<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON D.C., 20549


                                    FORM 10-Q

(Mark one)

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

                 For the quarterly period ended October 2, 1999
                                                ---------------

                                       or
                                       --

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

            For the transition period from __________ to ___________

                         Commission File Number 0-25898
                                                -------


                    NUMBER NINE VISUAL TECHNOLOGY CORPORATION
             (Exact name of registrant as specified in its charter)



            DELAWARE                                     04-2821358
            --------                                     ----------
 (State or other jurisdiction of                      (I.R.S. Employer
  incorporation or organization)                     Identification No.)



 18 HARTWELL AVENUE, LEXINGTON, MA                       02421-3141
 ---------------------------------                       ----------
(Address of principal executive offices)                 (Zip Code)


      Registrant's telephone number, including area code:  (781) 674-0009
                                                           --------------

 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X   No
                                               ---     ---
The number of shares outstanding of the registrant's common stock at November
12, 1999 was 10,415,992.
<PAGE>

                    NUMBER NINE VISUAL TECHNOLOGY CORPORATION

                               INDEX TO FORM 10-Q

<TABLE>
<CAPTION>


                                                                                    Page
                                                                                    ----
<S>                                                                                   <C>
Part I - Financial Information:
-------------------------------

Item 1 - Financial Statements

     Condensed Consolidated Balance Sheets as of October 2, 1999 and
     January 2, 1999                                                                  1

     Condensed Consolidated Statements of Operations for the three and nine months
     ended October 2, 1999 and October 3, 1998                                        2

     Condensed Consolidated Statements of Cash Flows for the nine months ended
     October 2, 1999 and October 3, 1998                                              3

     Notes to Condensed Consolidated Financial Statements                             4

Item 2 - Management's Discussion and Analysis of
         Financial Condition and Results of Operations                                10

Item 3 - Quantitative and Qualitative Disclosures About Market Risk                   22


Part II - Other Information:
----------------------------

Item 1 - Legal Proceedings                                                            23

Item 2 - Changes in Securities and Use of Proceeds                                    23

Item 3 - Defaults Upon Senior Securities                                              24

Item 4 - Submission of Matters to a Vote of Security Holders                          24

Item 5 - Other Information                                                            24

Item 6 - Exhibits and Reports on Form 8-K                                             25

    (a) Exhibits

    (b) Reports on Form 8-K

SIGNATURE(S)                                                                          26
</TABLE>
<PAGE>
PART I  FINANCIAL INFORMATION:
------------------------------

Item 1  Financial Statements

                   NUMBER NINE VISUAL TECHNOLOGY CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>

                                                                        October 2, 1999      JANUARY 2, 1999
                                                                        ---------------      ---------------
                                                                         (unaudited)
<S>                                                                   <C>                <C>
Current assets:
 Cash and cash equivalents, inclusive of restricted cash of $0 and        $     58               $    413
  $117 at October 2, 1999 and January 2, 1999, respectively
 Accounts receivable, trade, net of allowances for doubtful                  1,881                  2,542
  accounts of $168 and $122, at October 2, 1999 and January 2, 1999
 Inventories, net                                                              822                  1,052
 Prepaid expenses                                                            1,260                    711
                                                                          --------               --------
  Total current assets                                                       4,021                  4,718

 Property and equipment, net of $6,816 in accumulated depreciation           1,724                  2,581
 Deferred financing costs                                                      369                      -
 Other assets                                                                   39                     41
                                                                          --------               --------
  Total assets                                                            $  6,153               $  7,340
                                                                          ========               ========

CURRENT LIABILITIES:
 Accounts payable, trade                                                  $  3,182               $  2,684
 Revolving line of credit                                                    1,595                  1,301
 Related-party accounts payable, trade                                       1,017                  1,218
 Demand note payable                                                           300                      -
 Related-party promissory note payable                                         240                      -
 Note payable to manufacturing contractor                                      497                    476
 Accrued expenses and other current liabilities                                621                    594
 Deferred revenue                                                                -                     40
                                                                          --------               --------
  Total current liabilities                                                  7,452                  6,313

 Deferred revenue                                                              312                      -

 Commitments and contingencies                                                   -                      -

 Preferred Stock, $.01 par value; Series B Redeemable Convertible            3,000                      -
  Preferred Stock,  300 shares issued and outstanding at October 2,
  1999, no shares issued and outstanding at January 2, 1999
  (liquidation value of $3 million)

STOCKHOLDERS' EQUITY (DEFICIT):
 Preferred Stock, $.01 par value; 5,000,000 shares authorized;               6,877                  9,215
  Series A Convertible Preferred Stock, 2,500,894 shares issued and
  outstanding at October 2, 1999, 3,350,894 shares issued and
  outstanding at January 2, 1999 (at liquidation preference)
 Common Stock, $.01 par value; 30,000,000 shares authorized;                   104                     94
  10,358,799 shares issued and outstanding at October 2, 1999;
  9,394,385 shares issued and outstanding at January 2, 1999
 Additional paid-in capital, net of costs                                   39,589                 35,936
 Accumulated deficit                                                       (51,181)               (44,218)
                                                                          --------               --------
 Total stockholders' equity (deficit)                                       (4,611)                 1,027
                                                                          --------               --------
  Total liabilities and stockholders' equity (deficit)                    $  6,153               $  7,340
                                                                          ========               ========
</TABLE>

The accompanying notes are an integral part of the condensed consolidated
financial statements
<PAGE>

                    NUMBER NINE VISUAL TECHNOLOGY CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>


                                                           THREE MONTHS ENDED                          NINE MONTHS ENDED
                                                  OCTOBER 2, 1999      OCTOBER 3, 1998       October 2, 1999       OCTOBER 3, 1998
                                                  ---------------      ---------------       ---------------       ---------------
<S>                                             <C>                   <C>                  <C>                    <C>
Net product sales                                     $ 1,736              $ 1,471              $ 6,617                 $ 13,397
Net product royalty sales                                 753                    -                1,557                        -
                                                      -------              -------              -------                 --------
Total revenue                                           2,489                1,471                8,174                   13,397
Cost of sales                                           1,922                1,894                4,605                   14,003
                                                      -------              -------              -------                 --------
  Gross margin                                            567                 (423)               3,569                     (606)

Operating expenses:
  Selling, general, and administrative                  1,853                1,576                4,935                    5,963
  Research and development                              1,327                1,364                4,170                    4,293
                                                      -------              -------              -------                 --------
    Total operating expenses                            3,180                2,940                9,105                   10,256

Loss from operations                                   (2,613)              (3,363)              (5,536)                 (10,862)

Other income (expense):
  Interest expense                                       (101)                 (81)                (200)                    (374)
  Other income (expense), net                              12                  (84)                  11                      178
                                                      -------              -------              -------                 --------

Loss before income taxes                               (2,702)              (3,528)              (5,725)                 (11,058)

Provision for income taxes                                  -                    -                    -                        -
                                                      -------              -------              -------                 --------
Net loss                                              $(2,702)             $(3,528)             $(5,725)                $(11,058)

Accretion of beneficial conversion feature                  -                    -                 (829)                       -
Accretion of commmon stock warrants                      (348)                   -                 (348)                       -
Series B Preferred Stock dividend                         (30)                   -                  (60)                       -
                                                      -------              -------              -------                 --------
Net loss available to common shareholders             $(3,080)             $(3,528)             $(6,962)                $(11,058)
                                                      =======              =======              =======                 ========
Net loss per common share,
    basic - diluted                                    $(0.30)              $(0.38)              $(0.71)                  $(1.19)
                                                      =======              =======              =======                 ========

Weighted average common shares outstanding
  basic - diluted                                      10,314                9,361                9,858                    9,294
                                                      =======              =======              =======                 ========
</TABLE>


The accompanying notes are an integral part of the condensed consolidated
financial statements.

                                      -2-
<PAGE>
                    NUMBER NINE VISUAL TECHNOLOGY CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (unaudited, in thousands)


<TABLE>
<CAPTION>

                                                                                       NINE MONTHS ENDED
                                                                            OCTOBER 2, 1999         OCTOBER 3, 1998
                                                                            ---------------         ---------------
<S>                                                                        <C>                         <C>
 Cash flows from operating activities:
   Net loss                                                                    $(5,725)                 $(11,058)
   Adjustments to reconcile net loss to net cash
     Provided by (used for) operating activities:
     Depreciation and amortization                                                 892                     1,089
     Provision for bad debts                                                        77                       159
     Amortization of deferred financing costs                                       82                         -
     Change in operating assets and liabilities:
       Accounts receivable                                                         584                     7,870
       Receivable due from manufacturing contractor                                  -                     1,678
       Inventories                                                                 230                     1,675
       Prepaids and other assets                                                  (547)                     (559)
       Accounts payable                                                            498                    (3,501)
       Related-party accounts payable                                             (201)                        -
       Deferred revenue                                                            272                         -
       Note payable to manufacturing contractor                                     21                         -
       Demand note payable                                                         300                         -
       Related-party promissory note payable                                       240                         -
       Accrued expenses and other current liabilities                               27                      (746)
                                                                               -------                  --------
         Net cash used for operating activities                                 (3,250)                   (3,393)
                                                                               -------                  --------

 Cash flows from investing activities:
     Purchase of property and equipment                                            (35)                     (375)
                                                                               -------                  --------
         Net cash used for investing activities                                    (35)                     (375)
                                                                               -------                  --------

