<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 June 27, 1998
                                                -------------

                                      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 August 10, 1998 was 9,336,728
<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 June 27, 1998 and
         December 27, 1997                                                 1
 
         Condensed Consolidated Statements of Operations for the 
         three and six months ended June 27, 1998 and June 28, 1997        2
 
         Condensed Consolidated Statements of Cash Flows for the 
         six months ended June 27, 1998 and June 28, 1997                  3
 
         Notes to Condensed Consolidated Financial Statements              4
 

Item 2 - Management's Discussion and Analysis of
         Financial Condition and Results of Operations                     9


 
Part II - Other Information:
----------------------------
 
Item 1 - Legal Proceedings                                                 20
 
Item 2 - Changes in Securities and Use of Proceeds                         20
 
Item 3 - Defaults Upon Senior Securities                                   21
 
Item 4 - Submission of Matters to a Vote of Security Holders               21
 
Item 5 - Other Information                                                 22
 
Item 6 - Exhibits and Reports on Form 8-K                                  23
 
   (a)   Exhibits
         10.27  Separation Agreement with Archie K. Miller, 
                dated May 13, 1998
         27     Financial Data Schedule
 
   (b)   Reports on Form 8-K
 
SIGNATURE(S)                                                               24

</TABLE> 
<PAGE>
 
Part I  Financial Information:
------------------------------

Item 1  Financial Statements

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

<TABLE> 
<CAPTION> 
                                                              JUNE 27, 1998   JUNE 27, 1998   DECEMBER 27, 1997
                                                              -------------   -------------   -----------------
                                                                                 Pro Forma
                                                                               (See Note A)
                                                                unaudited       unaudited
<S>                                                           <C>             <C>             <C> 

CURRENT ASSETS:                                                                              
  Cash and cash equivalents                                      $  2,224       $  2,224          $  2,481
  Accounts receivable, trade, net of allowances for doubtful                                 
    accounts of $38 and $193, at June 27, 1998 and 
    December 27, 1997                                               4,489          4,489            10,506
  Receivable from manufacturing contractor                              -              -             1,678
  Inventories                                                       1,209          1,209             2,864
  Prepaid expenses                                                    767            405               274
                                                                 --------       --------          --------
    Total current assets                                            8,689          8,327            17,803
                                                                                             
Property and equipment, net                                         3,219          3,219             3,906
Other assets                                                           38             38               150
                                                                 --------       --------          --------
    TOTAL ASSETS                                                 $ 11,946       $ 11,584          $ 21,859
                                                                 ========       ========          ========
                                                                                             
CURRENT LIABILITIES:                                                                         
  Revolving line of credit                                       $    658       $    658          $  8,500
  Convertible subordinated promissory notes                         9,102              -                 -
  Note payable to manufacturing contractor                          1,166          1,166                 -
  Accounts payable                                                  1,621          1,621             6,148
  Accrued expenses and other current liabilities                      888            888             1,429
                                                                 --------       --------          --------
    Total current liabilities                                      13,435          4,333            16,077
                                                                                             
Commitments and contingencies                                           -              -                 -

STOCKHOLDERS' EQUITY:                                                                        
   Preferred Stock, $.01 par value; 5,000,000 shares                                         
     Authorized; no shares issued or outstanding, actual; 
     3,309,848 shares of Series A Convertible Preferred Stock, 
     $.01 par value, issued and outstanding at June 27, 1998, 
     pro forma                                                          -             33                 -
   Common Stock, $.01 par value; 20,000,000 shares authorized;                                
     9,336,728 shares issued and outstanding at June 27, 1998;                               
     9,172,548 shares issued and outstanding at December 27, 1         93             93                92
  Additional paid-in capital                                       36,251         44,958            35,994
  Accumulated deficit                                             (37,833)       (37,833)          (30,304)
                                                                 --------       --------          --------
    Total stockholders' equity                                     (1,489)         7,251             5,782
                                                                 --------       --------          --------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $ 11,946       $ 11,584          $ 21,859
                                                                 ========       ========          ========
</TABLE>
                                                                                
The accompanying notes are an integral part of the condensed consolidated
financial statements.

                                      -1-
<PAGE>
 
                   NUMBER NINE VISUAL TECHNOLOGY CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               (unaudited, in thousands, except per share data)
 
<TABLE> 
<CAPTION> 
                                               THREE MONTHS ENDED               SIX MONTHS ENDED
                                       JUNE 27, 1998   June 28, 1997     June 27, 1998  June 28, 1997
                                       --------------  -------------     -------------  -------------
<S>                                    <C>             <C>              <C>            <C>  
Net sales                                 $ 3,785         $ 7,094           $11,926       $ 21,058
Cost of sales                               4,800           8,293            12,109         19,843
                                          -------         -------           -------       --------
    Gross margin                           (1,015)         (1,199)             (183)         1,215
                                                                                   
Operating expenses:                                                                
  Selling, general, and                     2,220           3,927             4,374          7,225
   administrative                                                                  
  Research and development                  1,304           2,712             2,943          4,193
                                          -------         -------           -------       --------
    Total operating expenses                3,524           6,639             7,317         11,418
                                                                                   
Loss from operations                       (4,539)         (7,838)           (7,500)       (10,203)
Other income (expense):                                                            
  Interest expense                           (183)            (76)             (292)          (183)
  Other income, net                           225             123               263            238
                                          -------         -------           -------       --------
                                                                                   
Loss before income taxes                   (4,497)         (7,791)           (7,529)       (10,148)
                                                                                   
Provision for income taxes                      -           1,838                 -          1,838
                                          -------         -------           -------       --------
Net loss                                  $(4,497)        $(9,629)          $(7,529)      $(11,986)
                                          =======         =======           =======       ========
                                                                                   
 Net loss per common share                                                         
    - diluted                             $ (0.48)        $ (1.06)          $ (0.81)      $  (1.32)
                                          =======         =======           =======       ========
    - basic                               $ (0.48)        $ (1.06)          $ (0.81)      $  (1.32)
                                          =======         =======           =======       ========
                                                                                   
Common shares used in computing                                                    
  net loss per share                                                               
    - diluted                               9,317           9,101             9,258          9,089
                                          =======         =======           =======       ========
    - basic                                 9,317           9,101             9,258          9,089
                                          =======         =======           =======       ========
</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>
                                                                                SIX MONTHS ENDED
                                                                      JUNE 27, 1998             JUNE 28, 1997
                                                                   ------------------        -------------------
<S>                                                                <C>                       <C>
 Cash flows from operating activities:
   Net loss                                                                  $(7,529)                  $(11,986)
   Adjustments to reconcile net income to net cash
     Provided by (used for) operating activities:
     Depreciation and amortization                                               735                        571
     Amortization of capitalized software costs                                    -                        385
     Provision for bad debts                                                     272                       (243)
     Deferred taxes                                                                -                      1,838
     Change in operating assets and liabilities:
       Accounts receivable                                                     5,745                      7,475
       Receivable due from manufacturing contractor                            1,678                       (696)
       Inventories                                                             1,655                      6,627
       Prepaids and other assets                                                (381)                       347
       Accounts payable                                                       (4,527)                       177
       Accrued expenses and other current liabilities                           (541)                      (901)
                                                                             -------                   --------
         Net cash provided by (used for) operating activities                 (2,893)                     3,594
                                                                             -------                   --------
 
 Cash flows from investing activities:
     Purchase of property and equipment                                          (48)                    (1,070)
                                                                             -------                   --------
         Net cash used for investing activities                                  (48)                    (1,070)
                                                                             -------                   --------
 
 Cash flows from financing activities:
     Proceeds from issuance of common stock and
         exercise of common stock options                                        258                        104
     Advances (payments) on revolving line of credit, net                     (7,842)                    (6,500)
     Advances on convertible subordinated promissory note                      9,102                          -
     Advances on notes payable with manufacturing contractor, net              1,166                          -
     Principal payments on capital lease obligations                               -                        (42)
                                                                             -------                   --------
         Net cash provided by (used for) financing activities                  2,684                     (6,438)
                                                                             -------                   --------
 
 Net change in cash and cash equivalents                                        (257)                    (3,914)
 Cash and cash equivalents, beginning of period                                2,481                     13,895
                                                                             -------                   --------
 Cash and cash equivalents, end of period                                    $ 2,224                   $  9,981
                                                                             =======                   ========
</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.

