<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

                      For the quarter ended March 31, 1999

                                       OR

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

            For the transition period from __________ to __________

                         Commission file number 0-21126

                                 S3 INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                                   77-0204341
     ----------------------------           ------------------------------------
     (State or other jurisdiction           (I.R.S. Employer Identification No.)
  of incorporation or organization)

    2801 Mission College Boulevard
        Santa Clara, California                           95052-8058
    ------------------------------                        ----------
(Address of principal executive offices)                  (Zip Code)


       Registrant's telephone number, including area code: (408) 588-8000



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 of the Registrant's Common Stock, $.0001 par value,
                 outstanding at April 30, 1999 was 52,648,622.



<PAGE>   2
                                 S3 INCORPORATED
                                    FORM 10-Q


                                      INDEX

<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>                                                                     <C>
PART I.    CONDENSED CONSOLIDATED FINANCIAL INFORMATION              

Item 1.    Condensed Consolidated Financial Statements:

           Condensed Consolidated Balance Sheets                  
           March 31, 1999 and December 31, 1998                            3

           Condensed Consolidated Statements of Operations        
           Three months ended March 31, 1999 and 1998                      4

           Condensed Consolidated Statements of Cash Flows        
           Three months ended March 31, 1999 and 1998                      5

           Notes to Unaudited Condensed Consolidated Financial    
           Statements                                                    6-9


Item 2.    Management's Discussion and Analysis of Financial           
           Condition and Results of Operations                          9-22

Item 3.    Quantitative and Qualitative Disclosures About Market  
           Risk                                                        22-23

PART II.   OTHER INFORMATION

Item 1.    Legal Proceedings                                  
                                                                          23

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         23-24

Item 5.    Other Information                                  Not Applicable

Item 6.    Exhibits and Reports on Form 8-K                               24

Signatures                                                                25
</TABLE>



                                       2
<PAGE>   3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

                                 S3 INCORPORATED
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       MARCH 31,        DECEMBER 31,
                                                         1999              1998
                                                      ---------         ---------
<S>                                                   <C>               <C>      
                         ASSETS
Current assets:
   Cash and equivalents                               $  36,906         $  31,022
   Short-term investments                                92,123            88,553
   Accounts receivable (net of allowances
     of $8,107 in 1999 and $6,525 in 1998)               20,155            23,864
   Inventories                                            8,822            11,383
   Prepaid expenses and other                            37,872            42,356
                                                      ---------         ---------
               Total current assets                     195,878           197,178

Property and equipment, net                              20,309            22,392
Investment in joint venture                              86,900            88,056
Other assets                                             16,743            18,175
                                                      ---------         ---------
               Total                                  $ 319,830         $ 325,801
                                                      =========         =========

          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                   $  20,806         $  16,315
   Notes payable                                         14,400            14,400
   Accrued liabilities                                   16,160            12,314
   Deferred revenue                                       1,961             1,905
                                                      ---------         ---------
               Total current liabilities                 53,327            44,934

Other liabilities                                        12,875            13,837
Convertible subordinated notes                          103,500           103,500

Commitments and contingencies
  (Notes 5 and 6)

Stockholders' equity:
   Common stock, $.0001 par value;
    120,000,000 and 70,000,000 shares
    authorized in 1999 and 1998;
    52,102,897 and 51,716,171 shares
    outstanding in 1999 and 1998                        194,403           191,647
   Accumulated other comprehensive loss                 (17,034)          (14,755)
   Accumulated deficit                                  (27,241)          (13,362)
                                                      ---------         ---------
               Total stockholders' equity               150,128           163,530
                                                      ---------         ---------
               Total                                  $ 319,830         $ 325,801
                                                      =========         =========
</TABLE>


               See accompanying notes to the unaudited condensed
                       consolidated financial statements.



                                       3
<PAGE>   4
                                 S3 INCORPORATED
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                ----------------------------------
                                                MARCH 31, 1999      MARCH 31, 1998
                                                --------------      --------------
<S>                                             <C>                 <C>
Net sales                                          $ 44,300         $ 82,507

Cost of sales                                        34,033           66,829
                                                   --------         --------

Gross margin                                         10,267           15,678

Operating expenses:
    Research and development                         18,037           22,033
    Selling, marketing and
      administrative                                  7,788           12,494
    Other operating expense                              --            8,000
                                                   --------         --------
               Total operating expenses              25,825           42,527
                                                   --------         --------
Loss from operations                                (15,558)         (26,849)

Gain on sale of shares of joint venture                  --           26,561
Other income, net                                       157                8
                                                   --------         --------

Loss before income taxes and equity
  in net income of joint venture                    (15,401)            (280)
Provision (benefit) for income taxes                     --             (751)
                                                   --------         --------
Income (loss) before equity in net
income of joint venture                             (15,401)             471
Equity in net income of joint
  venture (net of tax)                                1,522            3,650
                                                   --------         --------
Net income (loss)                                  $(13,879)        $  4,121
                                                   ========         ========

Per share amounts:
    Basic                                          $  (0.27)        $   0.08
    Diluted                                        $  (0.27)        $   0.08
Shares used in computing per share amounts:
    Basic                                            51,856           50,601
    Diluted                                          51,856           52,148
</TABLE>



               See accompanying notes to the unaudited condensed
                       consolidated financial statements.



                                       4
<PAGE>   5
                                 S3 INCORPORATED
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                              -------------------------
                                                              MARCH 31,        MARCH 31,
                                                                1999             1998
                                                              --------         --------
<S>                                                           <C>              <C>
Operating activities:
  Net income (loss)                                           $(13,879)        $  4,121
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
   Deferred income taxes                                            --            2,293
   Depreciation and amortization                                 4,819            5,114
   Write-off of acquired technologies                               --            8,000
    Gain on sale of shares of joint venture                         --          (26,561)
    Equity in net income of joint venture                       (1,522)          (5,944)
   Changes in assets and
      liabilities:
            Accounts receivable                                  3,709           12,151
            Inventories                                          2,561           34,240
            Prepaid expenses and other                           4,414              921
            Accounts payable                                     4,491          (22,073)
            Accrued liabilities                                  2,884            1,976
            Deferred revenue                                        56           (6,539)
            Income taxes payable                                    --            5,550
                                                              --------         --------
  Net cash provided by operating activities                      7,533           13,249
                                                              --------         --------

Investing activities:
  Property and equipment purchases, net                         (2,071)          (1,106)
  Sale of shares of joint venture                                   --           68,025
  Purchase of short-term investments, net                       (3,145)         (31,796)
  Other assets                                                     811              329
  Purchase of technology                                            --          (40,000)
                                                              --------         --------
  Net cash used for investing activities                        (4,405)          (4,548)
                                                              --------         --------

Financing activities:
  Sale of common stock, net                                      1,766              643
  Sale of warrant                                                  990               --
  Repayments of equipment financing                                 --           (2,656)
  Repayments of notes payable                                       --          (10,000)
                                                              --------         --------
  Net cash provided by (used for) financing activities           2,756          (12,013)
                                                              --------         --------

Net increase (decrease) in cash and equivalents                  5,884           (3,312)
Cash and cash equivalents at beginning of period                31,022           90,484
                                                              --------         --------
Cash and cash equivalents at end of period                    $ 36,906         $ 87,172
                                                              ========         ========
</TABLE>




                See accompanying notes to the unaudited condensed
                       consolidated financial statements.



                                       5
<PAGE>   6
                                 S3 INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. Basis of Presentation:

   The condensed consolidated financial statements have been prepared by S3
Incorporated, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and include the accounts of S3 Incorporated
and its wholly-owned subsidiaries ("S3" or collectively the "Company"). All
significant inter-company balances and transactions have been eliminated.
Investments in entities in which the Company does not have control, but has the
ability to exercise significant influence over operating and financial policies
are accounted for by the equity method. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position at March 31, 1999 and December 31, 1998, and the operating results and
cash flows for the three months ended March 31, 1999 and 1998. These financial
statements and notes should be read in conjunction with the Company's audited
financial statements and notes thereto for the year ended December 31, 1998,
included in the Company's Form 10-K filed with the Securities and Exchange
Commission.

   The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the future
quarters or the year ending December 31, 1999. Certain reclassifications of 1998
amounts were made in order to conform to the 1999 presentation.

2. Inventories:

   Inventories consist of work in process and finished goods and are stated at
the lower of cost (first-in, first-out) or market.

<TABLE>
<CAPTION>
                                                  MARCH 31,            DECEMBER 31,
INVENTORIES CONSIST OF:                             1999                  1998
                                                   -------               -------
<S>                                               <C>                  <C>    
Work in process                                    $ 1,356               $ 6,340
Finished goods                                       7,466                 5,043
                                                   -------               -------
   Total                                           $ 8,822               $11,383
                                                   =======               =======
</TABLE>

3.  Technology Exchange:

        In January 1998, the Company entered into a $40.0 million technology
exchange with Cirrus Logic, Inc. to obtain graphic functionality technologies.
As a result of the exchange, the Company acquired the technology covered by 10
graphic patents and 25 graphic patent applications, as well as cross-licensed
Cirrus Logic's remaining patents. Under the terms of the cross-licensing
provisions, the Company and Cirrus Logic have a perpetual license to each
other's graphic patents and additional licenses with respect to the other
party's patents for agreed upon periods of time.

         The Company wrote-off $8.0 million of the acquired technologies that
were not realizable based on estimated cash flows from the sale of products
currently sold by the Company. The remaining $32.0 million intangible asset was
being amortized to cost of sales based on the estimated lives of the currently
utilized core technologies, which was generally five years until the fourth
quarter of 1998. During the fourth quarter of 1998, management reevaluated the
carrying value of the intangible assets recorded in connection with the
technology exchange with Cirrus Logic, Inc. and related to the patents obtained
from Brooktree, as well as other long-lived assets, including property and
equipment. This revaluation was necessitated by management determination based
on recent results of operations and that the future expected sales and cash
flows for the Company's operations would be substantially lower than had been
previously expected by management. Expected undiscounted future cash flows were
not sufficient to recover the carrying value of such assets. Accordingly, an
impairment loss of $27.2 million was recognized for write-downs of a substantial
portion of the intangible assets. The estimated fair value of the intangible
assets was based on management's best estimate of the patent portfolio based on
a comparison to other graphics technology portfolios in the marketplace. Due to
technological changes in the graphics marketplace, the Company concluded it
should accelerate its amortization of its remaining patent portfolio, of
approximately $4.0 million, over the current estimated life of the currently
utilized core technologies, which is two years.


                                       6
<PAGE>   7
4. Earnings per share:

   Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that would occur
from any instrument or options which could result in additional common shares
being issued.

   When computing earnings per share, the Company includes only potential common
shares that are dilutive. Exercise of options, and conversion of convertible
debt in the three months ended March 31, 1999 and 1998 respectively, are not
assumed because the result would have been anti-dilutive. The warrant exercise
during the three months ended March 31, 1999 is not assumed because the result
would have been anti-dilutive.

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                            --------------------------
                                                            MARCH 31,        MARCH 31,
                                                              1999             1998
                                                            --------         ---------
                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                         <C>              <C>
NUMERATOR
   Net Income (loss)
      Basic                                                 $(13,879)        $  4,121
                                                            --------         --------
      Diluted                                               $(13,879)        $  4,121
                                                            ========         ========
DENOMINATOR
    Denominator for basic earnings (loss) per share           51,856           50,601
    Common stock equivalents                                      --            1,547
                                                            --------         --------
    Denominator for diluted earnings (loss) per share         51,856           52,148
                                                            ========         ========
Basic earnings (loss) per share                             $  (0.27)        $   0.08
Diluted earnings (loss) per share                           $  (0.27)        $   0.08
</TABLE>


5. Wafer supply agreements and commitments

   During 1995, the Company entered into two long-term manufacturing capacity
arrangements. The Company entered into an agreement with United Microelectronics
Corporation (UMC) and Alliance Semiconductor Corporation to form United
Semiconductor Corporation (USC), a separate Taiwanese company, for the purpose
of building and managing a semiconductor manufacturing facility in Taiwan,
Republic of China. The Company invested a total of $89.4 million for its equity
interest of 23.75%. On December 31, 1998, the Company entered into an agreement
with UMC to sell to UMC 80 million shares of stock of USC for a purchase price
of 2.4 billion New Taiwan dollars. The Company received the purchase price
(approximately $68.0 million in cash) in January 1998 upon closing. As a result
of the January 1998 sale to UMC, S3's percentage ownership in USC decreased to
15.75%. The Company has the right to purchase up to 31.25% of the output from
the foundry.

   The Company accounts for its investment in USC using the equity method of
accounting. The Company records its share of the earnings or losses of the
investment in its income statement. The Company believes that the equity method
of accounting is appropriate due to the significant influence it has in the
financial and operating decisions of USC.

   Summarized financial information of USC below uses an average exchange rate
for the three months ended March 31, 1999 and 1998 respectively for results of
operations (in thousands):

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED MARCH 31,
                                             1999           1998
                                          -----------   -----------
<S>                                       <C>           <C>
RESULTS OF OPERATIONS
Net sales.............................    U.S.$81,804   U.S.$85,323
Gross profit..........................         25,417        43,978
Net income............................         10,186        38,328
</TABLE>



                                       7
<PAGE>   8
   In addition, in 1995 the Company expanded and formalized its relationship
with Taiwan Semiconductor Manufacturing Company (TSMC) to provide additional
capacity over the 1996 to 2000 timeframe. The agreement with TSMC requires the
Company to make certain annual advance payments to be applied against the
following year's capacity. The Company has signed promissory notes to secure
these payments over the term of the agreement. At March 31, 1999, the remaining
advance payments (and corresponding promissory notes) totaled $14.4 million
which the Company is obligated to pay in 1999. During 1998, the Company
commenced negotiations with TSMC to modify and amend its capacity agreement.
Although the terms have not been finalized, the Company is requesting TSMC to
reduce its option capacity and extend the term of the agreement.

   In the ordinary course of business, the Company places purchase orders with
its wafer suppliers based on its existing and anticipated customer orders for
its products. Should the Company experience a substantial unanticipated decline
in the selling price of its products and/or demand thereof, it could result in a
material loss on such purchase commitments.

6. Contingencies

   The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. The Company is party to various
claims of this nature. Although the ultimate outcome of these matters is not
presently determinable, management believes that the resolution of all such
pending matters will not have a material adverse effect on the Company's
financial position or results of operations.

   Since November 1997, a number of complaints have been filed in federal and
state courts seeking an unspecified amount of damages on behalf of an alleged
class of persons who purchased shares of the Company's common stock at various
times between April 18, 1996 and November 3, 1997. The complaints name as
defendants the Company, certain of its officers and former officers, and certain
directors of the Company, asserting that they violated federal and state
securities laws by misrepresenting and failing to disclose certain information
about the Company's business. In addition, certain stockholders have filed
derivative actions in the state courts of California and Delaware seeking
recovery on behalf of the Company, alleging, among other things, breach of
fiduciary duties by such individual defendants. The derivative cases in
California state court have been consolidated, and plaintiffs have filed a
consolidated amended complaint. The court has entered a stipulated order in
those derivative cases suspending court proceedings and coordinating discovery
in them with discovery in the class actions in California state courts. On
plaintiffs' motion, the federal court has dismissed the federal class actions
without prejudice. The class actions in California state court have been
consolidated, and plaintiffs have filed a consolidated amended complaint. The
Company has answered that complaint. Discovery is pending. While management
intends to defend the actions against the Company vigorously, there can be no
assurance that an adverse result or settlement with regards to these lawsuits
would not have a material adverse effect on the Company's financial condition or
results of operations.

   The Company has received from the United States Securities and Exchange
Commission a request for information relating to the Company's restatement
announcement in November 1997. The Company has responded and intends to continue
to respond to such requests.

7. Other Operating Expenses

   In July 1998, the Company implemented a restructuring plan in order to align
resources with a new business model and to lower the Company's overall cost
structure. In connection with the restructuring, the Company reduced its
headcount and consolidated facilities. All severance packages will be paid by
June 30, 1999. The following analysis sets forth the significant components of
the restructuring reserve at March 31, 1999:

<TABLE>
<CAPTION>
                                                                     SEVERANCE AND
                                                                        BENEFITS
                                                                     -------------
<S>                                                                  <C>    
Restructuring charge ...................................                $ 1,024
Cash charge ............................................                   (896)
Non-cash charge ........................................                     --
                                                                        -------
Reserve balance March 31, 1999 .........................                $   128
                                                                        =======
</TABLE>


8. Comprehensive Income



                                       8
<PAGE>   9
   Under SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments are to be included in other comprehensive loss.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.

   The following are the components of accumulated other comprehensive loss, net
of tax:

<TABLE>
<CAPTION>
                                                     MARCH 31,         DECEMBER 31,
                                                       1999               1998
                                                     --------          --------
                                                           (IN THOUSANDS)
<S>                                                  <C>               <C>      
Unrealized loss on investments .............         $ (1,904)         $ (2,329)
Foreign currency translation adjustments ...          (15,130)          (12,426)
                                                     --------          --------
  Accumulated other comprehensive loss .....         $(17,034)         $(14,755)
                                                     ========          ========
</TABLE>


   The following schedule of other comprehensive loss shows the gross
current-period gain and the reclassification adjustment:

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED MARCH 31,
                                                     ---------------------------
                                                         1999            1998
                                                     ----------         --------
                                                             (IN THOUSANDS)
<S>                                                    <C>              <C>
Unrealized gain on investments:
  Unrealized gain on
   available-for-sale securities .............         $   379          $    83
  Less: reclassification adjustment for
     (gain) loss realized in net income ......              46              (33)
                                                       -------          -------
Net unrealized gain on investments ...........             425               50
Foreign currency translation adjustments .....          (2,704)          (1,045)
                                                       -------          -------
Other comprehensive loss .....................         $(2,279)         $  (993)
                                                       =======          =======
</TABLE>


PART I. FINANCIAL INFORMATION

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

   When used in this Report, the words "expects", "anticipates", "estimates" and
similar expressions are intended to identify forward-looking statements. Such
statements, which include statements concerning the timing of availability and
functionality of products under development, trends in the personal computer
("PC") market, the percentage of export sales and sales to strategic customers,
and the adoption or retention of industry standards, and the availability and
cost of products from the Company's suppliers, are subject to risks and
uncertainties, including those set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That May
Affect Our Results" and elsewhere in this report, that could cause actual
results to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.

OVERVIEW

   S3(R) Incorporated ("S3" or the "Company") is a leading supplier of
multimedia acceleration hardware and its associated software for the PC market.
The Company's accelerators are designed to work cooperatively with a PC's
central processing unit ("CPU"), implementing functions best suited for a
dedicated accelerator while allowing the CPU to perform the more general purpose
computing functions of today's advanced multimedia user interface and
applications. By complementing the computing power of the general purpose CPU,
the Company's integrated software and silicon-based accelerator solutions
significantly improve the multimedia performance of PCs while reducing overall
system cost and complexity. S3 has been a pioneer in graphics acceleration since
1991, when it was the first company to ship in volume a single chip graphics
accelerator with a local bus interface. S3 has since delivered new generations
of high performance accelerator solutions from the first 32-bit and 64-bit
graphics accelerator families to the first 128-bit, full-featured integrated
two-dimensional ("2D") and three-dimensional ("3D") graphics and video
accelerator specifically designed for today's 3D and digital versatile disc
("DVD")-based applications. As the demand for greater multimedia capabilities in



                                       9
<PAGE>   10
    PCs increases, particularly the demand for 2D/3D technology, the Company is
focused on delivering accelerator solutions for use in business desktop, home
and mobile computing systems. S3's families of accelerator products and software
are currently used by many of the world's leading original equipment PC
manufacturers ("OEMs") and add-in card and motherboard manufacturers.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial data
as a percentage of net sales:

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED
                                                       -------------------------
                                                       MARCH 31,       MARCH 31,
                                                         1999            1998
                                                       ---------       ---------
<S>                                                    <C>             <C>   
Net sales                                                100.0%          100.0%
Cost of sales                                             76.8            81.0
                                                         -----           -----
Gross margin                                              23.2            19.0
Operating expenses:
   Research and development                               40.7            26.7
   Selling, marketing and administrative                  17.6            15.1
   Other operating expense                                  --             9.7
                                                         -----           -----
           Total operating expenses                       58.3            51.5
                                                         -----           -----
Loss from operations                                     (35.1)          (32.5)
Gain on sale of joint venture                               --            32.2
Other income, net                                          0.4              --
                                                         -----           -----
Loss before income taxes and equity
      in net income of shares of joint venture           (34.7)           (0.3)
Benefit for income taxes                                    --             0.9
Equity in net income of joint venture (net of tax)         3.4             4.4
                                                         =====           =====
Net income (loss)                                        (31.3)%           5.0%
                                                         =====           =====
</TABLE>


NET SALES

   The Company's net sales to date have been generated from the sale of its
graphics and multimedia accelerators. The Company's products are used in, and
its business is dependent upon, the personal computer industry with sales
primarily in the U.S., Asia and Europe. Net sales were $44.3 million for the
three months ended March 31, 1999, a 46.3% decrease from the $82.5 million of
net sales for the three months ended March 31, 1998. Net sales for the quarter
ended March 31, 1999 consisted primarily of the Company's 3D and Mobile products
while net sales for the quarter ended March 31, 1998 consisted primarily of the
Company's 2D and 3D products. Net sales decreased primarily as a result of
declining unit average selling prices due to aggressive pricing from certain of
the Company's competitors, the sale of older generation products at lower
prices, as well as a decrease in number of units sold. Unit volumes decreased
approximately 35% for the quarter ended March 31, 1999 versus the quarter ended
March 31, 1998. The Company expects that the percentage of its net sales
represented by any one product or type of product may change significantly from
period to period as new products are introduced and existing products reach the
end of their product life cycles. Due to competitive price pressures, the
Company's products experience declining unit average selling prices over time,
which at times can be substantial. The Company commenced shipment of its Savage4
family of products in the first quarter of 1999.

   Prices for graphics accelerators tend to decline over time, and prices for
newly introduced products are under significant pricing pressures due in part to
aggressive pricing from some of our competitors. The Company has experienced and
anticipates that it will continue to experience increased pricing pressures on
average selling prices for the Company's ViRGE, Trio and Savage families of
accelerators.

   The graphics accelerator market has transitioned from 2D acceleration to 3D
acceleration and products that compete in the high performance segment of that
market have higher gross margins than products in the mainstream PC or in the
sub-$1,000, or "segment zero," PC market. The Company commenced shipment of its
Savage3D product during the third quarter of 1998. This product was intended to
address the high performance 3D acceleration market. However, the Savage3D
failed to achieve significant market acceptance. The Company commenced shipments
of its Savage4 product in the first quarter of 1999. Savage4 is designed to
compete in multiple performance segments of the commercial and consumer PC
markets of the 3D acceleration market. The Company does not know whether Savage4
will be able to compete successfully in that segment. If the Company is not able
to introduce and successfully market higher performance products, our gross
margin and profitability could be negatively affected.



                                       10
<PAGE>   11
   Export sales accounted for 99% and 81% of net sales for the three months
ended March 31, 1999 and 1998, respectively. Approximately 44% and 21% of export
sales for the three months ended March 31, 1999 and 1998, respectively, were to
affiliates of United States customers. The Company expects that export sales
will continue to represent a significant portion of net sales, although there
can be no assurance that export sales as a percentage of net sales will remain
at current levels. All sales transactions were denominated in U.S. dollars.

   One customer and two distributors accounted for 34%, 26% and 15% of net
sales, respectively, for the three months ended March 31, 1999. Three
distributors accounted for 33%, 13% and 13% of net sales for the three months
ended March 31, 1998. The Company expects a significant portion of its future
sales to remain concentrated within a limited number of strategic customers.
There can be no assurance that the Company will be able to retain its strategic
customers or that such customers will not otherwise cancel or reschedule orders,
or in the event of canceled orders, that such orders will be replaced by other
sales. In addition, sales to any particular customer may fluctuate significantly
from quarter to quarter. The occurrence of any such events or the loss of a
strategic customer could have a material adverse effect on the Company's
operating results.

GROSS MARGIN

   Gross margin percentage increased to 23.2% for the three months ended March
31, 1999 from 19.0% for the three months ended March 31, 1998. The increase in
gross margin was the result of unanticipated sales of certain inventory formerly
reserved by the Company. The Company also took fewer inventory reserves in the
three months ended March 31, 1999 versus the three months ended March 31, 1998
as the result of better inventory management.

   In the future, the Company's gross margin percentages may be affected by
increased competition and related decreases in the unit average selling prices
(particularly with respect to older generation products), timing of volume
shipments of new products, the availability and cost of products from the
Company's suppliers, changes in the mix of products sold, the extent to which
the Company forfeits or utilizes its production capacity rights with TSMC, the
extent to which the Company will incur additional licensing fees and shifts in
sales mix between add-in card and motherboard manufacturers and systems OEMs.
The Company expects gross margin in the second quarter of 1999 to exceed that
of the current quarter as the result of new product introductions coupled with
sales of existing products.

RESEARCH AND DEVELOPMENT EXPENSES

   The Company has made and intends to continue to make significant investments
in research and development to remain competitive by developing new and enhanced
products. Research and development expenses were $18.0 million for the three
months ended March 31, 1999, a decrease of $4.0 million from $22.0 million for
the three months ended March 31, 1998. Headcount decreased by about 12% from the
first quarter ended March 31, 1998 versus the first quarter ended March 31,
1999. The Company also incurred certain one time engineering costs during the
first quarter of 1998 associated with the discontinued audio and communications
products line. The Company expects research and development expenses to increase
in absolute dollars in the second quarter of 1999.

SELLING, MARKETING AND ADMINISTRATIVE EXPENSES

   Selling, marketing and administrative expenses were $7.8 million for the
three months ended March 31, 1999, a decrease of $4.7 million from $12.5 million
for the three months ended March 31, 1998. Headcount decreased approximately 38%
from the three months ended March 31, 1998 to the three months ended March 31,
1999. This headcount reduction was the result of the Company implementing a
restructuring plan that took effect in July 1998. Commission expenses also
decreased by over 90% as the result of lower net sales in the first quarter of
1999 versus the first quarter of 1998.

OTHER OPERATING EXPENSE

       In January 1998, the Company entered into a $40.0 million technology
exchange with Cirrus Logic, Inc. to obtain graphic functionality technologies.
As a result of the exchange, the Company acquired the technology covered by 10
graphic patents and 25 graphic patent applications, as well as cross-licensed
Cirrus Logic's remaining patents. Under the terms of the cross-licensing
provisions, the Company and Cirrus Logic have a perpetual license to each
other's graphic patents and additional licenses with respect to the other
party's patents for agreed upon periods of time. The Company wrote-off $8.0
million of the acquired technologies that



                                       11
<PAGE>   12
were not realizable based on estimated cash flows from the sale of products
currently sold by the Company. The remaining $32.0 million intangible asset was
being amortized to cost of sales based on the lives of the currently utilized
core technologies, which was generally five years until the fourth quarter of
1998.

   During the fourth quarter of 1998, management reevaluated the carrying value
of the intangible assets recorded in connection with the technology exchange
with Cirrus Logic, Inc., and related to the patents obtained from Brooktree, as
well as other long-lived assets, including property and equipment. This
revaluation was necessitated by management's determination based on recent
results of operations and that the future expected sales and cash flows for the
Company's operations would be substantially lower than had been previously
expected by management. Expected undiscounted future cash flows were not
sufficient to recover the carrying value of such assets. Accordingly, an
impairment loss of $27.2 million, representing the excess of the carrying value
over the estimated fair value of the assets, was recognized for write-downs of a
substantial portion of the intangible assets. The estimated fair value of the
intangible assets was based on management's best estimate of the patent
portfolio based on a comparison to other graphics technology portfolios in the
marketplace. The Company determined that no write-down of property and equipment
was necessary at December 31, 1998 based on its estimate of the fair value of
such assets. Due to technological changes in the graphics marketplace, the
Company concluded it should accelerate its amortization of its remaining patent
portfolio, of approximately $4.0 million, over the current estimated life of the
currently utilized core technologies, which is two years.

GAIN ON SALE OF SHARES OF JOINT VENTURE

   On December 31, 1998, the Company entered into an agreement with UMC to sell
to UMC 80 million shares of stock of USC for a purchase price of 2.4 billion New
Taiwan dollars. The Company received the purchase price (approximately $68.0
million in cash) in January 1998 upon closing. The gain on the sale of stock of
USC was $26.6 million.

OTHER INCOME, NET

   Other income was $0.2 million for the three months ended March 31, 1999 an
increase of $0.2 million from the three months ended March 31, 1998. The
increase was primarily associated with sublease income the Company received in
the first quarter of 1999.

INCOME TAXES

   The Company's effective tax rates for the three months ended March 31, 1999
and 1998 are 0% and 42%, respectively. The 1999 effective tax rate reflects
operating losses with no realized tax benefit. The 1998 effective tax rate was
applied to income excluding the gain on the sale of shares of joint venture and
write-off of acquired in process technology (for which the effective tax rate of
38.5% was applied). 

EQUITY IN NET INCOME OF JOINT VENTURE

   As discussed in "Liquidity and Capital Resources", the Company entered into
an agreement with other parties to form a separate Taiwanese company, USC. This
investment is accounted for under the equity method of accounting in reporting
the Company's share of results for the entity. Equity in net income of joint
venture reflects the Company's share of income earned by USC for the current
quarter. The Company reported $1.5 million and $3.7 million of equity in net
income of joint venture, net of tax for the three months ended March 31, 1999
and 1998, respectively.

LIQUIDITY AND CAPITAL RESOURCES 

   Cash provided by operating activities for the three months ended March 31,
1999 was $7.5 million, as compared to $13.2 million of cash provided by
operating activities for the three months ended March 31, 1998. The Company's
net loss for the quarter ended March 31, 1999 was partially offset by
depreciation and amortization expense. In addition, cash provided by operations
for the quarter ended March 31, 1999 was favorably impacted by decreases in
accounts receivable, inventories, prepaids, and increases in accounts payable
and accrued liabilities. Accounts receivable were down as the result of lower
revenues coupled with improved cash collections. Inventories were down as the
Company transitioned from older generation product to newer generation product.
The change in prepaids, accounts payable and accrued liabilities is the result
of timing of payments. The Company's net income for the



                                       12
<PAGE>   13
three months ended March 31, 1998 was offset by a number of non-cash items
including deferred taxes, depreciation and amortization and the write-off of
acquired technologies. These were offset by the gain on the sale of shares of
joint venture and equity in net income from the joint venture. Changes in assets
and liabilities include decreases in accounts receivable, inventories, accounts
payable and deferred revenue. The decrease in accounts receivable for the three
months ended March 31, 1998 was the result of lower net sales for the quarter.
The decrease in inventories and accounts payable for the three months ended
March 31, 1998 were attributable to reductions in inventory procurement
resulting from softening demand and the Company's efforts to reduce inventory
balances in its distribution channel. Deferred revenue for the three months
ended March 31, 1998 decreased as distributors sold through inventory to their
end user customers.

   Investing activities used cash of $4.4 million for the three months ended
March 31, 1999 and consisted primarily of purchases of property and equipment,
net and the purchase of short term investments, net. Investing activities used
$4.5 million during the three months ended March 31, 1998 and consisted
primarily of cash received from the sale of USC shares, offset by cash used in
the technology exchange with Cirrus Logic, Inc. and the purchase of short term
investments, net.

   Financing activities provided cash of $2.8 million and used cash of $12.0
million for the three months ended March 31, 1999 and 1998, respectively. Sales
of common stock, net and the sale of a warrant to Intel were the financing
activities generating cash during the three months ended March 31, 1999.
Repayment on the line of credit and equipment financing were the principal
financing activities that used cash for the three months ended March 31, 1998.

   In 1995, the Company entered into two long-term manufacturing capacity
arrangements. The Company entered into an agreement with UMC and Alliance
Semiconductor Corporation to form USC, a separate Taiwanese company, for the
purpose of building and managing a semiconductor manufacturing facility in the
Science Based Industrial Park in Hsin Chu City, Taiwan, Republic of China. The
Company invested $53.0 million in 1996 and $36.4 million in 1995 for its 23.75%
equity interest. In January 1998, the Company reduced its equity interest to
15.75% through the sale of a portion of its USC shares, and received
approximately $68.0 million in cash. Under the terms of the agreement, if at any
time a "Liquidity Event" occurs, S3 will be entitled to receive, in addition to
the initial payment of 2.4 billion New Taiwan dollars, a contingent payment of
up to 19 New Taiwan dollars per share, or up to an additional 1.5 billion New
Taiwan dollars (approximately U.S. $45.5 million at exchange rates prevailing on
March 31, 1999). A "Liquidity Event" is defined as any event by which UMC, or
its successor, will have the opportunity to receive value from transfer of its
ownership of shares of stock in USC in an arms-length transaction other than by
way of transfer to employees for incentives, whether or not UMC or its
successor, in fact, participates in such opportunity. A Liquidity Event will
include, for example, completion of a public offering of USC securities on a
recognized securities exchange; a sale of USC stock owned by UMC (or by a UMC
successor) in an arms-length transaction; or a sale of all or substantially all
of the assets of USC. The facility commenced production utilizing advanced
submicron semiconductor manufacturing processes in late 1996. The Company has
the right to purchase up to 31.25% of the output from the foundry. In addition,
the Company expanded and formalized its relationship with TSMC to provide
additional capacity over the 1996 to 2000 timeframe. The agreement with TSMC
requires the Company to make certain annual advance payments to be applied
against the following year's capacity. The Company has signed promissory notes
to secure these payments, which totaled $14.4 million as of March 31, 1999.


   Working capital at March 31, 1999 and December 31, 1998 was $142.6 million
and $152.2 million, respectively. At March 31, 1999, the Company's principal
sources of liquidity included cash and equivalents of $36.9 million and $92.1
million in short-term investments. The Company's principle sources of liquidity
at December 31, 1998 included cash and equivalents of $31.0 million and $88.6
million of short-term investments. The Company believes that its available funds
will satisfy the Company's projected working capital and capital expenditure
requirements for at least the next 12 months, other than expenditures for future
potential manufacturing agreements.

   In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company has entered into
and will continue to consider various possible transactions, including the use
of "take or pay" contracts that commit the Company to purchase specified
quantities of wafers over extended periods, equity investments in, advances or
issuance of equity securities to wafer manufacturing companies in exchange for
guaranteed production or the formation of joint ventures to own and operate or
construct wafer fabrication facilities. Manufacturing arrangements such as these
may require substantial capital investments, which may require the Company to
seek additional equity or debt financing. There can be no assurance that such
additional financing, if required, will be available when needed or, if
available, will be on satisfactory terms. In addition, the Company may, from
time to time, as business conditions warrant, invest in or acquire businesses,
technology or products that complement the business of the Company.



                                       13
<PAGE>   14
   The Company is currently a party to certain legal proceedings. Litigation
could result in substantial expense to the Company. See "Part II - Item 1.
Legal Proceedings."

YEAR 2000 COMPLIANCE

   As a result of computer programs being written using two digits, rather than
four, to represent year dates, the performance of the Company's computer systems
and those of its suppliers and customers in the Year 2000 is uncertain. Any
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in other normal business activities.

   The Company's plans to address the Year 2000 issue involve the following
phases: (i) inventory/risk assessment, (ii) remediation, (iii) testing and (iv)
full compliance and/or the creation of contingency plans. The Company has
completed an inventory and assessment of its systems for Year 2000 readiness.
The assessment indicated that most of the Company's significant information
technology systems could be affected, particularly the general ledger, billing
and inventory systems. That assessment also indicated that software and hardware
(embedded chips) used in development, production and manufacturing systems also
are at risk. Based on a review of its product line, the Company believes that
its products do not require remediation to be Year 2000 compliant. Accordingly,
the Company believes that the Company's products will not expose the Company to
material Year 2000 related liabilities. The Company has also queried its
significant suppliers and subcontractors that do not share information systems
with the Company ("external agents"). Although the Company is not aware of any
external agent with a Year 2000 issue that would materially affect the Company's
results of operations or financial condition, the failure of an external agent
to be Year 2000 compliant could have a material adverse effect on the Company's
results of operations or financial condition. The Company intends to
periodically review its external agents to monitor their progress toward
completion of their Year 2000 compliance.

   The Company has completed the remediation phase for its information
technology systems and expects to complete software reprogramming and
replacement by the second quarter of 1999. Once software is reprogrammed or
replaced for a system, the Company begins testing and implementation. These
phases run concurrently for different systems. To date, the Company has
completed approximately 50% of its testing. Completion of the testing phase for
all remediated systems is expected to occur by the second quarter of 1999, with
all remediated systems fully tested and implemented by the second quarter of
1999. The Company's order entry system interfaces directly with significant
third party vendors. The Company is in the process of working with third party
vendors to ensure that the Company's systems that interface directly with third
parties are Year 2000 compliant by the second quarter of 1999.

   The Company will utilize both internal and external resources to reprogram,
or replace, test and implement its software and operating equipment for Year
2000 modifications. The Company believes that costs for remediation, testing and
implementation are not expected to exceed $0.3 million.

   The Company has completed 50% of its contingency plans in the event it does
not complete all phases of the Year 2000 program. The Company plans to finalize
all contingency plans by the end of the second quarter of 1999. The failure of
either the Company's critical systems or those of its material third parties to
be Year 2000 compliant would result in the interruption of its business, which
could have a material adverse affect on the results of operations or financial
condition of the Company.


FACTORS THAT MAY AFFECT OUR RESULTS

Our Operating Results May Fluctuate

   Our operating results have in the past varied significantly and are expected
to vary significantly in the future due to several factors, some of which are
beyond our control.
Those factors include:

   -  changes in our pricing policies or those of our competitors or suppliers;

   -  competitive pressures on average selling prices;



                                       14
<PAGE>   15
   -  the availability and cost of products from our suppliers;

   -  changes in the mix of products sold by us or in the mix of distribution
      channels through which those products are sold;

   -  the timing of new product introductions by us or our competitors;

   -  market acceptance of new or enhanced versions of our products;

   -  disruptions in our production or shipping processes;

   -  the gain or loss of significant customers;

   -  seasonal customer demand;

   -  the operating results of USC, our manufacturing joint venture; and

   -  general economic conditions, including economic conditions in Asia in
      particular, that could affect the timing of customer orders and capital
      spending and result in order cancellations or rescheduling.

   Some or all of those factors could adversely affect demand for our products
and, therefore, our operating results, in the future.

   In addition, we generally ship more products in the third month of each
quarter than in either of the first two months of the quarter, with levels of
shipment in the third month higher towards the end of the month. This pattern,
which is common in the semiconductor industry, is likely to continue and makes
future quarterly operating results less predictable.

We Experienced A Net Loss For the Quarter And May Continue To Experience Net
Losses In The Future

   We had a net loss of $13.9 million for the three months ended March 31, 1999.
Our net sales decreased 46% for the three months ended March 31,1998 as compared
to net sales for the three months ended March 31, 1998. These results occurred
primarily because we did not offer competitive products in the high end of the
graphics and multimedia accelerator market. As a result, our sales consisted of
sales of primarily older generation and lower price products that were sold into
markets that had significant price competition. We may continue to experience
net losses in the future.

Our Products Are Subject to Significant Pricing Pressures

   Prices for graphics accelerators tend to decline over time, and prices for
newly introduced products are under significant pricing pressures due in part to
aggressive pricing from some of our competitors. We have experienced and
anticipate that we will continue to experience increased pricing pressures on
average selling prices for our ViRGE, Trio and Savage families of accelerators.

We Have Only Recently Started to Offer a Product That Spans All Volumes of the
Commercial and Consumer PC Market

   The graphics accelerator market has transitioned from 2D acceleration to 3D
acceleration and products that compete in the high performance segment of that
market have higher gross margins than products in the mainstream PC or in the
sub-$1,000, or "segment zero," PC market. We commenced shipment of our Savage3D
product during the third quarter of 1998. This product was intended to address
the high performance 3D acceleration market. However, the Savage3D failed to
achieve significant market acceptance. We commenced shipments of our Savage4 in
the first quarter of 1999, which is designed to compete in multiple performance
segments of the commercial and consumer PC markets of the 3D acceleration
market. We do not know whether Savage4 will be able to compete successfully in
that segment. If we are not able to introduce and successfully market higher
performance products, our gross margin and profitability could be negatively
affected.

We May Not Adequately Forecast Demand For Our Products



                                       15
<PAGE>   16
   Because we are "fabless" and must order products and build inventory
substantially in advance of product shipments, and because the markets for
our products are volatile and subject to rapid technological and price changes,
we might forecast product demand incorrectly and produce excessive or
insufficient inventories of particular products. In addition, our customers may
change delivery schedules or cancel orders without significant penalty. If we
produce excessive or insufficient inventories of particular products, our
operating results could be negatively affected, as they were in 1998.

    Changes in demand in the graphics chips markets could be large and sudden.
Since graphics board manufacturers often build inventories during periods of
anticipated growth, they may be left with excess inventories if growth slows or
if they have incorrectly forecasted product transitions. In such cases, the
manufacturers may abruptly stop purchasing additional inventory from suppliers
such as us until the excess inventory has been used.

We Face Substantial Competition

   The market for our products is extremely competitive and is characterized by
declining selling prices over the life of a particular product and rapid
technological changes. Our principal competitors for graphics accelerators
include 3DFX Interactive, Inc., ATI Technologies, Inc., Intel Corporation,
Matrox Graphics Inc., NVIDIA Corporation, and Trident Microsystems, Inc. Our
principal competitors in the multimedia market include the companies just named
as well as a number of smaller companies that may have greater flexibility to
address specific market needs. Potential competitors in these markets include
both large and emerging domestic and foreign semiconductor companies. In
particular, there are a significant number of established and emerging companies
that have developed, are developing or have announced plans to develop 3D
graphics chips. Our product offerings may not address the demand for the next
generation of accelerators or be competitive. If we expand our product line to
add products with additional functionality, we will encounter substantial
competition from established semiconductor companies and may experience
competition from companies designing chips based on different technologies.

   Furthermore, the need of PC manufacturers to rapidly introduce a variety of
products aimed at different segments of the PC market may lead to the shift by
system OEMs to the purchase of graphics and multimedia add-in cards provided by
others. Some of our competitors supply both add-in cards and accelerator chips,
which may provide those competitors with an advantage over suppliers that offer
only accelerator chips. In addition, some of our potential competitors, such as
Intel, that supply add-in cards and/or motherboards may seek to use their
card/board business to leverage their graphics accelerator business. Some of our
current and potential competitors have greater technical, manufacturing,
financial and marketing resources than we do. We believe that our ability to
compete successfully will depend upon a number of factors both within and
outside of our control, including:

   -  product performance and quality;

   -  product features;

   -  product availability;

   -  the prices that we charge;

   -  the timing of new product introductions by us and our competitors;

   -  the emergence of new graphics and PC standards;

   -  the level of customer support we offer; and

   -  industry and general economic trends.

   We may not have the financial resources, technical expertise or marketing,
distribution and support capabilities to compete successfully.

Our Success Depends Upon Our Ability to Develop New Products and Keep Pace with
Rapid Technological Change



                                       16
<PAGE>   17
   The PC industry in general, and the market for our products in particular, is
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions. Products in our market typically have a life
cycle of 12 to 18 months, with regular reductions of unit average selling prices
over the life of a specific product. The successful development and
commercialization of new products required to replace or supplement existing
products involve many risks, including the identification of new product
opportunities, the successful and timely completion of the development process
and the selection of our products by leading systems suppliers and add-in card
and motherboard manufacturers for design into their products. There can be no
assurance that we will successfully identify new product opportunities and
develop and bring to market new products in a timely manner. Furthermore, there
can be no assurance that products or technologies developed by others will not
render our products or technologies noncompetitive, or that our products will be
selected for design into its customers' products.

   Our products are designed to improve the graphics and multimedia performance
of Pentium-based PCs and Microsoft Windows, Windows NT and IBM OS/2 operating
systems. We expect that additional specialized graphics processing and general
purpose computing capabilities will be integrated into future versions of Intel
and other Pentium-based microprocessors and that standard multimedia
accelerators in the future will likely integrate memory, system logic, audio,
communications or other additional functions. In particular, Intel has announced
plans to develop chips that integrate graphics and processor functions to serve
the lower cost PC market. A substantial portion of our 1998 sales were derived
from products addressing the lower cost PC market, and we anticipate that a
substantial portion of our 1999 sales will also be derived from products
addressing that market. We have not previously offered either single function or
integrated accelerator products that provide these functions, which have
traditionally been provided by separate single function chips or chipsets. We
have and will continue to expand the scope of our research and development
efforts to provide these functions, which will require the hiring of engineers
skilled in the respective areas and additional management and coordination among
our design and engineering groups. Alternatively, we may find it necessary or
desirable to license or acquire technology to enable us to provide these
functions, and there can be no assurance that any such technology will be
available for license or purchase on terms acceptable to us.

   Furthermore, there is a limited amount of space on PC motherboards, and
companies that offer solutions that provide the greatest amount of functionality
within this limited space may have a competitive advantage. While our strategy
is to develop new and enhanced graphics and multimedia accelerator products that
will be complementary to present and future versions of Intel and other
Pentium-based microprocessors and integrate additional functionality, there can
be no assurance that we will be able to develop such new or enhanced products in
a timely manner or correctly anticipate the additional functionality that will
be needed to compete effectively in this market. Our initial product containing
a number of additional functions, Plato/PX, has been discontinued. There can be
no assurance that, if developed, our new or enhanced products that incorporate
additional functions will achieve market acceptance.

   We are continually developing new products, such as Savage4, to address
changing market needs. If new products are not brought to market in a timely
manner or do not address market needs or achieve market acceptance, then our
operating results could be negatively affected. Market acceptance of our
products depends upon a number of factors, some of which are significantly
beyond our control, such as the acceptance of other components, such as memory,
that our products are designed to work with.

We Must Keep Pace with Evolving Industry Standards

   Our products are designed to improve the graphics and multimedia performance
of Pentium-based PCs and Microsoft Windows, Windows NT and IBM OS/2 operating
systems, the predominant standards in today's PC market. Any shift away from
such standards would require us to develop new products. We cannot be certain
that new technological developments or changes in standards will not result in
decreased demand for graphics and multimedia accelerators or for our products
that are not compatible with such changed standards.

   In 1996, for example, there was an absence of an industry standard 3D
graphics API. As a result, we developed and promoted our proprietary API.
Microsoft has since introduced its Direct3D API and Silicon Graphics has
introduced OpenGL, which have emerged as the standard APIs for 3D acceleration.
While our 3D accelerators currently support our proprietary API, Direct 3D API
and OpenGL, it is possible that another API will emerge as an industry standard
and that our accelerators will not support such a new standard, which would have
a materially negative effect on our business, financial condition and results of
operations.

   Furthermore, due to the widespread industry acceptance of Intel's
microprocessor architecture and interface architecture, including its AGP bus,
Intel exercises significant influence over the PC industry generally. From time
to time, Intel significantly modifies its



                                       17
<PAGE>   18
existing technology, architecture and standards. If we fail to develop products
that are compatible with such modifications, that failure would have a material
adverse effect on our business, financial condition and results of operations.
Likewise, any delay in the public release of information relating to any such
modifications could have a material adverse effect on us.

We are a Fabless Semiconductor Company and Depend on Independent Foundries for
the Manufacture of Our Products

   We currently rely on two independent foundries to manufacture all of our
products either in finished form or wafer form. We have a "take or pay" contract
with Taiwan Semiconductor Manufacturing Company ("TSMC") and a joint venture
foundry, United Semiconductor Corporation ("USC"). In 1995, we expanded and
formalized our relationship with TSMC to provide additional capacity over the
1996 to 2000 time frame. The foundry agreement with TSMC requires us to make
certain annual advance payments to purchase certain committed capacity amounts
to be applied against the following year's capacity or forfeit advance payments
against such amounts. Our current note payable to TSMC is $14.4 million. During
1998, we commenced negotiations with TSMC to modify and amend the foundry
agreement. Although the terms have not been finalized, we are requesting TSMC to
reduce its option capacity and extend the term of the agreement. If we purchase
excess inventories of particular products or choose to forfeit advance payments,
our operating results could be negatively affected.

   We conduct business with one of our current foundries by delivering written
purchase orders specifying the particular product ordered, quantity, price,
delivery date and shipping terms. This foundry is therefore not obligated to
supply products to us for any specific period, in any specific quantity or at
any specific price, except as may be provided in a particular purchase order. To
the extent a foundry terminates its relationship with us or our supply from a
foundry is interrupted or terminated for any other reason, such as a natural
disaster or an injunction arising from alleged violations of third party
intellectual property rights, we may not have a sufficient amount of time to
replace the supply of products manufactured by that foundry. There can be no
assurance that we will obtain sufficient advanced process technology foundry
capacity to meet customer demand in the future. From time to time we may
evaluate potential new sources of supply. However, the qualification process and
the production ramp-up for additional foundries has in the past taken, and could
in the future take, longer than anticipated, and there can be no assurance that
such sources will be able or willing to satisfy our requirements on a timely
basis or at acceptable quality or per unit prices.

   TSMC and USC are both located in the Science-Based Industrial Park in Hsin
Chu City, Taiwan. We currently expect these foundries to supply the substantial
portion of our products in 1999. Disruption of operations at these foundries for
any reason, including work stoppages, fire, earthquakes or other natural
disasters, would cause delays in shipments of our products, and could have a
material adverse effect on our operating results. In addition, as a result of
the rapid growth of the semiconductor industry based in the Science-Based
Industrial Park, severe constraints have been placed on the water and
electricity supply in that region. Any shortages of water or electricity could
adversely affect our foundries' ability to supply our products, which could have
a material adverse effect on our operating results.