 Cash flows from financing activities:
     Proceeds from issuance of common stock, net of issuance                        85                        35
      costs
     Proceeds from exercise of common stock options, net                            10                         -
     Proceeds from issuance of Series B Preferred Stock                          3,000                         -
     Borrowings (payments) on revolving line of credit, net                        294                    (7,831)
     Payments on issuance costs on Series B Preferred Stock                       (459)                        -
     Advances on convertible subordinated promissory note                            -                     9,000
     Interest converted to Series A Preferred Stock                                  -                       248
     Advances on notes payable with manufacturing contractor, net                    -                       469
                                                                               -------                  --------
         Net cash provided by financing activities                               2,930                     1,921
                                                                               -------                  --------

 Net change in cash and cash equivalents                                          (355)                   (1,847)
 Cash and cash equivalents, beginning of period                                    413                     2,481
                                                                               -------                  --------
 Cash and cash equivalents, end of period                                      $    58                  $    634
                                                                               =======                  ========

Supplemental disclosure of non-cash financing activities:
Conversion of convertible subordinated promissory note to
   Series A Preferred Stock, net                                                     -                  $  9,000
Conversion of Series A Preferred Stock to common stock                         $ 2,338                         -
Common stock dividend on Series B Preferred Stock                                   60                         -
Deferred financing costs associated with warrants issued to
   Secured lender                                                                  451                         -
Common stock warrants issued in conjunction with Series B
   Preferred Stock                                                                 348                         -
Beneficial conversion feature of Series B Preferred Stock                          829                         -
</TABLE>

The accompanying notes are an integral part of the condensed consolidated
financial statements.

                                      -3-
<PAGE>

                    NUMBER NINE VISUAL TECHNOLOGY CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. BASIS OF PRESENTATION:
-------------------------

  The accompanying financial statements have been presented on a going concern
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.

  We have continued to incur substantial losses from operations and are in
violation of our current loan and security agreement with our bank.  We have
unresolved class action litigation concerning alleged violations of securities
laws, and need additional financing to continue operations, all of which raises
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

  We have prepared the accompanying condensed unaudited consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial information and pursuant to the applicable rules and
regulations of the Securities and Exchange Commission.  Our condensed unaudited
consolidated financial statements include our accounts, our foreign sales
corporation and our wholly-owned German subsidiary.  All material intercompany
accounts and transactions have been eliminated in consolidation.  In the opinion
of our management, the accompanying financial statements contain all adjustments
(consisting of normal and recurring accruals) necessary to present fairly all
financial statements.  The financial statements herein should be read in
conjunction with our consolidated financial statements and notes thereto
contained in our Annual Report on Form 10-K, as amended, for our fiscal year
ended January 2, 1999. Operating results for the three month period and nine
month period ended October 2, 1999 may not necessarily be indicative of the
results to be expected for any other interim period or for the full year.

B.  CASH AND CASH EQUIVALENTS:
------------------------------

  As of October 2, 1999, cash and cash equivalents consisted of $58,000 invested
in overnight and money market mutual funds comprised of obligations which are
issued or guaranteed as to principal and interest by the U.S. government and
thus constitute direct obligations of the United States of America with a
dollar-weighted average maturity of 90 days or less.

C.  INVENTORIES:
----------------

 Inventories consisted of (in thousands):

                                   OCTOBER 2, 1999         JANUARY 2, 1999
                                    ---------------         ---------------
       Raw materials                     $115                    $  448
       Work in process                      3                         3
       Finished goods                     704                       601
                                         ----                    ------
                                         $822                    $1,052
                                         ====                    ======
  The market for our products is characterized by rapid technological advances,
frequent new product life cycles, product obsolescence, changes in customer
requirements, evolving industry standards, significant competition and rapidly
changing pricing.

                                      -4-
<PAGE>

D. ROYALTY AND SERVICE REVENUE RECOGNITION:
-------------------------------------------

  We recognize revenue from product sales upon shipment. In addition, we
recognize revenue from product royalty, support and commission fees. Under our
current royalty arrangements, we earn and recognize revenue for royalty and
commission fees when our royalty partners, Silicon Graphics, Inc. ("SGI") and S3
Inc., ship product. Service revenue is recognized over the lifetime of the
warranty period associated with the product, typically one to three years. There
is no cost of sales associated with royalty revenue.

  During the second quarter of 1999, we were appointed a sales agent of S3 Inc.
In this role, we provide engineering development, technical and customer support
for the SR9 graphics accelerator board. We also provide administrative duties
such as order entry, invoicing and collections. In exchange for these services,
S3 Inc. pays us a royalty. Product royalty sales for this business were $344,000
in the third quarter of 1999, representing 13.8% of net sales during the
quarter.

  During the fourth quarter of 1998, we entered into a Product Distribution
Agreement with SGI. Under this agreement, SGI appointed us as an authorized
sales agent with respect to selling and marketing the Digital Flat Panel
Solution Pack. Acting as an agent of SGI, we were authorized to sell and market
the Digital Flat Panel Solution Pack to distributors and certain OEM customers.
We provide technical and customer support for the Revolution(R) IV-FP graphics
subsystem component of the Digital Flat Panel Solution Pack, and provide
administrative duties such as order entry, invoicing and collections. In
exchange for providing these services, SGI pays us a royalty, sales commission
and support fee. These product royalty sales were $409,000 in the third quarter
of 1999, representing 16.4% of net sales during the quarter. The Product
Distribution Agreement with SGI expired on June 30, 1999. We are currently
working with SGI to define the terms of our continuing relationship.

E. RELATED-PARTY TRANSACTIONS:
------------------------------

  SGI currently owns 2,500,894 shares of Series A Preferred Stock and 395,000
shares of common stock, representing ownership of 22.4% in Number Nine.

  During the fourth quarter of 1998, we entered into a Product Distribution and
Procurement Agreement with SGI. Under this agreement, and upon our request, SGI
may place orders for manufacture of Number Nine Products, implementing our
technical designs. SGI then would resell this product to Number Nine. At October
2, 1999, we had purchased $3.4 million of finished good products from SGI under
this agreement since the fourth quarter of 1998 and recognized the corresponding
accounts payable liability, approximately $1.0 million, net, in our balance
sheet for the period ended October 2, 1999.

                                      -5-
<PAGE>

F.  DEBT:
---------

  On March 31, 1999, we entered into a new loan and security agreement with a
new major commercial bank for a secured working capital line of credit. This
line of credit replaced the previous borrowing facility. Under this agreement,
we can borrow up to 80% of qualified accounts receivable up to a maximum amount
of $15.0 million, at an annual interest rate of either prime rate plus 1% or at
the LIBOR rate plus 3.25%. Our present intent is to use prime rate plus 1% for
this borrowing facility. On November 3, 1999, prime rate was 8.25% and the 90
day LIBOR rate was 6.11%. We can lower these interest rates by achieving certain
financial objectives. In addition, we incur an unused line fee calculated at a
rate of .375% per annum on the unused portion of the maximum borrowing amount.
The line of credit agreement is collateralized by substantially all the assets
of our company. On October 2, 1999, $1.6 million was outstanding under the line
of credit. The loan agreement requires the bank approval for the payment of any
dividends other than dividends on Series B Convertible Preferred Stock (the
"Series B Preferred"). It also requires that we achieve certain financial
covenants, including quarterly profitability targets. This agreement expires on
December 31, 2001. In connection with this credit facility, the bank received a
warrant to purchase 211,000 shares of Common Stock at an exercise price of $2.86
per share for a ten year period. These warrants have been valued, using the
Black-Scholes methodology, at $451,000 and will be treated as interest expense,
amortized over the life of the credit facility.  The amount of amortization for
the quarter ended October 2, 1999 was $41,000.  We are currently in violation of
certain financial covenants of this agreement, including profitability for the
second and third quarters of 1999, certain key financial ratios and the
maintenance of a minimum excess borrowing availability. We are negotiating a
forbearance agreement with the bank, which will include the requirement that we
refinance this credit facility with another lender within a short-time period.
As a result of our violation of these financial covenants, the bank has reduced
the maximum borrowing amount to $4.0 million and has increased the annual
interest rate to the Prime rate plus 4%.

  We have entered into promissory notes with two of our Board of Director
members. As of October 2, 1999, $240,000 was outstanding and is subject to
payment on demand. Under the terms of the note payable, these notes bear
interest at the rate of 4.0% plus Prime.

  We have entered into a note payable with one of our manufacturing contractors.
Under the terms of the note payable, we converted approximately $1.4 million of
accounts payable with the manufacturing contractor into a note payable. The note
payable is a six (6) month note that bears interest at the rate of 5.99% per
annum, and was to be repaid in six equal monthly installments. The first
principal and interest payment was made in June 1998. However, as of October 2,
1999, $497,000 was outstanding and is subject to payment on demand.


G.  SERIES B CONVERTIBLE PREFERRED STOCK:
-----------------------------------------

  On March 31 1999, we sold 300 shares of Series B Preferred Stock at a stated
price of $10,000 per share. Proceeds from the offering, net of issuance costs
were approximately $2.5 million. Holders of the Series B Preferred are entitled
to receive a 4% dividend payable, at our option, in cash or shares of our common
stock. The Series B Preferred has beneficial conversion features which are
convertible into common stock at the lower of (i) $4.27 per share, or (ii) 88%
of the average of the ten lowest closing bid prices during the thirty day period
prior to the conversion date. After October 28, 1999, holders of the Series B
Preferred may convert all of their shares. Subject to certain restrictions, we
have the option to redeem the Series B Preferred at any time. The redemption
amount is calculated as 110% of the Series B Preferred investment prior to
October 31, 1999, if the closing bid price is less than $1.60 per share, and
118% in all other instances. The Series B Preferred automatically converts into
common stock three years after the date of issuance. Since our Common Stock was
delisted from the Nasdaq National Market System, the holder of Series B
Preferred has mandatory redemption rights for the full amount of their
investment.

