<PAGE>   1

                                                                    EXHIBIT 10.1


                               1989 STOCK PLAN OF

                                 S3 INCORPORATED

                 (Amended and Restated as of December 14, 1998)

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
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                                                                         Page
                                                                         ----
<S>             <C>                                                      <C>
SECTION 1.      ESTABLISHMENT AND PURPOSE...............................   1

SECTION 2.      DEFINITIONS.............................................   1
       (a)      "Board of Directors"....................................   1
       (b)      "Change in Control".....................................   1
       (c)      "Code"..................................................   2
       (d)      "Committee".............................................   2
       (e)      "Company"...............................................   2
       (f)      "Employee"..............................................   2
       (g)      "Exchange Act"..........................................   2
       (h)      "Exercise Price"........................................   2
       (i)      "Fair Market Value".....................................   2
       (j)      "ISO"...................................................   2
       (k)      "Nonstatutory Option"...................................   2
       (l)      "Offeree"...............................................   3
       (m)      "Option"................................................   3
       (n)      "Optionee"..............................................   3
       (o)      "Outside Director"......................................   3
       (p)      "Plan"..................................................   3
       (q)      "Purchase Price"........................................   3
       (r)      "Service"...............................................   3
       (s)      "Share".................................................   3
       (t)      "Stock".................................................   3
       (u)      "Stock Option Agreement"................................   3
       (v)      "Stock Purchase Agreement"..............................   3
       (w)      "Subsidiary"............................................   3
       (x)      "Total and Permanent Disability"........................   3

SECTION 3.      ADMINISTRATION..........................................   4
       (a)      Committee Procedures....................................   4
       (b)      Committee Responsibilities..............................   4

SECTION 4.      ELIGIBILITY.............................................   5
       (a)      General Rule............................................   5
       (b)      Outside Directors.......................................   5
       (c)      Limitation On Grants....................................   7
       (d)      Ten-Percent Stockholders................................   7
       (e)      Attribution Rules.......................................   7
       (f)      Outstanding Stock.......................................   7

SECTION 5.      STOCK SUBJECT TO PLAN...................................   7
       (a)      Basic Limitation........................................   7
       (b)      Additional Shares.......................................   7
</TABLE>


                                      -i-

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<TABLE>
<CAPTION>
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<S>             <C>                                                      <C>
SECTION 6.      TERMS AND CONDITIONS OF AWARDS OR SALES.................   8
       (a)      Stock Purchase Agreement................................   8
       (b)      Duration of Offers and Nontransferability of Rights.....   8
       (c)      Purchase Price..........................................   8
       (d)      Withholding Taxes.......................................   8
       (e)      Restrictions on Transfer of Shares......................   8

SECTION 7.      TERMS AND CONDITIONS OF OPTIONS.........................   8
       (a)      Stock Option Agreement..................................   8
       (b)      Number of Shares........................................   9
       (c)      Exercise Price..........................................   9
       (d)      Withholding Taxes.......................................   9
       (e)      Exercisability and Term.................................   9
       (f)      Nontransferability......................................   9
       (g)      Exercise of Options Upon Termination of Service.........   9
       (h)      Leaves of Absence.......................................   9
       (i)      No Rights as a Stockholder..............................  10
       (j)      Modification, Extension and Renewal of Options..........  10
       (k)      Restrictions on Transfer of Shares......................  10

SECTION 8.      PAYMENT FOR SHARES......................................  10
       (a)      General Rule............................................  10
       (b)      Surrender of Stock......................................  10
       (c)      Services Rendered.......................................  10
       (d)      Cashless Exercise.......................................  10

SECTION 9.      ADJUSTMENT OF SHARES....................................  11
       (a)      General.................................................  11
       (b)      Reorganizations.........................................  11
       (c)      Reservation of Rights...................................  11

SECTION 10.     LEGAL AND REGULATORY REQUIREMENTS.......................  11

SECTION 11.     NO EMPLOYMENT RIGHTS....................................  12

SECTION 12.     DURATION AND AMENDMENTS.................................  12
       (a)      Term of the Plan........................................  12
       (b)      Right to Amend or Terminate the Plan....................  12
       (c)      Effect of Amendment or Termination......................  12

SECTION 13.     EMPLOYEES BASED OUTSIDE OF THE UNITED STATES............  12

SECTION 14.     EXECUTION...............................................  13
</TABLE>


                                      -ii-

<PAGE>   4

                               1989 STOCK PLAN OF

                                 S3 INCORPORATED

                 (Amended and Restated as of December 14, 1998)


SECTION 1. ESTABLISHMENT AND PURPOSE.

