Company will pay for your
reasonable moving expenses attributable to the relocation of your primary
residence to the San Francisco Bay Area. After you move your residence to the
San Francisco Bay Area, the Company shall not require you to relocate your
residence from the San Francisco Bay Area without your prior written consent, or
from any other area to which you may voluntarily move with the Company's prior
written consent during the Term. The Company shall not be required to pay all or
any part of the cost of your new residence in the San Francisco Bay Area. In
addition, the Company will pay you a tax gross-up payment in an amount
sufficient to ensure that you do not incur any net income tax liability due to
the payments described in this Section 8.

         9. Employee Benefit Programs. Commencing on the Effective Date, and
during the period of your full-time employment, you will be entitled to
participate in all Company employee benefit plans and compensation and
perquisite programs made available to the Company's executives or salaried
employees generally, including the Company's Employee Stock Purchase Plan,
401(k) Plan and Executive Deferred Compensation Plan. You will be entitled to
reimbursement of reasonable work-related expenses. You will be entitled to four
weeks of paid vacation per year, provided that you will not accrue unused
vacation of more 

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Mr. Kenneth Potashner
October 30, 1998
Page 6



than eight weeks. You will be paid for unused vacation time.

         10. Consequences of Termination of Employment.

         (a) Involuntary Termination By Company For Cause. In the event the
Company terminates your full-time employment during the term of this Agreement
for Cause, you will be entitled to any unpaid salary, bonus and vacation due you
pursuant to paragraphs 3, 4 and 9 above through the date of termination and you
will be entitled to no other compensation from the Company.

         (b) Involuntary Termination (i) By Company Without Cause or (ii) by
Constructive Termination - Before Change in Control. In the event either (i) the
Company terminates your full-time employment without Cause during the Term and
before the consummation of a Change in Control or (ii) your employment is
terminated during the Term and before the consummation of a Change in Control by
Constructive Termination, you will be entitled to the following:

         (i)      the Company will pay you any unpaid salary, bonus and vacation
                  due you pursuant to paragraphs 3, 4 and 9 above through the
                  date of termination. For 12 months thereafter, your base
                  salary and benefits will continue, and each month during that
                  12-month period you will be paid 1/12th of the maximum (200%
                  of base salary) regular bonus payable under paragraph 4;

         (ii)     the 1,500,000 Share Option will be fully vested and
                  exercisable, as set forth in paragraph 6 above;

         (iii)    the 3,000,000 Share Option will continue to vest during the
                  12-month compensation and benefit continuation period, subject
                  to your provision, if requested to do so by the Company, of
                  consulting services to the Company and your agreement to, and
                  compliance with, nonsolicitation and noncompetition agreements
                  in favor of the Company (substantially in the form attached as
                  Exhibit E) during such 12-month period. The 3,000,000 Share
                  Option, in such event shall terminate 90 days after the end of
                  such vesting continuation period; and

         (iv)     the Special Cash Bonus will be paid as set forth in paragraph
                  7 above, provided that the amount of the Special Cash Bonus
                  will be calculated as of the date of termination of your
                  full-time employment and paid three business days after such
                  termination (and such payment date will be deemed the "Payment
                  Date"). The net exercise value of the 1,500,000 Share Option
                  shall, for purposes of determining the amount of Special Cash
                  Bonus payable, if any, be determined based on the closing
                  price of the Common Stock on the trading day immediately
                  preceding the date of termination of your full-time
                  employment.

         (c) Involuntary Termination (i) By Company Without Cause or (ii) by
Constructive Termination - Upon or After Change in Control. In the event either
(i) the Company terminates your employment without Cause during the Term upon or
after the consummation of a Change 

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Mr. Kenneth Potashner
October 30, 1998
Page 7


in Control or (ii) your employment is terminated during the Term on or after the
consummation of a Change in Control of a Constructive Termination, you will be
entitled to the following:

         (i)      the Company will pay you any unpaid salary, bonus and vacation
                  due you pursuant to paragraphs 3, 4 and 9 above through the
                  date of termination. For 18 months thereafter, your base
                  salary and benefits will continue, and each month during that
                  18-month period you will be paid 1/12th of the maximum (200%
                  of base salary) regular bonus payable under paragraph 4;

         (ii)     the 1,500,000 Share Option will be fully vested and
                  exercisable, as set forth in paragraph 6 above;