  In addition, the investor received a three year warrant to purchase 195,000
shares of our common stock at an exercise price of $3.45 per share. We also
issued a three-year warrant to purchase 30,000 shares of our common stock at
$3.45 per share to the broker involved with this transaction. The total value of
both of these warrants is estimated to be approximately $348,000 and was
initially charged to additional paid-in capital. In the third quarter of 1999,
this value has been accreted to Series B Preferred stock and is accounted for
on our records as if it were an additional dividend to the holder.

                                      -6-
<PAGE>

  The carrying value of the Series B Preferred is approximately $3.0 million. We
issued 26,810 shares, at $1.12 per share, of our common stock as payment for the
quarterly dividend, valued at $30,000 to the holder of its 4% Series B
Convertible Preferred Stock during the third quarter of 1999. The estimated
intrinsic value of the beneficial conversion feature of the Series B Convertible
Preferred Stock, estimated to be approximately $830,000 at the time of the
closing of this transaction and initially charged to additional paid-in capital,
has been accreted to this class of preferred stock and accounted for on our
records as if it were an additional dividend to the holder.

H.  SERIES A CONVERTIBLE PREFERRED STOCK:
-----------------------------------------

  In May 1999, the holder of Series A Convertible Preferred Stock converted
850,000 shares of this class of stock into 850,000 shares of our common stock,
leaving a remaining balance of 2,500,894 shares of Series A Convertible
Preferred Stock outstanding.

I. EARNINGS (LOSS) PER SHARE:
-----------------------------

  Basic earnings (loss) per share (EPS) is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.

  The following table sets forth the computation of basic and diluted earnings
(loss) per share:

<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED
                                                      -----------------------------
                                                       OCTOBER 2,      OCTOBER 3,
                                                          1999            1998
                                                      -------------  --------------
<S>                                                   <C>            <C>
Basic EPS Computation
  Numerator:
     Net loss ....................................      $ (5,725)      $(11,058)
     Accretion of beneficial conversion feature ..          (829)          --
     Accretion of common stock warrants...........          (348)          --
     Series B Convertible Preferred stock dividend           (60)          --
     Net loss available to common shareholders ...      $ (6,962)      $(11,058)

  Denominator:
     Weighted average common shares outstanding ..         9,858          9,294
  Basic EPS ......................................      $  (0.71)      $  (1.19)

Diluted EPS Computation:
  Numerator
     Net loss ....................................      $ (5,725)      $(11,058)
     Accretion of beneficial conversion feature ..          (829)          --
     Accretion of common stock warrants...........          (348)          --
     Series B Convertible Preferred stock dividend           (60)          --
     Net loss available to common shareholders ...      $ (6,962)      $(11,058)

  Denominator:
     Weighted average common shares outstanding ..         9,858          9,294
     Stock options ...............................          --             --
                                                        --------       --------
        Total shares .............................         9,858          9,294
  Diluted EPS ....................................      $  (0.71)      $  (1.19)
</TABLE>

  Potentially dilutive securities, at October 2, 1999, include stock options
outstanding to purchase 1,243,462 shares of common stock, warrants to purchase
approximately 1,030,000 shares of common stock, 2,500,894 shares of common stock
issuable upon conversion of Series A Convertible Preferred Stock and 2,740,978
shares of Series B Convertible Preferred Stock. However, such securities have
not been included in the net loss per common share calculation because their
effect would be antidilutive.



                                      -7-
<PAGE>

J. RECENTLY ISSUED ACCOUNTING STANDARDS
---------------------------------------

  In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The adoption of SOP 98-1 had no material effect on
our results of operations or financial condition.

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Due to our limited use of derivative instruments,
we do not believe the adoption of FAS 133 will have a material effect on our
results of operations or financial condition.


K  INCOME TAXES:
----------------

  At January 2, 1999, we had net operating loss carryforwards of approximately
$45.8 million and $49.4 million available to offset future federal and state
taxable income, respectively. The federal carryforwards begin to expire in 2010
and the state carryforwards begin to expire in 2000.

L.  CONTINGENCIES:
------------------

  On June 11, 1996, a complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff RBI, an Alaskan limited
partnership, against Number Nine, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of our initial public
offering, Robertson Stephens & Company, Cowen & Company and Unterberg Harris
(the "Managing Underwriters"). On or about July 17, 1996, John Foley, as
plaintiff, filed a complaint in the United States District Court for the
District of Massachusetts against Number Nine, each member of our Board of
Directors, (Andrew Najda, Stanley W. Bialek, Gill Cogan, Dr. Paul R. Low, Dr.
Fouad H. Nader and William H. Thalheimer), Kevin M. Hanks, our former Chief
Financial Officer and Treasurer and the Managing Underwriters. On or about
October 16, 1996, Robert Schoenhofer, as plaintiff, filed an additional
complaint in the United States District Court for the District of Massachusetts
against Number Nine, each member of our Board of Directors, Mr. Hanks, and the
Managing Underwriters. Each of the plaintiffs purports to represent a class of
purchasers of our Common Stock between and including May 26, 1995 through
January 31, 1996. Each complaint alleges that the named defendants violated the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, by, among other things, issuing to the investing public false and
misleading statements regarding our business, products, sales and earnings
during the class period in question. The plaintiffs seek unspecified damages,
interest, costs and fees. By order of the District Court, these actions have
been consolidated into a single action. It is possible that other claims may be
made against us or that there may be other consequences from the lawsuits. On
June 1, 1999, the District Court issued a memorandum and order dismissing the
majority of Federal securities law claims asserted in all three complaints
against Number Nine, certain directors and officers and the Managing
Underwriters. As a result of the significant reduction in the scope of the
plaintiffs' claims and discussions with plaintiffs' counsel, Number Nine
believes the plaintiffs' current settlement position would be within the range
of the directors and officers' liability insurance coverage amount at the time
of the commencement of this litigation. Number Nine does not believe that this
litigation will have a material adverse effect on its future financial condition
and results of operations, and accordingly no provision for any liability is
required in the accompanying financial statements.

  A foreign inventor has asserted claims against several PC manufacturers,
including our customers, that the graphics technology included in their systems
infringes the inventor's patents. Certain of our customers have notified us of

                                      -8-
<PAGE>

these assertions and their intent to seek indemnification from us in the event
these claims are successful and the infringing technology was included in
products that we sold. We believe there are meritorious defenses to these claims
and that if the technology in fact infringes the inventor's rights, we would
have rights of indemnification from its suppliers. While we cannot assure you,
we do not expect this matter to have a material adverse effect on us.

                                      -9-
<PAGE>

Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and other parts of this Form 10-Q contain forward-looking statements
involving risks and uncertainties as defined in the Private Securities
Litigation Reform Act of 1995. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed here and those included in publicly available filings with the
Securities and Exchange Commission, such as this report.

OVERVIEW

  Since our founding in 1982, we have introduced successive generations of
video/graphics subsystems providing advanced video/graphics performance in
desktop PCs. We have focused on providing a broad line of high-performance
hardware and software video/graphics solutions, targeting both Original
Equipment Manufacturers ("OEMs") and two-tier and retail distribution
customers. Our series of 128-bit proprietary accelerators have been recognized
as some of the highest performance graphics products available to the desktop PC
market. During the third quarter of 1997, we began shipping products utilizing
our third generation proprietary 128-bit graphics accelerator chip technology,
Ticket to Ride/TM/. During the third quarter of 1998, we began shipping our
fourth generation proprietary 128-bit video/graphics accelerator chip, Ticket to
Ride/TM/ IV, and the related graphics board product, Revolution(R) IV. Also
during the third quarter 1998, we announced our first jointly developed product
with our strategic partner, SGI; the Digital Flat Panel Solution Pack, a
digital flat panel monitor containing the first all digital high resolution
display system, the SGI 1600 SW Digital Flat Panel. During the second quarter of
1999, we began shipping our newest product, SR9, using the Savage4 graphics
accelerator chip from S3 Inc.  We cannot assure you that our products,
Revolution/TM/ 3D, which utilizes the Ticket to Ride/TM/ chip and Revolution(R)
IV which utilizes the Ticket to Ride/TM/ IV chip, will be successful and
marketed successfully.

  We also market Hawkeye, a display control utilities and driver software suite,
which enhances user control over various graphics functions and is designed to
improve PC system graphics performance under Windows 95 and Windows 98 operating
systems.

  Our past operating results have been, and our future operating results will
continue to be, subject to fluctuations from quarter to quarter due to a variety
of factors, including:

 .    The gain or loss of significant customers,
 .    Changes in the mix of products sold and in the mix of sales by distribution
     channels,
 .    Our ability to introduce new technologies and products on a timely basis,
 .    Availability and timing of component shipments and cost of components
     obtained from our suppliers,
 .    Availability and cost of manufacturing and foundry capacity,
 .    New product introductions by our competitors,
 .    Delays in related product introductions by others,
 .    Market acceptance of our products,
 .    Product returns or price protection charges from customers,
 .    Reductions in sales of older generation products as customers anticipate
     new products, giving rise to charges for obsolete or excess inventory, and
 .    Changes in our product pricing, or changes in our competitors and suppliers
     pricing, including possible decreases in unit average selling prices of our
     products caused by competitive pressures.

