<PAGE>


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

                                    FORM 10-Q

(Mark One)

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

                   For the quarter ended September 30, 2001 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

                             SONICBLUE INCORPORATED
             (Exact name of registrant as specified in its charter)

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

         2841 Mission College Boulevard
            Santa Clara, California                             95054
    (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 [ ]          No [X]

The number of shares of the Registrant's Common Stock, $0.0001 par value,
outstanding at September 30, 2001 was 93,534,515.

<PAGE>


                             SONICBLUE INCORPORATED
                                    FORM 10-Q

                                      INDEX

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

Item 1.    Condensed Consolidated Financial Statements:

           Condensed Consolidated Balance Sheets at September 30, 2001 and
           December 31, 2000                                                              3

           Condensed Consolidated Statements of Operations for the three months
           and nine months ended September 30, 2001 and 2000                              4

           Condensed Consolidated Statements of Cash Flows for the nine months
           ended September 30, 2001 and 2000                                              5

           Notes to Unaudited Condensed Consolidated Financial Statements                 6

Item 2.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                                         11

Item 3.    Quantitative and Qualitative Disclosures About Market Risk                    27

PART II.   OTHER INFORMATION

Item 1.    Legal Proceedings                                                             28

Item 5.    Other Information                                                             29

Item 6.    Exhibits and Reports on Form 8-K                                              29

Signatures                                                                               30
</TABLE>


                                       2
<PAGE>

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements


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


<TABLE>
<CAPTION>
                                                           SEPTEMBER 30,     DECEMBER 31,
                                                               2001            2000(1)
                                                           -------------     ------------
<S>                                                        <C>               <C>
                                 ASSETS
Current assets:
   Cash and other investments                                $  14,054       $    45,599
   Investment - UMC                                             83,760           228,673
   Accounts receivable (net of allowances of $13,568 in
      2001 and $7,790 in 2000)                                  59,859            85,950
   Inventories                                                  18,471            86,727
   Prepaid expenses and other                                    4,658             9,734
                                                             ---------       -----------
               Total current assets                            180,802           456,683

Property and equipment, net                                      8,059            24,761
Investment - UMC                                                86,886           406,363
Deferred taxes                                                  17,688                --
Goodwill and intangible assets                                 133,460           162,381
Other assets                                                    32,213            49,117
                                                             ---------       -----------
               Total                                         $ 459,108       $ 1,099,305
                                                             =========       ===========

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                          $ 101,086       $    99,296
   Notes payable                                                31,809            72,672
   Accrued liabilities                                          99,098            45,354
   Deferred taxes                                               17,688            69,563
   Deferred revenue                                              9,275             8,287
                                                             ---------       -----------
               Total current liabilities                       258,956           295,172

Long-term deferred taxes                                            --            25,140
Other liabilities                                               20,615             4,040
Convertible subordinated debentures                            103,300           103,300
                                                             ---------       -----------
               Total liabilities                               382,871           427,652

Stockholders' equity:
   Common stock, $0.0001 par value; 175,000,000
      shares authorized: 93,534,515 and 93,054,332
      shares outstanding in 2001 and 2000, respectively        564,119           602,566
   Unearned stock-based compensation                            (4,520)               --
   Accumulated other comprehensive loss                        (48,447)         (199,599)
   Retained earnings (accumulated deficit)                    (434,915)          268,686
                                                             ---------       -----------
               Total stockholders' equity                       76,237           671,653
                                                             ---------       -----------
               Total                                         $ 459,108       $ 1,099,305
                                                             =========       ===========
</TABLE>

(1) Derived from audited financial statements

                See accompanying notes to the unaudited condensed
                       consolidated financial statements.


                                       3
<PAGE>


                             SONICBLUE INCORPORATED
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED              NINE MONTHS ENDED
                                                          SEPTEMBER 30,                   SEPTEMBER 30,
                                                     ------------------------       -------------------------
                                                       2001           2000            2001            2000
                                                     --------       ---------       ---------       ---------
<S>                                                  <C>            <C>             <C>             <C>
Net sales                                            $ 54,783       $ 139,960       $ 134,177       $ 437,499

Cost of sales                                          46,572         160,192         210,246         439,323
                                                     --------       ---------       ---------       ---------
Gross profit (loss)                                     8,211         (20,232)        (76,069)         (1,824)

Operating expenses:
    Research and development                            6,627          21,677          23,748          63,708
    Selling, marketing and administrative              19,246          31,028          78,231          88,102
    In-process research and development                 4,200              --           5,078              --
    Restructuring expense and impairment charge         7,226           8,981         129,459           8,981
    Non-cash deferred compensation                        296              --             296              --
    Amortization of goodwill and intangibles            5,106          11,795          27,394          33,354
                                                     --------       ---------       ---------       ---------
               Total operating expenses                42,701          73,481         264,206         194,145
                                                     --------       ---------       ---------       ---------
Loss from operations                                  (34,490)        (93,713)       (340,275)       (195,969)

Gain on sale of manufacturing joint venture                --              --              --          14,738
Gain (loss) on UMC investment                         (17,715)         (6,419)       (545,672)        873,749
Gain (loss) on other investments                       (3,119)             --         (24,595)          5,917
Equity (loss) of investees                                 --          (2,993)           (114)         (9,374)
Other income (expense), net                                34          (3,211)         (7,178)         (2,541)
                                                     --------       ---------       ---------       ---------
Income (loss) before income taxes                     (55,290)       (106,336)       (917,834)        686,520
Income tax expense (benefit)                               --         (30,688)       (214,233)        306,183
                                                     --------       ---------       ---------       ---------
Net income (loss)                                    $(55,290)      $ (75,648)      $(703,601)      $ 380,337
                                                     ========       =========       =========       =========
Earnings per share amounts:
    Basic                                            $  (0.62)      $   (0.82)      $   (8.34)      $    4.25
    Diluted                                          $  (0.62)      $   (0.82)      $   (8.34)      $    3.79

Shares used in computing per share amounts:
    Basic                                              89,873          92,573          84,346          89,416
    Diluted                                            89,873          92,573          84,346         101,179
</TABLE>

                See accompanying notes to the unaudited condensed
                       consolidated financial statements.