     The Plan was established in 1989 to offer selected employees, directors,
advisers and consultants an opportunity to acquire a proprietary interest in the
success of the Company, or to increase such interest, by purchasing Shares of
the Company's Common Stock. The Plan provides both for the direct award or sale
of Shares and for the grant of Options to purchase Shares. Options granted under
the Plan may include Nonstatutory Options as well as ISOs intended to qualify
under Code section 422.

     The Plan was amended and restated as of December 14, 1998 to incorporate
prior amendments, to amend the provisions governing grants to Outside Directors,
to increase the number of shares which may be issued upon the exercise of ISOs
and to extend the term of the Plan.


SECTION 2. DEFINITIONS.

     (a)  "Board of Directors" shall mean the Board of Directors of the Company,
as constituted from time to time.

     (b)  "Change in Control" means the occurrence of either of the following 
events:

          (i)  A change in the composition of the Board of Directors, as a
result of which fewer than one-half of the incumbent directors are directors who
either:

               (A)  Had been directors of the Company twenty-four (24) months
prior to such change; or

               (B)  Were elected, or nominated for election, to the Board of
Directors with the affirmative votes of at least a majority of the directors who
had been directors of the Company twenty-four (24) months prior to such change
and who were still in office at the time of the election or nomination; or

          (ii) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) by the acquisition or aggregation of securities is or becomes
the beneficial owner, directly or indirectly, of securities of the Company
representing twenty percent (20%) or more of the combined voting power of the
Company's then outstanding securities ordinarily (and apart from rights accruing
under special circumstances) having the right to vote at elections of directors
(the "Base Capital Stock"); except that any


                                      -1-

<PAGE>   5

change in the relative beneficial ownership of the Company's securities by any
person resulting solely from a reduction in the aggregate number of outstanding
shares of Base Capital Stock, and any decrease thereafter in such person's
ownership of securities, shall be disregarded until such person increases in any
manner, directly or indirectly, such person's beneficial ownership of any
securities of the Company. For purposes of this Subsection (ii), the term
"person" shall not include an employee benefit plan maintained by the Company.

     (c)  "Code" shall mean the Internal Revenue Code of 1986, as amended.

     (d)  "Committee" shall mean the committee designated by the Board of 
Directors, which is authorized to administer the Plan under Section 3 hereof.
The Committee shall have membership composition which enables the Options or
other rights granted under the Plan to qualify for exemption under Rule 16b-3
with respect to persons who are subject to Section 16 of the Exchange Act.

     (e)  "Company" shall mean S3 Incorporated, a Delaware corporation.

     (f)  "Employee" shall mean (i) any individual who is a common-law employee 
of the Company or of a Subsidiary, (ii) a member of the Board of Directors and
(iii) an independent contractor or advisor who performs services for the Company
or a Subsidiary. Service as a member of the Board of Directors or as an
independent contractor or advisor shall be considered employment for all
purposes of the Plan except the second sentence of Section 4(a) and Section
4(b).

     (g)  "Exchange Act" shall mean the Securities Exchange Act of 1934, as 
amended.

     (h)  "Exercise Price" shall mean the amount for which one Share may be 
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.

     (i)  "Fair Market Value" shall mean (i) the closing price of a Share on the
principal exchange which the Shares are trading, on the date on which the Fair
Market Value is determined (if Fair Market Value is determined on a date which
the principal exchange is closed, Fair Market Value shall be determined on the
last immediately preceding trading day), or (ii) if the Shares are not traded on
an exchange but are quoted on the Nasdaq National Market or a successor
quotation system, the closing price on the date on which the Fair Market Value
is determined, or (iii) if the Shares are not traded on an exchange or quoted on
the Nasdaq National Market or a successor quotation system, the fair market
value of a Share, as determined by the Committee in good faith. Such
determination shall be conclusive and binding on all persons.