  Our operating results may also be adversely affected by general economic and
other conditions affecting the timing of customer orders, a downturn in the
market for PCs, and order cancellations or rescheduling. Our sales to OEMs,
which accounted for 56.1% of net sales in the first nine months of 1999, 79.2%
of net sales in 1998, and 43.8% of net sales in 1997, are particularly
susceptible to fluctuations.

  Our sales to OEMs typically generate lower gross margins than retail and
distributor sales, but also generally entail lower marketing, sales and product
support costs. Our net sales, gross margins and profits have in the past, and
may

                                      -10-
<PAGE>

in the future, vary significantly depending on the proportion of our sales to
OEMs and other distribution channels, as well as the mix of products sold in
each channel. Our sales of merchant-based technology products are typically at a
significantly lower margin than the sales of our proprietary technology
products. The gross margin on all of our products is significantly impacted by
costs of components, particularly memory costs and controller chips, which have
varied widely over the past several years, as well as significant pricing
pressure on our products as a result of competition.

RESULTS OF OPERATIONS FOR THE QUARTERS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998

  Net Sales: Net sales increased 67% to $2.5 million in the third quarter of
1999 from approximately $1.5 million in the third quarter of 1998. This increase
was primarily attributable to increased sales in international and domestic two-
tier and distribution customers. Net sales of our proprietary 128-bit products
increased 85% to $997,000 in the third quarter of 1999 from $538,000 in the
third quarter of 1998, representing 39.9% of net sales in the third quarter of
1999 compared to 35.9% of net sales in the third quarter of 1998. Sales of 64-
bit products represented the remaining $1.5 million or 60.0.% of net sales
during the third quarter of 1999 compared to approximately $936,000 or 62.4% of
net sales in the third quarter of 1998.

  Sales to OEMs decreased 32%, to approximately $1.3 million in the third
quarter of 1999 from approximately $1.9 million in the third quarter of 1998,
representing 52% of net sales in the third quarter of 1999 compared to 126.7% of
net sales in the third quarter of 1998. The decrease is primarily attributable
to a decrease in sales to IBM from $864,000 during the third quarter of 1998 to
$279,000 in sales during the third quarter of 1999.  This decrease is due to our
transition from direct product sales of graphics accelerator subsystems to OEM
customers, towards royalty-based sales.  As a result of this change, we
recognize lower revenues, but higher product gross profit.

  Royalty sales increased to $753,000 in the third quarter of 1999 from nothing
for the third quarter of 1998, because, in part, we were appointed a sales agent
of S3 Inc. Under this role, we provide engineering development, technical and
customer support for the SR9 graphics accelerator board. We also provide
administrative duties such as order entry, invoicing and collections. In
exchange for these services, S3 Inc. pays us a royalty. Product royalty sales
for this business were $344,000 in the third quarter of 1999, representing 13.8%
of net sales during the quarter.

  During the fourth quarter of 1998, we entered into a Product Distribution
Agreement with SGI. Under this agreement, SGI appointed us as an authorized
sales agent with respect to selling and marketing the Digital Flat Panel
Solution Pack. Acting as an agent of SGI, we were authorized to sell and market
the Digital Flat Panel Solution Pack to distributors and certain OEM customers.
We provide technical and customer support for the Revolution IV-FP graphics
subsystem component of the Digital Flat Panel Solution Pack, and provide
administrative duties such as order entry, invoicing and collections. In
exchange for providing these services, SGI pays us a royalty, sales commission
and support fee. These product royalty sales were $409,000 in the third quarter
of 1999, representing 16.4% of net sales during the quarter. The Product
Distribution Agreement with SGI expired on June 30, 1999. We are currently
working with SGI to define the terms of our continuing relationship.

  Net sales to our domestic retail and two-tier distribution customers increased
58% to $1.1 million in the third quarter of 1999 compared to  $696,000 during
the third quarter of 1998. Total international sales increased 126% to $126,000
in the third quarter of 1999 from approximately ($472,000) in the third quarter
of 1998.

  Gross Profit: Gross profit was approximately $567,000 in the third quarter of
1999 compared to gross margin loss of approximately $423,000 in the third
quarter of 1998. As a percentage of net sales, gross profit improved to 22.8% in
the third quarter of 1999 from a loss of 28.8% in the third quarter of 1998. The
increase in gross profit during the third quarter of 1999 was largely
attributable to an increase in net product royalties, representing 30.1% of net
sales. As we transition from direct product sales of graphics accelerator
subsystems, towards royalty-based sales to OEM customers, we expect to recognize
lower revenues, but higher product gross profit. In the third quarter of 1998,
we experienced significant pricing pressure across all of our products resulting
in price protection claims and customer returns.

  Our future prospects will depend in part on our ability to successfully manage
our product transitions and fluctuating component costs, particularly memory
components and control inventory as new products are introduced. We may not be
successful in managing these changes. While we reserve for anticipated charges,
based upon historical rates of product returns, price protection claims,
component cost fluctuations, and other factors, reductions in sales and returns
of older generation products may give rise to charges for obsolete or excess
inventory or substantial price protection charges. The effects of planned new

                                      -11-
<PAGE>

product introductions, anticipated stock rotations and sales activity during
future periods, as further described in "Certain Factors That May Affect Future
Results of Operations", may have a negative impact on gross margin.

  Selling, General and Administrative Expenses:   Selling, general and
administrative expenses increased 19%, to approximately $1.9 million in the
third quarter of 1999 from $1.6 million in the third quarter of 1998, primarily
as a result of increased headcount and discretionary spending associated with
the introduction of our SR9 product family in the third quarter of 1999.  As a
percentage of net sales, selling, general and administrative expenses decreased
to 76.0% in the third quarter of 1999 from 106.7% in the third quarter of 1998,
primarily attributable to lower sales in the third quarter of 1998. We currently
expect that selling, general and administrative expenses will increase during
subsequent quarters, although not necessarily as a percentage of net sales, as
we begin to market and sell our newer technology.

  Research and Development Expenses:  Research and development expenses
decreased 7%, to approximately $1.3 million in the third quarter of 1999 from
approximately $1.4 million in the third quarter of 1998, resulting primarily
from closely controlled discretionary spending and development costs associated
with the introduction of our SR9 product family in the second quarter of 1999.
As a percentage of net sales, research and development expenses decreased to
52.0% in the third quarter of 1999 from 93.3% in the third quarter of 1998,
primarily attributable to higher sales in the third quarter of 1999. We
currently expect that research and development expenses will increase in
subsequent quarters, although not necessarily as a percentage of net sales,
primarily as a result of continued investment in our development efforts.

  Interest Expense: Net interest expense for the third quarter of 1999 was
$101,000 compared to interest expense of $81,000 in the third quarter of 1998.
This increase was attributable to higher average outstanding loan balances
during the third quarter of 1999, as compared to the third quarter of 1998.

  Other Expense/Income: Other income totaled approximately $12,000 in the third
quarter of 1999 compared to other expense of $84,000 in the third quarter of
1998.  Other income during the third quarter of 1998 was primarily attributable
to the settlement of certain accounts payable balances, while other income
during the third quarter of 1999 was primarily attributable to interest income.

  Provision for Income Taxes: During the third quarter of 1999 and the third
quarter of 1998, we did not provide an income tax benefit due to the uncertainty
of realizing the benefit from future taxable income.

RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED OCTOBER 2, 1999 AND
OCTOBER 3, 1998

  Net Sales: Net sales decreased 39% to $8.2 million in the first nine months of
1999 from approximately $13.4 million in the first nine months of 1998. This
decrease was primarily attributable to lower sales of our proprietary 128-bit
products to our OEM customers, as well as lower sales in international two-tier
and retail distribution customers, as our fourth generation proprietary 128-bit
video/graphics accelerator chip nears the end of its product life cycle. Net
sales of our proprietary 128-bit products decreased 34% to $4.2 million the
first nine months of 1999 from $6.4 million in the first nine months of 1998,
representing 51.2% of net sales in the first nine months of 1999 compared to
47.8% of net sales in the first nine months of 1998. Sales of 64-bit products
represented the remaining $4.0 million or 48.8% of net sales during the first
nine months of 1999 compared to approximately $7.0 million or 52.2% of net sales
in the first nine months of 1998.

  Sales to OEMs decreased 60%, to approximately $4.6 million in the first nine
months of 1999 from approximately $11.4 million in the first nine months of
1998, representing 56.1% of net sales in the first nine months of 1999 compared
to 85.1% of net sales in the first nine months of 1998. The decrease is
primarily attributable to a decrease in sales to IBM from $5.1 million during
the first nine months of 1998 to $843,000 in sales during the first nine months
of 1999. This decrease in IBM sales is attributable to our transition from
direct product sales of graphics accelerator subsystems, towards royalty-based
sales. As a result of this change, we expect to recognize lower revenues, but
higher product gross profit. This decrease was partially offset by sales of $2.0
million for non-recurring engineering efforts associated with a design win with
IBM for our SR9 graphics subsystem product.