                                       4
<PAGE>

                             SONICBLUE INCORPORATED
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                                -------------------------
                                                                  2001            2000
                                                                ---------       ---------
<S>                                                             <C>             <C>
Operating activities:
  Net income (loss)                                             $(703,601)      $ 380,337
  Adjustments  to reconcile net income (loss) to net
    cash used for operating activities:
    Deferred income taxes                                        (214,233)        221,926
    Depreciation                                                    4,697          17,848
    Amortization                                                   27,394          34,410
    Gain on sale of shares of manufacturing joint venture              --         (14,738)
    (Gain)/loss on UMC investment                                 545,672        (873,747)
    (Gain)/loss on other investments                               24,595          (5,917)
    Impairment of long term assets                                113,975              --
    Write-off acquired in-process research and development          5,078              --
    Other                                                             410           6,381
  Changes in assets and liabilities:
        Accounts receivable                                        15,397          (2,882)
        Inventories                                                30,117          10,098
        Prepaid expenses and other assets                             153          10,621
        Accounts payable                                           (3,170)        (31,384)
        Accrued liabilities and other liabilities                  35,351           1,220
        Deferred revenue                                            1,389          (2,071)
                                                                ---------       ---------
  Net cash used for operating activities                         (116,776)       (247,898)
                                                                ---------       ---------
Investing activities:
  Property and equipment purchases                                   (802)         (8,971)
  Sale of short-term investments                                  178,925         100,592
  Acquisitions, net of cash acquired                              (27,218)        (49,441)
  Sale of manufacturing joint venture                                  --          14,738
  Other                                                            (7,618)         12,574
                                                                ---------       ---------
  Net cash provided by investing activities                       143,287          69,492
                                                                ---------       ---------
Financing activities:
  Sale of common stock                                              3,670         156,782
  Repayments of notes payable                                     (53,644)          3,120
                                                                ---------       ---------
  Net cash (used for) provided by financing activities            (49,974)        159,902
                                                                ---------       ---------
Effect of exchange rate changes                                       (16)            (18)
                                                                ---------       ---------
Net decrease in cash and equivalents                              (23,479)        (18,522)
Cash and equivalents at beginning of period                        36,582          45,825
                                                                ---------       ---------
Cash and equivalents at end of period                           $  13,103       $  27,303
                                                                =========       =========
</TABLE>

                See accompanying notes to the unaudited condensed
                       consolidated financial statements.


                                       5
<PAGE>

                             SONICBLUE INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

      The condensed consolidated financial statements have been prepared by
SONICblue Incorporated, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and include the accounts of SONICblue
Incorporated and its wholly owned subsidiaries ("SONICblue" 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 principles and the rules and regulations of the
Securities and Exchange Commission. 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
September 30, 2001 and December 31, 2000, and the operating results and cash
flows for the nine months ended September 30, 2001 and 2000. 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, 2000,
included in the Company's Form 10-K/A filed with the Securities and Exchange
Commission.

      The results of operations for the nine months ended September 30, 2001 are
not necessarily indicative of the results that may be expected for the future
quarters or the year ending December 31, 2001. Certain reclassifications of 2000
amounts were made in order to conform to the 2001 presentation.

      This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. In particular, the Management's
Discussion and Analysis section of this Quarterly Report on Form 10-Q regarding
revenue growth, gross margin trends and cost trends contain forward-looking
statements and are qualified by the risks detailed in "Factors That May Affect
Our Results" and other risks detailed in the Company's Annual Report on Form
10-K/A for the year ended December 31, 2000 and other reports filed by SONICblue
with the Securities and Exchange Commission from time to time. Actual results
could differ materially from those discussed in these forward-looking statements
as a result of the risks described above as well as other risks set forth in
SONICblue's periodic reports both previously and hereafter filed with the
Securities and Exchange Commission.

2.    Significant Transactions

Purchase of Assets of Number Nine

      On February 1, 2000, the Company completed the acquisition of all of the
assets of Number Nine Visual Technology Corporation ("Number Nine"). The
purchase price of $5.3 million includes $5.1 million of cash and $0.2 million in
estimated expenses of the transaction. The purchase price was allocated as
follows: $0.7 million to the estimated fair value of Number Nine net assets (as
of February 1, 2000), $0.5 million to workforce-in-place and $4.1 million to
goodwill. Goodwill is recorded as a result of consideration paid in excess of
the fair value of net tangible and intangible assets acquired. Goodwill and
identified acquisition related intangible assets are amortized on a
straight-line basis over five years.

Purchase of Empeg Limited

      In November 2000, SONICblue acquired U.K. digital audio equipment
manufacturer Empeg Limited, known as empeg, for $1.9 million. One of the first
companies to design and bring to market digital audio players for automobiles,
empeg has become a part of SONICblue's Rio division, and empeg's technology
formed the basis for the Rio Car audio player.