         (iii)    the 3,000,000 Share Option will continue to vest as follows:
                  if the termination precedes the second anniversary of the
                  Effective Date, the 3,000,000 Share Option will continue to
                  vest over the 18-month compensation and benefit continuation
                  period, subject to your provision, if requested to do so, of
                  consulting services to the Company and your agreement to, and
                  compliance with, nonsolicitation and noncompetition agreements
                  in favor of the Company (substantially in the form attached as
                  Exhibit E) during the 18-month period. If the termination is
                  on or after the second anniversary of the Effective Date, the
                  3,000,000 Share Option will continue to vest over the 18-month
                  compensation and benefit continuation period, subject to your
                  provision, if requested to do so, of consulting services to
                  the Company and your agreement to, and compliance with,
                  nonsolicitation and noncompetition agreements in favor of the
                  Company (substantially in the form attached as Exhibit E)
                  during the 18-month period, and any portion of the 3,000,000
                  Share Option that would not vest during the 18-month
                  continuation period will be fully vested at the date of
                  termination. The 3,000,000 Share Option in either event would
                  terminate 90 days after the end of such vesting continuation
                  period;

         (iv)     the Special Cash Bonus will be paid as set forth in paragraph
                  7 above, provided that the amount of the Special Cash Bonus
                  will be calculated as of the date of termination of your
                  full-time employment and paid three business days after such
                  termination (and such payment date will be deemed the "Payment
                  Date"). The net exercise value of the 1,500,000 Share Option
                  shall, for purposes of determining the amount of Special Cash
                  Bonus payable, if any, be determined based on the closing
                  price of the Common Stock on the trading day immediately
                  preceding the date of termination of your full-time
                  employment; and

         (v)      you will be paid an additional payment equal to the excess, if
                  any, of (x) $10,000,000, over (y) the Special Cash Bonus, plus
                  the total salary and bonus continuation payments payable
                  pursuant to clause (i) of paragraph 10(c), plus the net
                  exercise value of the 3,000,000 Share Option (including any
                  exercised portion thereof). Net exercise value for these
                  purposes will be determined by taking any built-in gain
                  (greater of closing price on the date of exercise or closing
                  price on your termination of full-time employment over
                  exercise price) on any portion of the 3,000,000 Share Option
                  which you exercised prior to the 

<PAGE>   8

Mr. Kenneth Potashner
October 30, 1998
Page 8



                  termination date of your full-time employment, and adding
                  thereto the product of the number of shares of Common Stock
                  that are still subject to the 3,000,000 Share Option times the
                  excess of the closing price of the Common Stock on the last
                  trading day immediately preceding your termination of
                  full-time employment over the exercise price per share of the
                  3,000,000 Share Option. If the amount referenced in (y)
                  exceeds $10,000,000, the Company will have no claim to the
                  excess and you shall have no rights to any payments pursuant
                  to this clause (v).

         (d) Voluntary Termination, Death or Disability. In the event you
terminate your employment with the Company of your own volition (other than a
Constructive Termination) or as a result of death or Disability, such
termination will have the same consequences as a termination for Cause.

         (e) Examples. Examples of the operation of this paragraph 10 and
paragraph 7 are attached hereto as Exhibit C.

         11. Conditions to Receipt of Payments and Benefits.

         (a) Release of Claims. As a condition to the receipt of any the
payments and other consideration described in paragraph 10, you must execute and
deliver to the Company a full and complete release and covenant not to sue
substantially in the form of Exhibit F (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 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.

         (b) Proprietary Information. In view of your position and access to
proprietary information, as a condition to the receipt of payments and other
consideration described in this Agreement, during the term of your employment by
the Company you will not, without the Company's written consent, directly or
indirectly, alone or as a partner, joint venturer, officer, director, employee,
consultant, agent or stockholder (other than a less than 5% stockholder of a
publicly traded company) (i) engage in any activity which is in competition with
the business, the products or services of the Company, (ii) solicit any of the
Company's employees, consultants or customers, (iii) hire any of the Company's
employees or consultants in an unlawful manner or actively encourage employees
or consultants to leave the Company, or (iv) otherwise breach your proprietary
information obligations. You agree to execute and comply with the Company's
standard form of Proprietary Information and Inventions Agreement, attached as
Exhibit D as a condition to receipt of any payments or other consideration under
this Agreement.