  Royalty sales increased to $1.6 million in the first nine months of 1999 from
nothing in the first nine months of 1998, because, in part, we were appointed a
sales agent of S3 Inc. In this role, we provide engineering

                                      -12-
<PAGE>

development, technical and customer support for the SR9 graphics accelerator
board.  We also provide administrative duties such as order entry, invoicing and
collections.   In exchange for these services, S3 Inc. pays us a royalty.
Product royalty sales for this business were $418,000 in the first nine months
of 1999, representing 5.1% of net sales during the first nine months of 1999.

  During the fourth quarter of 1998, we entered into a Product Distribution
Agreement with SGI. Under this agreement, SGI appointed us as an authorized
sales agent with respect to selling and marketing the Digital Flat Panel
Solution Pack. Acting as an agent of SGI, we were authorized to sell and
market the Digital Flat Panel Solution Pack to distributors and certain OEM
customers.  We provide technical and customer support for the Revolution IV-FP
graphics subsystem component of the Digital Flat Panel Solution Pack, and
provide administrative duties such as order entry, invoicing and collections. In
exchange for providing these services, SGI pays us a royalty, sales commission
and support fee. These product royalty sales were $1.2 million in the first nine
months of 1999, representing 14.6% of net sales during the quarter.  The Product
Distribution Agreement with SGI expired on June 30, 1999.  We are currently
working with SGI to define the terms of our continuing relationship.

  Net sales to our domestic retail and two-tier distribution customers increased
89% to $3.4 million in the first nine months of 1999 compared to $1.8 million
during the first nine months of 1998. Total international sales decreased 94.8%
to $257,000 in the first nine months of 1999 from approximately  $4.8 million in
the first nine months of 1998.

  Gross Profit: Gross profit was approximately $3.6 million in the first nine
months of 1999 compared to gross margin loss of approximately $606,000 in the
first nine months of 1998. As a percentage of net sales, gross profit improved
to 43.7% in the first nine months of 1999 from a loss of 4.5% in the first nine
months of 1998. The increase in gross profit during the first nine months of
1999 was largely attributable to sales of non-recurring engineering efforts
associated with a design win at IBM for our SR9 graphics subsystem product,
representing 24.4% of net sales, and net product royalties representing 9.2% of
net sales.  In the first nine months of 1998, we experienced significant pricing
pressure across all of our products resulting in price protection claims and
customer returns.

  Our future prospects will depend in part on our ability to successfully manage
our product transitions and fluctuating component costs, particularly memory
components and control inventory as new products are introduced. We may not be
successful in managing these changes. While we reserve for anticipated charges,
based upon historical rates of product returns, price protection claims,
component cost fluctuations, and other factors, reductions in sales and returns
of older generation products may give rise to charges for obsolete or excess
inventory or substantial price protection charges. The effects of planned new
product introductions, anticipated stock rotations and sales activity during
future periods, as further described in "Certain Factors That May Affect Future
Results of Operations", may have a negative impact on gross margin.

  Selling, General and Administrative Expenses:   Selling, general and
administrative expenses decreased 18%, to approximately $4.9 million in the
first nine months of 1999 from $6.0 million in the first nine months of 1998,
primarily as a result of decreased headcount and lower marketing costs as we
controlled variable discretionary spending. As a percentage of net sales,
selling, general and administrative expenses increased to 59.8% in the first
nine months of 1999 from 44.8% in the first nine months of 1998, primarily
attributable to lower sales in the first nine months of 1999. We currently
expect that selling, general and administrative expenses will increase during
subsequent quarters, although not necessarily as a percentage of net sales, as
we begin to market and sell our newer technology.

  Research and Development Expenses:  Research and development expenses
decreased 2%, to approximately $4.2 million in the first nine months of 1999
from approximately $4.3 million in the first nine months of 1998, resulting
primarily from continuing to closely control discretionary spending in the first
nine months of 1999.  As a percentage of net sales, research and development
expenses increased to 51.2% in the first nine months of 1999 from 32.1% in the
first nine months of 1998, primarily attributable to lower sales in the first
nine months of 1999. We currently expect that research and development expenses
to increase in subsequent quarters, although not necessarily as a percentage of
net sales, primarily as a result of continued investment in our development
efforts.

  Interest Expense: Net interest expense for the first nine months of 1999 was
$200,000 compared to interest expense of $374,000 in the first nine months of
1998. This decrease was attributable to lower average outstanding loan balances
during the first nine months of 1999, as compared to the first nine months of
1998.

                                      -13-
<PAGE>

  Other Expense/Income: Other income totaled approximately $11,000 in the first
nine months of 1999 compared to other income of $178,000 in the first nine
months of 1998.  Other income during the first nine months of 1998 was primarily
attributable to the settlement of certain accounts payable balances, while other
income during the first nine months of 1999 was primarily attributable to
interest income.

  Provision for Income Taxes: During the first nine months of 1999 and the first
nine months of 1998, we did not provide an income tax benefit due to the
uncertainty of realizing the benefit from future taxable income.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

Investing in our common stock is very risky. You should be able to bear a
complete loss of your investment. You should carefully consider the following
factors, in addition to other information in this report.

  Competing Technologies May Render Some or All of Our Products or Future
  -----------------------------------------------------------------------
Products Noncompetitive or Obsolete.  The PC industry in general, and the market
-----------------------------------
for our products in particular, are characterized by:

 .    rapid technological advances,
 .    frequent new product introductions,
 .    short product life cycles,
 .    product obsolescence,
 .    changes in customer requirements or preferences for competing products,
 .    evolving industry standards,
 .    significant competition, and
 .    rapidly changing pricing.

  In this regard, the life cycle of products in our markets is often as short as
nine to twelve months. Therefore, our future prospects depend, in part, upon our
ability to:

 .    continually update our existing products in a timely manner, and
 .    continue to identify, develop and achieve market acceptance of products
     that incorporate new technologies and standards and meet evolving customer
     needs.

  We may not be successful in managing product transitions, including
controlling inventory of older generation products when introducing new
products. We have experienced and could, in the future, experience reductions in
sales of older generation products as customers delay purchases in anticipation
of new product introductions. We establish reserves for anticipated product
returns, based upon historical return rates of product returns and other
factors. However, reductions in sales and returns of older generation products
by distributors, primarily attributable to customer stock rotation, may give
rise to charges for obsolete or excess inventory or substantial price protection
charges.

  Dramatic Reductions in Sales to Significant Customers May Adversely Affect Our
  ------------------------------------------------------------------------------
Sales.  The volume and timing of orders received during a particular quarter are
-----
very difficult to forecast. Our customers can change delivery schedules or
cancel orders with limited or no penalties. Future sales to significant
customers are uncertain and depend upon the performance and pricing of our new
products and their acceptance by these customers.

  Customers generally order on an as-needed basis, and as a result, we have
historically operated without significant backlog. Moreover, as is often the
case in the PC industry, a disproportionate percentage of our net sales in any
quarter may be generated in the final month or weeks of a quarter. Consequently,
a shortfall in sales in any quarter as compared to management expectations may
not be identifiable until the end of the quarter. Because significant portions
of operating expense levels are relatively fixed, the timing of expense levels
is based in large part on our expectations of future sales. If sales do not meet
our expectations, we may be unable to quickly adjust spending, which could have
a material adverse effect on our business.

                                      -14-
<PAGE>

  Our Success Depends Heavily Upon Sales to a Limited Group of OEMs.  We try to
  -----------------------------------------------------------------
provide a broad line of high-performance hardware and software video/graphics
solutions, targeting both OEMs and two-tier and retail distribution customers.
The PC industry has a limited number of major OEMs driving the majority of PC
sales. While we are pursuing a significant portion of our business derived from
the limited number of major OEMs, we may not be successful in establishing
profitable relationships with major OEMs. In addition, major OEMs exercise
significant price pressure on their suppliers, generating lower gross margins
than those of retail and distribution customers. Our failure to establish
profitable relationships with major OEM customers or to maintain and increase
the volume and profitability of the products manufactured for such customers
would have a material adverse effect on our business.

  The Highly Competitive Market for Our Products May Adversely Affect Our
  -----------------------------------------------------------------------
Business Results.  Our current and prospective competitors include many
----------------
companies that have substantially greater name recognition and financial,
technical, manufacturing and marketing resources than we have. We may not be
able to compete successfully against current and future competitors.

  The market for our products is highly competitive. Our ability to compete
successfully depends upon a number of factors both within and beyond our
control, including:

 .    Product performance,
 .    Product features,
 .    Product availability,
 .    Price,
 .    Quality,
 .    Timing of our new product introductions compared with the timing of our
     competitors' product introductions,
 .    Emergence of new video/graphics and PC standards,
 .    Customer support, and
 .    Industry and general economic trends.

  We compete by offering products emphasizing high performance and quality,
utilizing merchant chips. Commencing in the third quarter of 1999, we no longer
design and manufacture our own chips. The trend in our industry is toward
establishing close alliances between chip and board manufacturers leveraging
their respective competitive advantages for the benefit of the customer. We
strive to improve our current products and to introduce new products in order to
provide a broad product line where demand justifies it. Our current principal
competitors include ATI Technologies, Inc., Diamond Multimedia Systems, Inc.,
which was recently acquired by S3 Incorporated, a chip manufacturer, and Matrox
Electronic Systems, Inc. Each of these named competitors markets graphics
accelerator products that are marketed in competition with our 64-bit and 128-
bit graphics accelerator products.