Transfer of assets to S3 Graphics Co., Ltd.

      In January 2001, SONICblue completed the transfer of its graphics chips
net assets, other than its shares of common stock of S3-VIA, to S3 Graphics Co.,
Ltd., a joint venture between VIA and a wholly owned subsidiary of SONICblue.
The joint venture will manufacture and distribute semiconductor products and
conduct related research and development activities. Pursuant to the joint
venture agreement with VIA, SONICblue received 13 million shares of SONICblue
common stock in return for a reduction of its economic interest in the future
operations of the joint venture to 0.1%. Upon the occurrence of events specified
in the investment agreement between SONICblue and VIA, SONICblue must pay
specified liquidated damages, subject to a maximum damages cap. Under the joint
venture agreement, SONICblue will also receive earn-out payments if the new
venture meets specified profitability goals.

      At closing, SONICblue granted a wholly owned subsidiary of VIA a warrant
(the "Warrant") to purchase up to 2 million shares of SONICblue common stock at
an exercise price of $10.00 per share, for an aggregate exercise price of $20
million. The Warrant expires on January 3, 2005, unless terminated earlier
pursuant to its terms. The fair value of the Warrant is recorded in the balance
sheet.

Sale of professional graphics division to ATI Technologies

      In March 2001, SONICblue completed the sale to ATI Technologies, Inc. of
its professional graphics division, based in Starnberg, Germany, which produced
the Fire GL line of graphics accelerators. Under the terms of an Asset Purchase
Agreement, SONICblue received $2.7 million in cash and is eligible to receive
further financial consideration, contingent upon the Fire GL graphics business,
as operated by ATI, achieving future performance targets.

Purchase of Sensory Science Corporation


                                       6
<PAGE>

      On June 27, 2001, SONICblue completed the acquisition of Sensory Science
Corporation, a developer of consumer electronics products, including dual deck
video cassette player/recorders and DVD players. The acquisition was accounted
for as a purchase. At closing, SONICblue issued approximately 1.3 million shares
of SONICblue common stock to Sensory Science stockholders in exchange for the
common stock of Sensory Science outstanding on June 27, 2001, and Sensory
Science became a wholly owned subsidiary of SONICblue.. In connection with the
acquisition of Sensory Science, SONICblue had made loans to Sensory Science in
the amount of $9.8 million as of June 27, 2001, which became part of the
purchase price.

      The purchase price of $21.7 million includes $7.2 million of stock issued
at fair value (fair value being determined as the average price of SONICblue
common stock at the date the exchange ratio was fixed per the merger agreement),
$0.3 million of stock option costs, cash paid to Sensory Science of $9.8 million
and $4.4 million in estimated expenses of the transaction. The purchase price
was allocated as follows: $(2.1) million to the estimated fair value of the
Sensory Science net tangible assets purchased (as of June 27, 2001), $0.9
million to purchased in-process research and development, $0.9 million to
purchased existing technology, $1.2 million to trade names, $1.1 million to
workforce-in-place, $5.0 million to distribution channel relationships and $14.7
million to goodwill. Goodwill is recorded as a result of consideration paid in
excess of the fair value of net tangible and intangible assets acquired,
principally due to estimated synergies of the acquisition. Goodwill and
identified acquisition related intangible assets are amortized on a
straight-line basis, generally over a five year period. The allocation of the
purchase price to intangibles was based upon management's estimates. The
purchase price and the related allocation are subject to further refinement and
change over the next year.

Purchase of ReplayTV, Inc.

      On August 1, 2001 SONICblue completed the acquisition of ReplayTV, Inc., a
developer of personal television technology. The acquisition was accounted for
as a purchase. At closing, SONICblue issued 10.4 million shares of common stock
and an aggregate of 5.1 million options and warrants to purchase shares of
SONICblue common stock in exchange for all of ReplayTV's outstanding equity, and
ReplayTV became a wholly owned subsidiary of SONICblue. In connection with the
acquisition of ReplayTV, SONICblue had made loans to ReplayTV in the amount of
$20.0 million at August 1, 2001, which became part of the purchase price.

      The purchase price of $50.1 million includes $26.5 million of stock issued
at fair value (fair value being determined as the average price of SONICblue
common stock at the date the exchange ratio was fixed per the merger agreement),
$2.8 million of stock option costs, cash paid to ReplayTV of $20.0 million and
$0.8 million in estimated expenses of the transaction. The purchase price was
allocated as follows: $(43.5) million to the estimated fair value of the
ReplayTV net tangible assets purchased (as of August 1, 2001), $4.2 million to
purchased in-process research and development, $17.5 million to purchased
existing and core technology, $19.5 million to non-compete agreements, $4.8
million to deferred compensation and $47.6 million to goodwill. Goodwill is
recorded as a result of consideration paid in excess of the fair value of net
tangible and intangible assets acquired, principally due to estimated synergies
of the acquisition and the value of the workforce acquired. Goodwill will not be
amortized, but will be reviewed periodically for potential impairment, in
accordance with SFAS 142. The identified acquisition related intangible assets
are amortized on a straight-line basis, generally over a five year period. The
allocation of the purchase price to intangibles was based upon a third party
appraisal. The purchase price and the related allocation are subject to further
refinement and change over the next year.