    Number Nine Visual Technology Corporation (the "Company") has continued to
incur substantial losses from operations, has lost a significant customer, is
not in compliance with all of the covenants required by its lender, has
unresolved class action litigation concerning alleged violations of securities
laws and needs additional financing to continue operations, all of which raise
substantial doubt about its ability to continue as a going concern. The Company
has hired financial management with experience in working with financially
troubled companies. The Company also has retained investment-banking counsel to
advise it on the possible sale of equity securities, as well as to introduce and
assist it in the evaluation of potential merger and partnering opportunities.

    On May 7, 1998 the Company secured a portion of its required funding by
entering into a Securities Purchase Agreement (the "Agreement") with Silicon
Graphics, Inc. ("SGI") pursuant to which the Company established a strategic and
financial partnership with SGI. Under the Agreement the Company issued during
the second quarter ended June 27, 1998 a series of secured subordinated
convertible promissory notes (the "Notes") in the aggregate principal amount of
$9.0 million and a Series A Convertible Preferred Stock Purchase Warrant (the
"Warrant"). The Notes are subordinated to the Company's existing secured line of
credit, are secured by essentially all of the Company's assets, and bear
interest at a rate per annum equal to the prime rate plus 2% and are
convertible, at SGI's option, into shares of the Company's Series A Convertible
Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a
conversion price equal to $2.75 per share. If the Company pays any of the
outstanding principal and interest due under any of the Notes, then on such date
(the "Payment Date") the Warrant will entitle the holder until the third
anniversary of the Payment Date to purchase at an exercise price of $2.75 per
share that number of shares of Preferred Stock equal to 3% of the Company's then
issued and outstanding Common Stock. Following issuance each share of Preferred
Stock would be convertible into one share of the Company's Common Stock. If not
converted, the Notes will be payable on demand 180 days after September 30,
1998. The financial statements do not include any adjustments relating to the
recovery and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. However, no assurance can be provided
that the Company will be successful in raising additional capital, continuing
this strategic alliance, or entering into a new business alliance.

    As of August 10, 1998, SGI converted the Notes, including all accrued
interest, into an aggregate of 3,350,894 shares of Preferred Stock, which
represents approximately 26.4% of the issued and outstanding equity of the
Company. In connection with the conversion, the Warrant was canceled and the
Company issued to SGI a replacement Series A Convertible Preferred Stock
Purchase Warrant (the "Replacement Warrant"). The Replacement Warrant entitles
the holder to purchase for a period of three years at an exercise price of $2.75
per share that number of shares of Preferred Stock equal to 3% of the Company's
then issued and outstanding Common Stock. If exercised on August 10, 1998, the
Replacement Warrant would have entitled the holder to purchase up to 294,000
shares of Preferred Stock.

    The pro forma balance sheet at June 27, 1998 reflects the conversion on
August 10, 1998 of Notes evidencing an aggregate of $9.1 million of principal
and accrued interest, offset by deferred finacing costs of $362,000, into
3,309,848 shares of Preferred Stock as if the same had occurred on June 27,
1998. The pro forma balance sheet does not reflect the effects of the fair value
of the Replacement Warrant and any loss on conversion, accumulated deficit, and 
additional paid in capital. The determination of fair value is not currently 
available.

    The accompanying condensed unaudited consolidated financial statements have
been prepared by the Company 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.  The condensed
unaudited consolidated financial statements include the accounts of the Company,
its foreign sales corporation and its wholly-owned German subsidiary.  All
material intercompany accounts and transactions have been eliminated in

                                      -4-
<PAGE>
 
consolidation.  In the opinion of 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 the Company's consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K, as amended, for its fiscal year ended December 27, 1997.  Operating
results for the three month period and six month period ended June 27, 1998 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 June 27, 1998, cash and cash equivalents consists of $2.2 million
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):
 
<TABLE>
<CAPTION>
                                JUNE 27, 1998       DECEMBER 27, 1997
                                -------------       -----------------
        <S>                    <C>                 <C>
         Raw materials              $  451                $  527
         Work in process               561                   715
         Finished goods                197                 1,622
                                    ------                ------
                                    $1,209                $2,864
                                    ======                ======
</TABLE>

    The market for the Company's 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.

    At December 30, 1995 and June 28, 1996, a portion of inventory related to
several of the Company's products was identified as in excess of current
requirements based on a number of factors such as an acceleration of product
transitions, further deterioration of memory inventory value, continued pressure
on pricing of older products, lower than expected sales activity of certain
products and excess component inventories. Accordingly, during the fourth
quarter of 1995 and second quarter of 1996, the Company wrote off approximately
$8.0 and $5.7 million of inventory, respectively, related to those products.  At
that time, management developed a program to reduce this type of inventory to
desired levels over the near term.  This program has been extended to handle the
Company's newer products as they approach their effective end-of-life.
Management, on a quarterly basis, estimates the fair market value for all of its
inventory, and if it is determined that fair market value is lower than cost,
reserves are taken to account for this loss.  Management believes no additional
loss will be incurred on its disposition. No estimate can be made of a range of
amounts of loss that are reasonably possible should this program not be
successful.

    At December 27, 1997, the Company had a $1.7 million due from a
manufacturing contractor, which arose from components sold by the Company at
cost to the contractor for assembly into finished goods. The Company did not
have receivables due from its manufacturing contractors, on June 27, 1998. The
Company may continue to sell components to its manufacturing contractors in the
future.

D.  DEBT:
    -----

    The Company is party to an amended loan and security agreement with a
commercial bank providing for a revolving credit facility of $15 million.
Pursuant to this agreement, the Company may borrow an amount equal to 65% of
qualified accounts receivable (as defined in the agreement) up to the maximum
amount at an interest rate

                                      -5-
<PAGE>
 
per annum equal to either the prime rate (8.50% as of June 27, 1998) plus 1.25%
or at the Libor Rate (as defined in the agreement) plus 2.5%, plus an unused
line fee at a rate of 0.5% per annum on the unused portion of the maximum
borrowing amount. The agreement expires on December 2, 1998 and is renewable on
a yearly basis thereafter. The loan balance is collateralized by substantially
all of the Company's assets.

    The agreement contains financial covenants including, but not limited to, a
minimum current ratio, minimum tangible net worth, a maximum debt to tangible
net worth ratio, and minimum quarterly net loss. The agreement also gives the
lender the right to call the loan in the event of a material adverse change in
the Company's business and prohibits the Company from paying dividends without
the consent of the lender. The Company is not in compliance with certain
covenants currently. The Company has received a forebearance arrangement from
the lender for noncompliance with certain covenants in the agreement, which is
effective until September 30, 1998.  Under the forebearance agreement, the
maximum amount the Company can borrow can not exceed $4.5 million.  If the
Company is not in compliance with all of the covenants of the lender, there can
be no assurance that the lender will grant additional waivers and/or amendments,
nor can there be any assurance that alternative financing will be available.
The Company believes that the lender will continue to allow the Company to
operate under its forebearance agreement while the Company seeks to secure
additional permanent financing. Should the lender refuse to grant any future
waiver or amendment, and the line of credit is not available to the Company,
management anticipates that it would require alternative financing. However, if
the Company is not able to secure alternative financing, the Company's liquidity
would be adversely affected.