         12. Assignability; Binding Nature. Commencing on the Effective Date,
this Agreement will be binding upon you and the Company and your respective
successors, heirs, and assigns. This Agreement may not be assigned by you except
that your rights to compensation and benefits hereunder, subject to the
limitations of this Agreement, may be transferred by will or operation of law.
No rights or obligations of the Company under this Agreement may be 

<PAGE>   9


Mr. Kenneth Potashner
October 30, 1998
Page 9


assigned or transferred except by operation of law in the event of a merger or
consolidation in which the Company is not the continuing entity, or the sale or
liquidation of all or substantially all of the assets of the Company, provided
that the assignee or transferee is the successor to all or substantially all of
the assets of the Company and assumes the Company's obligations under this
Agreement contractually or as a matter of law.

         13. Notice. Any notice to be delivered pursuant to this Agreement shall
be in writing and shall be deemed delivered upon service, if served personally,
or three days after deposit in the United States Mail, if mailed by first class
mail, postage prepaid, registered or certified with return receipt requested,
addressed to the other party at the address set forth herein, or such other
address as may be designated in accordance herewith:

If to you:                                      Kenneth Potashner
                                                16452 Avenida de los Olivos
                                                Rancho Santa Fe, CA 92067

with a copy to his counsel
    at:                                         Deidra Schneider
                                                Latham & Watkins
                                                701 B Street, Suite 2100
                                                San Diego, CA 92101-8197

If to the Company:                              S3 Incorporated
                                                2801 Mission College Boulevard
                                                P. O. Box 58058
                                                Santa Clara, CA

with a copy to its counsel
    at:                                         Jorge del Calvo, Esq.
                                                Pillsbury Madison & Sutro LLP
                                                2550 Hanover Street
                                                Palo Alto, CA 94304

         14. Dispute Resolution. Any disputes between you and the Company,
including but not limited to disputes arising out of or related to the Agreement
and disputes arising out of or related to the agreements evidencing your Company
stock options, 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 
<PAGE>   10


Mr. Kenneth Potashner
October 30, 1998
Page 10


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 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. The prevailing party in the arbitration shall be
entitled to recover from the other party his or its reasonable attorney fees and
its costs incurred in connnection with the arbitration, as determined by the
arbitrator.

         (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
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 the 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 my 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.

         15. Governing Law. This Agreement will be deemed a contract made under,
and for all purposes will be construed in accordance with, the laws of
California applicable to contracts between California residents and wholly to be
performed in California, notwithstanding California, without regard to
California choice of law provisions or principles of conflicts of law.

         16. Withholding. Anything to the contrary notwithstanding, following
the Effective Date all payments made by the Company hereunder to you or your
estate or beneficiaries will be subject to tax withholding pursuant to any
applicable laws or regulations. In lieu of withholding, the Company may, in its
sole discretion, accept other provision for payment of taxes as required by law,
provided it is satisfied that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
<PAGE>   11

Mr. Kenneth Potashner
October 30, 1998
Page 11


         17. Entire Agreement. Except as otherwise specifically provided in this
Agreement, this Agreement together with all Exhibits thereto, contains all the
legally binding understandings and agreements between you and the Company
pertaining to the subject matter of this Agreement and supersedes all such
agreements, whether oral or in writing, previously entered into between the
parties.

         18. Miscellaneous. No provision of this Agreement may be amended or
waived unless such amendment or waiver is agreed to by you and the Board in
writing. No waiver by you or the Company of the breach of any condition or
provision of this Agreement will be deemed a waiver of a similar or dissimilar
provision or condition at the same or any prior or subsequent time. In the event
any portion of this Agreement is determined to be invalid or unenforceable for
any reason, the remaining portions will be unaffected thereby and will remain in
full force and effect to the fullest extent permitted by law.

         The offer made by this letter will terminate if you do not return a
signed copy of this letter by ______________, 1998.

                                 Sincerely,

                                 S3 Incorporated



                                 By 
                                    -------------------------------------------
                                 Its
                                    -------------------------------------------


ACKNOWLEDGED AND AGREED:



   /s/ Kenneth Potashner      
------------------------------
       Kenneth Potashner

Dated: October 30, 1998
       ----------------

<PAGE>   12




                                    EXHIBIT C

                                    EXAMPLES


I.  $100,000 LIMITATION ON INCENTIVE STOCK OPTIONS

Internal Revenue Code section 422(d) states that to the extent the aggregate
fair market value of an incentive stock option ("ISO") that first becomes
exercisable in a calendar year exceeds $100,000 in a given year, the option will
not be an ISO. For this purpose, the fair market value is determined on the date
of grant (which, for an ISO, cannot precede the first day of employment).