     (j)  "ISO" shall mean an employee incentive stock option described in Code 
section 422.

     (k)  "Nonstatutory Option" shall mean an employee stock option that is not 
an ISO.


                                      -2-
<PAGE>   6

     (l)  "Offeree" shall mean an individual to whom the Committee has offered
the right to acquire Shares under the Plan (other than upon exercise of an
Option).

     (m)  "Option" shall mean an ISO or Nonstatutory Option granted under the
Plan and entitling the holder to purchase Shares.

     (n)  "Optionee" shall mean an individual who holds an Option.

     (o)  "Outside Director" shall mean a member of the Board of Directors who
is not a common-law employee of the Company or of a Subsidiary.

     (p)  "Plan" shall mean this 1989 Stock Plan of S3 Incorporated, as amended
from time to time.

     (q)  "Purchase Price" shall mean the consideration for which one Share may
be acquired under the Plan (other than upon exercise of an Option), as specified
by the Committee.

     (r)  "Service" shall mean service as an Employee."

     (s)  "Share" shall mean one share of Stock, as adjusted in accordance with
Section 9 (if applicable).

     (t)  "Stock" shall mean the Common Stock of the Company.

     (u)  "Stock Option Agreement" shall mean the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his Option.

     (v)  "Stock Purchase Agreement" shall mean the agreement between the
Company and an Offeree who acquires Shares under the Plan which contains the
terms, conditions and restrictions pertaining to the acquisition of such Shares.

     (w)  "Subsidiary" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.

     (x)  "Total and Permanent Disability" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than six (6) months.


                                      -3-

<PAGE>   7

SECTION 3. ADMINISTRATION.

     (a)  Committee Procedures. The Board of Directors shall designate one of
the members of the Committee as chairman. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Committee members, shall be valid acts of the
Committee.

     (b)  Committee Responsibilities. Subject to the provisions of the Plan, the
Committee shall have full authority and discretion to take the following
actions:

          (i)  To interpret the Plan and to apply its provisions;

          (ii) To adopt, amend or rescind rules, procedures and forms relating
to the Plan;

          (iii) To authorize any person to execute, on behalf of the Company,
any instrument required to carry out the purposes of the Plan;

          (iv) To determine when Shares are to be awarded or offered for sale
and when Options are to be granted under the Plan;

          (v)  To select the Offerees and Optionees;

          (vi) To determine the number of Shares to be offered to each Offeree
or to be made subject to each Option;

          (vii) To prescribe the terms and conditions of each award or sale of
Shares, including (without limitation) the Purchase Price, the vesting of the
award (including accelerating the vesting of awards) and to specify the
provisions of the Stock Purchase Agreement relating to such award or sale;

          (viii) To prescribe the terms and conditions of each Option, including
(without limitation) the Exercise Price, the vesting or duration of the Option
(including accelerating the vesting of the Option), to determine whether such
Option is to be classified as an ISO or as a Nonstatutory Option, and to specify
the provisions of the Stock Option Agreement relating to such Option;

          (ix) To amend any outstanding Stock Purchase Agreement or Stock Option
Agreement, subject to applicable legal restrictions and to the consent of the
Offeree or Optionee who entered into such agreement;

          (x)  To prescribe the consideration for the grant of each Option or
other right under the Plan and to determine the sufficiency of such
consideration;

          (xi) To determine the disposition of each Option or other right under
the Plan in the event of an Optionee's or Offeree's divorce or dissolution of
marriage;


                                      -4-

<PAGE>   8

          (xii) To determine whether Options or other rights under the Plan will
be granted in replacement of other grants under an incentive or other
compensation plan of an acquired business;

          (xiii) To correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Stock Option Agreement or any Stock Purchase
Agreement; and

          (xiv) To take any other actions deemed necessary or advisable for the
administration of the Plan.

     Subject to the requirements of applicable law, the Committee may designate
persons other than members of the Committee to carry out its responsibilities
and may prescribe such conditions and limitations as it may deem appropriate,
except that the Committee may not delegate its authority with regard to the
selection for participation of or the granting of Options or other rights under
the Plan to persons subject to Section 16 of the Exchange Act. All decisions,
interpretations and other actions of the Committee shall be final and binding on
all Offerees, all Optionees, and all persons deriving their rights from an
Offeree or Optionee. No member of the Committee shall be liable for any action
that he has taken or has failed to take in good faith with respect to the Plan,
any Option, or any right to acquire Shares under the Plan.