    On May 7, 1998 the Company entered into the Agreement with SGI for a loan.
Under the Agreement the Company issued during the second quarter ended June 27,
1998 a series of Notes in the aggregate principal amount of $9.0 million and the
Warrant.  The Notes are subordinated to the Company's existing secured line of
credit, are secured by essentially all of the Company's assets, bear interest at
a rate per annum equal to the prime rate plus 2% and are convertible, at SGI's
option, into shares of the Company's Preferred Stock, at a conversion price
equal to $2.75 per share.  If the Company pays any of the outstanding principal
and interest due under any of the Notes, then on the Payment Date, the Warrant
will entitle the holder until the third anniversary of the Payment Date to
purchase that number of shares of Preferred Stock equal to 3% of the Company's
then issued and outstanding Common Stock.  Following issuance each share of
Preferred Stock is convertible into one share of the Company's Common Stock.  If
not converted, the Notes will be payable on demand 180 days after September 30,
1998.

    As of August 10, 1998, SGI converted the Notes, including all accrued
interest, into an aggregate of 3,350,894 shares of Preferred Stock. In
connection with the conversion, the Warrant was canceled and the Company issued
to SGI the Replacement Warrant which entitles the holder to purchase for a
period of three years at an exercise price of $2.75 per share that number of
shares of Preferred Stock equal to 3% of the Company's then issued and
outstanding Common Stock. If exercised on August 10, 1998, the Replacement
Warrant would have entitled the holder to purchase up to 294,000 shares of
Preferred Stock.

    The Company has entered into a note payable with one of its manufacturing
contractors. Under the terms of the note payable, the Company 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 is to be repaid in six equal monthly
installments. The first principal and interest payment was made in June 1998.
The last payment is scheduled to occur in November 1998. Should the Company fail
to pay any of its monthly installments, the manufacturing contractor would be
entitled to demand immediate payment in full of the note payable. As of June 27,
1998, the total amount due under this note payable was $1.2 million.

E.  RECENTLY ISSUED ACCOUNTING STANDARDS
    ------------------------------------

    Financial Accounting Standards Board Statement No. 129 ("FAS 129")
"Disclosure of Information about Capital Structure" is effective for financial
statements issued for periods ending after December 31, 1997. FAS 129

                                      -6-
<PAGE>
 
establishes standards for disclosure of information about securities,
liquidation preference of preferred stock and redeemable stock.

    Financial Accounting Standards Board Statement No. 131 ("FAX 131")
"Disclosure about Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates.

   Financial Accounting Standards Board Statement No. 132 ("FAS 132")
"Employers' Capital Disclosures about Pensions and other Postretirement
Benefits" is effective for fiscal years beginning after December 15, 1997,
although earlier application is encouraged. FAS 132 establishes standards
related to the disclosure requirements for pensions and other postretirement
benefits. FAS 132 requires additional information to be disclosed regarding
changes in the benefit obligation and fair value of plan assets, as well as
eliminates other disclosures no longer considered useful.

    Financial Accounting Standards Board Statement No. 133 ("FAS 133")
"Accounting for Derivative Instruments and Hedging Activities" is effective for
fiscal years beginning after June 15, 1999, although earlier application is
encouraged.  FAS 133 established standards related to the Company's financial
risks associated with its activity as it relates to financial activities with
respect to derivative instruments and hedging.  The Company currently does not
engage and has no plans to engage in the practice of using financial derivative
instruments and hedging activities.

    The Company does not believe that the implementation of FAS 129, FAS 131,
FAS 132 or FAS 133 will have a material impact on the Company's financial
position or results of operations.

    Financial Accounting Standards Board Statement No. 130 ("FAS 130")
"Reporting Comprehensive Income" is effective for fiscal years beginning after
December 31, 1997, although earlier application is permitted. The Company
adopted the requirements of this pronouncement in its financial statements for
the quarter ended March 28, 1998.  FAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general-
purpose financial statements. FAS 130 requires that all components of
comprehensive income shall be reported in the financial statements in the period
in which they are recognized. Furthermore, a total amount for comprehensive
income shall be displayed in the financial statement where the components of
other comprehensive income are reported. The Company was not previously required
to present comprehensive income or the components thereof in its financial
statements under generally accepted accounting principles.  The Company had no
additional comprehensive income other than reported on the income statement for
the quarter ended June 27, 1998.

F.  INCOME TAXES:
    -------------

    At June 27, 1998, the Company had net operating loss carryforwards of
approximately $28.9 million and $32.6 million available to offset future federal
and state taxable income, respectively.  The federal net carryforwards begin to
expire in 2010 and the state net carryforwards begin to expire in 2000.

G.  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 the Company, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of the Company's initial
public offering, Robertson, Stephens & Company, Cowen & Company and Unterberg
Harris (the "Managing Underwriters"). On or about July 17, 1996, a complaint
was filed in the United States District Court for the District of Massachusetts
by named plaintiff John Foley against the Company, each member of the Company's
Board of Directors, other than John G. Thompson,

                                      -7-
<PAGE>
 
(Andrew Najda, Stanley W. Bialek, Gill Cogan, Dr. Paul R. Low, Dr. Fouad H.
Nader and William H. Thalheimer), Kevin M. Hanks, former Chief Financial Officer
and Treasurer of the Company, and the Managing Underwriters. On or about October
16, 1996, an additional complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff Robert Schoenhofer against
the Company, each member of the Company's Board of Directors (other than John G.
Thompson), Mr. Hanks, and the Managing Underwriters. Each of the plaintiffs
purports to represent a class of purchasers of the Common Stock of the Company
between and including May 26, 1995 through January 31, 1996. Each complaint
alleges that the named defendants violated the Securities Act of 1933 and the
Securities Exchange Act of 1934 by, among other things, issuing to the investing
public false and misleading statements regarding the Company's 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 the Company or that there may be other
consequences from the lawsuits. The defendants deny any liability, believe they
have meritorious defenses, and intend to vigorously defend these and any similar
lawsuits that may be filed, although the ultimate outcome of these matters
cannot yet be determined. If the lawsuits are not resolved satisfactorily for
the Company, there could be a material adverse effect on the Company's future
financial condition and results of operations and, accordingly, income (loss).
The Company does not believe that the ultimate liability, if any, is estimable
or probable, and therefore no provision for any liability that may result from
the actions has been recognized in the accompanying consolidated financial
statements.

                                      -8-
<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 its founding in 1982, Number Nine has introduced successive
generations of video/graphics subsystems providing advanced video/graphics
performance in desktop PCs. The Company has focused on providing a broad line of
high-performance hardware and software video/graphics solutions, targeting both
OEMs and two-tier and retail distribution customers. The Company's 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, the Company began shipping products utilizing its third
generation proprietary 128-bit graphics accelerator chip technology, Ticket
to Ride/(TM)/.

    During the second quarter of 1998, the Company announced its fourth
generation proprietary 128-bit video/graphics accelerator chip, Ticket to Ride
IV, and the related graphics board product, Revolution/(R)/ IV. In addition, the
Company began to develop its fifth generation proprietary 128-bit video/graphics
accelerator chip. There can be no assurance that the Company's latest generation
product, Revolution3D utilizing the Ticket to Ride chip and Revolution IV
utilizing the Ticket to Ride IV chip, will be successful or that the fifth
generation product will be completed and marketed successfully.

    The Company also markets Hawkeye95, 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 Windows95.  During
1998, the Company currently plans to develop several different products with 3-D
capabilities and anticipates that most of its products will also incorporate
motion video acceleration.