3.    Revenue Recognition

      In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," or SAB 101,
retroactively to January 1, 2000. SAB 101 requires that the following criteria
must be met before revenues can be recorded: (a) persuasive evidence that an
arrangement exists, (b) delivery has occurred or services have been rendered,
(c) the seller's price to the buyer is fixed or determinable, and (d)
collectibility is reasonably assured. There was no cumulative effect associated
with implementing SAB 101.

      Revenue for product sales to customers where the above criteria are met is
recognized upon product shipment. Accruals for estimated sales returns and
allowances are recorded at the time of the sale. Revenue for product sales to
customers where one or more of the above criteria are not initially met is
deferred until such criteria have been met.

4.    Inventories

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

<TABLE>
<CAPTION>
                                          SEPTEMBER 30,     DECEMBER 31,
                                              2001              2000
                                          -------------     ------------
                                                  (IN THOUSANDS)
<S>                                       <C>               <C>
          Raw materials                      $ 4,210          $ 41,734
          Work in process                      1,249            14,222
          Finished goods                      13,012            30,771
                                             -------          --------
             Total                           $18,471          $ 86,727
                                             =======          ========
</TABLE>

5.    Investments

Investment in UMC

      In 1995, SONICblue entered into a joint foundry venture with United
Microelectronics Corporation, or UMC, to build United Semiconductor Corporation,
or USC, a semiconductor manufacturing facility in Taiwan, R.O.C. In January
2000, USC merged with UMC and, as a result of the merger, SONICblue received 252
million UMC shares in exchange for 252 million USC shares. The Company also
received stock dividends of approximately 50 and 32 million shares of UMC stock,
in April 2000 and August 2001, respectively. The Company sold 15 million shares
of UMC stock in 2000 and 136 million shares in the first nine months of 2001 on
the Taiwan Stock Exchange. Under the terms of the USC merger with UMC, a portion
of the original number of UMC shares


                                       7
<PAGE>

received by SONICblue are subject to restrictions on their sale that lapse over
a three-year period from the date of the merger. At September 30, 2001,
approximately 76 million shares were subject to restrictions on sale that will
lapse in one year or more and are recorded at adjusted cost as a long-term
investment. The unrestricted shares and shares where the restrictions will lapse
in one year or less are recorded as a current asset and are marked to market
value through other comprehensive income as required by SFAS 115.

       At December 31, 2000, the market value of the investment in UMC had
declined to an amount significantly below its original cost basis. It was
determined at that point that this decline was related to the downturn in the
semiconductor industry as a whole and was temporary in nature due to the
historically cyclical nature of the industry. During the first and second
quarters of 2001, the Company concluded that the downturn in the semiconductor
industry and the economy in general appeared to be more severe than previously
anticipated and that there was a great deal of uncertainty regarding when the
semiconductor industry would recover from this down cycle. Because SONICblue
concluded that the decline in value of UMC was other than temporary, it reported
an unrealized loss on the UMC investment of $468 million for the six months
ended June 30, 2001 based on the market value at June 20, 2001. At September 30,
2001, the market value of the investment in UMC had declined to an amount
significantly below its adjusted cost basis. Due to the recent unsettled world
events and related market volatility, the Company determined that this decline
was temporary in nature and no further impairment was recorded during the third
quarter of 2001. For the nine months ended September 30, 2001, the Company
realized a loss of $78 million related to its sale of 136 million UMC shares.

      As of September 30, 2001, SONICblue's 183 million UMC shares were worth
approximately $143 million, based on the closing price of UMC shares on the
Taiwan Stock Exchange and the prevailing U.S. dollar to New Taiwan Dollar
exchange rate on that date. The Company's available-for-sale portion of the
investment will be marked to market through other comprehensive income as
required by SFAS 115 for changes in market value subsequent to September 30,
2001 unless a further decline in market value is considered to be other than
temporary. If the existing decline, or any further decline, is considered to be
other than temporary, the decrease in value of both the available-for-sale and
long term portions of the Company's UMC investment will be recorded as expense
in the statement of operations.

Investment in RioPort, Inc.

      In October 1999, SONICblue caused RioPort, Inc. (formerly RioPort.com,
Inc.), which was a wholly owned subsidiary of SONICblue, to sell shares of its
preferred stock to third party investors. RioPort is developing an integrated
platform for acquiring, managing and experiencing music and spoken audio
programming from the Internet. As a result, SONICblue retains a minority
investment in RioPort and accounts for its investment using the equity method.
In addition, in November 1999, SONICblue received $10.9 million for the sale to
RioPort of OneStep, LLC, a software development company. In June 2000, RioPort
sold additional preferred stock to third party investors. As part of this
financing, the Company invested an additional $10.7 million in RioPort,
maintaining its percentage ownership of RioPort. In the fourth quarter of 2000,
RioPort sold additional preferred stock to third party investors. As of
September 30, 2001, the Company held approximately 33% of RioPort's outstanding
stock. The Company recorded its equity in the loss of RioPort of $0.1 million
and $9.4 million for the nine months ended September 30, 2001 and 2000,
respectively. As a result of the Company recording such losses, its remaining
net basis in RioPort is zero and the Company has discontinued recording any
further share of RioPort's losses. As of September 30, 2001, the Company was a
contingent guarantor of RioPort's $2 million bank line of credit.

Investment in S3-VIA, Inc.

      In November 1999, the Company established a joint venture ("JV1") with VIA
to bring high-performance integrated graphics and core logic chip sets to the
volume OEM desktop and notebook PC markets. The venture, S3-VIA, Inc. has joint
funding, exclusive access to both companies' technology and distribution rights
for developed products between SONICblue and VIA. The Company owns 50.1% of the
voting common stock of the joint venture. Accordingly, the Company consolidates
the accounts of S3-VIA, Inc. in its consolidated financial statements.