  Numerous competitors, particularly in higher-volume, lower-priced product
categories, have lowered their prices, which may result in reduced sales and/or
lower margins for our products. In addition, many companies compete on the basis
of their integrated circuit design capabilities by:

 .    supplying accelerator chips on a merchant basis,
 .    producing board-level products, and
 .    integrating the accelerator chip that will be placed directly on the CPU
     motherboard.

  We expect this trend to continue for low-end video/graphic accelerator
subsystems; however, we believe the market for video/graphic accelerator
subsystems in mid-range to high-end PCs will continue to exist.

  Several of our board-level competitors, as well as various independent
software developers, offer software products with features comparable to our
HawkEye software utilities. Future enhancements to such competing software
products that we do not match, or the inclusion of comparable features in future
versions of the Windows operating system, reduce the demand for our HawkEye
utilities software. In addition, we may eventually experience indirect
competition from suppliers of memory components, CPU manufacturers and others to
the extent they integrate advanced graphics processing capabilities into future
generations of products.

  We May Not Be Profitable or Generate Cash from Operations in the Future. We
  -----------------------------------------------------------------------
have incurred significant losses in the last several years. We intend to
continue to expend significant financial and management resources on the

                                      -15-
<PAGE>

development of additional products, sales and marketing, improved technology and
expanded operations. Although we believe that operating losses and negative cash
flows may diminish in the near future, we may not be profitable or generate cash
from operations in the foreseeable future.

   If We Do Not Secure Additional Financing, We May Be Unable to Develop or
  -------------------------------------------------------------------------
Enhance Our Services, Take Advantage of Future Opportunities or Respond to
--------------------------------------------------------------------------
Competitive Pressures. We require substantial working capital to fund our
---------------------
business. We have had significant operating losses and negative cash flow from
operations. Additional financing may not be available when needed, on favorable
terms, or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures, which
could have a material adverse effect on our business. Our capital requirements
depend on several factors, including the rate of market acceptance of our
products, the ability to expand our customer base, the growth of sales and
marketing and other factors. If capital requirements vary materially from those
currently planned, we may require additional financing sooner than anticipated.


  We Depend Upon a Limited Group of Suppliers for Key Components. We depend on
  --------------------------------------------------------------
sole or limited source suppliers for certain key components and have
experienced:

 .  limited availability,
 .  delays in shipments, and
 .  unanticipated cost fluctuations related to the supply of components,
   particularly memory chips.

  We actively work with memory component suppliers to secure pricing and volume
commitments for future production. Additionally, our suppliers could make key
components, such as memory graphics accelerator chips, less available to the
extent that they reduce our lines of credit and payment terms. In such an event,
we could have difficulty securing sufficient supply to meet customer
requirements. We may not secure commitments in sufficient amounts to meet our
needs or at prices that will enable us to attain profitability.

  The Loss of Key Members of Our Management Staff Could Delay and May Prevent
  ---------------------------------------------------------------------------
the Achievement of Our Business Objectives. Our future success will depend, to a
------------------------------------------
significant extent, upon the efforts and abilities of our senior management and
professional, technical, sales and marketing personnel. The competition for such
personnel is intense. The loss and failure to promptly replace any one of these
key members could significantly delay and may prevent the achievement of our
business objectives. Accordingly, our failure to hire, retain or adequately
replace key personnel could have a material adverse effect on our business.

  The Value of Our Stock Has in the Past and May in the Future Change Suddenly
  ----------------------------------------------------------------------------
and Significantly. The trading price of our common stock has been subject to
-----------------
significant fluctuations to date, and could be subject to wide fluctuations in
the future, in response to many factors, including the following:

 .  Quarter-to-quarter variations in our operating results,
 .  Announcements of technological innovations,
 .  New products or significant OEM system design wins by us or our competitors,
 .  General conditions in the markets for our products or the computer industry,
 .  The price and availability of purchased components,
 .  General financial market conditions,
 .  Changes in earnings estimates by analysts, or
 .  Other events or factors.

  In this regard, we do not endorse or accept responsibility for the estimates
or recommendations issued by stock research analysts from time to time. The
volatility of public stock markets, and technology stocks specifically, have
frequently been unrelated to the operating performance of the specific
companies. These market fluctuations may adversely affect the market price of
our common stock.

  We May Have to Indemnify or Pay Damages to Some of Our OEM Customers for
  ------------------------------------------------------------------------
Possible Intellectual Property Infringement Claims Filed or Threatened to Be
----------------------------------------------------------------------------
Filed. It is common in the PC industry for companies to assert intellectual
-----
property infringement claims against other companies. As a consequence, we
indemnify some OEM customers in certain respects against intellectual property
claims relating to our products. If an intellectual property

                                      -16-
<PAGE>

claim were to be brought against us, or any of our OEM customers, and we, or any
of our OEM customers, were found to be infringing upon the rights of others, we
could be required to:

 .  pay infringement damages,
 .  pay licensing fees,
 .  modify our products so that they are not infringing, or
 .  discontinue offering products that were found to be infringing.

  Any of the above-listed actions could have a material adverse effect on our
business. Several OEM customers recently sent us notices of potential indemnity
claims based upon notices of infringement that they have received from a patent
owner. Subsequently, the patent owner filed patent infringement lawsuits in the
U.S. and elsewhere against several of such OEM customers and a number of other
major PC systems manufacturers. We provide multimedia subsystems to our OEM
customers for use in such OEM customers' products that are alleged to infringe
on the patent owner's rights. Based upon our preliminary evaluation of the
patent, we do not believe the infringement claims are meritorious as to our
products sold to our customers. However, under the indemnity agreements or if we
are directly sued, we may be required to dedicate significant management time
and expense to defending ourselves or assisting our OEM customers in their
defense of this or other infringement claims, regardless of merit, which could
have a material adverse effect on our business. If an intellectual property
claim were to be brought against any of our suppliers and the supplier was found
to be infringing upon the rights of others, the supplier could be enjoined from
further shipments of our products to us, which could have a material adverse
effect on our business.

  An appeal hearing, conducted at our request, before the Nasdaq Listing
Qualifications Panel (the "Panel") was held on July 15, 1999 to determine
whether the we could continue to be listed on The Nasdaq National Market.  We
received written notification on September 20, 1999 that the Panel decided to
delist our Common Stock from The Nasdaq National Market, effective with the
close of business on September 20, 1999. The Panel also determined that, at the
time of delisting from The Nasdaq National Market, the Company did not comply
with the requirements for continued listing on The Nasdaq SmallCap Market.
Accordingly, following the date of the delisting, the Company's common stock has
been traded on the OTC Bulletin Board.

  If the Series A or Series B Preferred Stock is Converted or We Issue
  --------------------------------------------------------------------
Additional Shares of Equity Securities, The Value of Those Shares of Common
---------------------------------------------------------------------------
Stock Then Outstanding May Be Diluted. To the extent that we raise additional
-------------------------------------
capital by issuing equity securities at a price or a value per share less than
the then current price per share of common stock, the value of the shares of
common stock then outstanding will be diluted or reduced. At present, we have
two arrangements to issue additional equity securities which could result in
dilution to the present common stockholders. One arrangement involves the
issuance of our Series A preferred stock, each share of which was purchased or
acquired for $2.75 and all of which are convertible into shares of common stock
on a one for one basis. In May, 1999, the holder of Series A preferred stock
converted 850,000 shares into common stock.   Based on the number of shares of
Series A preferred stock presently outstanding and an outstanding warrant to
purchase additional shares of Series A preferred stock, as of November 3, 1999,
we would be required to issue up to 2,857,721 shares of common stock at a price
per share that is approximately $1.78 more than the last sale price of the
common stock of $.97 on November 3, 1999. If the sale price of the common stock
decreases, we may be required to issue shares of common stock at a price per
share that would be less than the then current price per share.

  We also have an arrangement which involves the issuance of our Series B
preferred stock (and payment of dividends thereunder in shares of common stock),
which is convertible from and after July 28, 1999 into shares of common stock at
a price per share equal to the lesser of:

 .  $4.2703, or
 .  88% of the average of the 10 lowest closing bid prices during the 30 trading
   days immediately prior to the date of conversion.

  On October 29, 1999, the holder of the Series B preferred stock converted 5
shares of this stock into 57,193 shares of common stock. Based on the number of
shares of Series B preferred stock outstanding after this conversion and the
applicable conversion price as of November 3, 1999, we would be required to
issue up to 3,405,287 shares of common stock at a price per share that is
approximately $.10 less than the last sale price of the common stock of $.97 on
November 3, 1999. In anticipation of price fluctuations that may reduce the
conversion price, we originally registered for resale up to 3,022,137 shares of
common stock which would become issuable upon conversion of the Series B
preferred stock if the conversion price fell as low as approximately $1.05 per
share.

                                      -17-
<PAGE>

Since the conversion price fell to less than $1.05 per share, we are required to
register more than the 3,022,137 shares of common stock previously registered
for conversion of the Series B preferred stock. Since our Common Stock was
delisted from the Nasdaq National Market System, the holder of Series B
Preferred has mandatory redemption rights for the full amount of their
investment.

  If additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or such equity securities may have rights,
preferences or privileges senior to those of our common stockholders.