    The Company's past operating results have been, and its 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; the Company's ability to introduce new technologies and products on a
timely basis; availability and timing of component shipments and cost of
components obtained from the Company's suppliers; availability and cost of
manufacturing and foundry capacity; new product introductions by the Company's
competitors; delays in related product introductions by others; market
acceptance of the Company's 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 product prices by the Company, its competitors and
suppliers, including possible decreases in unit average selling prices of the
Company's products caused by competitive pressures. In particular, in the second
quarter of 1996, the Company identified charges of approximately $5.7 million of
obsolete and excess finished goods and component inventory. There were a number
of events during the second quarter of 1996 that were the primary drivers for
this provision. These include an acceleration of product transitions, further
deterioration of memory inventory value, continued pressure on pricing of older
products, lower than expected sales activity of certain products and excess
component inventories. Operating results can 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. The
Company's sales to original equipment manufacturers ("OEMs"), which accounted
for 43.8% of net sales in 1997, 68.3% of net sales in 1996, and 52.8% of net
sales during 1995, are particularly susceptible to fluctuations.

                                      -9-
<PAGE>
 
    The Company's sales to OEMs typically generate lower gross margins than
retail and distributor sales, but also generally entail lower marketing, sales
and product support costs. The Company's net sales, gross margins and profits
have in the past, and may in the future, vary significantly depending on the
proportion of its sales to OEMs and other distribution channels, as well as the
mix of products sold in each channel. The Company's sales of merchant-based
technology products are typically at a significantly lower margin than the sales
of its proprietary technology products. The gross margin on all of the Company's
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 its products as a result of
competition.


RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 27, 1998 AND JUNE 28, 1997

    Net Sales: Net sales decreased 46%, to $3.8 million in the second quarter of
1998 from approximately $7.1 million in the second quarter of 1997. This
decrease was primarily attributable to lower sales of the Company's proprietary
128-bit products to the Company's OEM customers, as well as lower sales in
international two-tier and retail distribution customers, as the Company's third
generation proprietary 128-bit video/graphics accelerator chip nears the end of
its product life cycle. Net sales of the Company's proprietary 128-bit products
decreased 62% to $1.8 million in the second quarter of 1998 from $4.8 million in
the second quarter of 1997, representing 47.4% of net sales in the second
quarter of 1998, compared to 67.6% in net sales in the second quarter of 1997.
Sales of 64-bit products represented the remaining $2.0 million or 52.6% of net
sales during the second quarter of 1998 compared to approximately $2.3 million
or 32.4% of net sales in the second quarter of 1997. Sales to OEMs increased 9%,
to approximately $3.7 million in the second quarter of 1998 from approximately
$3.4 million in the second quarter of 1997, representing 97.6% in the second
quarter of 1998 compared to 47.9% of net sales in the second quarter of 1997.
The increase in OEM sales was primarily due to continued sales activity with
International Business Machines Corporation ("IBM"), which represented
approximately $1.6 million or 42.1% of net sales in the second quarter of 1998.
Net sales to IBM have decreased from the first quarter of 1998 by 38% from $2.6
million, primarily due to lower than expected orders from IBM. Sales to Digital
Equipment Corporation ("DEC") represented 30.5% of net sales in the second
quarter of 1998, compared to 12.0% of net sales in the second quarter of 1997.
Sales to Micron Electronics, Inc. ("Micron") represented 3.9% of the second
quarter of 1998, compared to 8.9% of net sales in the second quarter of 1997.
Net sales to the Company's retail and two-tier distribution customers decreased
95%, to $100,000 during the second quarter of 1998 compared to $1.9 million
during the second quarter of 1997. Total international sales decreased 73% to
$1.0 million in the second quarter of 1998 from approximately $3.7 million in
the second quarter of 1997.

    Gross Margin: Gross margin was a loss of  $(1.0) million in the second
quarter of 1998 compared to a loss of  $(1.2) million in the second quarter of
1997. The Company's gross profit margin decreased to (26.8)% in the second
quarter of 1998 from (16.9)% in the second quarter of 1997, due primarily to the
significantly lower net sales level and continued pricing pressure, in the form
of stock rotation and price protection in the two-tier and retail distribution
customers worldwide, when compared to the second quarter of 1997. The Company's
future prospects will depend in part on its ability to successfully manage its
product transitions and fluctuating component costs, particularly memory, and
control inventory as new products are introduced. There can be no assurance that
the Company will be successful in managing these changes. While the Company
reserves for anticipated charges based upon historical rates of product returns,
price protection claims, component cost fluctuations, and other factors, there
can be no assurance that reductions in sales and returns of older generation
products will not 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 44%, to approximately $2.2 million in the
second quarter of 1998 from $3.9 million in the second quarter of 1997,
primarily as a result of decreased headcount and lower marketing costs as the
Company reduced variable

                                      -10-
<PAGE>
 
discretionary spending. As a percentage of net sales, selling, general and
administrative expenses increased to 58.7% in the second quarter of 1998 from
55.4% in the second quarter of 1997, primarily attributable to lower sales in
the recent quarter. The Company currently expects that selling, general and
administrative expenses will increase during subsequent quarters, although not
necessarily as a percentage of net sales, as the Company begins to market and
sell its newer technology.

    Research and Development Expenses:  Research and development expenses
decreased 52%, to $1.3 million in the second quarter of 1998 from approximately
$2.7 million in the second quarter of 1997, resulting primarily from incurring
one-time costs associated with completing development efforts on the Ticket to
Ride accelerator chip, and Revolution3D products in the second quarter of 1997.
During the second quarter of 1998, the Company announced its fourth generation
proprietary 128-bit video/graphics accelerator chip, Ticket to Ride IV, and the
related graphics board product, Revolution IV. In addition, the Company began to
develop its fifth generation proprietary 128-bit video/graphics accelerator
chip. As a percentage of net sales, research and development expenses decreased
to 34.4% in the second quarter of 1998 from 38.2% in the second quarter of 1997.
The Company currently expects 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 the Company's
proprietary technology efforts.

    Interest Expense: Net interest expense for the second quarter of 1998 was
$183,000 compared to interest expense of $76,000 in the second quarter of 1997,
primarily attributable to higher average levels of debt in the second quarter 
of 1998.

    Other Expense/Income: Other income totaled $225,000 in the second quarter of
1998 compared to other income of $123,000 in the second quarter of 1997.  Other
income during the second quarter of 1998 was primarily attributable to the
settlement of certain accounts payable balances, while other income during the
second quarter of 1997 was primarily attributable to interest income.

    Provision for Income Taxes: During the second quarter of 1998, the Company
did not provide an income tax benefit due to the uncertainty of realizing the
benefit from future taxable income. In the second quarter of 1997, the Company
increased its valuation allowance against the remainder of its net deferred tax
asset, of approximately $1.8 million. Valuation of the net deferred tax asset
was dependent upon generating sufficient taxable income in near-term periods.
Principally as a result of the net losses incurred in 1997, management estimates
of future taxable income have been reduced. As a result, management believes it
is less likely than not that the remaining net deferred tax asset will be
realized.


RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED 
JUNE 27, 1998 AND JUNE 28, 1997

    Net Sales: Net sales decreased 44%, to $11.9 million in the first six months
of 1998 from approximately $21.1 million in the first six months of 1997. This
decrease was primarily attributable to lower sales of the Company's proprietary
128-bit products to the Company's OEM customers, as well as lower sales in
international two-tier and retail distribution customers, as the Company's third
generation proprietary 128-bit video/graphics accelerator chip nears the end of
its product life cycle. Net sales of the Company's proprietary 128-bit products
decreased 62% to $5.8 million in the first six months of 1998 from $15.1 million
in the first six months of 1997, representing 48.3% of net sales in the first
six months of 1998 compared to 71.5% in net sales in the first six months of
1997. Sales of 64-bit products represented the remaining $6.2 million or 51.6%
of net sales during the first six months of 1998 compared to approximately $6.0
million or 28.5% of net sales in the first six months of 1997. Sales to OEMs
decreased 21%, to approximately $9.5 million in the first six months of 1998
from approximately $12.1 million in the first six months of 1997, representing
80% in the first six months of 1998 compared to 57.7% of net sales in the first
six months of 1997. The decrease in OEM sales was primarily a result of
essentially no sales to Dell Computer Corporation ("Dell") during the first six
months of 1998 compared to net sales of $5.1 million or approximately 24.2%
during the first six months of 1997. The loss of net sales to Dell was partially
offset by new sales activity

                                      -11-
<PAGE>
 
with IBM, which represented approximately $4.2 million or 35.3% of net sales in
the first six months of 1998. Sales to Micron represented 9.3% in the first six
months of 1998 compared to 11.6% of net sales in the first six months of 1997.
Net sales to the Company's retail and two-tier distribution customers decreased
75%, to $1.1 million during the first six months of 1998 compared to $4.5
million during the first six months of 1997. Total international sales decreased
33% to $5.3 million in the first six months of 1998 from approximately $7.9
million in the first six months of 1997.