The Manufacturers On Which We Depend May Experience Manufacturing Yield Problems
That Could Increase Our Per Unit Costs And Otherwise Jeopardize The Success Of
Our Products

   Our products are graphics chips. The fabrication of graphics chips is a
complex and precise process that often experiences problems that are difficult
to diagnose and time consuming or expensive to solve. As a result, companies
like ours often experience problems in achieving acceptable wafer manufacturing
yields. These yields reflect the quality of a particular wafer. Depending on the
specific product, we have negotiated with our manufacturers to pay either an
agreed upon price for all wafers or a price that is typically higher for only
wafers of acceptable quality. If the payment terms for a specific product
require us to pay for all wafers, and if yields associated with that product are
poor, we bear the risk of those poor manufacturing yields.

We Are Subject to the Risk of Operating Losses from Our Joint Venture

   We currently own 15.75% of USC and maintain the right to purchase up to
31.25% of USC's output. If USC experiences operating losses, we will recognize
our proportionate share of those losses and may be required to contribute
additional capital. We believe that a number of manufacturers are expanding or
planning to expand their fabrication capacity over the next several years, which
could lead to over-capacity in the market and resulting decreases in costs of
finished wafers. If the wafers produced by USC cannot be produced at competitive
prices, USC could sustain operating losses. There can be no assurance that these
operating losses will not have a material adverse effect on our operating
results.



                                       18
<PAGE>   19
We Rely On Third Parties to Assemble and Test Our Products

   Our products are assembled and tested by a variety of independent
subcontractors. Our reliance on independent assembly and testing houses to
provide these services involves a number of risks, including the absence of
adequate availability of certain packaging technologies, the absence of
guaranteed capacity and reduced control over delivery schedules, quality
assurance and costs.

Commitments We Have Made to Obtain Manufacturing Capacity Could Expose Us to
Significant Financial Risks and Give Rise to Future Capital Needs

   In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, we have entered into and may
consider in the future various transactions, including:

   -  the use of "take or pay" contracts that commit us to purchase specified
      quantities of wafers over extended periods;

   -  equity investments in or advances or issuance of equity securities to
      wafer manufacturing companies in exchange for guaranteed production
      capacity; or

   -  the formation of joint ventures to own and operate or construct foundries
      or to develop certain products.

   Any such transactions would involve financial risk to us and could require us
to commit substantial capital or provide technology licenses in return for
guaranteed production capacity.

   In particular, we have entered into a "take or pay" contract with TSMC and
have entered into the USC joint venture. The need to commit substantial capital
may require us to seek additional equity or debt financing. Although we
currently believe that the need for such additional capital will be minimal for
the next two years, if such capital is needed, the sale or issuance of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. There can be no assurance that such additional
financing, if required, will be available when needed or, if available, will be
on terms acceptable to us. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Manufacturing and Design Methodology" in the
Company's 1998 Form 10-K.

Our Sales are Concentrated within a Limited Number of Customers

   We expect a significant portion of our future sales to remain concentrated
within a limited number of strategic customers. This concentration is reflected
in our accounts receivable where greater than 90% of the balance is represented
by three customers at March 31, 1999.

   One customer, IBM Corporation, accounted for 34% of net sales for the three
months ended March 31, 1999. Two distributors Synnex Technology, Inc. ("Synnex")
and Promate Electronic Co. ("Promate"), accounted for 26% and 15%, respectively,
of net sales for the three months ended March 31, 1999. Three distributors,
Synnex, CNW International Limited ("CNW"), and Promate, accounted for 33%, 13%
and 13%, respectively, of net sales for the three months ended March 31, 1998.
We expect a significant portion of our future sales to remain concentrated
within a limited number of strategic customers. There can be no assurance that
we will be able to retain our strategic customers or that these customers will
not otherwise cancel or reschedule orders, or in the event of canceled orders,
that such orders will be replaced by other sales.

Our Sales May Be Hurt by Shortages of Components and Product Defects

   PC graphics and multimedia subsystems include, in addition to our products, a
number of other components that are supplied by third-party manufacturers. Any
shortage of such components in the future could negatively impact our business
and operating results.

   Furthermore, it is possible that our products may be found to be defective
after we have already shipped significant volumes. If that were to occur, there
can be no assurance that we would be able to correct such defects successfully
or that such corrections would be acceptable to our customers. The occurrence of
such an event could have a materially negative effect on our business and
operating results.



                                       19
<PAGE>   20
We Depend on Sales Through Distributors

   A substantial percentage of our products are distributed in the distribution
channel through add-in card manufacturers that in turn sell to Value Added
Resellers ("VARS"), System Integrators ("SI"), Original Equipment Manufacturers
("OEM") and distributors. Accordingly, we are dependent upon these add-in card
manufacturers to assist in promoting market acceptance of our products. The
board manufacturers that purchase our products are generally not committed to
make future purchases of our products and therefore could discontinue
incorporating our products into their graphics boards in favor of a competitor's
product, or for any other reason.

   In addition, our distributors are given limited rights to return to us the
products purchased by them, and we provide our distributors with price
protection in the event that we reduce the price of our products.

Nearly All of Our Sales Are Made on the Basis of Purchase Orders

   Nearly all of our sales are made on the basis of purchase orders rather than
long-term agreements. As a result, we may commit resources to the production of
products without having received advance purchase commitments from customers.
Any inability to sell products to which we have devoted significant resources
could have a material adverse effect on our business, financial condition or
operating results. In addition, cancellation or deferral of product orders could
result in us holding excess inventory, which could have a material adverse
effect on our profit margins and restrict our ability to fund our operations.

We May Not Be Able to Protect Our Intellectual Property Rights and Proprietary
Information

   Our ability to compete is affected by our ability to protect our intellectual
property rights and proprietary information. We have filed several United States
and foreign patent applications and to date have a number of issued United
States patents. We rely primarily on our trade secrets and technological
know-how in the conduct of our business. The steps taken by us to protect our
intellectual property might not be adequate to prevent misappropriation of our
technology. Also, our competitors might independently develop technologies that
are substantially equivalent or superior to our technology. The semiconductor
and software industries are characterized by frequent claims and related
litigation regarding patent and other intellectual property rights. We are party
to various claims of this nature. Although the ultimate outcome of these matters
is not presently determinable, our management presently believes that the
resolution of all such pending matters will not have a material adverse effect
on our operating results. There can be no assurance that third parties will not
assert additional claims or initiate litigation against us, our foundries or our
customers with respect to existing or future products. In addition, we may
initiate claims or litigation against third parties for infringement of our
proprietary rights or to determine the scope and validity of our proprietary
rights or those of others.

   Litigation by or against us has in the past resulted in, and could in the
future result in, substantial expense to us and diversion of the efforts of our
technical and management personnel, whether or not litigation is determined in
favor of us. In the event of an adverse result in any such litigation, we could
be required to pay substantial damages, cease the manufacture, use, sale, offer
for sale and importation of infringing products, expend significant resources to
develop or obtain non-infringing technology, discontinue the use of certain
processes or obtain licenses to the technology which is the subject of the
litigation. There can be no assurance that we would be successful in such
development or acquisition or that any such licenses, if available, would be
available on commercially reasonable terms, and any such development or
acquisition could require expenditures by us of substantial time and other
resources. Any such litigation or unfavorable outcome of litigation could have a
material adverse effect on our operating results. For example, in October 1995,
Brooktree alleged that certain of our products infringed a Brooktree patent. The
resulting lawsuit resulted in substantial expense to us to defend the action and
diverted the efforts of our technical and management personnel. In a settlement
of that suit, we agreed to pay to Brooktree a license fee and royalties relating
to certain product revenues over a five-year period.

We Must Attract, Integrate, Train and Retain Key Personnel Knowledgeable About
Our Business

   Our future success depends in part on the continued service of certain key
engineering, sales, marketing and executive personnel, including highly skilled
semiconductor design personnel and software developers, and our ability to
identify and hire additional personnel. Competition for such personnel is
intense, particularly in the technology sectors and in the regions where our
facilities are located. We cannot be certain that we will be able to retain
existing personnel or attract, hire or retain additional qualified personnel.
The loss of services of any of our senior management team or other key employees
or our failure to attract, integrate, train and retain additional key employees
could harm our business.



                                       20
<PAGE>   21
We Have Recently Undergone a Management Transition

   In November 1998, we appointed Kenneth F. Potashner as President and Chief
Executive Officer. Our Board of Directors also increased the size of the board
by one, elected Mr. Potashner to fill the newly created vacancy and elected Mr.
Potashner Chairman of the Board. Terry N. Holdt, who returned from his
retirement in January 1998 to assume the role of interim President, Chief
Executive Officer and Chairman of the Board, remains as Vice Chairman of our
Board of Directors. There can be no assurance as to the effects of this
management transition on our business and operating results. The loss of key
personnel could have a material adverse effect on our business and operating
results. We do not maintain key man insurance on any of our employees.