SECTION 4. ELIGIBILITY.

     (a)  General Rule. Only Employees shall be eligible for designation as
Optionees or Offerees by the Committee. In addition, only individuals who are
employed as common-law employees by the Company or a Subsidiary shall be
eligible for the grant of ISOs.

     (b)  Outside Directors. Any other provision of the Plan notwithstanding,
the participation of Outside Directors in the Plan shall be subject to the
following restrictions:

          (i)  Outside Directors shall only be eligible for the grant of
Nonstatutory Options as described in this Section 4(b).

          (ii) Each Outside Director shall automatically be granted a
Nonstatutory Option to purchase 40,000 Shares (subject to adjustment under
Section 9) as a result of their appointment as an Outside Director. Subject to
paragraph (iii) below, upon the conclusion of each regular annual meeting of the
Company's stockholders following the meeting at which they were appointed, each
Outside Director who will continue serving as a member of the Board thereafter
shall receive a Nonstatutory Option to purchase 20,000 Shares (subject to
adjustment under Section 9). All such Nonstatutory Options shall vest and become
exercisable at the rate of twenty-five percent (25%) upon each one (1) year
anniversary of the date the 


                                      -5-

<PAGE>   9

option is granted to the Outside Director. No Shares shall vest after
termination of the Outside Director's Service.

          (iii) Each Outside Director who serves on the Board on December 14,
1998 shall automatically be granted a Nonstatutory Option to purchase 100,000
Shares (subject to adjustment under Section 9); provided that such Nonstatutory
Options shall be lieu of any Nonstatutory Options that would otherwise be
granted to the Outside Director pursuant to paragraph (ii) above before the 2004
annual meeting of the Company's stockholders. Such Nonstatutory Options shall
vest and become exercisable as follows: 20,000 shares vest and become
exercisable at the rate of twenty-five percent (25%) upon each one (1) year
anniversary of the regular annual meeting of the Company's stockholders
occurring in calendar year 1999; 20,000 shares vest and become exercisable at
the rate of twenty-five percent (25%) upon each one (1) year anniversary of the
regular annual meeting of the Company's stockholders occurring in calendar year
2000; 20,000 shares vest and become exercisable at the rate of twenty-five
percent (25%) upon each one (1) year anniversary of the regular annual meeting
of the Company's stockholders occurring in calendar year 2001; 20,000 shares
vest and become exercisable at the rate of twenty-five percent (25%) upon each
one (1) year anniversary of the regular annual meeting of the Company's
stockholders occurring in calendar year 2002; and 20,000 shares vest and become
exercisable at the rate of twenty-five percent (25%) upon each one (1) year
anniversary of the regular annual meeting of the Company's stockholders
occurring in calendar year 2003. No Shares shall vest after termination of the
Outside Director's Service.

          (iv) All Nonstatutory Options granted to an Outside Director under
this Section 4(b) shall also become exercisable in full in the event of (A) the
termination of such Outside Director's service because of death or Total and
Permanent Disability or (B) a Change in Control of the Company.

          (v)  The Exercise Price of all Nonstatutory Options granted to an
Outside Director under this Section 4(b) shall be equal to one hundred percent
(100%) of the Fair Market Value of a Share on the date of grant, payable in one
of the forms described in Sections 8(a), (b) and (d).

          (vi) All Nonstatutory Options granted to an Outside Director under
this Section 4(b) shall terminate on the earliest of (A) the 10th anniversary of
the date of grant of such Options, (B) the date ninety (90) days after the
termination of such Outside Director's service for any reason other than death,
Total and Permanent Disability or voluntary retirement as an Outside Director at
or after the age of 60, or (C) the date twelve (12) months after the termination
of such Outside Director's service because of death, Total and Permanent
Disability or voluntary retirement as an Outside Director at or after the age of
60.

     (c)  Limitation On Grants. No Employee shall be granted Options to purchase
more than 1,500,000 Shares in any fiscal year of the Company; provided, however,
that with respect to fiscal year 1998, the 1,500,000 Share limit shall be
increased to 4,500,000 Shares.