    Gross Margin:  Gross margin was a loss of $(183,000) in the first six
months of 1998 compared to gross profit of $1.2 million in the first six months
of 1997. The decrease in gross profit during the first six months of 1998 was
largely attributable to the significantly lower net sales level and continued
pricing pressure across the Company's products compared to the first six months
of 1997.  The Company's gross profit margin decreased to (1.5)% in the first six
months of 1998 from 5.8% in the first six months of 1997, due primarily to
significantly lower net sales and continued price pressure, as the Company's
third generation proprietary 128-bit video/graphics accelerator chip nears the
end of its product life cycle, compared to the first six months of 1997. The
Company's future prospects will depend in part on its ability to successfully
manage its product transitions and fluctuating component costs, particularly
memory, and control inventory as new products are introduced. There can be no
assurance that the Company will be successful in managing these changes. While
the Company reserves for anticipated charges based upon historical rates of
product returns, price protection claims, component cost fluctuations, and other
factors, there can be no assurance that reductions in sales and returns of older
generation products will not 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 39%, to approximately $4.4 million in the
first six months of 1998 from $7.2 million in the first six months of 1997,
primarily as a result of decreased headcount and lower marketing costs as the
Company controlled variable discretionary spending.  As a percentage of net
sales, selling, general and administrative expenses increased to 36.7% in the
first six months of 1998 from 34.3% in the first six months of 1997, primarily
attributable to lower sales in the recent quarter.  The Company currently
expects that selling, general and administrative expenses will increase during
subsequent quarters, although not necessarily as a percentage of net sales, as
the Company begins to market and sell its newer technology.

    Research and Development Expenses: Research and development expenses
decreased 30%, to $2.9 million in the first six months of 1998 from
approximately $4.2 million in the first six months of 1997, resulting primarily
from incurring one-time costs associated with completing development efforts on
the Ticket to Ride accelerator chip, and Revolution3D products. During the first
six months of 1998, the Company announced its fourth generation proprietary 128-
bit video/graphics accelerator chip, Ticket to Ride IV, and the related graphics
board product, Revolution IV. In addition, the Company began to develop its
fifth generation proprietary 128-bit video/graphics accelerator chip. As a
percentage of net sales, research and development expenses increased to 24.7% in
the first six months of 1998 from 19.9% in the first six months of 1997,
primarily attributable to lower sales in the recent quarter. The Company
currently expects 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 the Company's proprietary
technology efforts.

    Interest Expense: Net interest expense for the first six months of 1998 
was $292,000 compared to interest expense of $183,000 in the first six months 
of 1997.

    Other Expense/Income: Other income totaled $263,000 in the first six months
of 1998 compared to other income of $238,000 in the first six months of 1997.
Other income during the first six months of 1998 was primarily attributable to
the settlement of certain accounts payable balances, while other income during
the first six months of 1997 was primarily attributable to interest income.

                                      -12-
<PAGE>
 
    Provision for Income Taxes:  During the first six months of 1998 and the
first six months of 1997, the Company did not provide an income tax benefit due
to the uncertainty of realizing the benefit from future taxable income. In 1997,
the Company increased its valuation allowance against the remainder of its net
deferred tax asset, of approximately $1.8 million. Valuation of the net deferred
tax asset was dependent upon generating sufficient taxable income in near-term
periods. Principally as a result of the net losses incurred in 1997, management
estimates of future taxable income have been reduced. As a result, management
believes it is less likely than not that the remaining net deferred tax asset
will be realized.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

    This report contains forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and are subject to a number of factors and
uncertainties, which could cause actual results to differ materially from those,
described in the forward-looking statements. The Company cautions investors that
there can be no assurance that actual results or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to the
following:

Product Life Cycle Management

    The PC industry in general, and the market for the Company's 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 the Company's markets is often as
short as six to twelve months. Therefore, the Company's future prospects will
depend in part on its ability to enhance the functionality of its existing
products in a timely manner and to continue to identify, develop and achieve
market acceptance of products that incorporate new technologies and standards
and meet evolving customer needs. There can be no assurance that the Company
will be successful in managing product transitions, including controlling
inventory of older generation products as new products are introduced. The
Company has in the past experienced and could in the future experience
reductions in sales of older generation products as customers anticipate new
product introductions. For example, the Company is currently completing its
development efforts on its fourth generation proprietary 128-bit video/graphics
accelerator chip, while its third generation proprietary 128-bit video/graphics
accelerator chip is nearing the end of its product life cycle. The Company's
ability to successfully transition its Revolution 3D products to its fourth
generation proprietary-based 128-bit products will depend on such factors. While
the Company reserves for anticipated returns based upon historical rates of
product returns and other factors, there can be no assurance that reductions in
sales and returns of older generation products by distributors, which are
primarily attributable to customer stock rotation, will not give rise to charges
for obsolete or excess inventory or substantial price protection charges.

    The volume and timing of orders received during a particular quarter are
very difficult to forecast. The Company's customers can change delivery
schedules or cancel orders with limited or no penalties. For example, in
September 1996 the Company received notice from Dell that Dell would discontinue
buying its merchant graphics solution from the Company in the fourth quarter of
1996. In addition, during the second quarter of 1997, Dell reduced its purchases
of the Company's proprietary Imagine 128 Series 2 4MB VRAM product. As a result,
the Company's net sales to Dell in 1997 were not significant, $4.9 million
during 1997 compared to $62.7 million during 1996. Future sales to Dell are
uncertain and depend upon the performance and pricing of new Company products
and their acceptance by Dell. Customers generally order on an as-needed basis,
and as a result, the Company has historically operated without significant
backlog. Moreover, as is often the case in the PC industry, a disproportionate
percentage of the Company's 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,

                                      -13-
<PAGE>
 
the timing of expense levels is based in large part on the Company's
expectations of future sales. If sales do not meet the Company's expectations,
it may be unable to quickly adjust spending, which could have a material adverse
effect on the Company's operating results.

    Due primarily to industry seasonality, demand for the Company's products
historically has been strongest during the fourth calendar quarter, and sales in
the subsequent calendar quarter have tended to decline. Net sales decreased
53.5% in the second quarter of 1998 from the first quarter of 1998 and 49.2% in
the second quarter of 1997 from the first quarter of 1997, although period-to-
period comparisons of financial results should not be relied upon as an
indication of future performance. Quarterly peaks in sales also tend to coincide
with peak working capital requirements.

Dependence upon the PC Industry

    The Company has focused on providing 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 is characterized by a limited
number of major OEMs driving the majority of PC sales.  While the Company is
pursuing a significant portion of its business derived from the limited number
of major OEMs, there is no assurance that the Company will 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 retail and distribution customers do. Any failure by the Company
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 the Company's business,
financial condition and results of operations.

Proprietary Technology: Product Mix

    The Company's products have historically been based both on merchant and
proprietary-based video/graphic accelerator chips. These product lines have each
contributed gross profit for the Company during the last few years. However, the
Company believes that over the long-term, its proprietary-based products will
become an increasingly more important factor in determining success for the
Company, and the Company currently anticipates reduced sales of merchant based
products. If sales of the Company's proprietary-based products do not meet the
Company's expectations or if there are delays in the completion and availability
of these proprietary-based products, the Company may have significantly reduced
sales, which could have a material adverse effect on the Company's operating
results.