6.    Notes Payable

      At September 30, 2001, the Company had an $80.0 million domestic bank
facility permitting borrowings at the rate of LIBOR plus 2%. This bank facility
expires in November 2001. The covenants covering this debt agreement pertain to
minimum levels of collateral coverage and tangible net worth, quarterly
profitability and minimum levels of liquidity. As of September 30, 2001, the
Company was in compliance with all loan covenants and the Company had pledged 53
million UMC shares as collateral. Borrowings were $19.4 and $72.7 million under
this facility at September 30, 2001 and December 31, 2000, respectively. During
the fourth quarter of 2001, this bank facility was paid in full.

        Sensory Science Corporation has loans under a line of credit with
Congress Financial Corporation, which has a maturity date of March 1, 2002. The
financing agreement with Congress Financial was first entered into in October
1992 and was last amended during June 2000. The maximum line of credit is $20.0
million, limited by a borrowing base determined by specific inventory and
receivable balances. Interest is charged at prime plus 0.5%. Borrowings were
$11.6 million under this facility at September 30, 2001.

7.    Earnings (Loss) Per Share

      Basic earnings (loss) per share ("EPS") are 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 (loss) per share, the
Company includes only potential common shares that are dilutive. Exercise of
options and conversion of convertible debt in the three months and nine months
ended September 30, 2001 are not assumed because the result would have been
anti-dilutive.


                                       8
<PAGE>

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS                   NINE MONTHS
                                                            ENDED SEPTEMBER 30,           ENDED SEPTEMBER 30,
                                                          -----------------------       ------------------------
                                                            2001           2000           2001            2000
                                                          --------       --------       ---------       --------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                       <C>            <C>            <C>             <C>
NUMERATOR
   Net income (loss)
      Basic                                               $(55,290)      $(75,648)      $(703,601)      $380,337
      Interest expense on subordinated debt                     --             --              --          2,898
                                                          --------       --------       ---------       --------
      Diluted                                             $(55,290)      $(75,648)      $(703,601)      $383,235
                                                          ========       ========       =========       ========

DENOMINATOR
   Denominator for basic earnings (loss) per share          89,873         92,573          84,346         89,416
   Common stock equivalents                                     --             --              --          6,378
   Subordinated debt                                            --             --              --          5,385
                                                          --------       --------       ---------       --------
   Denominator for diluted earnings (loss) per share        89,873         92,573          84,346        101,179
                                                          ========       ========       =========       ========
Basic earnings (loss) per share                           $  (0.62)      $  (0.82)      $   (8.34)      $   4.25
Diluted earnings (loss) per share                         $  (0.62)      $  (0.82)      $   (8.34)      $   3.79
</TABLE>

8.    Comprehensive Income (Loss)

      The Company's available-for-sale securities and foreign currency
translation adjustments are included in other comprehensive income (loss).

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

<TABLE>
<CAPTION>
                                                         SEPTEMBER 30,     DECEMBER 31,
                                                             2001             2000
                                                         -------------     ------------
                                                                 (IN THOUSANDS)
<S>                                                      <C>               <C>
     Unrealized gain (loss) on investments                 $(40,029)        $(191,197)
     Foreign currency translation adjustments                (8,418)           (8,402)
                                                           --------         ---------
     Accumulated other comprehensive loss                  $(48,447)        $(199,599)
                                                           ========         =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                  SEPTEMBER 30,              SEPTEMBER 30,
                                                              ---------------------     -----------------------
                                                                2001          2000         2001         2000
                                                              --------     --------     ---------     ---------
                                                                               (IN THOUSANDS)
<S>                                                           <C>          <C>          <C>           <C>
Unrealized gain on investments:
  Unrealized gain (loss) on  available-for-sale securities    $(40,029)    $(71,340)    $ (39,131)    $(118,471)
  Less: reclassification adjustment for (gain)
     loss realized in net income                                    --        1,996       190,299            --
                                                              --------     --------     ---------     ---------
Net unrealized loss on investments                             (40,029)     (69,344)      151,168      (118,471)
Foreign currency translation adjustments                             1           (9)          (16)          (18)
                                                              --------     --------     ---------     ---------
Other comprehensive income (loss)                             $(40,028)    $(69,353)    $ 151,152     $(118,489)
                                                              ========     ========     =========     =========
</TABLE>

9.    Contingencies

      Since November 1997, a number of complaints have been filed in federal and
state courts seeking unspecified damages on behalf of an alleged class of
persons who purchased shares of SONICblue's common stock at various times
between April 18, 1996 and November 3, 1997. The complaints name as defendants
SONICblue, certain of its officers and former officers, and certain directors of
SONICblue, and assert that they violated federal and state securities laws by
misrepresenting and failing to disclose certain information about SONICblue's
business. In addition, certain stockholders have filed derivative actions in the
state courts of California and Delaware seeking recovery on behalf of SONICblue,
alleging, among other things, breach of fiduciary duties by such individual
defendants. The plaintiffs in the derivative action in Delaware have not taken
any steps to pursue their case. 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. SONICblue has answered that
complaint. Discovery is proceeding. On January 22, 2001, four of the insurance
carriers which issued directors and officers insurance to SONICblue filed suit
against all parties named as defendants in the securities litigation, claiming
that the carriers have no obligation to provide coverage under the California
Insurance Code. In May 2001, the court entered an order staying the insurance
action pending resolution of the securities litigation. While management intends
to defend the actions against SONICblue vigorously, there can be no assurance
that an adverse result or settlement with regard to these lawsuits would not
have a material adverse effect on SONICblue's financial condition or results of
operations.

      SONICblue received from the SEC a request for information relating to
SONICblue's restatement announcement in November 1997. SONICblue responded and
intends to respond to any future requests.

      SONICblue has also been defending several putative class action lawsuits
naming Diamond, which were filed in June and July 1996 and June 1997 in the
California Superior Court for Santa Clara County and the U.S. District Court for
the Northern District of


                                       9
<PAGE>

California. The plaintiffs alleged that Diamond and the other defendants made
various material misrepresentations and omissions during the class period. The
parties have tentatively agreed to settle this matter, subject to final
documentation and court approval, for a payment of $15.0 million. SONICblue
funded $4.5 million of the settlement on November 1, 2000. SONICblue previously
accrued this amount in connection with the merger with Diamond. SONICblue
believes that Diamond's insurance covers the remaining $10.5 million of the
settlement; Diamond's insurers have funded that amount into the settlement,
although one of these insurers has served a notice of arbitration disputing its
obligation to pay $3 million of the $10.5 million. SONICblue intends to defend
the arbitration vigorously.

      C3 Sales, Inc. filed suit against SONICblue on October 6, 1999 in the
Harris County (Houston), Texas District Court. The petition sought a judicial
declaration that a Sales Representative Agreement entered into between C3 and
SONICblue on May 19, 1999 was a valid contract that governed the relationship
between the two parties. In December 1999, SONICblue filed a summary judgment
motion seeking judgment against C3 on the grounds that no issues of material
fact remain to be determined regarding the declaratory judgment sought by C3. C3
responded by filing an amended petition alleging that the Sales Representative
Agreement applied to Diamond products, and that certain commissions due under
the agreement were not paid. The parties settled this matter in October 2001.

      On October 31, 2001, a group of entertainment companies including, among
others, Paramount Pictures Corporation, Disney Enterprise, Inc. and the three
major television networks filed a lawsuit against SONICblue Incorporated and
ReplayTV, Inc. in the U.S. District Court in Los Angeles, California. The
lawsuit alleges that the Company's planned manufacture and sale of the ReplayTV
4000, which will allow users to skip commercials and to use the Internet to send
recorded material to other ReplayTV 4000 users, will constitute contributory and
vicarious copyright infringement, among other claims. The lawsuit also alleges
that the Company's Go-Video VCRs featuring the commercial skipping technology
similarly violate the copyright laws. The plaintiffs in the lawsuit are seeking
an injunction prohibiting the Company from including these features in its video
products. SONICblue intends to defend this action vigorously.

      On June 19, 2000, an individual, Valentin Pepelea, filed a lawsuit against
ReplayTV, Inc. in Santa Clara County Superior Court alleging that ReplayTV and
its founders misappropriated trade secrets allegedly disclosed by Mr. Pepelea in
discussions with the founders in the spring of 1997, and that he had been
promised a founder's share in ReplayTV. On January 17, 2001, Mr. Pepelea amended
his complaint to seek licensing royalties as a remedy. The parties are engaged
in discovery and have agreed to submit their dispute to non-binding arbitration.
The Company intends to defend vigorously against this action.

      The Amended and Restated Investment Agreement, dated as of August 28,
2000 between SONICblue, VIA and JV provides that, under certain circumstances,
SONICblue is required to pay VIA significant liquidated damages if a court
enjoins JV from utilizing SONICblue's patent cross-license with Intel or if
SONICblue enters into a settlement agreement with Intel such that JV can no
longer operate under the patent cross-license. In September 2001, Intel
Corporation ("Intel") filed a patent infringement lawsuit against JV and
SONICblue's joint venture partner, VIA. Although SONICblue is not a party to the
lawsuit, under certain circumstances SONICblue could be required to pay VIA
significant liquidated damages if the JV is enjoined from utilizing SONICblue's
patent cross license with Intel.

      The digital media, consumer appliance and home networking industries are
characterized by frequent litigation, including litigation regarding patent and
other intellectual property rights. SONICblue is party to various legal
proceedings that arise in the ordinary course of business. 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 SONICblue's financial position or results of operations.

10.   New Accounting Pronouncements

      In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141, "Business Combination" ("FAS 141") and
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 141 eliminates the pooling-of-interests
method of accounting for business combinations except for qualifying business
combinations that were initiated prior to June 1, 2001. FAS 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of FAS 141 are effective for any business combination accounted
for by the purchase method that is completed after June 30, 2001. Under FAS 142,
goodwill and indefinite-lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. We will
adopt FAS142 on January 1, 2002. We are currently evaluating the impact of this
statement, but have not yet quantified the impact on our operations. During
2002, we will perform the first of the required impairment tests of goodwill as
of January 1, 2002, and we have not yet determined what the effect of these
tests will be on our earnings and financial position. Any impairment resulting
from our initial application of the statement will be recorded as a cumulative
effect accounting change as of January 1, 2002.

11.   Restructuring Expense and Impairment Charge

      In April 2001, the Company adopted a restructuring plan relating to the
change in its business strategy to address changes in the market due to
technology changes, customer demands, and methods of distribution to reflect its
long term strategy and focus. Specific actions taken included reducing the
Company's workforce worldwide by approximately 100 employees in April 2001,
consolidating facilities, discontinuing unprofitable products and closing
offices in unprofitable locations. Restructuring expenses of $122 million in the
second quarter of 2001 related to the restructuring plan primarily included the
write-off of goodwill and other intangibles ($109 million), facilities closure
expenses ($9 million) and personnel severance compensation and related expenses
($3 million). As part of the restructuring, the Company also wrote off $60
million of inventory, through cost of sales.

      Due to the circumstances created by the significant downturns in the
digital media markets, the Company recorded an impairment charge against the
goodwill associated with its acquisitions of Diamond Multimedia, RioPort, and
empeg. These downturns have negatively impacted the forecasted revenues and cash
flows from the Diamond and empeg businesses acquired in 1999 and 2000. In
accordance with the Company's policy, undiscounted cash flows indicated that the
assets were impaired. The Company calculated the impairment charge by comparing
the expected discounted future cash flows to the carrying amount of the


                                       10
<PAGE>

related intangible assets. This resulted in a $109 million write-down of
goodwill and other intangibles for the quarter ended June 30, 2001.

      In the third quarter of 2001, the Company continued the restructuring
efforts described above. Specific actions taken included a further reduction of
the Company's workforce by approximately 100 employees, consolidating facilities
and canceling certain contracts. Restructuring expenses of $7 million in the
third quarter of 2001 related to the restructuring plan included personnel
severance compensation and related expenses ($2 million), contract termination
costs ($4 million) and facilities related expenses ($1 million).

      The related accrued restructuring charges activity was as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    Accrued                                           Accrued
                                                    Restructuring                                     Restructuring
                                                    Charges at     Restructurig  Cash      Non-cash   Charges at
                                                    12/31/00       Charges       Payments  Charges    9/30/01
                                                    --------------------------------------------------------
<S>                                                 <C>            <C>           <C>       <C>        <C>
Severance compensation and related expenses         1,240            4,741       (2,913)               3,068
Goodwill & Intangibles                                 --          109,067                 (109,067)      --
Redundant facilities related costs                     --           10,052         (110)     (4,349)   5,593
Contract and other costs                              812            5,598         (949)               5,461
                                                    ----------------------                            ------
                                                    2,052          129,458                            14,122
</TABLE>

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

      When used in this discussion, the words "expects," "anticipates,"
"believes," "estimates" and similar expressions are intended to identify
forward-looking statements. These statements, which include statements as to the
Company's intention to continue to supply and support its OEM customers, channel
partners and end-users for existing Diamond-Multimedia branded PC graphics
add-in cards, the timing of availability and functionality of products under
development, product mix, the percentage of net sales represented by any
particular new or current product, trends in average selling prices, the
percentage of export sales and sales to strategic customers, trends and expected
improvements in gross margins, the availability and cost of products from the
Company's suppliers, the Company's intention to focus on core technology and
products, including higher volume and margin products, expectations regarding
improvement in supply chain management, expectations regarding expenses,
including research and development expenses and selling, general and
administrative expenses, expectations regarding working capital, capital
expenditures, capital requirements and adequacy of capital resources
expectations regarding operating cash flow and profitability, debt financing
alternatives, and the strategy of monetization of the UMC shares, are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are not limited
to, those risks discussed below, as well as risks relating to SONICblue's
ability to develop and timely introduce and ship in volume products that address
market demands, manufacturing difficulties, the cost and availability of
component products, decreases in average selling prices, timing and volume of
shipments of new products, SONICblue's ability to work with strategic partners
and OEMs, the ability of the Company to obtain and retain customers, the impact
of alternative technological advances and competitive products, the value of the
Company's shares of UMC common stock and declines in the semiconductor industry,
market fluctuations, developments in and expenses relating to litigation,
SONICblue's ability to complete business transactions and integrate acquired
businesses in a timely manner, the costs of integrating acquired businesses and
technologies, and the matters discussed in "Factors that May Affect Our
Results." 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 statement is based.

OVERVIEW

      SONICblue Incorporated ("SONICblue" or the "Company"), previously known as
S3 Incorporated, designs, develops and markets products for the digital media,
entertainment, consumer electronics, Internet appliance and home networking
markets. The Company's products include Rio(R) digital audio players; ProGearTM
Information Appliances; ReplayTV(R) personal television technology and software
solutions; Go-Video(R) Dual-DeckTM VCRs and integrated DVD+VCRs and California
Audio Labs high-end home entertainment theater components. Prior to the transfer
in January 2001 of its graphics chips business to a joint venture between VIA
Technologies, Inc. ("VIA") and a wholly owned subsidiary of the Company, the
Company was a leading supplier of graphics and multimedia accelerator subsystems
for PCs for over ten years.


      In September 1999, SONICblue made a significant strategic shift by merging
with Diamond Multimedia Systems, Inc. ("Diamond"), an established PC original
equipment manufacturer or OEM and retail provider of communications and home
networking solutions, PC graphics and audio add-in boards and digital audio
players. The transaction was accounted for as a purchase and, accordingly, the
results of operations of Diamond and the estimated fair value of assets acquired
and liabilities assumed are included in the Company's consolidated financial
statements as of September 24, 1999, the effective date of the purchase.

      In October 1999, SONICblue announced that it caused RioPort, Inc.
("RioPort"), formerly RioPort.com Inc., which was a wholly owned subsidiary, to
sell shares of its preferred stock to third party investors. RioPort is
developing an integrated platform for acquiring, managing and experiencing music
and spoken audio programming from the Internet. As a result of the preferred
stock financing, the Company retained a minority investment in RioPort and
accounts for its investment using the equity method.