For example, if the 3,000,000 Share Option is granted on November 2, 1998, and
the fair market value of a share of Company common stock on that date is $3.50,
then the portion of the 3,000,000 Share Option that will be an ISO will be as
follows:

         *        Of the 750,000 shares vesting on 11/2/99, 28,571 shares
                  ($100,000 divided by $3.50) will be ISOs;

         *        No other shares vesting in 1999 will be ISOs;

         *        The first 28,571 shares vesting in each subsequent calendar
                  year will be ISOs.


II.  SPECIAL CASH BONUS

Assumptions

1,500,000 Share Option has $3.00 exercise price
Closing price @ 1-year anniversary, and for preceding 10 trading days, is $4.00
Closing price @ 2-year anniversary, and for preceding 10 trading days, is $5.00
Closing price @ 3-year anniversary, and for preceding 10 trading days, is $6.00


Threshold Conditions to Payment of Special Cash Bonus

         -        Average closing price over last 10 trading days in 3-year term
                  is less than $7.67 ($4.67 plus $3.00)

         -        During each and every 10 trading day period that occurs in an
                  open officers trading window, the average closing price is
                  less than $7.67.

         -        No hedging transactions

         -        Employed on a full-time basis @ 3 year anniversary.

<PAGE>   13

Amount of Special Cash Bonus

Example 1       -     No Option Exercise;
                      Special Cash Bonus payable @ 3-year anniversary

        Special Cash Bonus = $7,000,000
                       - 1,500,000 x ($6.00 - $3.00)
                -----------------------------------
                       = $2,500,000

Example 2       -     No Option Exercise;
                      Terminated Without Cause @ 2-year anniversary
                      Special Cash Bonus payable @ termination

        Special Cash Bonus = $7,000,000
                       - 1,500,000 x ($5.00 - $3.00)
                -----------------------------------
                       = $4,000,000


Example 3       -     Option exercised @ 2-year anniversary for 400,000 Shares;
                      Special Cash Bonus payable @ 3-year anniversary

        Special Cash Bonus = $7,000,000
                       - 1,100,000 x ($6.00 - $3.00)
                       - greater of:
                            (i) 400,000 x ($5.00-$3.00); or
                           (ii)400,000 x ($6.00-$3.00) - 1,200,000
                 -------------------------------------------------
                       = $2,500,000

Note that the formula results in the same bonus, whether you exercise or not,
unless the closing price is higher at exercise than the closing price at payment
of the Special Cash Bonus.


III.  SECTION 7(b) CRITERION

Assume an exercise price per share of $3.50 per share for the 1,500,000 Share
Option. Assume further that during every 10 trading day period occurring during
an open trading window, the average closing price per share is less than $ 8.17
(the sum of $3.50 and $4.67). Section 7(b) shall not bar the payment of the
Special Cash Bonus.

Assume now the same facts, but during one 10 trading day period occurring during
an open trading window, the average closing price is $8.25. No Special Cash
Bonus will be payable.


IV.     SECTION 10(c)(v) PAYMENT

Assumptions 3,000,000 Share Option exercise price is $3.00 
                    Total Salary and Bonus Continuation is $2,250,000 
                    (18 months @ 500,000 + 200% bonus)
<PAGE>   14

Example 1:        3,000,000 Share Option is not exercised. Closing price on
                  last trading day preceding termination is $5.00. At this
                  price, the Special Cash Bonus is approximately $4,000,000.

        The Section 10(c)(v) payment will be:

                            $10,000,000
                less        $4,000,000(option bonus)
                less        $2,250,000(salary and bonus continuation) [constant]
                less         3,000,000 x ($5.00 - $3.00)
                            ----------------------------------------------------

                            (negative number)

                No Section 10(c)(v) payment will be made.


Example 2       -     Same facts as 1, except that the closing price is $6.00, 
                      so the Special Cash Bonus will be $2,500,000.


                          $10,000,000
                less        2,500,000
                less        2,250,000
                less        9,000,000
                          -----------
                      (negative number)

                No Section 10(c)(v) payment will be made.

Example 3:      Same facts as 2, except that the closing price is $1.00.
                The Special Cash Bonus will be $7,000,000.

                           $10,000,000
                less        $7,000,000(option bonus)
                less        $2,250,000(salary/bonus continuation)
                less         3,000,000x ($1.00-$3.00) = 0 (built-in gain)
                           -----------------------------------------------
                          $750,000

                The Section 10(c)(v) payment will be $750,000.




<PAGE>   15



                                   EXHIBIT D

                PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT