UNITED STATES
                        SECURITIES & 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 September 30, 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 0-25580

                        DIAMOND MULTIMEDIA SYSTEMS, INC.

             (Exact name of registrant as specified in its charter)


DELAWARE                                                        77-0390654
(State or other jurisdiction of                              (I.R.S. Employer 
incorporation or organization)                               Identification No.)

                2880 JUNCTION AVENUE, SAN JOSE, CALIFORNIA 95134
               (Address of principal executive offices) (Zip Code)


       Registrant's telephone number, including area code: (408) 325-7000


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
September 30, 1998 was 35,137,697.



<PAGE>

                        DIAMOND MULTIMEDIA SYSTEMS, INC.

                               INDEX TO FORM 10-Q



         PART I - FINANCIAL INFORMATION:


         ITEM 1- Financial Statements

                  Consolidated Balance Sheets as of September 30, 1998
                  and December 31, 1997

                  Consolidated Statements of Operations for the three
                  and nine months ended September 30, 1998 and 1997

                  Consolidated Statements of Cash Flows for the 
                  nine months ended September 30, 1998 and 1997

                  Notes to Consolidated Financial Statements

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


         PART II - OTHER INFORMATION

         ITEM 1 - Legal proceedings

         ITEM 2 - Changes in securities

         ITEM 3 - Defaults Upon Senior Securities

         ITEM 4 - Submission of Matters to a Vote of Security Holders

         ITEM 5 - Other Information

         ITEM 6 - Exhibits and Reports on Form 8-K

         SIGNATURES






<PAGE>



PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS


                DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
               (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                    September 30, December 31,
                                                       1998          1997
                                                    ------------  ------------
<S>                                                 <C>           <C>
                               ASSETS
Current assets:
  Cash and cash equivalents........................     $74,596       $85,929
  Short-term investments...........................       3,123         4,136
  Trade accounts receivable, net of allowance
    for doubtful accounts of $2,063 and $2,440
    as of September 30, 1998 and December 31, 1997.      81,926        98,777
  Inventories......................................      52,145        78,647
  Prepaid expenses and other current assets........      14,256         6,350
  Income taxes receivable..........................       6,342        24,929
  Deferred income taxes............................      24,596        14,679
                                                    ------------  ------------
       Total current assets........................     256,984       313,447
  Property, plant and equipment, net...............      26,783        15,216
  Other assets.....................................      28,110         3,616
  Goodwill and other intangibles, net..............       4,543         5,275
                                                    ------------  ------------
       Total assets................................    $316,420      $337,554
                                                    ============  ============

                             LIABILITIES
Current liabilities:
  Current portion of long-term debt................     $48,031       $36,455
  Trade accounts payable...........................      75,213        98,764
  Accrued liabilities..............................      28,546        17,667
  Income taxes payable.............................         197         2,274
                                                    ------------  ------------
       Total current liabilities...................     151,987       155,160
Long-term debt, net of current portion.............       1,605         1,873
                                                    ------------  ------------
       Total liabilities...........................     153,592       157,033
                                                    ------------  ------------
                        STOCKHOLDERS' EQUITY
Preferred stock, par value $.001; Authorized -
   8,000 shares at September 30, 1998 and
   December 31, 1997; none issued and outstanding..        --            --
Common stock, par value $.001;
  Authorized - 75,000 at September 30, 1998 and
  December 31, 1997; Issued and outstanding -
  35,138 at September 30, 1998 and 34,491 at
  December 31, 1997................................          35            34
Additional paid-in capital.........................     312,689       307,877
Distributions in excess of net book value..........     (56,775)      (56,775)
Accumulated deficit................................     (93,121)      (70,615)
                                                    ------------  ------------
   Total stockholders' equity......................     162,828       180,521
                                                    ------------  ------------
     Total liabilities and stockholders' equity....    $316,420      $337,554
                                                    ============  ============
</TABLE>
  The accompanying notes are an integral part of these consolidated condensed
                             financial statements.
<PAGE>


















































                DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                   Three Months Ended     Nine Months Ended
                                      September 30,         September 30,
                                  --------------------- ---------------------
                                     1998       1997       1998       1997
                                  ---------- ---------- ---------- ----------
<S>                               <C>        <C>        <C>        <C>
Net sales........................  $123,200    $92,028   $481,743   $257,413
Cost of sales....................   122,817     73,850    419,271    242,767
                                  ---------- ---------- ---------- ----------
      Gross profit...............       383     18,178     62,472     14,646
                                  ---------- ---------- ---------- ----------

Operating expenses:
  Research and development.......     8,135      5,899     22,395     18,121
  Selling, general and
    administrative...............    23,231     16,474     70,136     61,557
  Amortization of intangibles....       244        172        732      2,831
  Write-off of intangibles.......      --         --         --        9,938
  Restructuring expenses.........      --         --        1,384       --
                                  ---------- ---------- ---------- ----------
       Total operating expenses..    31,610     22,545     94,647     92,447
                                  ---------- ---------- ---------- ----------
Income (loss) from operations....   (31,227)    (4,367)   (32,175)   (77,801)
Interest income, net.............       (12)       388        481      1,426
Other income (expense), net......      (402)        50       (457)       783
                                  ---------- ---------- ---------- ----------
Income (loss) before provision
  (benefit) from income taxes....   (31,641)    (3,929)   (32,151)   (75,592)
Provision (benefit) from income
  taxes..........................    (9,465)    (1,376)    (9,618)   (22,979)
                                  ---------- ---------- ---------- ----------
Net income (loss)................  ($22,176)   ($2,553)  ($22,533)  ($52,613)
                                  ========== ========== ========== ==========

Net income (loss) per share:
       Basic.....................    ($0.63)    ($0.07)    ($0.65)    ($1.54)
       Diluted...................    ($0.63)    ($0.07)    ($0.65)    ($1.54)

Shares used in per share
  calculations:
       Basic.....................    34,990     34,389     34,863     34,274
       Diluted...................    34,990     34,389     34,863     34,274
</TABLE>
  The accompanying notes are an integral part of these consolidated condensed
                             financial statements.
<PAGE>





               DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                                            September 30,
                                                        ----------------------
                                                           1998        1997
                                                        ----------  ----------
<S>                                                     <C>         <C>
Cash flows from operating activities:
  Net loss.............................................  ($22,506)   ($52,613)
  Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
     Depreciation and amortization.....................     5,313       6,631
     Provision for doubtful accounts...................    (2,162)        691
     Provision for excess and obsolete inventories.....   (20,711)      7,093
     Gain (Loss) on disposal of fixed assets............       (3)        287
     Write-off of intangibles..........................        --       9,938
     Deferred income taxes.............................    (9,917)    (21,161)
  Changes in assets and liabilities:
     Trade accounts receivables........................    19,248      33,859
     Inventories.......................................    51,473     (15,597)
     Prepaid expenses and other assets.................    (6,849)      2,494
     Income taxes receivable...........................    18,587          --
     Trade accounts payable and other liabilities......   (27,009)        305
                                                        ----------  ----------
       Net cash provided by (used in) operating
         activities....................................     5,464     (28,073)
                                                        ----------  ----------
Cash flows from investing activities:
   Purchases of property and equipment.................   (15,276)     (5,788)
   Sale of Micronics building..........................     6,310           0
   Purchase of Micronics, net of cash acquired.........   (21,755)          0
   Purchase of DigitalCast, net of cash acquired.......    (2,060)          0
   Other equity investments............................    (1,150)         --
   Purchases of short-term investments.................     1,013          --
                                                        ----------  ----------
     Net cash used in investing activities.............   (32,918)     (5,788)
                                                        ----------  ----------
Cash flows from financing activities:
   Proceeds from issuance of common stock..............     4,814       1,593
   Repurchases of common stock.........................        (1)         (7)
   Proceeds from term loans and revolving credit
       facilities......................................    78,344     100,942
   Payments and maturities of term loans and
       revolving credit facilities.....................   (66,413)    (89,929)
   Repayments of capital lease financings..............      (623)       (601)
                                                        ----------  ----------
     Net cash provided by financing activities.........    16,121      11,998
                                                        ----------  ----------
Net increase (decrease) in cash and cash equivalents...   (11,333)    (21,863)
Cash and cash equivalents at beginning of period.......    85,929     120,147
                                                        ----------  ----------
Cash and cash equivalents at end of period.............   $74,596     $98,284
                                                        ==========  ==========
Supplemental Disclosure of cash flow information:
   Income taxes paid during the period.................    $3,760      $1,400
                                                        ==========  ==========
   Interest paid during the period.....................    $1,844        $783
                                                        ==========  ==========
</TABLE>
   The accompanying notes are an integral part of these consolidated condensed
                             financial statements.
<PAGE>














































                DIAMOND MULTIMEDIA SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

1.      BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been 
prepared by the Company in accordance with generally accepted accounting 
principles for interim financial information and pursuant to rules and 
regulations of the Securities and Exchange Commission. In the opinion of 
management, all adjustments (consisting only of normal recurring 
adjustments) considered necessary for a fair presentation have been 
included. These financial statements should be read in conjunction with 
the Company's consolidated financial statements and notes thereto 
contained in the Company's Form 10-K for the fiscal year ended December 
31, 1997.

Operating results for the quarter ended September 30, 1998 may not 
necessarily be indicative of the results to be expected for any other 
interim period or for the full year.

2.      INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in, 
first-out basis) or market.  Inventories consisted of (in thousands):

<TABLE>
<CAPTION>
                               September 30,  December 31,
                                   1998           1997
                               ------------   ------------
<S>                            <C>            <C>
Raw materials .............        $17,292        $29,876
Work in process............         25,574         40,286
Finished goods.............          9,279          8,485
                               ------------   ------------
                                   $52,145        $78,647
                               ============   ============
</TABLE>

The Company had approximately $3 million of inventory in excess of its 
normal short-term needs for certain product lines at September 30, 1998. 
Management has developed a program to reduce this inventory to desired 
levels over the near term; however, it is reasonably possible that the 
program will not be wholly successful and that a material loss could 
ultimately result on the disposal of this inventory. No estimate can be 
made of the range of amounts of such loss.







3.      COMPUTATION OF NET INCOME (LOSS) PER SHARE

Basic EPS is computed as net income (loss) divided by the weighted 
average number of common shares outstanding for the period.  Diluted EPS 
reflects the potential dilution that could occur from common shares 
issuable through stock options, warrants and other convertible 
securities.  Common equivalent shares are excluded from the computation 
of net loss per share where applicable as their effect is antidilutive.

The following is a reconciliation of the numerator (net loss) and 
denominator (number of shares) used in the basic and diluted EPS 
calculation:
(Dollar amounts, in thousands)

<TABLE>
<CAPTION>
                                   Three Months Ended     Nine Months Ended
                                      September 30,         September 30,
                                  --------------------- ---------------------
                                     1998       1997       1998       1997
                                  ---------- ---------- ---------- ----------
<S>                               <C>        <C>        <C>        <C>
Basic:
  Net income (loss)..............  ($22,176)   ($2,553)  ($22,533)  ($52,613)
  Average Common
    Shares Outstanding...........    34,990     34,389     34,863     34,274
                                  ---------- ---------- ---------- ----------
Basic EPS........................    ($0.63)    ($0.07)    ($0.65)    ($1.54)
                                  ========== ========== ========== ==========

Diluted:
  Net income (loss)..............  ($22,176)   ($2,553)  ($22,533)  ($52,613)
  Average Common
    Shares Outstanding...........    34,990     34,389     34,863     34,274
  Stock options..................      --         --         --         --
                                  ---------- ---------- ---------- ----------
Total shares.....................    34,990     34,389     34,863     34,274

Diluted EPS......................    ($0.63)    ($0.07)    ($0.65)    ($1.54)
                                  ========== ========== ========== ==========
</TABLE>

Common equivalent shares of 54,000 and 833,000 have been excluded from 
the calculation of dilituve earnings per share for the three and nine 
months ended September 30, 1998, respectively, as their effect is anti-
dilutive. 

4. MICRONICS ACQUISITION

On June 26, 1998 the Company accepted for payment 11,616,380 shares of 
common stock of Micronics Computers, Inc. ("Micronics") at a price of 
$2.45 per share, or approximately $28.6 million. On July 9, 1998, the 
Company, through a wholly owned subsidiary, effected a merger with 
Micronics pursuant to Section 253 of the Delaware General Corporation 
Law. The Company estimates the total cost of the acquisition of all the 
shares of Micronics to be approximately $31.6 million. Cash payment for 
Micronics shares was delivered the first week of July, 1998. Micronics is 
a supplier of high-performance system boards and multimedia peripherals 
for personal computers. The acquisition was treated as a purchase for 
accounting purposes. The Company's operating results for the three month 
and nine month periods ending September 30, 1998 include Micronics 
results for the entire three months ending September 30, 1998. Also 
included in the nine month period ending September 30, 1998 are 
activities for the period June 27, 1998 to June 30, 1998, which were not 
material to the Company. As a result of the acquisition, the Company 
recorded approximately $1.4 million in restructuring charges for the 
three months ending June 30, 1998 to reflect severance and outplacement 
costs, the cost of closing the Micronics building and moving certain 
employees to existing Company facilities, and other integration expenses 
specifically associated with the acquisition. These actions were carried 
out over the three months ended September 30, 1998 and no liability for 
such restructuring charges remains. 

The Company's consolidated balance sheet as of September 30, 1998 
reflects a preliminary allocation of the purchase price of Micronics. 
This resulted in an increase in cash, inventory, accounts receivable, 
other current assets, fixed assets and current liabilities. The fair 
market value of assets acquired were originally estimated to total $24.7 
million while liabilities were $11.6 million. The difference between the 
acquisition cost, including approximately $1.1 million in acquisition 
expenses, and the fair market value of the acquired assets net of 
acquired liabilities will be allocated between in process technology 
expense and goodwill upon the completion of a valuation study. At the 
time of filing this Form 10-Q, the valuation study is still in progress. 
When the study is completed at the end of 1998, a charge to in-process 
technology expense will be recognized. The Company currently estimates 
that this charge will be between $5 million and $7 million. 

5.      LITIGATION

The Company has been named as a defendant in several putative class 
action lawsuits which were filed in June and July 1996 and June 1997 in 
the California Superior Court for Santa Clara County and the U.S. 
District Court for the Northern District of California.  Certain 
executive officers and directors of the Company are also named as 
defendants.  The plaintiffs purport to represent a class of all persons 
who purchased the Company's Common Stock between October 18, 1995 and 
June 20, 1996 (the "Class Period").  The complaints allege claims under 
the federal securities laws and California law.  The plaintiffs allege 
that the Company and the other defendants made various material 
misrepresentations and omissions during the Class Period.  The complaints 
do not specify the amount of damages sought.  The Company believes that 
it has good defenses to the claims alleged in the lawsuits and will 
defend itself vigorously against these actions.  These cases are in the 
early stages and no trial date has been set.  The ultimate outcome of 
these actions cannot be presently determined.  Accordingly, no provision 
for any liability or loss that may result from adjudication or settlement 
thereof has been made in the accompanying consolidated financial 
statements. 

The Company has been named as a defendant in a lawsuit filed on October 
9, 1998 in the United States District Court for the Central District of 
California.  Plaintiffs are the Recording Industry Association of America, 
Inc. (the "RIAA"), a trade organization representing recording companies 
and the Alliance of Artists and Recording Companies (the "AARC") an 
organization controlled by the RIAA which exists to distribute royalties 
collected by the copyright office.  The complaint alleges that the Company's 
Rio product, a portable music player, is subject to regulation under the 
Audio Home Recording Act (the "AHRA") and that the device does not comply 
with the requirements of the AHRA.  On October 16, 1998 a hearing was held 
and the Court issued a Temporary Restraining Order preventing the Company 
from manufacturing or distributing the Rio product for a period of ten days.  
On October 26, 1998 a hearing was held to determine if a Preliminary 
Injunction should issue to further restrain the Company until the conclusion 
of the suit.  The court denied the motion and refused to restrain the 
Company from manufacturing and distributing the Rio product.  The RIAA has 
filed a notice that it intends to appeal the Court's ruling to the United 
States Court of Appeals for the Ninth Circuit.  No schedule has been set for 
any briefing or other action on the appeal. No provision for any liability 
or loss that may result from adjudication or settlement of this action has 
been made in the accompanying consolidated financial statements.

The Company is also party to other claims and pending legal 
proceedings that generally involve employment and trademark issues.  
These cases are, in the opinion of management, ordinary and routine 
matters incidental to the normal business conducted by the Company.  In 
the opinion of management, the ultimate disposition of such proceedings 
will not have a materially adverse effect on the Company's consolidated 
financial position or future results of operations.

6. COMPREHENSIVE NET INCOME

        The Company has adopted the provisions of Statement of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income", 
effective January 1, 1998.  This statement requires the disclosure of 
comprehensive income and its components in a full set of general-purpose 
financial statements.  Comprehensive income is defined as net income plus 
revenues, expenses, gains and losses that, under generally accepted 
accounting principles, are excluded from net income.  The components of 
comprehensive income which are excluded from net income are not 
significant, individually or in the aggregate, and therefore, no separate 
statement of comprehensive income has been presented.



<PAGE>












ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS

     The discussion and analysis below contains trend analysis and other 
forward-looking statements within the meaning of Section 27A of the 
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 
1934.  Actual results could differ materially from those projected in the 
forward-looking statements as a result of the risk factors set forth 
under "Certain Factors That May Affect Future Performance" below and 
elsewhere in this report.

     The following discussion should be read in conjunction with the 
Company's consolidated financial statements and the notes thereto.  All 
references to years represent fiscal years unless otherwise noted. 



Overview

        Diamond Multimedia Systems, Inc. ("Diamond" or the "Company") designs, 
develops, manufactures and markets multimedia and connectivity products 
for IBM-compatible personal computers ("PCs"). The Company is a leading 
supplier of graphics and multimedia accelerator subsystems for PCs, and 
is expanding its position in the interactive multimedia market by 
providing advanced solutions for home, business and professional desktop 
computer users, enabling them to create, access and experience compelling 
new media content from their desktops and through the Internet. Diamond 
accelerates multimedia from the Internet to the hard drive with products 
that include the Stealth series of media accelerators, the Monster series 
of entertainment 3D and audio accelerators, the Fire series of 
professional 3D graphics and SCSI accelerators, and the Supra? series of 
modems. Headquartered in San Jose, CA, Diamond has sales, marketing and 
technical facilities in several locations including Vancouver (WA), 
Albany (OR), Atlanta (GA), Dallas (TX), Singapore, Sydney, Hong Kong, 
Seoul, Tokyo, Starnberg (Germany), Saarbrecken (Germany), Paris, and 
Winnersh (U.K.). Diamond's products are sold through regional, national 
and international distributors as well as directly to major computer 
retailers, VARs and OEMs worldwide. 


Net Sales 

Net sales for the third quarter of 1998 increased $31.1 million (34%) 
to $123.2 million compared to $92 million for the third quarter of 1997. 
Net sales for the first nine months of 1998 increased $224.3 million 
(87%) to $481.7 million compared to $257.4 million for the corresponding 
prior year period. The increases in net sales for both periods were 
primarily attributable to shipments of the Company's graphics accelerator 
products, modems and motherboard revenues associated with the Company's 
purchase of Micronics Computers, Inc. at the end of the second quarter.   

As a percentage of total net sales, international net sales 
represented 43% of net sales in the third quarter of 1998 compared to 41% 
of net sales in the third quarter of 1997. For the first nine months of 
1998, international sales were 45% of total net sales compared to 37% in 
the same period of 1997. Sales growth was 40% in Europe and 35% in other 
international markets (Asia and Latin America) in the third quarter of 
1998 compared to the third quarter of 1997. For the first nine months of 
1998, net sales in Europe grew 163% compared to the first nine months of 
1997, while net sales in other international markets grew 57% for the 
same period. European sales were 33% of total net sales in the third 
quarter of 1998 and 34% of total net sales in the first nine months of 
1998, compared to 31% in the third quarter of 1997 and 24% for the first 
nine months of 1997. Other international sales were 10% of total net 
sales in the third quarter of 1998 and 11% of total net sales for the 
first nine months of 1998, compared to 10% for the third quarter of 1997 
and 13% for the first nine months of 1997. 

The transition of mainstream PC graphics subsystem architectures from 
2D graphics and the PCI bus to 3D graphics and the accelerated graphics 
port (AGP), which began in 1997 and is expected to continue through 1998, 
as well as the SGRAM-to-SDRAM memory transition, has led to excess 
inventory of PCI and SGRAM-based products at the Company and in certain 
distribution channels. When combined with seasonal softness in the 
personal computer market and competitive pricing pressures, the Company 
experienced lower average selling prices and lower gross margins than 
originally anticipated during the third quarter of 1998. These market 
conditions also resulted in price protection charges continuing to be 
higher than expected and selling and marketing expenses to be higher than 
planned. 

Inventory levels of the Company's products in the two-tier 
distribution channels used by the Company ("Channel Inventory Levels") 
generally are maintained in a range of one to three months of customer 
demand.  These Channel Inventory Levels tend toward the low end of the 
months-of-supply range when demand is stronger, sales are higher and 
products are in short supply.  Conversely, when demand is slower, sales 
are lower and products are abundant, then Channel Inventory Levels tend 
toward the high end of the months-of-supply range.  Frequently, in such 
situations, the Company attempts to ensure that distributors devote their 
working capital, sales and logistics resources to the Company's products 
to a greater degree than to those of competitors.  Similarly, the 
Company's competitors attempt to ensure that their own products are 
receiving a disproportionately higher share of the distributors' working 
capital and logistics resources. In an environment of slower demand and 
abundant supply of products, price declines are more likely to occur and, 
should they occur, are more likely to be severe. Further, in such an 
event, high Channel Inventory Levels may result in substantial price 
protection charges. Such price protection charges have the effect of 
reducing net sales and gross profit. As planned, the Company took steps 
to bring its Channel Inventory Levels down to a more desirable level 
during the third quarter. This affected revenue in the third quarter due 
to lower shipment levels and price protection charges associated with 
aggressive pricing moves. The Company estimates that worldwide Channel 
Inventory Levels were reduced by approximately $13 million during the 
third quarter. While the Company believes that its Channel Inventory 
Levels for many of its products are appropriate at this time, there are 
certain products which currently have a Channel Inventory Level that is 
higher than desirable. The Company plans to further reduce Channel 
Inventory Levels on these products during the fourth quarter which may 
adversely affect fourth quarter performance. The Company estimates and 
accrues for potential price protection charges on unsold channel 
inventory.  However, there can be no assurance that these estimates or 
accruals will be sufficient.  Should the estimates or accruals not be 
sufficient, additional price protection charges may be required, the 
result of which could have a material adverse effect on operating results 
during the fourth quarter of 1998. 

Gross Margin

Gross margin for the third quarter of 1998 decreased $17.8 million to 
$0.4 million (0.3% of net sales) compared to $18.2 million (19.8% of net 
sales) in the third quarter of 1997. For the first nine months of 1998, 
gross margin increased  $47.8 million to $62.5 million (13% of net sales) 
compared to $14.6 million (5.7% of net sales) in the first nine months of 
1997. The decrease in gross margin in the third quarter of 1998 compared 
to the third quarter of 1997 was caused by a number of factors including 
general slowness in the industry and highly competitive pricing 
pressures. The increase in year to date gross margin reflects negative 
gross margins earned in the second quarter of 1997 due to technology 
transitions (2D only graphics to 2D/3D graphics, higher speed modems and 
consumer uncertainty regarding connectivity standards), seasonal 
slowness, and competitive pressures. Further, gross margin positively 
impacted in the first nine months of 1998 by significantly higher 
shipment volume levels over which indirect manufacturing costs were 
absorbed.

Research and Development

Research and development (R&D) expenses increased $2.2 million (38%) 
to $8.1 million for the third quarter of 1998, compared to the third 
quarter of 1997. For the first nine months of 1998, R&D expenses 
increased $4.3 million (24%) to $18.1 million, compared to the first nine 
months of 1997. As a percentage of sales, R&D expenses were 6.6% and 5.3% 
in the third quarter of 1998 and 1997, respectively, and 8% and 7.5% in 
the first nine months of 1998 and 1997, respectively. These increases 
were primarily due to higher personnel-related expenses and the material 
and outside service costs associated with new product development, 
including products that will offer various functions or combinations of 
functions including graphics, digital video, 3D animation, 3D CAD, sound, 
modem, telephony and other functions increasingly being implemented on 
personal computers. 

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses increased $6.8 
million (41%) to $23.2 million for the third quarter of 1998, compared to 
the third quarter of 1997. For the first nine months of 1998, SG&A 
expenses increased $8.6 million (14%) to $70.1 million, compared to the 
first nine months of 1997. These increases are primarily due to increases 
in sales and promotional expenses during the first nine months of 1998. 
As a percentage of net sales, SG&A expenses were 18.9% and 16.7% in the 
third quarters of 1998 and 1997, respectively, and 22.3% and 25.4% of net 
sales for the first nine months of 1998 and 1997, respectively. The 
increases in SG&A in absolute dollars for both the third quarter of 1998 
and the first nine months of 1998, when compared to the same periods in 
1997, were primarily attributable to higher selling and marketing 
expenses. Certain of these expenses, especially expenses attributable to 
channel sales incentive programs, are directly proportional to increases 
in channel sales experienced between the two periods. In addition, end-
user mail-in rebates were used extensively in the third quarter of 1998.  
Personnel related expenses have also increased during 1998.

Restructuring Expenses

The Company incurred restructuring expenses of $1.4 million in the 
second quarter of 1998 associated with the purchase of Micronics. These 
expenses related to the integration of the Micronics business into 
Diamond, especially severance and out placement fees as well as the cost 
of consolidating the remaining Micronics employees into existing Diamond 
facilities.  

Amortization of Intangible Assets

The Company incurred amortization expense of $0.24 million in the 
third quarter of 1998 compared to $0.17 million in the corresponding 
prior year period.  The increase in amortization expense in the third 
quarter of 1998 is primarily due to the amortization of the Company's 
purchase of Binar Graphics, Inc. in November 1997 which resulted in $2.0 
million in goodwill.  Amortization expense for the first nine months of 
1998 was $0.73 million compared to $2.83 million in the same period of 
1997. The decrease is primarily due to the write-off of $9.9 million of 
intangible assets during the third quarter of 1997 which significantly 
reduced the remaining outstanding balance to be amortized. These expenses 
relate to amortization of purchased technology and goodwill from the 
acquisitions of Supra Corporation and SPEA Software AG, which occurred in 
the third and fourth quarters of 1995, respectively.  This decrease in 
expense was offset in part by amortization expense arising from Company's 
acquisition of Binar Graphics, Inc. Amortization expense will increase in 
future periods due to the purchase of Micronics. Exact amounts are not 
currently available pending a valuation study to allocate the purchase 
price in excess of net assets and liabilities between goodwill and in 
process technology expense. This study was not yet complete prior to 
publication. 

Net Interest Income and Other Expense

Net interest expense was minimal in the third quarter of 1998 compared 
to net interest income of $0.4 million in the third quarter of 1997. Net 
interest income was $0.5 million and $1.4 million in the first nine 
months of 1998 and 1997, respectively.  Net interest income declined due 
to higher interest expense incurred because of larger average borrowings 
outstanding during the first three quarters of 1998 compared to the first 
three quarters of 1997.  Net other expense was $0.4 million in the third 
quarter of 1998 compared to a minimal net other income during the third 
quarter of 1997. For the first nine months of 1998, net other expense was 
$0.5 million compared to net other income of $0.8 million during the same 
period of 1997. These differences were  primarily due to proceeds from 
the settlement of a lawsuit during the third quarter of 1997 and costs 
from the settlement of a lawsuit during the third quarter of 1998.  

Benefit for Income Taxes

        The Company's effective tax benefit rate in the third quarter of 1998 
was 30% compared to an effective tax benefit rate of 35% for the 
corresponding period in 1997. The Company's effective tax benefit rate in 
the first nine months of 1998 was 30% compared to an effective tax 
benefit rate of 30% for the first nine months of 1997. The effective tax 
rate in the third quarter of 1997 and the first nine months of 1997 would 
have been 35% if not for the write-off of goodwill and existing 
technology, which are not deductible for tax purposes. Differences from 
the statutory rate consisted principally of the effect of state income 
taxes, federal tax-exempt interest income and the research and 
development tax credit. 


LIQUIDITY AND CAPITAL RESOURCES 

Cash and cash equivalents decreased by $11.3 million during the first 
nine months of 1998. Operating activities provided $5.4 million in cash. 
The primary sources of cash were decreases in inventories, trade accounts 
receivable and income taxes receivable. Significant uses of cash include 
reductions to trade accounts payable and other liabilities, reductions to 
the provisions for excess and obsolete inventory and doubtful accounts, 
and  increases in deferred taxes and prepaid assets. 

        The Company used $32.9 million in cash from investing activities. The 
primary investment was the purchase of Micronics, including acquisition 
costs, for $21.8 million net of cash acquired. Additional equity 
investments used of $3.2 million, primarily for the Company's investment 
in Not Limited, Inc., a developer of wireless data communication 
technologies including Diamond's HomeFree products, and the purchase of 
DigitalCast, the developer of Diamond's internet audio appliance sold 
under the name Rio. In addition, the Company has purchased $15.3 million 
in fixed assets during the first nine months of 1998 compared to 
purchases of $5.8 million in 1997. The increase is primarily due to the 
Company's investment in a new enterprise-wide business management, 
resource planning and decision support system. The Company successfully 
converted to this new system in early October 1998. The Company sold for 
$6.3 million a building and real estate acquired in its purchase of 
Micronics. Net maturities of short term investments yielded  $1.0 
million. 

        Net cash provided by financing activities was $16.1 million. Primary 
sources of cash included $78.0 million from term loans and revolving 
credit facilities and proceeds of $4.8 million from the issuance of 
common stock.  These proceeds were partially offset by payments and 
maturities of term loans and revolving credit facilities of $6.4 million.

        At September 30, 1998, the Company had $74.6 million of cash and cash 
equivalents and $3.1 million of short-term investments.  Further, as of 
such date, the Company had lines of credit and bank credit facilities 
totaling $59.3 million, of which $9.9 million was unused and available. 
At September 30, 1998, the Company was in default with its loan covenants 
regarding tangible net worth and profitability. Waivers for these 
violations are pending.

        The Company expects to spend approximately $17 million for capital 
equipment in 1998, principally relating to computer and office equipment 
and including, in particular, an enhanced enterprise-wide business 
management, resource planning and decision support system. In addition, 
the Company acquired fixed assets with a fair market value estimated at 
$7.1 million as a result of the purchase of Micronics. 

        The Company believes that its cash balances and available credit under 
existing bank lines will be sufficient to meet anticipated operating and 
investing requirements for the short term. There can be no assurance that 
additional capital beyond the amounts currently forecasted by the Company 
will not be required nor that any such required additional capital will 
be available on reasonable terms, if at all, at such time or times as 
required by the Company.

YEAR 2000 COMPLIANCE

Many existing computer systems and applications, and other control 
devices, use only two digits to identify a year in the date field, 
without considering the impact of the upcoming change in the century.  As 
a result, such systems and applications could fail or create erroneous 
results unless corrected so that they can process data related to the 
year 2000.  The Company relies on its systems, applications and devices 
in operating and monitoring all major aspects of its business, including 
financial systems (such as general ledger, accounts payable and payroll 
modules), customer services, infrastructure, embedded computer chips, 
networks and telecommunications equipment and end products.  The Company 
also relies, directly and indirectly, on external systems of business 
enterprises such as customers, suppliers, creditors, financial 
organizations, and of governmental entities, both domestic and 
international, for accurate exchange of data. The Company recently 
completed the first phase of a project to upgrade the computer hardware 
and software it uses to operate, monitor and manage its business on a day 
to day basis. At the end of the third quarter, the Company's operations 
were converted to this system on an integrated, world-wide basis. This 
effort was undertaken to significantly improve the tools and information 
available to manage the Company. These tools have the added benefit of 
managing data with dates beyond December 31, 1999 as indicated by the 
vendors. The Company continues to test such capabilities as part of its 
post-implementation process. This testing is expected to be completed 
during the first half of 1999. The Company's current estimate is that the 
costs specifically associated with this testing and validation process 
will not have a material adverse effect on the result of operations or 
financial position of the Company in any given year. However, despite the 
Company's efforts to address the year 2000 impact on its internal 
systems, the Company has not fully identified such impact or whether it 
can resolve it without disruption of its business and without incurring 
significant expense.  In addition, even if the internal systems of the 
Company are not materially affected by the year 2000 issue, the Company 
could be affected through disruption in the operation of the enterprises 
with which the Company interacts.  



CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

In addition to other information in this Form 10-Q, the following are 
important factors that should be considered carefully in evaluating the 
Company and its business.

Potential Fluctuations in Future Operating Results

The Company's operating results have fluctuated significantly in the past 
on a quarterly and an annual basis and are likely to continue to fluctuate 
significantly in the future depending on a number of factors. The 
accompanying sections explain in greater detail certain important factors 
that the Company has identified which may affect the future performance of 
the Company.  

The Company develops products in the highly competitive PC multimedia, 
and communications markets, including the graphics, video, sound, audio, 
modem, system boards and home networking segments.  These products are very 
susceptible to product obsolescence and typically exhibit a high degree of 
volatility of shipment volumes over relatively short product life cycles.  
The timing of introductions of new products in one calendar quarter as 
opposed to an adjacent quarter can materially affect the relative sales 
volumes in those quarters.  In addition, product releases by competitors and 
accompanying pricing actions can materially and adversely affect the 
Company's revenues and gross margins.

The Company sells its products to retail customers (mass merchandisers 
and large chains who sell products primarily off-the-shelf directly to end 
users), retail distribution customers (distributors which resell to smaller 
retail chains and large individual end users) and OEM customers (customers 
which use the Company's products in conjunction with other products to 
produce complete computer systems for sales through both direct and indirect 
distribution channels to end users).  Reliance on these indirect channels of 
distribution means that the Company typically has little or no direct 
visibility into end user customer demand.  OEM customers tend to provide the 
Company with forecasts for product requirements but actual order lead times 
remain less than 90 days.  Retail and retail distribution customers 
typically do not forecast product requirements and order lead times are 
typically very short, as these customers tend to reorder for stock in 
quantities that approximate recent sales volumes.  Accordingly, this means 
that future operating results are dependent on continued sales to customers 
where the vast majority of the normal volume of orders are placed with the 
Company within the same calendar quarter, and frequently within a few days, 
as the requested date of shipment by the customer.

Because the lead times of firm orders are typically short, the Company 
does not have the ability to predict with any certainty the future operating 
results of the Company.  Therefore, sudden changes that are out of the 
control of the Company such as general economic conditions, the actions or 
inaction of competitors, customers, third party vendors of operating system 
software, central processing unit hardware, and independent software 
application vendors can have and have had material adverse effects on the 
Company's performance.  

Other factors which may have a material adverse effect on the Company's 
future performance include the management of growth of the Company, rapid 
declines in the price of components used by the Company, latent defects that 
can exist in the Company's products, competition for the available supply of 
components, dependence on subcontract manufacturers, dependence on and 
development of adequate information technology systems, intellectual 
property rights and dependence on key personnel.

Each of these factors is discussed more thoroughly in the accompanying 
sections and all of these sections should be read carefully together to 
evaluate the risks associated with the Company's Common Stock.  Due to these 
factors, it is likely that the operating results of the Company in some 
future quarter or quarters will fall below the expectations of securities 
analysts and investors.  In such an event, the trading price of the 
Company's Common Stock could be materially and adversely affected.

Revenue Volatility and Dependence on Orders Received and Shipped in a 
Quarter

The volume and timing of orders received during a quarter are difficult 
to forecast. Retail and retail distribution customers generally order 
without forecasts on an as-needed basis and, accordingly, the Company has 
historically operated with a relatively small backlog. Moreover, the Company 
has emphasized its ability to respond quickly to customer orders as part of 
its competitive strategy. This strategy, combined with current industry 
supply and demand conditions as well as the Company's emphasis on minimizing 
inventory levels, has resulted in customers placing orders with relatively 
short delivery schedules and increased demand on the Company to carry 
inventory for its customer base. This has the effect of increasing such 
short lead time orders as a portion of the Company's business and reducing 
the Company's ability to accurately forecast net sales. Because retail and 
retail distribution customers' orders are more difficult to predict, there 
can be no assurance that the combination of these orders, OEM's orders, and 
backlog in any quarter will be sufficient to achieve either sequential or 
year-over-year growth in net sales during that quarter. If the Company does 
not achieve a sufficient level of retail and retail distribution orders in a 
particular quarter, the Company's revenues and operating results would be 
materially adversely affected.

Also, at any time and with no advance notice, during periods of 
uncertainty in the personal computer industry's outlook for future demand or 
pricing, the Company's customers may choose to draw down their inventory 
levels thereby adversely impacting the Company's revenue during the period 
of adjustment. The second and third quarters of 1997 comprised such a period 
due to the transition from older slower speed modems and 2D graphics 
products to new higher speed modems and 3D graphics products. In the current 
transition of mainstream PC graphics subsystem architectures from 2D 
graphics and the PCI bus to 3D graphics and the accelerated graphics port 
(AGP), which began in 1997 and is continuing through 1998, controller and 
memory chip selection and the timely introduction of new products have been 
and will continue to be critical factors.  The Company was significantly 
affected by the PCI-to-AGP transition and the SGRAM-to-SDRAM memory 
transition in 1998, which resulted in significant pricing pressures on the 
Company's remaining PCI-based and SGRAM-based graphics inventory and by 
significant price protection claims associated with such price declines. 
Also, as is common in the personal computer industry, a disproportionate 
percentage of the Company's net sales in any quarter may be generated in the 
last month or weeks of a quarter. As a result, a shortfall in sales in any 
quarter as compared to expectations may not be identifiable until at or near 
the end of the quarter.  In this regard, the Company's results for the 
second and third quarters of 1998 were less than expected due to less than 
expected shipments of the Monster 3D II product at the end of that quarter 
due principally to sudden order cancellations during the final week of the 
quarter. In addition, from time to time, a significant portion of the 
Company's net sales may be derived from a limited number of customers, the 
loss of one or more of which could adversely impact operating results.

Notwithstanding the difficulty in forecasting future sales and the 
relatively small level of backlog at any given time, the Company generally 
must plan production, order components and undertake its development, sales 
and marketing activities and other commitments months in advance. 
Accordingly, any shortfall in net sales in a given quarter may materially 
impact the Company's operating results and cash balances in a magnified way 
due to the Company's inability to adjust expenses or inventory levels during 
the quarter to match the level of net sales for the quarter. Excess 
inventory could also result in cash flow difficulties as well as added costs 
of goods sold and expenses associated with inventory write-offs or sell-
offs. Conversely, in its efforts to adjust inventory levels to a slower 
order rate, the Company may overcorrect its component purchases and 
inventory levels, thereby experiencing periodic shortages of inventory and 
delivery delays, and negatively impacting its net sales, market share and 
customer satisfaction levels in the current quarter or in future quarters. 
There can be no assurances that such an occurrence will not adversely impact 
the Company operating results.

Recently the company announced a shift to a short cycle inventory model 
in an effort to reduce price protection and inventory value exposures as a 
result of rapid downturns in customer orders. This will result in less 
inventory being carried in Company warehouses and by distribution customers.  
Consequently, the Company may not be able to react quickly enough to sudden 
increases or shifts in demand for a given product with the result that 
revenue may suffer. 


Declining Selling Prices and Other Factors Affecting Gross Margins

The Company's markets are characterized by intense ongoing competition 
coupled with a past history, and a current trend, of declining average 
selling prices. A decline in selling prices may cause the net sales in a 
quarter to be lower than the revenue of a preceding quarter or corresponding 
prior year's quarter even if more units were sold during such quarter than 
in the preceding or corresponding prior year's quarter. Accordingly, it is 
likely that the Company's average selling prices will decline, and that the 
Company's net sales and margins may decline in the future, from the levels 
experienced to date. (See also Short Product Life Cycles; Dependence on New 
Products) The Company's gross margins may also be adversely affected by 
shortages of, or higher prices for, key components for the Company's 
products, including its modems, 3D graphics accelerators, home networking 
adapters, internet music players and 3D audio accelerators, some of which 
have been impacted from time-to-time by a scarcity in the supply of 
associated chipsets and other components.  The availability of new products 
is typically restricted in volume early in the products' life cycle and 
should customers choose to wait for these new versions, the ability of the 
Company to procure sufficient volumes of these products to meet customer 
demand is unlikely.  Such a failure to meet demand is likely to have a 
material adverse effect on the revenues and operating margins of the 
Company.


 In addition, the Company's net sales, average selling prices and gross 
margins will be adversely affected if the market prices for certain 
components used or expected to be used by the Company, such as DRAM, SDRAM, 
SGRAM, RDRAM, or flash memory, DVD drives, multimedia or communications 
controller chips or bundled software, decline more rapidly than the Company 
is able to process component inventory bought earlier at higher prices into 
finished products, book and ship the related orders, and move such products 
through third-party distribution channels, some of which may be price 
protected, to the final end-user customer. The Company experienced such 
declining prices and reduced margins in the second and third quarters of 
1998 due to the effect of product transitions, including the PCI-to-AGP 
transition and the SGRAM-to-SDRAM memory transition.  Competition from 
products based on SDRAM memory, which has lower manufacturing costs than 
SGRAM based products, resulted in sharply declining selling prices for SGRAM 
based products.  This led to material charges for declining inventory values 
and price protection for channel inventory.  These charges had a material 
adverse effect on revenues, operating margins and operating results.  
Conversely, an increase in the price of semiconductor components that are in 
scarce supply, such as high-speed DRAMs, may adversely impact the Company's 
gross margin due to higher unit costs, and a decrease in the supply of such 
semiconductor components may adversely impact the Company's net sales due to 
lower unit shipments. 

Seasonality

The Company believes that, due to industry seasonality, demand for its 
products is strongest during the fourth quarter of each year and is 
generally slower in the period from April through August. This seasonality 
may become more pronounced and material in the future to the extent that a 
greater proportion of the Company's sales consist of sales into the 
retail/mass merchant channel, that PCs become more consumer-oriented or 
entertainment-driven products, or that the Company's net sales becomes 
increasingly based on entertainment-related products. Also, to the extent 
the Company is successful in expanding its European operations, it may 
experience relatively weak demand in third calendar quarters due to 
historically weak summer sales in Europe. 

Management of Growth

        In recent years, the Company has experienced a significant expansion in 
the overall level of its business and the scope of its operations, including 
manufacturing, research and development, marketing, technical support, 
customer service, sales and logistics.  This expansion in scope has resulted 
in a need for significant investment in infrastructure, processes and 
information systems. This requirement includes, without limitation: securing 
adequate financial resources to successfully integrate and manage the 
growing businesses and acquired companies; retention of key employees; 
integration of management information, product data management, control, 
accounting and telecommunications and networking systems; consolidation of 
geographically dispersed manufacturing and distribution facilities; 
coordination of suppliers; rationalization of distribution channels; 
establishment and documentation of business processes and procedures; and 
integration of various functions and groups of employees. Each of these 
requirements poses significant, material challenges. 


        The Company has a minority ownership (at 49.5%) with Philips 
Semiconductor (at 50.5%) of a 3D graphics semiconductor design subsidiary, 
SP3D.  The Company's 49.5% ownership of SP3D is carried on the Company's 
balance sheet at approximately $3.4 million.  Philips Semiconductor has full 
day-to-day operating management control of SP3D and holds the majority of 
seats on the SP3D board.  There can be no assurance that the Company will be 
able to achieve a reasonable return on this asset, or that the asset will 
not need to be written down, in whole or in part, during subsequent 
accounting periods.

        The Company completed a tender offer for Micronics, Inc. during the 
second quarter of 1998.  In addition to managing the growing business of the 
Company and its previous acquisitions, the Company will be required to 
integrate and manage the business of Micronics with that of the Company.  
Furthermore, Micronics is primarily a manufacturer of computer motherboards, 
a line of products that the Company has not previously offered for sale.  
The Company faces significant challenges in terms of manufacturing, 
engineering, sales, marketing, and logistics with respect to integrating the 
products and business of Micronics with similar functions of the Company.  
There can be no assurance that the Company will be able to successfully 
integrate the operations of Micronics.  If the Company fails to successfully 
integrate Micronics into the operations of the Company there will likely be 
a material adverse impact on the operating results of the Company.  Even if 
the integration is successfully achieved, there can be no assurance that the 
cost of such integration will not  materially and  adversely effect the 
Company's operating results. 

        In the fourth quarter of 1998, the Company intends to commence 
manufacturing and shipping its first finished consumer electronics product, 
Rio, an internet music player.  Also during the fourth quarter of 1998, the 
Company intends to commence manufacturing and shipping the HomeFree line of 
wireless home networking products. These products will pose new design, 
manufacturing and customer support issues to the Company and there can be no 
assurance that the Company can successfully meet these challenges or satisfy 
customer demand for the products. There can also be no assurance that the 
cost associated with of meeting such challenges and satisfying demand will 
not have a material adverse impact on the Company's operating results in 
future periods.

        The Company's future operating results will depend in large measure on 
its success in implementing operating, manufacturing and financial 
procedures and controls, improving communication and coordination among the 
different operating functions, integrating certain functions such as sales, 
procurement and operations, strengthening management information and 
telecommunications systems, and continuing to hire additional qualified 
personnel in all areas. Moreover, the Company has completed the first 
implementation phase of a new enterprise resource planning (ERP) system in 
order to better manage the increasing complexity of its international multi-
product business. This system also supports the Company's efforts to avert 
potential Year 2000 issues with its previous management information system. 
There can be no assurance that the Company will be able to manage these 
activities and implement these additional systems, procedures and controls 
successfully, and any failure to do so could have a material adverse effect 
upon the Company's short-term and long-term operating results. 


Short Product Life Cycles; Dependence on New Products

        The market for the Company's products is characterized by frequent new 
product introductions and rapid product obsolescence. These factors 
typically result in short product life cycles, frequently ranging from six 
to twelve months. The Company must develop and introduce new products in a 
timely manner that compete effectively on the basis of price and performance 
and that address customer needs and meet customer requirements. To do this, 
the Company must continually monitor industry trends and make difficult 
choices regarding the selection of new technologies and features to 
incorporate into its new products, as well as the timing of the introduction 
of such new products, all of which may impair the orders for or the prices 
of the Company's existing products. The success of new product introductions 
depends on various factors, some of which are outside the Company's direct 
control.  Such factors may include: selection of new products; selection of 
controller or memory chip architectures; implementation of the appropriate 
standards or protocols; timely completion and introduction of new product 
designs; trade-offs between the time of first customer shipment and the 
optimization of software for speed, stability and compatibility; development 
of supporting content by independent software application vendors; 
development and production of collateral product literature; prompt delivery 
to OEM accounts of prototypes; support of OEM prototypes; ability to rapidly 
ramp manufacturing volumes; and coordination of advertising, press 
relations, channel promotion and VAR evaluation programs.  For example, 
selection of the appropriate standards and protocols will be a key factor in 
determining the future success of the Company's new home networking and 
internet music player products.

        In the current transition of mainstream PC graphics subsystem 
architectures from 2D graphics and the PCI bus to 3D graphics and the 
accelerated graphics port (AGP), which began in 1997 and is expected to 
continue through 1998, controller and memory chip selection and the timely 
introduction of new products have been and will continue to be critical 
factors.  The Company saw the effects of the PCI-to-AGP graphics bus 
transition and the SGRAM-to-SDRAM memory transition in the second and third 
quarters of 1998, which resulted in significant price reductions for the 
Company's remaining PCI-based and SGRAM-based graphics inventory and the 
inventory of such products in the distribution channel.  As a result, the 
net sales and gross margins of the Company were materially and adversely 
affected by declining prices for the PCI-based and SGRAM-based products and 
there were significant price protection claims associated with such price 
declines. In addition, in the current transition from the widely accepted 
V.34 modem protocol (33.6Kbps) through the new higher speed proprietary 
K56flex and x2 protocols (56Kbps) to the new international standard V.90 
protocol (56Kbps), the chip selection to implement and deploy such standards 
and the industry alliances to convert such support into revenue and market 
share have been and will continue to be critical factors.  There can be no 
assurance that the Company will select the proper chips to implement and 
support its efforts in the various markets or that the Company will execute 
its strategy in a timely manner during this transition period.

Each new product cycle presents new opportunities for current or 
prospective competitors of the Company to gain a product advantage or 
increase their market share. If the Company does not successfully introduce 
new products within a given product cycle, the Company's sales will be 
adversely affected for that cycle and possibly for subsequent cycles. Any 
such failure could also impair the Company's brand name and ability to 
command retail shelf space and OEM design wins in future periods. Moreover, 
because of the short product life cycles coupled with the long lead times 
for procuring many of the components used in the Company's products, the 
Company may not be able, in a timely manner, or at all, to reduce its 
component procurement commitments, software license commitments, production 
rates or inventory levels in response to unexpected delays in product 
launch, shortfalls in sales, technological obsolescence or declines in 
prices or, conversely, to increase production in response to unexpected 
increases in demand, particularly if such demand increases are in a new 
product or new technology area where component supply may be hard to secure. 
Therefore, changes in actual or expected demand could result in excess 
inventory, inventory write downs, price protection and gross margin 
compression or, conversely, in lost sales and revenue compression due to 
product or component unavailability.  The timing and speed of the PCI-to-AGP 
bus transition and the SGRAM-to-SDRAM memory transition led to an excess 
inventory of PCI and SGRAM-based products at the Company and in the 
distribution channel which in turn resulted in lower average selling prices, 
lower gross margins, end-of-life inventory write-offs, and higher price 
protection charges during the second and third quarters of 1998. Further, 
the falling demand for, and the excess supply of, Monster 3D II and 
competitive entertainment 3D products in the channel during the third 
quarter of 1998 resulted in rapidly declining revenue and prices vis-a-vis 
the second quarter of 1998, and resulting price protection for this class of 
product in the third quarter of 1998. The Company estimates and accrues for 
potential inventory write-offs and price protection charges.  There can be 
no assurance that these estimates and accruals will be sufficient in future 
periods, or that additional inventory write-offs and price protection 
charges will not be required.  The impact of these charges on the Company's 
operating results in the second and third quarters of 1998 was material and 
adverse.  Any similar occurrence in the future could have a material effect 
on operating results in such future operating periods.

New Operating Systems

        The PC industry has been characterized by significant operating system 
changes, such as the introduction of Windows 95 in 1995 and Windows NT 4.0 
in 1996, and the introduction of significant new operating system 
components, such as Microsoft's Direct X and ActiveX for Windows 95. During 
the second quarter of  1998 Microsoft introduced Windows 98.  In 
anticipation of the release of Windows 98 a significant portion of new 
computer purchasers delayed purchase of a new system until after the release 
of Windows 98. The effects of this consumer resistance were compounded by 
the delay and uncertainty of the release due to legal challenges. 
Additionally, further purchases were delayed to ensure that the new 
operating system would be compatible with older applications and would 
operate at least as reliably as Windows 95.  The Company believes that this 
forward shift in time of a significant number of computer purchasers had an 
adverse impact on the revenues of the Company in the second quarter of 1998.  

        In addition, while new operating systems can provide new market 
opportunities, such as the growing market for graphical user interface (GUI) 
accelerators that occurred with the introduction of Windows 3.0 and the 
growth in the PC games market with the introduction of Windows 95, new 
operating systems and operating system components also place a significant 
research and development burden on the Company. New drivers, applications 
and user interfaces must be developed for new operating systems and 
operating system components in order to maintain net sales levels and 
customer satisfaction. Perhaps more significantly, such drivers, 
applications and interfaces customarily are ported to the recently shipped 
portion of the Company's installed base. This effort involves a substantial 
investment in software engineering, compatibility testing and customer 
technical support with only limited near-term incremental revenue return 
since these driver updates are usually provided via electronic distribution 
at no cost to the Company's installed customer base. In addition, the 
installation of this software may result in technical support calls, thereby 
generating expenses that do not have offsetting revenue. Moreover, during 
the introductory period of a major new operating system release such as 
Windows 95 or Windows 98, such installed base support may reduce the 
research and development and customer technical support resources available 
for launching new products. For example, after substantial investment in 
porting the Company's software, graphics accelerator and modem products to 
Windows 95, the Company was at year-end 1996 still developing for final 
release improved, accelerated Windows 95 drivers for the Viper Pro Video 
series of accelerator add-in cards. While this product line did not at that 
time represent a revenue opportunity for the Company, the Company 
nevertheless believed that it was important to make the significant software 
development investment represented by this effort in order to maintain 
relations with its installed customer base and its reputation for reliable 
on-going product support. Furthermore, new operating systems for which the 
Company prospectively develops driver support may not be successful, or the 
drivers themselves may not be successful or accepted by customers, and a 
reasonable financial return on the corollary research and development 
investment may never be achieved.

Dependence on Third Party Software Developers 

     The Company's business strategy includes developing relationships with 
major independent software application vendors that serve the 3D graphics 
and 3D audio markets, including the 3D computer games market and the 
professional 3D graphics applications market.  The Company believes that the 
availability of a sufficient number of high quality, commercially successful 
entertainment 3D software titles will be a significant factor in the sale of 
multimedia hardware to the PC-based interactive 3D entertainment market.  
The Company also believes that compelling professional 3D graphics 
applications developed for PCs or ported from traditional workstations, such 
as those supplied by Silicon Graphics and Sun Microsystems, to PCs based on 
advanced Intel microprocessors and the Microsoft NT operating system will be 
significant factors in the sale of 3D graphics hardware to the PC-based NT 
workstation market.  The Company depends on independent software application 
developers and publishers to create, produce and market software 
entertainment titles and professional graphics applications that will 
operate with the Company's 3D products, such as Monster entertainment 3D and 
Fire GL professional 3D series of graphics accelerators.  Only a limited 
number of software developers are capable of creating high quality 
professional 3D and entertainment 3D software.  Competition for these 
resources is intense and is expected to increase.  There can be no assurance 
that the Company will be able to attract the number and quality of software 
developers and publishers necessary to develop a sufficient number of high 
quality, commercially successful software titles and applications that are 
compatible with the Company's 3D products.

     Further, in the case of the Company's entertainment 3D products, there 
can be no assurance that third parties will publish a substantial number of 
entertainment 3D software titles or, if entertainment 3D software titles are 
available, that they will be of high quality or that they will achieve 
market acceptance.  The development and marketing of game titles that do not 
fully demonstrate the technical capabilities of the Company's entertainment 
3D products could create the impression that the Company's products offer 
less compelling performance over competing 3D games platforms, such as TV 
games console platforms.  This may slow or stop any migration from the 
current widespread use of TV games consoles to the use of computer games on 
PCs, or the enhancement of PCs to operate such games.  Further, because the 
Company has no control over the content of the entertainment titles produced 
by software developers and publishers, the entertainment 3D software titles 
developed may represent only a limited number of game categories and are 
likely to be of varying quality.

Semiconductor or Software Defects

     Product components may contain undetected errors or "bugs" when first 
supplied to the Company that, despite testing by the Company, are discovered 
only after certain of the Company's products have been installed and used by 
customers.  There can be no assurance that errors will not be found in the 
Company's products due to errors in such products' components, or that any 
such errors will not impair the market acceptance of these products or 
require significant product recalls.  Problems encountered by customers or 
product recalls could materially adversely affect the Company's business, 
financial condition and results of operations.  Further, the Company 
continues to upgrade the firmware, software drivers and software utilities 
that are incorporated into or included with its hardware products.  The 
Company's software products, and its hardware products incorporating such 
software, are extremely complex due to a number of factors including the 
products' advanced functionality, the diverse operating environments in 
which the products may be deployed, the need for interoperability, and the 
multiple versions of such products that must be supported for diverse 
operating platforms, languages and standards.  These products may contain 
undetected errors or failures when first introduced or as new versions are 
released.  The Company generally provides a five-year warranty for its 
products and, in general, the Company's return policies permit return within 
thirty days after receipt of products that do not meet product 
specifications.  There can be no assurance that, despite testing by the 
Company, by its suppliers and by current or potential customers, errors will 
not be found in new products after commencement of commercial shipments, 
resulting in loss of or delay in market acceptance or product acceptance or 
in warranty returns.  Such loss or delay would likely have a material 
adverse effect on the Company's business, financial condition and results of 
operations.  

Additionally, new versions or upgrades to operating systems or 
independent software vendor titles or applications may require upgrades to 
the Company's software products to maintain compatibility with these new 
versions or upgrades.  There can be no assurance that the Company will be 
successful in developing new versions or enhancements to its software or 
that the Company will not experience delays in the upgrade of its software 
products.  In the event that the Company experiences delays or is unable to 
maintain compatibility with operating systems and independent software 
vendor titles or applications, the Company's business, financial condition 
and results of operations could be materially adversely affected.

Market Anticipation of New Products, New Technologies or Lower Prices

Since the environment in which the Company operates is characterized by 
rapid new product and technology introductions and generally declining 
prices for existing products, the Company's customers may from time to time 
postpone purchases in anticipation of such new product introductions or 
lower prices. If such anticipated changes are viewed as significant by the 
market, such as the introduction of a new operating system or microprocessor 
architecture, then this may have the effect of temporarily slowing overall 
market demand and negatively impacting the Company's operating results. For 
example, the substantial pre-release publicity surrounding the release of 
Windows 95 may have contributed to a slowing of the consumer PC market in 
the summer of 1995. Moreover, a similar reaction occurred in the modem 
market as a result of the announcements of modems based on 56 Kbps 
technology, which became available in 1997, and in the overall PC market in 
anticipation of Intel Corporation's transition to MMX-based microprocessors 
during 1997.  Additionally, the substantial publicity by Intel Corporation 
for its MMX technology may have confused and slowed the market for add-in 
multimedia accelerators, such as those sold by the Company, during the first 
half of 1997.  Similarly, Microsoft's launch of Windows 98 combined with the 
uncertainties surrounding such a launch was a factor in slower PC sales in 
the second quarter of 1998.  These effects may continue into future periods 
for these or similar events. Other anticipated new product releases that may 
influence future market growth or the timing of such growth include Intel's 
release of its Pentium II CPU and the associated chipsets supporting the 2x 
AGP and 4x AGP architectures, Intel's release of its "Merced" workstation 
CPU slated for first customer shipment in 1999, and the release of 
Microsoft's Windows 2000.

The potential negative impact on the Company's operating results as a 
result of customer decisions to postpone purchases in favor of new and 
"publicized" technology can be further magnified if products or components 
based on such new technology are not available in a timely manner or in 
sufficient supply to meet the demand caused by the market's shift to the new 
technology from an older technology. For example, the Company believes that 
the PC market may have slowed in early 1997 in part as customers waited for 
the availability of Intel's new MMX-enabled Pentium CPUs.  Further, the 
Company's operating results could be adversely affected if the Company makes 
poor selections of chip architectures or chip suppliers to pursue 3D 
graphics, AGP or 56Kbps modem market opportunities and, as a result, is 
unable to achieve market acceptance of its new products or is unable to 
secure a sufficient supply of such components.

If the Company or any of its competitors were to announce a product that 
the market viewed as having more desirable features or pricing than the 
Company's existing products, demand for the Company's existing products 
could be curtailed, even though the new product is not yet available. For 
example, the Company's next-generation sixteen-megabyte SDRAM-based graphics 
accelerators have a memory cost component roughly equivalent to eight-
megabyte SGRAM-based graphics accelerators.  Market anticipation of new 
product releases such as these, as well as similar competitive releases, 
reduced demand for the Company's SGRAM based graphics products and 
materially and adversely affected the Company's operating results for the 
second and third quarters of 1998. Similar results may occur during the 
fourth quarter of 1998. Similarly, if the Company's customers anticipate 
that the Company may reduce its prices in the near term, they might postpone 
their purchases until such price reductions are effected, reducing the 
Company's near-term shipments and revenue.  In general, market anticipation 
of new products, new technologies or lower prices, although potentially 
positive in the longer term, can negatively impact the Company's operating 
results in the short term.

Component Shortages; Reliance on Sole or Limited Source Suppliers

The Company is dependent on sole or limited source suppliers for certain 
key components used in its products, particularly chipsets and software that 
provide graphics, digital video, DVD, television (TV), sound or other 
multimedia functions, random access memory (including DRAM, RDRAM, SDRAM, 
SGRAM and flash) chips, and speakerphone/modem and fax/modem chipsets. 
Although the price and availability of many semiconductor components 
improved during 1997 and 1998, these components are periodically in short 
supply and on allocation by semiconductor manufacturers. For example, it is 
expected that the Company may experience constraints in the supply of high-
performance SGRAMs, flash memory and high-performance 3D graphics chips for 
the foreseeable future.  There can be no assurances that the Company can 
obtain adequate supplies of such components, or that such shortages or the 
costs of these components will not adversely affect future operating 
results.  The Company's dependence on sole or limited source suppliers, and 
the risks associated with any delay or shortfall in supply, can be 
exacerbated by the short life cycles that characterize multimedia and 
communications ASIC chipsets and the Company's products in general. Although 
the Company maintains ongoing efforts to obtain required supplies of 
components, including working closely with vendors and qualifying 
alternative components for inclusion in the Company's products, component 
shortages continue to exist from time to time, and there can be no 
assurances that the Company can continue to obtain adequate supplies or 
obtain such supplies at their historical or competitive cost levels. 
Conversely, in its attempt to counter actual or perceived component 
shortages, the Company may over purchase certain components or pay 
unnecessary expediting or other surcharges, resulting in excess inventory or 
inventory at higher than normal costs and reducing the Company's liquidity, 
or in the event of unexpected inventory obsolescence or a decline in the 
market value of such inventory, causing inventory write-offs or sell-offs 
that adversely affect the Company's gross margin and profitability.  Such a 
condition existed in the first quarter of 1998, and the Company's perception 
of component shortages caused the Company to over purchase components and 
pay surcharges for components that subsequently declined in value in the 
second and third quarters of 1998.  In addition, such inventory sell-offs by 
the Company or its competitors could trigger channel price protection 
charges, further reducing the Company's gross margins and profitability, 
such as occurred with the Monster 3D II product line in the third quarter of 
1998.

As noted above, supply and demand conditions for semiconductor components 
are unpredictable and may change from time to time. During periods of 
oversupply, prices are likely to fall and certain vendors of such 
semiconductor chips may liquidate their inventories in a rapid manner. If 
such semiconductor vendors are suppliers to the Company's competitors, then 
such actions could enable competitors of the Company to enjoy a cost 
advantage vis-a-vis the Company, and any resulting price reduction for such 
competitors' products could force the Company to reduce its prices, thereby 
depressing the Company's net sales and gross margins in one or more 
operating periods. 

During periods of component oversupply and associated price deflation, 
customers of the Company, particularly those comprising channels that do not 
receive price protection from the Company, may seek to draw down the 
inventory that they hold since such inventory likely would bear a price 
deflation risk. As a consequence, the Company may see its orders, unit 
shipments or average selling prices depressed from time to time during such 
price-deflation and inventory-reduction periods; this occurred during the 
second quarter of 1998, which adversely affected net sales and gross margin 
during such period, and this may occur again in future periods. 

When the PC or PC peripherals markets emerge from a period of oversupply, 
such as that experienced in the second quarter of 1997, certain 
manufacturers, distributors and resellers may be unprepared for a possible 
rapid increase in market demand. Accordingly, the Company may not have 
sufficient inventory, scheduled component purchase orders or available 
manufacturing capacity to meet any rapid increase in market demand, thereby 
missing orders and revenue opportunities, causing customer dissatisfaction 
and losing market share. The Company experienced such a situation in the 
second half of 1997 and in the first half of 1998 as the Company experienced 
a shortage of various components, restricting the Company's ability to 
manufacture certain products in sufficient quantities or in a linear fashion 
to meet market demand.  For certain products, the Company continued to 
experience such restrictions in the third quarter of 1998.  In addition, the 
Company believes that in the near term the Company will continue to be 
subjected to restricted supply and increasing prices on certain 
semiconductor components including certain graphics controllers and 
memories.  The inability of the Company to obtain product components at 
their historical or planned cost levels, resulting in the Company being 
forced to pay higher prices to achieve timely delivery, would directly 
affect the cost of the Company's products and could materially and adversely 
affect the Company's gross margin.  There can be no assurance that the 
Company will be able to obtain adequate supplies of components or that such 
shortages or the costs of these components will not adversely impact the 
Company's future operating results.  Conversely, there can be no assurance 
that the Company will not see the value of its inventory depreciate if 
components in a shortage condition emerge from that condition and experience 
a significant oversupply condition.  For example, this situation occurred 
during the second and third quarters of 1998 with certain graphics chips 
that support only SGRAM memory, and in the third quarter of 1998 with 
components associated with the Company's Monster 3D II product line.

Dependence on Subcontractors

The Company relies on independent surface mount technology ("SMT") 
subcontractors to manufacture, assemble or test the Company's board level 
products, as well as its first "finished" consumer electronics product, 
Rio, an internet music player.  The Company typically procures its 
components, assembly and test services and assembled products through 
purchase orders and does not have specific volume purchase agreements with 
each of its subcontractors.  Most of the Company's subcontractors could 
cease supplying the services, products or components at any time with 
limited or no penalty.  In the event that it becomes necessary for the 
Company to replace a key subcontractor, the Company could incur significant 
manufacturing set-up costs and delays.  There can be no assurance that the 
Company would be able to find suitable replacement subcontractors.  The 
Company's emphasis on maintaining low inventory may exacerbate the effects 
of any shortage that may result from the use of sole-source subcontractors 
during periods of tight supply or rapid order growth.  The Company's ability 
to respond to greater than anticipated market demand may be constrained by 
the availability of SMT or finished product subcontracting services.  
Further, various of the Company's subcontractors are located in 
international locations that, while offering low labor costs, may present 
heightened process control, quality control, political, infrastructure, 
transportation, tariff, regulatory, legal, import, export, economic or 
supply chain management risks.

Dependence on Graphics and Multimedia Accelerator Market

Sales of graphics and video accelerator subsystems accounted for greater 
than 65% and 79% of the Company's net sales in the third quarter of 1998 and 
1997, respectively.  Although the Company has introduced audio subsystems, 
has entered the PC modem and communications and home networking markets, and 
has announced its intention to enter into the consumer electronics market 
with its Rio Internet music player, graphics and video accelerator 
subsystems are expected to continue to account for a majority of the 
Company's sales for the foreseeable future. A decline in demand or average 
selling prices for graphics and video accelerator subsystems, whether as a 
result of new competitive product introductions, price competition, excess 
supply, widespread cost reduction, technological change, incorporation of 
the products' functionality onto personal computer motherboards or 
otherwise, would have a material adverse effect on the Company's sales and 
operating results.

Migration to Personal Computer Motherboards

        The Company's graphics and multimedia accelerator subsystems are 
individual products that function within personal computers to provide 
additional multimedia functionality. Historically, as a given functionality 
becomes technologically stable and widely accepted by personal computer 
users, the cost of providing such functionality is typically reduced by 
means of large scale integration into semiconductor chips, which can be 
subsequently incorporated onto personal computer motherboards. The Company 
expects that such migration will not occur in a substantial way with 3D 
graphics or Intel's accelerated graphics port (AGP) in the near term, 
although the Company recognizes that such migration could occur with respect 
to the functionality provided by some of the Company's current products. 
While the Company believes that a market will continue to exist for add-in 
subsystems that provide advanced or multiple functions and offer flexibility 
in systems configuration, such as 3D graphics, 3D audio and communications, 
there can be no assurance that the incorporation of new multimedia functions 
onto personal computer motherboards or into CPU microprocessors, such as 
under Intel's MMX, Whitney or AGP technologies, will not adversely affect 
the future market for the Company's products.  In large part, the 
continuation of a robust market for add-in graphics and video subsystems may 
depend on the timing and market acceptance of 3D graphics and digital video 
MPEG-2 acceleration. This, in turn, may depend on the availability of 
compelling 3D and MPEG-2 content, including games and entertainment, 
broadcast digital video, PC video phones, desktop video conferencing, and 
digital video, audio and 3D VRML graphics on the Internet.   Similarly, the 
robustness of the communications market may depend largely on the widespread 
adoption of 56Kbps and digital subscriber line (xDSL) technologies in both 
client-side modems attached to the PC and server-side modems provided by 
Internet Service Providers and telephone network central offices. The timing 
of major xDSL technology introductions and the market acceptance of these 
new technologies and standards are largely out of the control of the 
Company. 

        The Company believes that a large portion of the growth in the sales of 
personal computers will be in sealed systems which contain all functionality 
on the motherboard and are not able to be upgraded in the manner most 
current personal computers can be upgraded.  These sealed computers would 
contain a systems board that would include CPU, system memory, graphics, 
audio, and modem functionality on a single board.  The Company recently 
acquired Micronics for the purpose of obtaining technical and marketing 
expertise and brand acceptance in CPU motherboard design and to develop 
integrated multimedia system board products.  However, there can be no 
assurance that a significant market will exist for low-cost fixed system 
boards or that the acquisition of Micronics will enable the Company to 
successfully compete in such an emerging market or in the current 
motherboard market.

Risks Associated with Industry Consolidation

        The Company pursues a strategy of "silicon agility" which entails 
continuous evaluation of outside sources of graphics, modem, home 
networking, and audio chipsets.  This strategy depends on a number of 
competitive suppliers of each of these products in order to ensure that the 
Company is offering leading edge technology in each product line at prices 
with which the Company can compete with competitors who design their own 
chipsets.  In the recent past there have been instances of chipset suppliers 
acquiring their own add-in card manufacturing, marketing and distribution 
(for example, Evans & Sutherland Corp's purchase of Accel Graphics or 3Dlabs 
Inc. acquisition of Dynamic Pictures Inc.).  While these acquisitions in and 
of themselves are not material to the operations of the Company, any 
increase in the number of vertical integration acquisitions may restrict the 
choices of chipset suppliers available to the Company and thereby reduce the 
likelihood that the Company will have access to leading edge technology at 
prices which would allow the Company to compete with vertically integrated 
competitors such as ATI Technologies Inc., Matrox Graphics Inc. and Creative 
Technologies, Inc.

Competition

The market for the Company's products is highly competitive. The Company 
competes directly against a large number of suppliers of graphics and 
multimedia accelerator products for the PC such as Matrox Graphics Inc., STB 
Systems Inc.,  Creative Technologies Inc. and ATI Technologies Inc., and 
indirectly against PC systems OEMs to the extent that they manufacture their 
own add-in subsystems or incorporate on PC motherboards the functionality 
provided by the Company's products. In certain markets where the Company is 
a relatively new entrant, such as modems, sound cards, and consumer 
electronics Internet music players, the Company may face dominant 
competitors including 3Com (modems), Creative Technologies, Inc. (sound 
cards) and Sony Corp. (consumer electronic music players). In addition, the 
Company's markets are expected to become increasingly competitive as 
multimedia functions continue to converge and companies that previously 
supplied products providing distinct functions (for example, companies today 
primarily in the sound, modem, CPU or motherboard markets) emerge as 
competitors across broader or more integrated product categories.

In addition, manufacturers of chipsets or other components used in the 
Company's products could become future competitors of the Company to the 
extent that such manufacturers elect to integrate forward into the add-in 
subsystem or value-added software market (for example, the acquisition of 
Accel Graphics by Evans & Sutherland), or as such multimedia chipset 
manufacturers provide increasingly higher quality and more sophisticated 
software to their chipset customers, including subsystem suppliers 
competitive to the Company. Also, certain of the Company's current and 
potential competitors have significantly greater market presence, name 
recognition and financial and technical resources relative to the Company, 
and many have long-standing market positions and established brand names in 
their respective markets. In addition, certain of the Company's current and 
potential competitors also have a competitive cost advantage as a result of 
being located in areas that impose significantly lower taxes than the United 
States or offer a substantially lower cost of labor or provide governmental 
subsidies, such as research and development and training funds. Many of the 
Company's current and potential competitors also design and manufacture 
their own graphics acceleration, video, sound, fax/modem or other multimedia 
processing chipsets. While the Company believes that its semiconductor 
vendor flexibility enables it to select, within certain limits, from among 
the most advanced and price competitive chipsets available on the open 
market, the captive semiconductor operations of certain of the Company's 
current and potential competitors could provide them with significant 
advantages, including greater control over semiconductor architecture and 
technology, component design, component performance, systems and software 
design, time to market, availability and cost.

The Company also believes that the strategy of certain of its current and 
potential competitors is to compete largely on the basis of price, which may 
result in significant price competition and lead to lower margins for the 
Company's products or otherwise adversely affect the market for the 
Company's products. To the extent that semiconductor availability is 
relatively robust and software drivers and reference hardware designs from 
multimedia chipset manufacturers are of high quality and sophistication, 
then competitors who sell such reference designs and compete largely on 
price with little value-added engineering may have a competitive cost or 
expense advantage relative to the Company.  There can be no assurance that 
the Company will be able to continue to compete successfully in its current 
and future markets, or will be able to compete successfully against current 
and new competitors, as the Company's technology, markets and products 
continue to evolve.

Distribution Risks

The Company sells its products through a network of domestic and 
international distributors, and directly to major retailers/mass merchants, 
VARs and OEM customers. The Company's future success is dependent on the 
continued viability and financial stability of its customer base. The 
computer distribution and retail channels historically have been 
characterized by rapid change, including periods of widespread financial 
difficulties and consolidation and the emergence of alternative sales 
channels, such as direct mail order, telephone sales by PC manufacturers and 
electronic commerce on the World Wide Web. The loss of, or reduction in, 
sales to certain of the Company's key customers as a result of changing 
market conditions, competition, or customer credit problems could have a 
material adverse effect on the Company's operating results. Likewise, 
changes in distribution channel patterns, such as increased commerce on the 
Internet, increased use of mail-order catalogues, increased use of consumer-
electronics channels for personal computer sales, or increased use of 
channel assembly to configure PC systems to fit customers' requirements 
could affect the Company in ways not yet known. Moreover, additions to or 
changes in the types of products the Company sells, such as the introduction 
of professional-grade products or the migration toward more communications-
centric products, such as home networking may require specialized value-
added reseller channels, relations with which the Company has only begun to 
establish.

Inventory levels of the Company's products in the two-tier distribution 
channels used by the Company ("Channel Inventory Levels") generally are 
maintained in a range of one to three months of customer demand.  These 
Channel Inventory Levels tend toward the low end of the months-of-supply 
range when demand is stronger, sales are higher and products are in short 
supply.  Conversely, when demand is slower, sales are lower and products are 
abundant, then Channel Inventory Levels tend toward the high end of the 
months-of-supply range.  Frequently, in such situations, the Company 
attempts to ensure that distributors devote their working capital, sales and 
logistics resources to the Company's products to a greater degree than to 
those of competitors.  Similarly, the Company's competitors attempt to 
ensure that their own products are receiving a disproportionately higher 
share of the distributors' working capital and logistics resources. In an 
environment of slower demand and abundant supply of products, price declines 
are more likely to occur and, should they occur, are more likely to be 
severe. Further, in such an event, high Channel Inventory Levels may result 
in substantial price protection charges. Such price protection charges have 
the effect of reducing net sales and gross profit. Consequently, the 
Company, in taking steps to bring its Channel Inventory Levels down to a 
more desirable level, may cause a shortfall in net sales during one or more 
accounting periods. This was the case in the third quarter of 1998 as the 
company reduced channel inventory levels as part of its new short-cycle 
inventory model. While this expected to reduce the Company's exposure to 
future charges for price protection and excess inventory, it materially and 
adversely affected revenues for the third quarter. Such efforts to reduce 
channel inventory might also result in price protection charges as prices 
are decreased, having an adverse impact on operating results. While the 
Company believes that its Channel Inventory Levels for many of its products 
are appropriate at this time, there are certain products which have a 
Channel Inventory Level that is higher than desirable, specifically its 
Monster 3D II product line. The Company accrues for potential price 
protection charges on unsold channel inventory.  However, there can be no 
assurance that any estimates, reserves or accruals will be sufficient or 
that any future price reductions will not have a material adverse effect on 
operating results, including during the fourth quarter of 1998. 




Product Returns; Price Protection

The Company frequently grants limited rights to customers to return 
certain unsold inventories of the Company's products in exchange for new 
purchases ("Stock Rotation"), as well as price protection on unsold 
inventory. Moreover, certain of the Company's retail customers will readily 
accept returned products from their own retail customers, and these returned 
products are, in turn, returned to the Company for credit. The Company 
estimates returns and accrues for potential price protection on unsold 
channel inventory.  The Company experienced significant price protection 
charges due to the transition from PCI to AGP-based graphics accelerators 
and from SGRAM to SDRAM-based graphics accelerators during the second and 
third quarters of 1998. Moreover, the Company experienced significant price 
and revenue erosion and associated price protection on its Monster 3D II 
product line in the third quarter of 1998 as demand for that class of 
product declined in the third quarter of 1998, and market prices also 
declined significantly.  The Company may be faced with further significant 
price protection charges as the Company and its competitors move to reduce 
channel inventory levels of current products, such as the Monster 3D II as 
new product introductions are made.  However, there can be no assurance that 
any estimates, reserves or accruals will be sufficient or that any future 
returns or price reductions will not have a material adverse effect on 
operating results, including through the mechanisms of Stock Rotation or 
price protection, particularly in light of the rapid product obsolescence 
which often occurs during product transitions. The short product life cycles 
of the Company's products, the evolving markets for new multimedia and 
connectivity technologies such as the new 56 Kbps modem and 3D graphics 
technologies, and the difficulty in predicting future sales through the 
distribution channels to the final end customer all increase the risk that 
new product introductions, price reductions by the Company or its 
competitors, or other factors affecting the personal computer and add-in 
subsystems industry could result in significant and unforeseen product 
returns, with such returns creating a material adverse effect on the 
Company's financial performance.  In addition, there can be no assurance 
that new product introductions by competitors or other market factors, such 
as the integration of graphics and video acceleration or modem connectivity 
by OEMs onto system motherboards, will not require the Company to reduce 
prices in a manner or at a time that gives rise to significant price 
protection charges and has a material adverse impact upon the Company's 
gross margins.  

Furthermore, the markets that the Company serves include end users who 
buy from computer retail and consumer electronics mass merchant outlets to 
upgrade their existing PCs.  Such customers frequently decide to return 
products to the retail outlets from which they earlier purchased the 
product.  Such returns are made for a variety of reasons, including the 
customer changing his or her mind regarding his or her purchase decision, 
the customer has difficulty with the installation or use of the product, the 
product does not offer the features, functions, or performance that the 
customer expected or the customer experiences incompatibilities between the 
product and his or her existing PC hardware or software.  Since many of the 
products that the Company sells incorporate advanced computer technology, 
the Company expects that end-user customer returns, including warranty 
returns, will be a continuing negative attribute of supplying the PC 
installed-base upgrade market.  There can be no assurance that the Company 
will be able to achieve gross margins in the PC installed-base upgrade 
market that will be high enough to offset the expenses of end-user customer 
returns and still generate an acceptable return on sales to the Company.

OEM Customer Risks

The Company currently has a limited number of OEM customers. While the 
Company is seeking to increase its sales to OEMs, certain OEMs maintain 
internal add-in subsystem design and manufacturing capabilities or have 
long-standing relationships with competitors of the Company, and there can 
be no assurance that the Company will be successful in its efforts to 
increase its OEM sales. Moreover, developing supplier relationships with 
major PC systems OEMs and installing the processes, procedures and controls 
required by such OEMs can be an expensive and time-consuming process, and 
there can be no assurance that the Company will achieve an acceptable 
financial return on this investment. Further, to the extent that PC systems 
OEM's selection criteria are weighted toward multimedia subsystem suppliers 
that have their own captive SMT manufacturing operations, then the Company's 
sole reliance on outside SMT subcontract manufacturers may be a negative 
factor in winning such PC systems suppliers' OEM contracts.

It is expected that OEM revenue will carry a lower gross margin 
percentage compared to sales to other channels due to perceived lower 
expenses to support such OEM revenue and the buying power exercised by large 
OEMs. Furthermore, many large OEMs require that distribution hubs be 
established local to their factories to supply such factories on very short 
notice. Such hubs represent a cash drain on the Company to support the 
required inventory, and a product obsolescence and inventory write-off risk 
as the price of such inventory may decline or reach the end of its useful 
life or the design-in life at the OEM before such inventory, which may be 
specific to a certain OEM, is completely consumed.   The Company's 
contractual relationships with Dell, Micron and Compaq regarding such hubs 
may represent such product obsolescence and inventory write-off risks.

The Company's products are priced for and generally aimed at the higher 
performance and higher quality segment of the market. Therefore, to the 
extent that OEMs focus on low-cost solutions rather than high-performance 
solutions, an increase in the proportion of the Company's sales to OEMs may 
result in an increase in the proportion of the Company's revenue that is 
generated by lower-selling-price and lower-gross-margin products, 
particularly with respect to the Company's audio and modem products, which 
could adversely affect future gross margins and operating results of the 
Company. 

Rapid Technological Change

        The markets for the Company's products are characterized by rapidly 
changing technology, evolving industry standards, frequent new product 
introductions and rapid product obsolescence. For example, 3D technology is 
evolving rapidly in the graphics and audio markets, memory architectures and 
speeds are changing rapidly, and DVD and MPEG-2 decryption techniques and 
navigation technologies are still being refined and moving from hardware-
centric to software-centric implementations. Product life cycles in the 
Company's markets frequently range from six to twelve months. The Company's 
success will be substantially dependent upon its ability to continue to 
develop and introduce competitive products and technologies on a timely 
basis with features and functionalities that meet changing customer 
requirements in a cost-effective manner. Further, if the Company is 
successful in the development and market introduction of new products, it 
must still correctly forecast customer demand for such new products so as to 
avoid either excessive unsold inventory or excessive unfilled orders related 
to the products. The task of forecasting such customer demand is unusually 
difficult for new products, for which there is little sales history, and for 
indirect channels, where the Company's customers are not the final end 
customers. Moreover, whenever the Company launches new products, it must 
also successfully manage the corollary obsolescence and price erosion of 
those of its older products that are impacted by such new products, as well 
as any resulting price protection charges and Stock Rotations from its 
distribution channels.  During the second quarter of 1998, the Company 
experienced large price protection charges with respect to the decline in 
average selling prices of graphics accelerators due to the SGRAM to SDRAM 
transition of mainstream graphics accelerators and other competitive 
pressures.  Due to the much lower cost of SDRAM solutions SGRAM prices fell 
in competition thereby lowering manufacturing costs of graphics 
accelerators.  The Company, forced to meet the pricing actions of its 
competitors was forced to lower prices triggering larger than normal or 
expected price protection and eroding the value of some of the Company's on 
hand inventory.  A similar phenomenon occurred in the third quarter of 1998 
relative to the Company's Monster 3D II product line.

Risks of International Sales

The Company's international sales are subject to a number of risks 
generally associated with international business operations, including the 
effect on demand for the Company's products in international markets as a 
result of a strengthening or weakening U.S. dollar, the effect of currency 
fluctuations on consolidated multinational financial results, any state-
imposed restrictions on the repatriation of funds, any import and export 
duties and restrictions, certain international economic conditions, the 
expenses, time and technical resources required to localize the Company's 
various products and to support local languages, the logistical difficulties 
of managing multinational operations and dispersed product inventory 
designed or manufactured to meet specific countries' requirements, and the 
delays and expenses associated with homologating the Company's 
telecommunications products and securing the necessary governmental 
approvals for shipment to various countries.  

The Company's international sales can also be affected if inventory sold 
by the Company to its international distributors and OEMs and held by them 
or their customers does not sell through to final end customers, which may 
impact international distributor or OEM orders in the succeeding periods. 
The Company believes that it generally has less information with respect to 
the inventory levels held by its international OEMs and distributors as 
compared to their domestic counterparts, and that the supply chain to such 
international customers is longer, and that therefore the Company generally 
has less visibility on how this held inventory might affect future orders to 
and sales by the Company.  In the event that international OEMs or 
distributors change their desired inventory levels, there can be no 
assurance that the Company's net sales to such customers will not decline at 
such time or in future periods, or that the Company will not incur price 
protection charges with respect to such customers.

Also, during the first three quarters of 1998, sales in Asia and 
Southeast Asia were below expected levels.  The lack of sales in the Asian 
market were primarily related to the lack of credit facilities available to 
customers in those markets for the Company's products and other products 
necessary for those customers to sell complete products. The Company expects 
continued sluggishness in sales in Asia and Southeast Asia during the 
remainder of 1998 and continuing into 1999.

Information Technology and Telecommunications Systems

The Company is currently making significant investments in establishing 
systems, processes and procedures to more efficiently and effectively manage 
its worldwide business and enable communications and data sharing among its 
employees and various business units. This effort comprises a significant 
investment of expense and capital funds, as well as a drain on management 
resources, for the installation of information technology ("IT"), network 
and telecommunications equipment and IT applications. As part of this 
program to install IT systems throughout the Company, management has begun 
installation of an enhanced enterprise-wide business management, resource 
planning and decision support application. Further, in order to more 
effectively manage the Company's business and avert Year 2000 issues, the 
Company is implementing this new ERP application and the associated 
processes and procedures and installing the associated IT equipment in order 
for it to be fully operational no later than by the beginning of 1999. Such 
an effort is expected to comprise a further substantial investment of 
expenses and management resources by the Company.

Year 2000 Compliance

Many existing computer systems and applications, and other control 
devices, use only two digits to identify a year in the date field, 
without considering the impact of the upcoming change in the century.  As 
a result, such systems and applications could fail or create erroneous 
results unless corrected so that they can process data related to the 
year 2000.  The Company relies on its systems, applications and devices 
in operating and monitoring all major aspects of its business, including 
financial systems (such as general ledger, accounts payable and payroll 
modules), customer services, infrastructure, embedded computer chips, 
networks and telecommunications equipment and end products.  The Company 
also relies, directly and indirectly, on external systems of business 
enterprises such as customers, suppliers, creditors, financial 
organizations, and of governmental entities, both domestic and 
international, for accurate exchange of data. The Company recently 
completed the first phase of a project to upgrade the computer hardware 
and software it uses to operate, monitor and manage its business on a day 
to day basis. At the end of the third quarter, the Company's operations 
were converted to this system on an integrated, world-wide basis. This 
effort was undertaken to significantly improve the tools and information 
available to manage the Company. These tools have the added benefit of 
managing data with dates beyond December 31, 1999 as indicated by the 
vendors. The Company continues to test such capabilities as part of its 
post-implementation process. This testing is expected to be completed 
during the first half of 1999. The Company's current estimate is that the 
costs specifically associated with this testing and validation process 
will not have a material adverse effect on the result of operations or 
financial position of the Company in any given year. However, despite the 
Company's efforts to address the year 2000 impact on its internal 
systems, the Company has not fully identified such impact or whether it 
can resolve it without disruption of its business and without incurring 
significant expense.  In addition, even if the internal systems of the 
Company are not materially affected by the year 2000 issue, the Company 
could be affected through disruption in the operation of the enterprises 
with which the Company interacts.  See "-Information Technology and 
Telecommunications Systems."

Capital Needs

There can be no assurance that additional capital beyond the amounts 
currently forecasted by the Company will not be required or that any 
required additional capital will be available on reasonable terms, if at 
all, at such time or times as required by the Company. Any shortfall in 
capital resources compared to the Company's level of operations or any 
inability to secure additional capital as needed could impair the Company's 
ability to finance inventory, accounts receivable and other operational 
needs. Such capital limitations could also impair the Company's ability to 
invest in research and development, improve customer service and support, 
deploy information technology systems, and expand manufacturing and other 
operations. Failure to keep pace with competitive requirements in any of 
these areas could have a material adverse effect on the Company's business 
and operating results. Moreover, any need to raise additional capital 
through the issuance of equity or debt securities may result in additional 
dilution to earnings per share.

Proprietary Rights

        While the Company had 14 issued U.S. Patents and 20 pending U.S. Patent 
Applications at September 30, 1998, it nonetheless relies primarily on a 
combination of trademark, copyright and trade secret protection together 
with licensing arrangements and nondisclosure and confidentiality agreements 
to establish and protect its proprietary rights. There can be no assurance 
that the Company's measures to protect its proprietary rights will deter or 
prevent unauthorized use of the Company's technology, brand or other 
proprietary or intellectual property. In addition, the laws of certain 
foreign countries may not protect the Company's proprietary rights to the 
same extent as do the laws of the United States or the EC. As is typical in 
its industry, the Company from time to time is subject to legal claims 
asserting that the Company has violated the proprietary rights of third 
parties. In the event that a third party was to sustain a valid claim 
against the Company, and any required licenses were not available on 
commercially reasonable terms, the Company's operating results could be 
materially and adversely affected. Litigation, which could result in 
substantial cost to and diversion of the resources of the Company, may also 
be necessary to enforce proprietary rights of the Company or to defend the 
Company against claimed infringement of the proprietary rights of others. 

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 systems 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, market conditions for PC or semiconductor 
stocks, changes in earnings estimates by analysts, or other events or 
factors. In this regard, the Company does not endorse and accepts no 
responsibility for the estimates or recommendations issued by stock research 
analysts from time to time. In addition, the public stock markets in 
general, and technology stocks in particular, have experienced extreme price 
and trading volume volatility. This volatility has significantly affected 
the market prices of securities of many high technology companies for 
reasons frequently unrelated to the operating performance of the specific 
companies. These broad market fluctuations may adversely affect the market 
price of the Company's Common Stock.

Dependence on 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, particularly in the San Jose, California area ("Silicon Valley"). 
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. The loss of services of one or more of its key 
personnel or the inability to add or replace key personnel could have a 
material adverse effect on the Company. The salary, performance bonus and 
stock option packages necessary to recruit or retain key personnel, 
particularly in Silicon Valley, may significantly increase the Company's 
expense levels or result in dilution to the Company's earnings per share.  
The Company does not carry "key person" life insurance on any of its 
employees. 

Legal Matters

The Company has been named as a defendant in several putative class 
action lawsuits which were filed in June and July, 1996 and June, 1997 in 
the California Superior Court for Santa Clara County and the U.S. District 
Court for the Northern District of California. Certain executive officers 
and directors of the Company are also named as defendants. The plaintiffs 
purport to represent a class of all persons who purchased the Company's 
Common Stock between October 18, 1995 and June 20, 1996 (the "Class 
Period"). The complaints allege claims under the federal securities laws 
and California law. The plaintiffs allege that the Company and the other 
defendants made various material misrepresentations and omissions during the 
Class Period. The complaints do not specify the amount of damages sought. 
The Company believes that it has good defenses to the claims alleged in the 
lawsuits and will defend itself vigorously against these actions. These 
cases are in the early stages and no trial date has been set. The ultimate 
outcome of these actions cannot be presently determined. Accordingly, no 
provision for any liability or loss that may result from adjudication or 
settlement thereof has been made in the accompanying consolidated financial 
statements.

The Company has been named as a defendant in a lawsuit filed on October 
9, 1998 in the United States District Court for the Central District of 
California.  Plaintiffs are the Recording Industry Association of America, 
Inc. (the "RIAA"), a trade organization representing recording companies 
and the Alliance of Artists and Recording Companies (the "AARC") an 
organization controlled by the RIAA which exists to distribute royalties 
collected by the copyright office.  The complaint alleges that the Company's 
Rio product, a portable music player, is subject to regulation under the 
Audio Home Recording Act (the "AHRA") and that the device does not comply 
with the requirements of the AHRA.  On October 16, 1998 a hearing was held 
and the Court issued a Temporary Restraining Order preventing the Company 
from manufacturing or distributing the Rio product for a period of ten days.  
On October 26, 1998 a hearing was held to determine if a Preliminary 
Injunction should issue to further restrain the Company until the conclusion 
of the suit.  The court denied the motion and refused to restrain the 
Company from manufacturing and distributing the Rio product.  The RIAA has 
filed a notice that it intends to appeal the Court's ruling to the United 
States Court of Appeals for the Ninth Circuit.  No schedule has been set for 
any briefing or other action on the appeal. No provision for any liability 
or loss that may result from adjudication or settlement of this action has 
been made in the accompanying consolidated financial statements.

     The Company is also party to other claims and pending legal proceedings 
that generally involve employment and patent issues.  These cases are, in 
the opinion of management, ordinary and routine matters incidental to the 
normal business conducted by the Company.  In the opinion of management, the 
ultimate disposition of such proceedings will not have a materially adverse 
effect on the Company's consolidated financial position or future results of 
operations.


PART II.        OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

The Company has been named as a defendant in several putative class 
action lawsuits which were filed in June and July 1996 and June 1997 in the 
California Superior Court for Santa Clara County and the U.S. District Court 
for the Northern District of California. Certain executive officers and 
directors of the Company are also named as defendants. The plaintiffs 
purport to represent a class of all persons who purchased the Company's 
Common Stock between October 18, 1995 and June 20, 1996 (the "Class 
Period"). The complaints allege claims under the federal securities laws 
and California law. The plaintiffs allege that the Company and the other 
defendants made various material misrepresentations and omissions during the 
Class Period. The complaints do not specify the amount of damages sought. 
The Company believes that it has good defenses to the claims alleged in the 
lawsuits and will defend itself vigorously against these actions. These 
cases are in the early stages and no trial date has been set. The ultimate 
outcome of these actions cannot be presently determined. Accordingly, no 
provision for any liability or loss that may result from adjudication or 
settlement thereof has been made in the accompanying consolidated financial 
statements.

The Company has been named as a defendant in a lawsuit filed on October 
9, 1998 in the United States District Court for the Central District of 
California.  Plaintiffs are the Recording Industry Association of America, 
Inc. (the "RIAA"), a trade organization representing recording companies 
and the Alliance of Artists and Recording Companies (the "AARC") an 
organization controlled by the RIAA which exists to distribute royalties 
collected by the copyright office.  The complaint alleges that the Company's 
Rio product, a portable music player, is subject to regulation under the 
Audio Home Recording Act (the "AHRA") and that the device does not comply 
with the requirements of the AHRA.  On October 16, 1998 a hearing was held 
and the Court issued a Temporary Restraining Order preventing the Company 
from manufacturing or distributing the Rio product for a period of ten days.  
On October 26, 1998 a hearing was held to determine if a Preliminary 
Injunction should issue to further restrain the Company until the conclusion 
of the suit.  The court denied the motion and refused to restrain the 
Company from manufacturing and distributing the Rio product.  The RIAA has 
filed a notice that it intends to appeal the Court's ruling to the United 
States Court of Appeals for the Ninth Circuit.  No schedule has been set for 
any briefing or other action on the appeal. No provision for any liability 
or loss that may result from adjudication or settlement of this action has 
been made in the accompanying consolidated financial statements.

     The Company is also party to other claims and pending legal proceedings 
that generally involve employment and trademark issues.  These cases are, in 
the opinion of management, ordinary and routine matters incidental to the 
normal business conducted by the Company.  In the opinion of management, the 
ultimate disposition of such proceedings will not have a materially adverse 
effect on the Company's consolidated financial position or future results of 
operations.


ITEM 2.         CHANGES IN SECURITIES

Not applicable.

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

None


ITEM 5.         OTHER INFORMATION

Pursuant to Rule 14a-4(c)(1) under the Securities and Exchange Act 
of 1934, the proxies of management would be allowed to use their 
discretionary voting authority with respect to any non-Rule 14a-8 
stockholder proposal raised at the Company's annual meeting of 
stockholders, without any discussion of the matter in the proxy 
statement, unless the stockholder has notified the Company of such 
proposal at least 45 days prior to the month and day on which the Company 
mailed its prior year's proxy statement. Since the Company mailed its 
proxy statement for the 1998 annual meeting of stockholders on April 17, 
1998, the deadline for receipt of any such stockholder proposal for the 
1999 annual meeting of stockholders is March 3, 1999.






ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K

      A. Exhibit

         Exhibit #       Description of Document

                Not Applicable

      B. Reports on Form 8-K 


         In connection with the acquisition of Micronics, the Company 
         filed a report on Form 8K on July 14, 1998, as amended on September 
         14, 1998, describing the merger and providing financial statements 
         and pro forma financial information relating thereto. 



<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.


                                        DIAMOND MULTIMEDIA SYSTEMS, INC.



Date:   November 16, 1998               /s/  William J. Schroeder
                                        -------------------------
                                        William J. Schroeder
                                        President and Chief Executive Officer


Date:   November 16, 1998               /s/  James M. Walker
                                        --------------------
                                        James M. Walker
                                        Senior Vice President and
                                        Chief Financial Officer




<PAGE>




























                               INDEX TO EXHIBITS



EXHIBIT
NUMBER                             DESCRIPTION
------                             -----------
 27.1                              Financial Data Schedule