Competition

    The market for the Company's products is highly competitive. The Company
believes that its ability to compete successfully depends upon a number of
factors both within and beyond its control, including product performance,
product features, product availability, price, quality, timing of new product
introductions by the Company and its competitors, the emergence of new
video/graphics and PC standards, customer support, and industry and general
economic trends. The Company seeks to compete by offering products emphasizing
high performance and quality and with a continuing commitment to product
improvements and new product introductions and the ability to provide a broad
product line where demand justifies it. The Company's principal competitors
include ATI Technologies, Inc. ("ATI"), Diamond Multimedia Systems, Inc., Matrox
Electronic Systems, Inc. ("Matrox") and STB Systems, Inc. Each of these named
competitors has graphics accelerator products that are marketed in competition
with the Company's 64-bit and 128-bit graphics accelerator products. The
Company's principal competitors on chip technology include Intel Corporation,
3DFX Interactive, Inc., 3DLabs Inc., Ltd., Nvidia Corporation, ATI and Matrox.

    Numerous competitors, particularly in higher-volume, lower-priced product
categories, compete primarily on the basis of price, which may result in reduced
sales and/or lower margins for the Company's products.  In addition, many
companies compete on the basis of their integrated circuit design capabilities,
by supplying accelerator chips

                                      -14-
<PAGE>
 
on a merchant basis, by producing board-level products, by integrating the
accelerator chip that will be placed directly on the CPU motherboard. The
Company expects this trend to continue for low-end video/graphic accelerator
subsystems; however, it believes the market for video/graphic accelerator
subsystems in mid-range to high-end PCs will continue to exist.

    Several of the Company's board-level competitors, as well as various
independent software developers, produce software utilities offering features
comparable to HawkEye95. Future enhancements to such competing software products
that are not matched by the Company, or the inclusion of comparable features in
future versions of the Windows operating system, could diminish the relative
attractiveness of the Company's HawkEye95 utilities software. In addition, the
Company may in the future 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.

    The Company's current and prospective competitors include many companies
that have substantially greater name recognition and financial, technical,
manufacturing and marketing resources than the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors.

Dependence upon Suppliers

    The Company is dependent on sole or limited source suppliers for certain key
components and has experienced limited availability, delays in shipments and
unanticipated cost fluctuations related to the supply of components,
particularly memory chips. The Company is actively working with memory component
suppliers to secure pricing and volume commitments for future production.
Additionally, the Company's suppliers could impact the availability of key
components, particularly memory and graphics accelerator chips, to the extent
that they reduce the Company's lines of credit and payment terms. In such an
event, the Company could have difficulty securing sufficient supply to meet
customer requirements. There can be no assurance that commitments will be
secured in sufficient amounts to meet the needs of the Company or at prices that
will enable the Company to attain profitability.

Dependence upon Key Personnel

    The Company's future success will depend, to a significant extent, upon the
efforts and abilities of its senior management and professional, technical,
sales and marketing personnel.  The competition for such personnel is intense.
There can be no assurance that the Company will be successful in retaining its
existing key personnel or in attracting and retaining the additional key
personnel that it requires.  Failure to retain key personnel, or to attract
additional personnel to satisfy the Company's needs could have a material
adverse effect on the Company's business, financial condition and results of
operation.

Year 2000 Compliance

    The Company uses a number of computer software programs and operating
systems in its internal operations, including applications used in financial
business systems and various administration functions, and also includes
software programs in its 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 such as 97 for
1997. On January 1, 2000, any clock or date recording mechanism incorporating
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,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in normal operating business activities.

    The Company has conducted an assessment of its internal information systems
to determine the extent of any Year 2000 problem. This assessment revealed that
its principal information systems correctly define the year 2000

                                      -15-
<PAGE>
 
and do not require any modification. As a result, the Company does not expect to
incur any material costs associated with Year 2000 issues. However, there can be
no assurances that, to date, the Company has identified all material Year 2000
issues associated with internal information systems which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

    The Company is in the process of contacting its customers, suppliers,
financial institutions, creditors, service providers and governmental agencies,
with which the Company has a material relationship, in an effort to verify the
Year 2000 readiness of these third parties that could cause a material impact on
the Company. However, there can be no assurances 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
Company's information systems. The Company's business, financial condition and
results of operations could be materially adversely affected by the failure of
its systems and applications or those operated by third parties to properly
operate or manage dates beyond 1999.

    The Company has not yet designed a contingency plan to address any Year 2000
issues that may arise, partially as a result of the favorable responses
regarding Year 2000 readiness received to date. The Company intends to design
and implement such a contingency plan prior to the end of the current fiscal
year, which will be based in part upon the balance of the responses the Company
expects to receive.

Stock Price Volatility

    The trading price of the Company's Common Stock has been subject to
significant fluctuations to date, and could be subject to wide fluctuations in
the future, in response to quarter-to-quarter variations in operating results,
announcements of technological innovations, new products or significant OEM
system design wins by the Company or its competitors, general conditions in the
markets for the Company's products or the computer industry, the price and
availability of purchased components, general financial market conditions,
changes in earnings estimates by analysts, or other events or factors.  In this
regard, the Company does 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
the Company's Common Stock.

Shareholder Litigation

    The Company has been served notice of three lawsuits seeking class action
status on or about June 11, 1996, July 16, 1996 and October 16, 1996,
respectively, filed in the United States District Court for the District of
Massachusetts naming as defendants the Company, the members of the Board of
Directors during the period in question, the former Chief Financial Officer and
Treasurer of the Company, and the Selling Shareholders and Managing Underwriters
of the Company's 1995 initial public offering. The alleged class of plaintiffs
consists of all persons who purchased shares of the Company's Common Stock on
the open market between and including May 26, 1995 through January 31, 1996. The
plaintiffs, who seek unspecified damages, interest, costs and fees, allege,
among other things, that the Company's Registration Statement and Prospectus in
its initial public offering and other public statements and reports filed with
the Securities and Exchange Commission during the class period in question
contained false and materially misleading statements. The defendants deny
liability, believe they have meritorious defenses and intend to vigorously
defend against these and any similar lawsuits that may be filed, although the
ultimate outcome of these matters cannot yet be determined. By order of the
District Court, these actions have been consolidated into a single action. If
the lawsuit is not resolved satisfactorily for the Company, there could be a
material adverse effect on the Company's future financial performance and
results of operations and accordingly, income (loss).

Intellectual Property Infringement

    It is common in the PC industry for companies to assert intellectual
property infringement claims against other companies. As a consequence, the
Company indemnifies some OEM customers in certain respects against intellectual
property claims relating to its products. Several OEM customers recently sent
the Company 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. The Company provides multimedia

                                      -16-
<PAGE>
 
subsystems to its OEM customers for use in such OEM customers' products that are
alleged to infringe on the patent owner's rights. Based upon the Company's
preliminary evaluation of the patent, it does not believe the infringement
claims are meritorious as to its products sold to its customer. However,
pursuant to such indemnity agreements or in the event, the Company is directly
sued, the Company may be required to dedicate significant management time and
expense to defending itself or assisting its OEM customers in their defense of
this or other infringement claims, whether meritorious or not, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. If this or another intellectual property claim were to be
brought against the Company, or one or more of its OEM customers, and the
Company, or one or more of its OEM customers, were found to be infringing upon
the rights of others, the Company could be required to pay infringement damages,
pay licensing fees, modify its products so that they are not infringing or
discontinue offering products that were found to be infringing, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. If an intellectual property claim were to
be brought against one or more of the Company's suppliers and the supplier were
found to be infringing upon the rights of others, the supplier could be enjoined
from further shipments of its products to the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

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 Condensed
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 27, 1997 as filed with the Commission.)