We Have Significant Exposure to International Markets

   Export sales accounted for 99% and 81% of our net sales for the three months
ended March 31, 1999 and 1998, respectively, and we expect that export sales
will continue to represent a significant portion of net sales, although there
can be no assurance that export sales, as a percentage of net sales, will remain
at current levels. In addition, a substantial proportion of our products are
manufactured, assembled and tested by independent third parties in Asia. As a
result, we are subject to the risks of conducting business internationally,
including:

   -  unexpected changes in, or impositions of, legislative or regulatory
      requirements;

   -  fluctuations in the U.S. dollar, which could increase the price in local
      currencies of our products in foreign markets or increase the cost of
      wafers purchased by us;

   -  delays resulting from difficulty in obtaining export licenses for certain
      technology;

   -  tariffs and other trade barriers and restrictions;

   -  potentially longer payment cycles;

   -  greater difficulty in accounts receivable collection;

   -  potentially adverse tax treatment; and

   -  the burdens of complying with a variety of foreign laws.

   We have experienced an adverse impact associated with the economic downturn
in Asia which contributed to our decrease in net sales in 1998. In addition, our
international operations are subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships. Our foundries, TSMC and USC, are located in Taiwan. The People's
Republic of China and Taiwan at times experienced strained relations in 1995 and
1996, and a worsening of relations or the development of hostilities between the
two parties could have a material adverse effect on us. Finally, the laws of
certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws of the United States.

We Have a Significant Level of Debt

   As a result of the sale by us of $103,500,000 aggregate principal amount of
Convertible Subordinated Notes in September 1996, our ratio of long-term debt to
total capitalization increased from approximately 9.5% at June 30, 1996 to
approximately 31.2% at December 31, 1996. At March 31,1999 this ratio increased
to 40.8%. The increase in this ratio is the result of the decrease in the
Company's total capitalization as the result of its net loss for the three
months ended March 31, 1999. The degree to which we are leveraged could
adversely affect our ability to obtain additional financing for working capital
or other purposes and could make us more vulnerable to economic downturns and
competitive pressures. Our increased leverage could also adversely affect our
liquidity, as a substantial portion of available cash from operations may have
to be applied to meet debt service requirements. In the event of a cash
shortfall, we could be forced to reduce other expenditures to be able to meet
such debt service requirements. See "Selected Consolidated Financial Data," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the Company's 1998 Form 10-K.



                                       21
<PAGE>   22
Our Stock Price Is Highly Volatile

   The market price of our common stock, like that of the common stock of many
other semiconductor companies, has been and is likely to be highly volatile.
This volatility may result from:

   -  general market conditions and market conditions affecting technology and
      semiconductor stocks generally;

   -  actual or anticipated fluctuations in our quarterly operating results;

   -  announcements of design wins, technological innovations, acquisitions,
      investments or business alliances; and

   -  the commencement of, developments in or outcome of litigation.

   The market price of our common stock also has been and is likely to continue
to be significantly affected by expectations of analysts and investors,
especially if our operating results do not meet those expectations. Reports and
statements of analysts do not necessarily reflect our views. The fact that we
have in the past met or exceeded analyst or investor expectations does not
necessarily mean that we will do so in the future.

   In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought. Such litigation could result in substantial costs and a diversion
of our management's attention and resources. Such litigation was brought against
the Company in 1994 and the Company is currently involved in another such
proceeding. See "Part II - Item 1. Legal Proceedings."

We Are Party to Legal Proceedings Alleging Securities Violations that Could Have
a Negative Financial Impact on Us

   Since November 1997, a number of complaints have been filed in federal and
state courts seeking an unspecified amount of damages on behalf of an alleged
class of persons who purchased shares of our common stock at various times
between April 18, 1996 and November 3, 1997. The complaints name us as
defendants as well as certain of our officers and former officers and certain of
our directors, asserting that we and they violated federal and state securities
laws by misrepresenting and failing to disclose certain information about our
business. In addition, certain shareholders have filed derivative actions in the
state courts of California and Delaware seeking recovery on our behalf,
alleging, among other things, breach of fiduciary duties by such individual
defendants. Discovery is currently proceeding. While our management intends to
defend the actions against us vigorously, there can be no assurance that an
adverse result or settlement with regards to these lawsuits would not have a
material adverse effect on our financial condition or results of operations.

   We have also received from the United States Securities and Exchange
Commission ("SEC") a request for information relating to our financial
restatement announcement in November 1997. We have responded and intend to
continue to respond to the SEC requests.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

INVESTMENT PORTFOLIO

   The Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments in instruments that meet high
credit quality standards, as specified in the Company's investment policy. The
Company also limits the amount of credit exposure to any one issue, issuer or
type of investment. The Company does not expect any material loss with respect
to its investment portfolio.

   The table below summarizes the Company's investment portfolio. The table
represents principal cash flows and related average fixed interest rates by
expected maturity date. The Company's policy requires that all investments
mature within twenty months.



                                       22
<PAGE>   23
   Principal (Notional) Amounts Maturing in 1999 in U.S. Dollars:

<TABLE>
<CAPTION>
                                                                   FAIR VALUE AT
                                                                   MARCH 31, 1999
                                                              ---------------------
                                                              (IN THOUSANDS, EXCEPT
                                                                   INTEREST RATES)
<S>                                                           <C>
At March 31, 1999:
Cash and equivalents ................................               $    36,906
Weighted average interest rate ......................                      4.57%
Short-term investments ..............................               $    92,123
Weighted average interest rate ......................                      5.28%
Total portfolio .....................................               $   129,029
Weighted average interest rate ......................                      5.08%
</TABLE>

CONVERTIBLE SUBORDINATED NOTES

   In September 1996, the Company completed a private placement of $103.5
million aggregate principal amount of convertible subordinated notes. The notes
mature in 2003. Interest is payable semi-annually at 5 3/4% per annum. The notes
are convertible at the option of the note holders into the Company's common
stock at an initial conversion price of $19.22 per share, subject to adjustment.
Beginning in October 1999, the notes are redeemable at the option of the Company
at an initial redemption price of 102% of the principal amount. The fair value
of the convertible subordinated notes at March 31, 1999 was approximately $82.96
million.

IMPACT OF FOREIGN CURRENCY RATE CHANGES

   The Company invoices its customers in US dollars for all products. The
Company is exposed to foreign exchange rate fluctuations as the financial
results of its foreign subsidiaries are translated into US dollars in
consolidation. The foreign subsidiaries maintain their accounts in the local
currency of the foreign location in order to centralize the foreign exchange
risk with the parent company. To date this risk has not been material.

   The effect of foreign exchange rate fluctuations on the Company's financial
statements for the three months ended March 31, 1999 and 1998 was not material.
Since foreign currency exposure increases as intercompany receivables grow, from
time to time the Company uses foreign exchange forward contracts as a means for
hedging these balances. As of March 31, 1999, the Company had no forward
exchange contracts.


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

        There have been no material developments in the Company's legal
proceedings since the disclosure of such legal proceedings set forth in the
Company's Form 10-K for the fiscal year ended December 31, 1998 as filed with
the Securities and Exchange Commission on March 26, 1999.

Item 4.  Submission of Matters to a Vote of Security Holders

(a) A Special Meeting of Stockholders was held on February 25, 1999.


(b) The matters voted upon at the meeting and results of the voting with respect
to those matters were as follows:

        (1) On the resolution to amend the Company's Restated Certificate of
Incorporation and to increase the number of authorized shares of Common Stock
from 70,000,000 to 120,000,000, the result of the voting was as follows:



                                       23
<PAGE>   24

<TABLE>
<CAPTION>
        Votes For        Against         Abstain
        ---------        -------         -------
<S>                     <C>              <C>    
        43,042,114      3,200,519        139,404
</TABLE>


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

27.1 Financial Data Schedule (filed only with the electronic submission of Form
10-Q in accordance with the EDGAR requirements)

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter for which this report is
filed.



                                       24
<PAGE>   25
                                   SIGNATURES

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

                                       S3 INCORPORATED
                                         (Registrant)

                                       /s/ WALTER D. AMARAL
                                       -----------------------------------------
                                       WALTER D. AMARAL
                                       Senior Vice President Finance
                                       and Chief Financial Officer
                                       (Principal Financial and Accounting 
                                       Officer)

                                       May 13, 1999



                                       25
<PAGE>   26
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 EXHIBIT   
 NUMBER             DESCRIPTION OF DOCUMENT
 ------             -----------------------
<S>                 <C>                         
 27.1               Financial Data Schedule
</TABLE>



                                       26