                                      -6-

<PAGE>   10

     (d)  Ten-Percent Stockholders. An Employee who owns more than 10 percent of
the total combined voting power of all classes of outstanding stock of the
Company or any of its Subsidiaries shall not be eligible for the grant of an ISO
unless such grant satisfies the requirements of Code section 422(c)(6).

     (e)  Attribution Rules. For purposes of Subsection (d) above, in
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his brothers, sisters, spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or beneficiaries.

     (f)  Outstanding Stock. For purposes of Subsection (d) above, "outstanding
stock" shall include all stock actually issued and outstanding immediately after
the grant. "Outstanding stock" shall not include shares authorized for issuance
under outstanding options held by the Employee or by any other person.


SECTION 5. STOCK SUBJECT TO PLAN.

     (a)  Basic Limitation. Shares offered under the Plan shall be authorized
but unissued Shares or treasury Shares. As of December 14, 1999, 26,253,105
shares have been reserved for issuance under the Plan (upon exercise of Options
or other rights to acquire Shares), which includes the 4,500,000 Shares reserved
for issuance on October 20, 1998. On each January 1 for the remaining term of
the Plan, the aggregate number of Shares which may be issued under the Plan to
individuals other than Outside Directors (upon exercise of Options or other
rights to acquire Shares) shall be increased by a number of Shares equal to 3
1/4 percent of the total number of Shares of the Common Stock of the Company
outstanding at the end of the most recently concluded calendar year. Any Shares
that have been reserved but not issued as Shares or Options during any calendar
year shall remain available for grant during any subsequent calendar year.
Notwithstanding the foregoing, no more than 36,000,000 Shares may be issued
under ISOs for the remaining term of the Plan. The aggregate number of Shares
which may be issued under the Plan shall at all times be subject to adjustment
pursuant to Section 9. The number of Shares which are subject to Options or
other rights outstanding at any time under the Plan shall not exceed the number
of Shares which then remain available for issuance under the Plan. The Company,
during the term of the Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.

     (b)  Additional Shares. In the event that any outstanding Option or other
right for any reason expires or is canceled or otherwise terminated, the Shares
allocable to the unexercised portion of such Option or other right shall again
be available for the purposes of the Plan. If Shares are forfeited before any
dividends have been paid with respect to the Shares, then such Shares shall
again be available for award or sale under the Plan.


                                      -7-

<PAGE>   11

SECTION 6. TERMS AND CONDITIONS OF AWARDS OR SALES.

     (a)  Stock Purchase Agreement. Each award or sale of Shares under the Plan
(other than upon exercise of an Option) shall be evidenced by a Stock Purchase
Agreement between the Offeree and the Company. Such award or sale shall be
subject to all applicable terms and conditions of the Plan and may be subject to
any other terms and conditions which are not inconsistent with the Plan and
which the Committee deems appropriate for inclusion in a Stock Purchase
Agreement. The provisions of the various Stock Purchase Agreements entered into
under the Plan need not be identical.

     (b)  Duration of Offers and . Any right to acquire Shares under the Plan
(other than an Option) shall automatically expire if not exercised by the
Offeree within thirty (30) days after the grant of such right was communicated
to him by the Committee. Such right shall not be transferable and shall be
exercisable only by the Offeree to whom such right was granted.

     (c)  Purchase Price. The Purchase Price shall be determined by the
Committee at its sole discretion. The Purchase Price shall be payable in one of
the forms described in Sections 8(a) and (c).

     (d)  Withholding Taxes. As a condition to the purchase of Shares, the
Offeree shall make such arrangements as the Committee may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such purchase.

     (e)  Restrictions on Transfer of Shares. Any Shares awarded or sold under
the Plan shall be subject to such special forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the
Committee may determine. Such restrictions shall be set forth in the applicable
Stock Purchase Agreement and shall apply in addition to any general restrictions
that may apply to all holders of Shares.


SECTION 7. TERMS AND CONDITIONS OF OPTIONS.

     (a)  Stock Option Agreement. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical.

     (b)  Number of Shares. Each Stock Option Agreement shall specify the number
of Shares that are subject to the Option and shall provide for the 


                                      -8-

<PAGE>   12

adjustment of such number in accordance with Section 9. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.