    The Company has continued to incur substantial losses from operations, lost
a significant customer, is not in compliance with all of the covenants required
by its lender, has unresolved class action litigation concerning alleged
violations of securities laws, and needs additional financing to continue
operations, all of which raises substantial doubt about its 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. The Company
has retained investment-banking counsel to advise it on the possible sale of
equity securities, as well as to introduce and assist it in the evaluation of
potential merger and partnering opportunities.

    During the second quarter of 1998, the Company has secured a portion of its
required funding through a strategic and financial partnership with Silicon
Graphics, Inc., which is further described below. However, no assurance can be
provided that the Company will be successful in raising additional capital,
continuing this strategic alliance, or entering into a new business alliance.
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 the Company be unable to continue
as a going concern.

    Several factors in the development of the Company's business during 1995,
1996 and 1997 have had a significant impact on its balance sheet and cash flows.
During 1995 and 1996, the Company experienced significantly higher sales to two-
tier and retail distribution channel customers. These customers tend to order
toward the end of each quarter and to pay more slowly than OEM customers. The
Company has since shifted its business, increasing sales to its OEM customers.
In addition, the Company's manufacturing strategy has focused on purchasing a
higher proportion of components directly from manufacturers, which reduces
component costs but requires longer-term commitments and faster payment compared
to distributor suppliers. Finally, the fluctuating cost of memory components has
resulted in variable gross and operating margins, and limited availability at
times has required the use of cash when necessary to secure supplies of memory.
The Company incurred valuation adjustments for inventory during the fourth
quarter of 1995 and second quarter of 1996, and recorded charges to cost of
sales associated with obsolete and excess inventory of $8.0 million and $5.7
million, respectively. The Company determined that the market value for this
material was substantially less than the cost to procure and build,

                                      -17-
<PAGE>
 
and the Company has written down the components to estimated net realizable
value less selling costs. Significant pricing pressure for the Company's
products has been experienced during 1997 and to date in 1998, resulting in
lower gross margin and less net income. In combination, these factors have
resulted in the Company requiring more working capital and generating less cash
flow from operations than anticipated.

    In the second quarter ending June 27, 1998, the Company continued to incur
losses on reduced revenue while marketplace pricing pressure has increased. The
Company's operating activities used cash of approximately $2.9 million in the
first six months of 1998, compared to operating activities which provided cash
of approximately $3.6 million in the first six months of 1997. In the first six
months of 1998, net decreases to accounts receivable, receivable due from
manufacturing contractors and inventory generated cash of approximately $5.7
million, $1.7 million and $1.7 million, respectively.  In addition, a net
decrease to accounts payable used cash of approximately $4.5 million. Decreases
in accounts receivable have primarily been attributable to lower sales levels in
the second quarter of 1998. The Company believes it can operate with lower
levels of working capital relative to net sales and has committed additional
resources to the management and control of its receivables and inventories. At
June 27, 1998, the Company's principal sources of liquidity consisted of
approximately $2.2 million of cash and cash equivalents and approximately $4.5
million available under its revolving line of credit, as described below.

    In the first six months of 1998, investing activities used cash of
approximately $48,000 for purchases of computer and office equipment compared to
$1.1 million for purchases and office equipment in the first six months of 1997.
Financing activities provided cash of $2.7 million during the first six months
of 1998, attributable to  advances of $9.0 million made against certain
convertible subordinated promissory notes, and $1.2 million of trade accounts
payable to a manufacturing subcontractor converted to a short-term note payable,
offset by a reduction of the outstanding balance of the revolving credit
facility by $7.8 million.  During the first six months of 1997, financing
activities used cash of $6.4 million, attributable to the reduction of the
outstanding balance of the revolving credit facility by $6.5 million.

   As of June 27, 1998, approximately $658,000 was outstanding under the
Company's revolving credit facility (the "Loan Agreement"). The Loan Agreement
contains financial covenants including, but not limited to, a minimum current
ratio, minimum tangible net worth, a maximum debt to tangible net worth ratio,
and maximum quarterly net loss. The Loan Agreement also gives the lender the
right to call the loan in the event of a material adverse change in the
Company's business and prohibits the Company from paying dividends without the
consent of the lender. The Company has been out of compliance with certain terms
of its Loan Agreement from time to time and as a result has entered into
amendments revising certain covenants in such Loan Agreement or has required a
waiver from its lender. On May 7, 1998, the Company executed a forbearance
agreement with this lender, which permits the Company to borrow within its
borrowing capacity through September 30, 1998 up to a maximum amount of $4.5
million. The Company is currently in compliance with all the terms of this
forbearance agreement.

   On April 17, 1998, the Company received a short term loan of $3.0 million
from Silicon Graphics, Inc. ("SGI") which was due on May 17, 1998. On May 7,
1998 the Company and SGI refinanced the short term loan by entering into a
Securities Purchase Agreement (the "Agreement") pursuant to which the Company
issued during the second quarter ended June 27, 1998 a series of secured
subordinated convertible promissory notes (the "Notes") in the aggregate
principal amount of $9.0 million and a Series A Convertible Preferred Stock
Purchase Warrant (the "Warrant"). The Notes are subordinated to the Company's
existing secured line of credit, are secured by essentially all of the Company's
assets, bear interest at a rate per annum equal to the prime rate plus 2% and
are convertible, at SGI's option, into shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"),
at a conversion price equal to $2.75 per share. If the Company pays any of the
outstanding principal and interest due under any of the Notes, then on such date
(the "Payment Date") the Warrant will entitle the holder until the third
anniversary of the Payment Date to purchase at an exercise price of $2.75 per
share that number of shares of Preferred Stock equal to 3% of the Company's then
issued and outstanding Common Stock. Following issuance each share of Preferred
Stock would be convertible into one share of the Company's Common Stock. If not
converted, the Notes will be payable on demand 180 days after September 30,
1998.

                                      -18-
<PAGE>
 
    As of August 10, 1998, SGI converted the Notes, including all accrued
interest, into an aggregate of 3,350,894 shares of Preferred Stock. In
connection with the conversion, the Warrant was canceled and the Company issued
to SGI the Replacement Warrant which entitles the holder to purchase for a
period of three years at an exercise price of $2.75 per share that number of
shares of Preferred Stock equal to 3% of the Company's then issued and
outstanding Common Stock. If exercised on August 10, 1998, the Replacement
Warrant would have entitled the holder to purchase up to 294,000 shares of
Preferred Stock.

    The Company has entered into a note payable with one of its manufacturing
contractors. Under the terms of the note payable, the Company 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 is to be repaid in six equal monthly
installments. The first principal and interest payment was made in June 1998.
The last payment is scheduled to occur in November 1998. Should the Company fail
to pay any of its monthly installments, the manufacturing contractor would be
entitled to demand immediate payment in full of the note payable.

    The Company believes that its existing cash balances plus funds generated
from product sales, and financing arrangements described above would be
sufficient to fund operations at anticipated levels through the third quarter of
1998.  However, after the third quarter of 1998 future growth in sales,
significant losses and limitations of credit/terms by suppliers, and/or
continued increases in working capital required by the Company's business would
result in the need for the Company to obtain additional equity or debt
financing. Additionally, the Company believes that working capital requirements
for future product releases, as well as continued investments in operations,
particularly research and development, after the third quarter of 1998 will
require additional equity or debt financing. No assurances can be given that any
additional financing will be available to the Company on acceptable terms, 
if at all.

                                      -19-
<PAGE>
 
PART II.  OTHER INFORMATION:
--------  ------------------

Item 1 - Legal Proceedings

    From time to time, the Company is involved in litigation relating to claims
arising out of its operation in the normal course of business. Other than the
litigation discussed below, the Company is currently not a party to any
additional legal proceeding the adverse outcome of which, individually or in the
aggregate, management believes would have a material adverse effect on the
financial position or results of operations of the Company.