  Our Computer System or our Suppliers' Computer System Could Fail When the Year
  ------------------------------------------------------------------------------
Changes to 2000. We use a number of computer software programs and operating
---------------
systems in our internal operations, including applications used in financial
business systems and various administration functions. We also include software
programs in our products. The Year 2000 issue refers to potential problems with
computer systems or any equipment with computer chips or software that use dates
where the date has been stored as just two digits to represent the year, such as
98 for 1998. On January 1, 2000, any clock or date recording mechanism which
incorporates date sensitive software, using only two digits to represent the
year, may recognize a date using 00 as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations, causing disruption of
operations, or, among other things, a temporary inability to process
transactions, send invoices, or engage in normal operating business activities.

  We have conducted an assessment of our Year 2000 readiness to determine the
extent of any potential problems. Our assessment revealed that all our products
are not keyed to a two digit date storage system. That is, our drivers and BIOS
do not reference or update the time or date, nor are they affected by the system
clock. Based upon our assessment, we consider all our products to be Year 2000
compliant. Our assessment also revealed that our principal information systems
correctly define the Year 2000 and do not require any modification. As a result,
we do not expect to incur any material costs associated with Year 2000 issues.
However, to date, we may not have identified all material Year 2000 issues
associated with our products.

  We have conducted an assessment of our Year 2000 readiness of the applications
used in financial business systems and various administrative functions to
determine the extent of any potential problems. We obtained Year 2000 compliance
statements from the manufacturers of our core internal information systems.
While these applications have been tested by their manufacturers, we will
continue to test our mission critical applications for Year 2000 compliance. As
a result, we do not expect to incur any material costs associated with Year 2000
issues. However, we cannot assure you that, to date, we have identified all
material Year 2000 issues associated with internal information systems which
could have a material adverse effect on our business.

  We continue the process of contacting our customers, suppliers, financial
institutions, creditors, service providers and governmental agencies, with whom
we have a material relationship, in an effort to verify the Year 2000 readiness
of these third parties that are in a position to impact us materially. Of those
contacted, we have received assurances from most indicating that they comply
with industry standards for Year 2000 readiness. We have limited or no control
over the actions of these third parties. Thus, while we expect that we will be
able to resolve any significant Year 2000 problems, we cannot assure you that
all material Year 2000 issues associated with third parties will be identified
and corrected on a timely basis, or that corrections made by third parties will
be compatible with our information systems. The failure of our systems and
applications or those operated by third parties to properly operate or manage
dates beyond 1999 could have a material adverse effect on our business.

  At this point, we do not believe we will be adversely affected, in a material
manner, by the Year 2000 issue. Our most reasonably likely worst case Year 2000
scenario is that we experience product procurement delays due to Year 2000
problems. We have not assessed, and may not be able to assess, what Year 2000
problems may occur with the public infrastructure, including transportation and
export systems, of the countries within which our suppliers operate. Such
problems may result in delays in procuring products, which we estimate may be
approximately 4 weeks. We are in the process of developing a contingency plan
specific to this scenario. In the event of worst case Year 2000 scenarios
regarding sales and financial systems and embedded systems, we would convert to
a manual system, until the third-party corrects the application, or switch to
other Year 2000 compliant applications. We are actively developing a contingency
plan to address any Year 2000 issues that may arise. We intend to design and
implement such a contingency plan prior to the end of the year, which will be
based in part upon the balance of the responses we expect to receive from third
parties. We will attempt to identify and resolve all Year 2000 problems that
could materially affect our business operations. However, management believes
that it is not possible to determine with complete certainty, that all Year 2000
problems affecting us have been identified or corrected. The number of devices
that could be affected and the interactions among such devices are simply too
numerous. In addition, we cannot accurately predict how many Year 2000 problem-
related failures will occur or the severity, duration or financial consequences
of these perhaps inevitable and unforeseen failures. As a result, we are
uncertain whether we or our clients might experience:

 .    a significant number of operational inconveniences and inefficiencies that
     may divert our time and attention, and financial and human resources, from
     our ordinary business activities, and/or
 .    a lesser number of serious system failures that may require significant
     efforts by us or our clients to prevent or alleviate material business
     disruptions.

                                      -18-
<PAGE>

  Based on the foregoing, we do not believe that the Year 2000 problem will have
a material adverse effect on our business. Our ability to achieve Year 2000
compliance and the level of incremental costs associated therewith could be
adversely impacted by, among other things, the availability and cost of
programming and testing resources, vendors' abilities to modify proprietary
software and unanticipated problems identified in the ongoing compliance review.
Currently, we estimate that we have spent approximately $500,000 on Year 2000
compliance.

                                      -19-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

  The accompanying financial statements have been presented on a going concern
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. (See Note B of Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended January 2, 1999 as filed with the Commission.)

  We have continued to incur substantial losses from operations. We will need
additional financing to continue operations, which raises substantial doubt as
to our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

  Significant pricing pressure for our products has been experienced during
1997, 1998 and the first nine months of 1999, resulting in lower gross margin
and higher net loss. Due to these factors, we have generated less cash flow from
operations than anticipated, and therefore require more working capital.

  In the first nine months of 1999, we continued to incur losses on reduced
revenue while pricing pressure in our industry has increased. Our operating
activities used cash of approximately $3.3 million in the first nine months of
1999, compared to operating activities which used cash of approximately $3.4
million in the first nine months of 1998. In the first nine months of 1999, cash
was generated through the net decrease to accounts receivable of $584,000, an
increase of $498,000 in accounts payable and $540,000 in demand notes payable.
Decreases in accounts receivable have primarily been attributable to lower sales
levels in the first nine months of 1999.  In addition, an increase in prepaids
and other assets of $547,000 and a net decrease to related party notes payable
used cash of approximately $201,000. We believe we can operate with lower levels
of working capital relative to net sales and have committed additional resources
to the management and control of our receivables and inventories. At October 2,
1999, our principal sources of liquidity consisted of approximately $58,000 of
cash and cash equivalents and a maximum borrowing capacity of $4 million based
on qualified accounts receivable balances, under our revolving line of credit,
as described below.

  In the first nine months of 1999, investing activities used cash of
approximately $35,000 for purchases of computer and office equipment compared to
$375,000 for purchases of property and office equipment in the first nine months
of 1998. Financing activities provided cash of approximately $2.9 million during
the first nine months of 1999, attributable to the $3.0 million proceeds from
issuing Series B Convertible Preferred Stock, partially offset by a cost
associated with this financing of $459,000. During the first nine months of
1998, financing activities provided cash of $1.9 million attributable mostly to
advances of $9.0 million made against certain convertible subordinated
promissory notes and partially offset by a reduction of the outstanding balance
of the revolving credit facility by  $7.8 million.

  On March 31, 1999, we entered into a loan and security agreement with a major
commercial bank for a secured working capital line of credit. This line of
credit replaces the current borrowing facility. Under this agreement, we can
borrow up to 80% of qualified accounts receivable up to a maximum amount of $15
million, at an annual interest rate of either prime rate plus 1% or at the LIBOR
rate plus 3.25%. Our present intent is to use prime rate plus 1% for this
borrowing facility. On November 3, 1999, the prime rate was 8.25% and the 90 day
LIBOR rate of 6.11%. We can lower these interest rates by achieving certain
financial objectives. In addition, we incur an unused line fee calculated at a
rate of .375% per annum on the unused portion of the maximum borrowing amount.
The bank also received a warrant to purchase up to 211,000 shares of common
stock, as of the date of closing, at an exercise price of $2.86 for a ten year
period. The line of credit agreement is collaterized by substantially all the
assets of our company. This agreement requires bank approval for the payment of
any dividends other than dividends on Series B Preferred. It also requires that
we achieve certain financial covenants, including quarterly profitability
targets in the third quarter of 1999. This agreement expires on December 31,
2001.

  As of October 2, 1999, we had outstanding indebtedness to the bank of $1.6
million. We are currently in violation of certain financial covenants of this
agreement, including quarterly profitability, certain key financial ratios and
the maintenance of a minimum excess borrowing availability. We are negotiating a
forbearance agreement with the bank, which will include the requirement that we
refinance this credit facility with another lender within a short-time period.
As a result of our violation of these financial convenants, the bank has reduced
the maximum borrowing amount to $4.0 million and has increased the annual
interest rate to the Prime rate plus 4%.

  We have entered into promissory notes with two of our Board of Director
members.  As of October 2, 1999, $240,000 was outstanding and is subject to
payment on demand.  Under the terms of the note payable, these notes

                                      -20-
<PAGE>

bear interest at the rate of 4.0% plus Prime.

  We have entered into a note payable with one of our manufacturing contractors.
Under the terms of the note payable, we converted approximately $1.4 million of
accounts payable with the manufacturing contractor into a note payable. The note
payable is a six (6) month note, bears interest at the rate of 5.99% per annum,
and was to be repaid in six equal monthly installments. The first principal and
interest payment was made in June 1998. However, as of October 2, 1999, $497,000
was outstanding and is subject to payment on demand.