     (c)  Exercise Price. Each Stock Option Agreement shall specify the Exercise
Price. The Exercise Price of an ISO shall not be less than 100 percent of the
Fair Market Value of a Share on the date of grant, except as otherwise provided
in Section 4(d). Subject to the preceding sentence, the Exercise Price under any
Option shall be determined by the Committee at its sole discretion. The Exercise
Price shall be payable in one of the forms described in Sections 8(a), (b) and
(d).

     (d)  Withholding Taxes. As a condition to the exercise of an Option, the
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such exercise. The Optionee shall also make such
arrangements as the Committee may require for the satisfaction of any federal,
state or local withholding tax obligations that may arise in connection with the
disposition of Shares acquired by exercising an Option.

     (e)  Exercisability and Term. Each Stock Option Agreement shall specify the
date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option. The term shall
not exceed ten (10) years from the date of grant, except as otherwise provided
in Section 4(d). Subject to the preceding three sentences, the Committee at its
sole discretion shall determine when all or any installment of an Option is to
become exercisable and when an Option is to expire.

     (f)  Nontransferability. During an Optionee's lifetime, his Option(s) shall
be exercisable only by him and shall not be transferable. In the event of an
Optionee's death, his Option(s) shall not be transferable other than by will or
by the laws of descent and distribution.

     (g)  Exercise of Options Upon Termination of Service. Each Stock Option
Agreement shall set forth the extent to which the Optionee shall have the right
to exercise the Option following termination of the Optionee's Service with the
Company and its Subsidiaries, and the right to exercise the Option of any
executors or administrators of the Optionee's estate or any person who has
acquired such Option(s) directly from the Optionee by bequest or inheritance.
Such provisions shall be determined in the sole discretion of the Committee,
need not be uniform among all Options issued pursuant to the Plan, and may
reflect distinctions based on the reasons for termination of Service.

     (h)  Leaves of Absence. An Optionee's Service shall be deemed to continue
while the Optionee is on military leave, sick leave or other bona fide leave of
absence (as determined by the Committee). The foregoing notwithstanding, in the
case of an ISO granted under the Plan, Service shall not be deemed to continue
beyond the first ninety (90) days of such leave, unless the Optionee's
reemployment rights are guaranteed by statute or by contract.


                                      -9-

<PAGE>   13

     (i)  No Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his Option until the date of the issuance of a stock certificate for
such Shares. No adjustments shall be made, except as provided in Section 9.

     (j)  Modification, Extension and Renewal of Options. Within the limitations
of the Plan, the Committee may modify, extend or renew outstanding options or
may accept the cancellation of outstanding options (to the extent not previously
exercised), whether or not granted hereunder, in return for the grant of new
Options at the same or a different price. The foregoing notwithstanding, no
modification of an Option shall, without the consent of the Optionee, impair his
rights or increase his obligations under such Option.

     (k)  Restrictions on Transfer of Shares. Any Shares issued upon exercise of
an Option shall be subject to such special forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the
Committee may determine. Such restrictions shall be set forth in the applicable
Stock Option Agreement and shall apply in addition to any general restrictions
that may apply to all holders of Shares.


SECTION 8. PAYMENT FOR SHARES.

     (a)  General Rule. The entire Purchase Price or Exercise Price of Shares
issued under the Plan shall be payable in lawful money of the United States of
America at the time when such Shares are purchased, except as provided in
Subsections (b), (c) and (d) below.

     (b)  Surrender of Stock. To the extent that a Stock Option Agreement so
provides, payment may be made all or in part with Shares which have already been
owned by the Optionee or his representative for more than twelve (12) months and
which are surrendered to the Company in good form for transfer. Such Shares
shall be valued at their Fair Market Value on the date when the new Shares are
purchased under the Plan.

     (c)  Services Rendered. At the discretion of the Committee, Shares may be
awarded under the Plan in consideration of services rendered to the Company or a
Subsidiary prior to the award. If Shares are awarded without the payment of a
Purchase Price in cash, the Committee shall make a determination (at the time of
the award) of the value of the services rendered by the Offeree and the
sufficiency of the consideration to meet the requirements of Section 6(c).