    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 the Company, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of the Company's initial
public offering, Robertson, Stephens & Company, Cowen & Company and Unterberg
Harris (the "Managing Underwriters"). On or about July 17, 1996, a complaint
was filed in the United States District Court for the District of Massachusetts
by named plaintiff John Foley against the Company, each member of the Company's
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, former Chief
Financial Officer and Treasurer of the Company, and the Managing Underwriters.
On or about October 16, 1996, an additional complaint was filed in the United
States District Court for the District of Massachusetts by named plaintiff
Robert Schoenhofer against the Company, each member of the Company's Board of
Directors, Mr. Hanks, and the Managing Underwriters. Each of the plaintiffs
purports to represent a class of purchasers of the Common Stock of the Company
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 the Company's 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 the
Company or that there may be other consequences from the lawsuits. The
defendants deny any liability, believe they have meritorious defenses, and
intend to vigorously defend these and any similar lawsuits that may be filed,
although the ultimate outcome of these matters cannot yet be determined. If the
lawsuits are not resolved satisfactorily for the Company, there could be a
material adverse effect on the Company's future financial condition and results
of operations and, accordingly, income (loss). The Company does not believe that
the ultimate liability, if any, is estimable or probable, and therefore no
provision for any liability that may result from the actions has been recognized
in the accompanying consolidated financial statements.

    A foreign inventor has asserted claims against several PC manufacturers,
including customers of the Company, that the graphics technology included in
their systems infringes the inventor's patents. Certain of the Company's
customers have notified the Company of these assertions and their intent to seek
indemnification from the Company in the event these claims are successful and
the infringing technology was included in products sold by the Company. The
Company believes there are meritorious defenses to these claims and that if the
technology in fact infringes the inventor's rights, the Company would have
rights of indemnification from its suppliers. While there can be no assurance,
the Company does not expect this matter to have a material adverse effect on the
Company.


Item 2 - Changes in Securities and Use of Proceeds

(a)      Not applicable.

(b)      Not applicable.

(c)      (1) Securities sold. (A) During the period from May 7, 1998 to June 27,
         1998 the Company issued a series of secured subordinated convertible
         promissory notes (the "Notes") and a Series A Convertible

                                      -20-
<PAGE>
 
         Preferred Stock Purchase Warrant (the "Warrant"). (B) On May 27, 1998,
         the Company issued and sold 12,000 shares (the "Option Shares") of its
         Common Stock, par value $.01 per share (the "Common Stock").

         (2) Underwriters and other purchasers. (A) No underwriters were
         involved in the transaction. The Company issued the Notes and the
         Warrant to Silicon Graphics, Inc. ("SGI"). (B) No underwriters were
         involved in the transaction. The Company issued the Option Shares
         pursuant to an exercise of an option granted to an employee under the
         Company's 1989 Stock Option Plan.

         (3) Consideration. (A) The Notes and the Warrant were issued to SGI for
         an aggregate purchase price of $9.0 million. (B) The Option Shares were
         issued at an exercise price of $0.27 per share for an aggregate
         exercise price of $3,240.

         (4) Exemption from registration claimed. (A) The Notes and the Warrant
         were issued in reliance upon Section 4(2) of the Securities Act of
         1933, as amended (the "Act"), because the transaction did not involve
         any public offering by the Company. (B) The Option Shares were issued
         in reliance upon the exemption from registration set forth in Rule 701
         under the Act, because the transaction involved the exercise of a stock
         option that was granted by the Company pursuant to a written
         compensatory benefit plan and before the Company became subject to the
         reporting requirements of Section 13 or 15(d) of the Securities
         Exchange Act of 1934, as amended.

         (5) Terms of conversion or exercise. (A) The Notes are convertible, at
         SGI's option, into shares of the Company's Series A Convertible
         Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a
         conversion price equal to $2.75 per share. If the Company pays any of
         the outstanding principal and interest due under any of the Notes, then
         on the date of such payment (the "Payment Date") the Warrant will
         entitle the holder until the third anniversary of the Payment Date to
         purchase at an exercise price of $2.75 per share that number of shares
         of Preferred Stock equal to 3% of the Company's issued and outstanding
         Common Stock, par value $.01 per share (the "Common Stock"). Following
         issuance each share of Preferred Stock would be convertible into one
         share of the Company's Common Stock. (B) Not applicable.

         (6) Use of Proceeds. (A) Not applicable. (B) Not applicable.

(d)      Not applicable.


Item 3 - Defaults Upon Senior Securities

         Not Applicable


Item 4 - Submission of Matters to a Vote of Security Holders
 
    The Company's annual meeting of shareholders was held on June 25, 1998 at
the Seaport Hotel, One Seaport Lane, near the World Trade Center, Boston,
Massachusetts at 10:00 a.m. There were 9,300,925 shares outstanding as of the
April 28, 1998, the record date for the Company's annual meeting of
shareholders. Of the 9,300,925 shares eligible to vote, 7,722,695 shares were
voted.

   At the meeting, the Company's shareholders elected two directors to serve
until the 2000 annual meeting of shareholders.  The vote counts were as follows:

                                      Affirmative    Withheld
                                      -----------    --------
    Mr. Andrew Najda                  7,574,592      148,103
    Mr. Stanley W. Bialek             7,575,042      147,653

                                      -21-
<PAGE>
 
    At the meeting, the Company's shareholders also ratified the appointment of
Coopers & Lybrand LLP (and its successors PricewaterhouseCoopers LLP) as the
Company's independent public accountants for the fiscal year ending January 2,
1999. The vote counts were as follows:

                      Affirmative    Against    Abstain
                      -----------    -------    -------
                      7,539,525      21,370     161,800


Item 5 - Other Information

    As of August 10, 1998, SGI converted the Notes, including all accrued
interest, into an aggregate of 3,350,894 shares of Preferred Stock, which
represents approximately 26.4% of the issued and outstanding equity of the
Company. In connection with the conversion, the Warrant was canceled and the
Company issued to SGI a replacement Series A Convertible Preferred Stock
Purchase Warrant (the "Replacement Warrant"). The Replacement Warrant entitles
the holder to purchase for a period of three years at an exercise price of $2.75
per share that number of shares of Preferred Stock equal to 3% of the Company's
then issued and outstanding Common Stock. If exercised on August 10, 1998, the
Replacement Warrant would have entitled the holder to purchase up to 294,000
shares of Preferred Stock.

    To be considered for inclusion in the proxy statement relating to the
Annual Meeting of stockholders to be held in 1999, stockholder proposals must be
received no later than January 29, 1999.  To be considered for presentation at
the Annual Meeting, although not included in the proxy statement, proposals must
be received no later than April 26, 1999.  All stockholder proposals should be
marked for the attention of: Assistant Treasurer, Number Nine Visual Technology
Corporation, 18 Hartwell Avenue, Lexington, Massachusetts 02173.

                                      -22-
<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
   --------------       -----------

   10.27                Separation Agreement with Archie K. Miller, dated 
                        May 13, 1998
   27                   Financial Data Schedule


   (b)  Reports on Form 8-K
        -------------------

   No reports on Form 8-K were filed during the quarterly period ended 
June 27, 1998.

                                      -23-
<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:  August 11, 1998         By: /s/  Andrew Najda 
                                   -------------------------------------- 
                                   Andrew Najda
                                   Chairman and Chief Executive Officer
                                   (Principal Executive Officer)


Date:  August 11, 1998         By: /s/  Timothy J. Burns                 
                                   -------------------------------------- 
                                   Timothy J. Burns
                                   Acting Chief Financial Officer
                                   (Principal Financial and Accounting Officer)

                                      -24-
<PAGE>
 
                                 EXHIBIT INDEX


Exhibit Number    Description                                  Page
--------------    -----------                                  ----

10.27            Separation Agreement with Archie K. Miller, 
                 dated May 13, 1998

27               Financial Data Schedule