  On March 31 1999, we sold 300 shares of Series B Convertible Preferred Stock
at a stated price of $10,000 per share. Proceeds from the offering, net of
issuance costs were approximately $3.0 million, net of issuance costs. Holders
of the Series B Preferred Stock are entitled to receive a 4% dividend payable,
at our option, in cash or shares of our common stock. As of October 2, 1999, the
Company has issued 41,336 shares of common stock in payment of this dividend for
the second and third quarters of 1999. The Series B Preferred Stock has
beneficial conversion features which entitles holders to convert their shares
into common stock at the lower of (i) $4.27 per share, or (ii) 88% of the
average of the ten lowest closing bid prices during the thirty day period prior
to the conversion date. After October 28, 1999, holders of the Series B
Preferred may convert all of their shares. Subject to certain restrictions, we
have the option to redeem the Series B Preferred Stock at any time. The
redemption amount is calculated as 110% of the Series B Preferred investment
prior to October 31, 1999, if the closing bid price is less than $1.60 per
share, and 118% in all other instances. The Series B Preferred Stock
automatically converts into common stock three years after the date of issuance.
On October 29,1999, the holder of the Series B Preferred Stock converted 5
shares into 57,193 shares of common stock. Since our Common Stock was delisted
from the Nasdaq National Market System, the holder of Series B Preferred has
mandatory redemption rights for the full amount of their investment.

  We are currently discussing with several financial institutions, high net
worth individuals and strategic business partners the terms of an investment in
the Company.  We have received an advance of this investment in the amount of
$300,000 on August 3,1999.  This advance has taken the form of a demand note at
an interest rate of 10% per annum. As of October 2, 1999, $300,000 was
outstanding and is subject to payment on demand.  We believe that this note will
be converted into equity upon the completion of this financing.

  We believe that our existing cash balances plus funds generated from product
sales, together with our working capital line of credit will not be sufficient
to fund operations at anticipated levels through the fourth quarter of 1999. We
will need the planned new financing to fund operations through the fourth
quarter of 1999. However future growth in sales, significant losses and
limitations of credit terms by suppliers, and/or continued increases in working
capital required by our business, future product releases, as well as continued
investments in operations, particularly research and development will require
additional equity or debt financing. Additional financing may not be available
to us on acceptable terms, if at all. The financial statements do not include
any adjustments relating to the recovery and classifications of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary should we be unable to continue as a going concern.

                                      -21-
<PAGE>

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.

  The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. The
Company's marketable securities consist of overnight and money market mutual
funds comprised of obligations which are issued or guaranteed as to principal
and interest by the U.S. Government and thus constitute direct obligations of
the United States of America with a dollar-weighted average maturity of 90 days
or less. Interest income is recognized when earned. The Company believes that
the effect, if any, of reasonable possible near-term changes in the interest
rates on its financial position, results of operations and cash flows would not
be material due to the short-term nature of these investments.

                                      -22-
<PAGE>

PART II.  OTHER INFORMATION:
----------------------------

ITEM 1 - LEGAL PROCEEDINGS

  From time to time, we are involved in litigation relating to claims arising
out of our operations in the normal course of business. Other than the
litigation discussed below, we are currently not a party to any additional legal
proceedings that if adversely adjudicated, in the belief of management, would
individually or in the aggregate have a material adverse effect on our financial
position or results of our operations.

  On June 11, 1996, a complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff RBI, an Alaskan limited
partnership, against Number Nine, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of our initial public
offering, Robertson Stephens & Company, Cowen & Company and Unterberg Harris
(the "Managing Underwriters"). On or about July 17, 1996, John Foley, as
plaintiff, filed a complaint in the United States District Court for the
District of Massachusetts against Number Nine, each member of our Board of
Directors, (Andrew Najda, Stanley W. Bialek, Gill Cogan, Dr. Paul R. Low, Dr.
Fouad H. Nader and William H. Thalheimer), Kevin M. Hanks, our former Chief
Financial Officer and Treasurer and the Managing Underwriters. On or about
October 16, 1996, Robert Schoenhofer, as plaintiff, filed an additional
complaint in the United States District Court for the District of Massachusetts
against Number Nine, each member of our Board of Directors, Mr. Hanks, and the
Managing Underwriters. Each of the plaintiffs purports to represent a class of
purchasers of our Common Stock between and including May 26, 1995 through
January 31, 1996. Each complaint alleges that the named defendants violated the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, by, among other things, issuing to the investing public false and
misleading statements regarding our business, products, sales and earnings
during the class period in question. The plaintiffs seek unspecified damages,
interest, costs and fees. By order of the District Court, these actions have
been consolidated into a single action. It is possible that other claims may be
made against us or that there may be other consequences from the lawsuits. On
June 1,1999, the District Court issued a memorandum and order dismissing the
majority of Federal securities law claims against Number Nine, directors and
officers and the Managing Underwriters. As a result of the significant reduction
in the scope of the plaintiffs' claims and discussions with the plaintiffs'
counsel, Number Nine believes that the plaintiffs' current settlement position
would be within the range of the directors and officers liability insurance
coverage amount of $8,000,000 at the time of the commencement of this
litigation. Number Nine does not believe that this litigation will have a
material adverse effect on its future financial condition and results of
operation. Accordingly, Number Nine believes that no provision for any liability
is required in the accompanying financial statements.

  A foreign inventor has asserted claims against several PC manufacturers,
including our customers, that the graphics technology included in their systems
infringes the inventor's patents. Certain of our customers have notified us of
these assertions and their intent to seek indemnification from us in the event
these claims are successful and the infringing technology was included in
products that we sold. We believe there are meritorious defenses to these claims
and that if the technology in fact infringes the inventor's rights, we would
have rights of indemnification from its suppliers. While we cannot assure you,
we do not expect this matter to have a material adverse effect on us.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

 (a)  Not applicable.

 (b)  Not applicable.

 (c) (1) Securities sold
     I.   During the quarter ended October 2, 1999, the Company issued an
          aggregate of 18,200 shares of its common stock to an employee in
          connection with its stock option plans at a weighted average price of
          $0.48 per share.
     II.  During the quarter ended October 2, 1999, the Company issued an
          aggregate of 32,156 shares of its common stock to employees in
          connection with its employee stock purchase plan, at a weighted
          average price of $1.65 per share.
     III. On October 2, 1999, the Company issued to the holder of the Series B
          Convertible Preferred Stock a quarterly dividend in the amount of
          26,810 shares of its common stock.
     (2) Underwriter. No underwriters were involved in these transactions.

                                      -23-
<PAGE>

    (3) Consideration
     I.   The Company received $8,802 for the issuance of its common stock from
          its stock option plans.
     II.  The Company received $53,057 for the issuance of its common stock from
          its employee stock purchase plan.
     III. There was no other consideration received with respect to the issuance
          of 26,810 shares of its common stock as a quarterly dividend to the
          holder of the Series B Convertible Preferred Stock

    (4) Exemption from registration claimed. The Company issued the securities
     in these transactions in reliance upon Section 4(2) of the Securities Act
     of 1933, as amended, because none of these transactions involved any public
     offering by the Company.

    (5) Terms of conversion or exercise.   Not applicable.

    (6) Use of proceeds.   Not applicable.

    (d) Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

  The Company is in violation of the following financial covenants of the loan
and security agreement with a major commercial bank:
     (a.) The achievement of profitability in the second and third quarters of
          1999.
     (b.) The accomplishment of the required operating cash flow to total debt
          service ratio for these periods.
     (c.) The maintenance of a minimum excess borrowing availability.

  The Company is currently negotiating a forbearance agreement with the bank
which includes a requirement to be financed out within a defined period of time.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's adjourned annual meeting of shareholders was held on July 9, 1999
with the following results:

1.   Dr. Fouad H. Nader was re-elected as a Class A director to serve until
     2002. The vote was 5,419,932 shares for and 95,856 shares withheld their
     vote.
2.   The proposal to increase the authorized amount of common stock by
     10,000,000 shares from 20,000,000 shares to 30,000,000 shares was approved.
     The vote was 5,204,070 shares for, 287,676 shares against, 24,042 shares
     abstained from voting.
3.   The proposal to issue more than 1,883,236 shares of common stock upon
     conversion of 300 shares of Series B Convertible Preferred Stock was
     approved. The vote was 5,082,350 shares for, 214,683 shares against, 60,567
     shares abstained and there were broker non votes of 158,188 shares.
4.   The adoption of the 1999 Employee, Director and Consultant Stock Option
     Plan was approved. The vote was 5,043,338 shares for, 266,770 shares
     against, 47,492 shares abstained and there were 158,188 broker non votes.
5.   The appointment of PricewaterhouseCoopers L.L.P. as the Company's
     independent public accountants for the fiscal year January 1, 2000 was
     approved. The vote was 5,464,680 shares for, 29,465 shares against and
     21,643 shares abstained.

ITEM 5 - OTHER INFORMATION



                                      -24-
<PAGE>

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

 (a)  Exhibits

   The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q

      Exhibit Number  Description
      --------------  -----------
      27.1            Financial Data Schedule

 (b) Reports on Form 8-K

    One report on Form 8-K, dated September 20, 1999 was filed on September 30,
1999.  This report described the process by which the Company's common stock was
delisted from the Nasdaq National Market. Following the date of the delisting,
the Company's common stock has been traded on the OTC Bulletin Board.

                                      -25-
<PAGE>

                                   SIGNATURES
                                   ----------


Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                           NUMBER NINE VISUAL TECHNOLOGY CORPORATION


Date:  November 16,1999    By:  /s/  Timothy J. Burns                         .
                              ------------------------------------------------
                              Timothy J. Burns
                              Chief Financial Officer
                              (Principal Financial and Accounting Officer)


Date:  November 16,1999    By:  /s/  William L. Ralph                          .
                              -------------------------------------------------
                              William L. Ralph
                              Chief Operating Officer
                              (Principal Operating Officer)

                                      -26-
<PAGE>

                                 EXHIBIT INDEX

      Exhibit Number  Description
      --------------  -----------
      27.1            Financial Data Schedule