     (d)  Cashless Exercise. To the extent that a Stock Option Agreement so
provides, payment may be made all or in part by delivery (on a form prescribed
by the Committee) of an irrevocable direction to a securities broker to sell
Shares and to deliver all or part of the sale proceeds to the Company in payment
of the aggregate Exercise Price.


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<PAGE>   14

SECTION 9. ADJUSTMENT OF SHARES.

     (a)  General. In the event of a subdivision of the outstanding Stock, a
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Stock (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization or a similar occurrence, the Committee shall make appropriate
adjustments in one or more of (i) the number of Shares available for future
grants under Section 5, (ii) the number of Shares available for grants under
Section 4(c), (iii) the number of Shares covered by each outstanding Option,
(iv) the Exercise Price under each outstanding Option, (v) the number of shares
covered by each outstanding award or (vi) the Purchase Price of each outstanding
award.

     (b)  Reorganizations. In the event that the Company is a party to a merger
or other reorganization, outstanding Options shall be subject to the agreement
of merger or reorganization. Such agreement may provide for the assumption of
outstanding Options by the surviving corporation or its parent or for their
continuation by the Company (if the Company is a surviving corporation);
provided, however, that if assumption or continuation of the outstanding Options
is not provided by such agreement then the Committee shall have the option of
offering the payment of a cash settlement equal to the difference between the
amount to be paid for one Share under such agreement and the Exercise Price, in
all cases without the Optionees' consent.

     (c)  Reservation of Rights. Except as provided in this Section 9, an
Optionee or Offeree shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class, the payment of any dividend or
any other increase or decrease in the number of shares of stock of any class.
Any issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.


SECTION 10. LEGAL AND REGULATORY REQUIREMENTS.

     Shares shall not be issued under the Plan unless the issuance and delivery 
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations and the regulations of any stock exchange on which the Company's
securities may then be listed, and the Company has obtained the approval or
favorable ruling from any governmental agency which the Company determines is
necessary or advisable.


                                      -11-

<PAGE>   15

SECTION 11. NO EMPLOYMENT RIGHTS.

     No provision of the Plan, nor any right or Option granted under the Plan, 
shall be construed to give any person any right to become, to be treated as, or
to remain an Employee. The Company and its Subsidiaries reserve the right to
terminate any person's Service at any time and for any reason, with or without
notice.


SECTION 12. DURATION AND AMENDMENTS.

     (a)  Term of the Plan. The amended and restated Plan, as set forth herein,
shall terminate automatically on December 13, 2008 and may be terminated on any
earlier date pursuant to Subsection (b) below.

     (b)  Right to Amend or Terminate the Plan. The Board of Directors may amend
the Plan at any time and from time to time. Rights and obligations under any
Option granted before amendment of the Plan shall not be materially altered, or
impaired adversely, by such amendment, except with consent of the person to whom
the Option was granted. An amendment of the Plan shall be subject to the
approval of the Company's stockholders only to the extent required by applicable
laws, regulations or rules.

     (c)  Effect of Amendment or Termination. No Shares shall be issued or sold
under the Plan after the termination thereof, except upon exercise of an Option
granted prior to such termination. The termination of the Plan, or any amendment
thereof, shall not affect any Share previously issued or any Option previously
granted under the Plan.


SECTION 13. EMPLOYEES BASED OUTSIDE OF THE UNITED STATES.

     Notwithstanding any provision of the Plan to the contrary, in order to
foster and promote achievement of the purposes of the Plan or to comply with
provisions of laws or regulations in other countries in which the Company and
its Subsidiaries operate or have employees, the Committee, in its sole
discretion, shall have the power and authority to (a) determine which Employees
outside the United States are eligible to participate in the Plan, (b) modify
the terms and conditions of any Options granted to Employees outside the United
States and (c) establish subplans, modified option exercise procedures and other
terms and procedures to the extent such actions may be necessary or advisable.


                                      -12-

<PAGE>   16

SECTION 14. EXECUTION

     To record the adoption of the amended and restated Plan by the Board of
Directors effective as of December 14, 1998, the Company has caused its
authorized officer to execute the same.

                                 S3 INCORPORATED



                                 By
                                    --------------------------------------------
                                                 Walter D. Amaral
                                         Senior Vice President Finance and
                                              Chief Financial Officer