      In November 1999, the Company established a joint venture with VIA
Technologies, Inc. to bring high-performance integrated graphics and core logic
chip sets to the volume OEM desktop and notebook PC markets. The joint venture,
S3-VIA, Inc., was jointly funded, with access to both SONICblue's and VIA's
technology as well as distribution rights for developed products between


                                       11
<PAGE>

SONICblue and VIA. SONICblue owns 50.1% of the voting common stock of S3-VIA and
accordingly, SONICblue consolidates the accounts of S3-VIA in its consolidated
financial statements.

      In August 2000, the Company began the shutdown of its Diamond
Multimedia-branded graphics add-in board business. The shut-down did not extend
to the Company's professional graphics division, headquartered in Germany, which
continued to develop and market its line of Fire GL graphics accelerators until,
as discussed below, the Company sold its professional graphics division to ATI
Technologies.

      In November 2000, SONICblue acquired U.K. digital audio equipment
manufacturer Empeg Limited, known as empeg, for $1.9 million. This acquisition
was accounted for as a purchase. One of the first companies to design and bring
to market digital audio players for automobiles, empeg has become a part of
SONICblue's Rio division.

      In January 2001, SONICblue completed the transfer of its graphics chips
net assets, other than its shares of common stock of S3-VIA, to S3 Graphics Co.,
Ltd., a joint venture between VIA and a wholly owned subsidiary of SONICblue.
The joint venture will manufacture and distribute semiconductor products and
conduct related research and development activities. Pursuant to the joint
venture agreement with VIA, SONICblue received 13 million shares of SONICblue
common stock in return for a reduction of its economic interest in the future
operations of the joint venture to 0.1%. Upon the occurrence of events specified
in the investment agreement between SONICblue and VIA, SONICblue must pay
specified liquidated damages, subject to a maximum damages cap. Under the joint
venture agreement, SONICblue will also receive earn-out payments if the new
venture meets specified profitability goals.

      In March 2001, SONICblue completed the sale to ATI Technologies, Inc. of
its professional graphics division, based in Starnberg, Germany, which produced
the Fire GL line of graphics accelerators. Under the terms of an Asset Purchase
Agreement, SONICblue received $2.7 million in cash and is eligible to receive
further financial consideration, contingent upon the Fire GL graphics business,
as operated by ATI, achieving future performance targets.

      On June 27, 2001, SONICblue completed the acquisition of Sensory Science
Corporation, a developer of consumer electronics products, including dual deck
video cassette player/recorders and DVD players. The acquisition was accounted
for as a purchase. At closing, SONICblue issued approximately 1.3 million shares
of SONICblue common stock to Sensory Science stockholders in exchange for the
common stock of Sensory Science outstanding on June 27, 2001, and Sensory
Science became a wholly owned subsidiary of SONICblue. In connection with the
acquisition of Sensory Science, SONICblue had made loans to Sensory Science in
the amount of $9.8 million as of June 27, 2001, which became part of the
purchase price.

      On August 1, 2001, SONICblue completed the acquisition of ReplayTV, Inc.,
a developer of personal television technology. The acquisition was accounted for
as a purchase. At closing, SONICblue issued 10.4 million shares of common stock
and an aggregate of 5.1 million options and warrants to purchase shares of
SONICblue common stock in exchange for all of ReplayTV's outstanding equity, and
ReplayTV became a wholly owned subsidiary of SONICblue. In connection with the
acquisition of ReplayTV, SONICblue had made loans to ReplayTV in the amount of
$20.0 million at August 1, 2001, which became part of the purchase price.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED       NINE MONTHS ENDED
                                                        SEPTEMBER 30,           SEPTEMBER 30,
                                                     --------------------    ------------------
                                                      2001        2000        2001        2000
                                                     ------       -----      ------       -----
<S>                                                  <C>          <C>        <C>          <C>
Net sales                                             100.0%      100.0%      100.0%      100.0%
Cost of sales                                          85.0       114.5       156.7       100.4
                                                     ------       -----      ------       -----
Gross profit (loss)                                    15.0       (14.5)      (56.7)       (0.4)

Operating expenses:
    Research and development                           12.1        15.5        17.7        14.6
    Selling, marketing and administrative              35.1        22.2        58.3        20.1
    In-process research and development                 7.7          --         3.8          --
    Restructuring expense and impairment charge        13.2         6.4        96.5         2.1
    Non-cash deferred compensation                      0.6          --         0.2          --
    Amortization of goodwill and intangibles            9.3         8.4        20.4         7.6
                                                     ------       -----      ------       -----
        Total operating expenses                       78.0        52.5       196.9        44.4
Loss from operations                                  (63.0)      (67.0)     (253.6)      (44.8)

Gain on sale of manufacturing joint venture              --          --          --         3.4
Gain (loss) on UMC investment                         (32.3)       (4.6)     (406.7)      199.7
Gain (loss) on other investments                       (5.7)         --       (18.3)        1.3
Equity (loss) of investees                               --        (2.1)       (0.1)       (2.1)
Other income (expense), net                             0.1        (2.3)       (5.3)       (0.6)
                                                     ------       -----      ------       -----
Income (loss) before income taxes                    (100.9)      (76.0)     (684.0)      156.9
Income tax expense (benefit)                             --       (22.0)     (159.6)       70.0
                                                     ------       -----      ------       -----
Net income (loss)                                    (100.9)%     (54.0)%    (524.4)%      86.9%
                                                     ======       =====      ======       =====
</TABLE>


                                       12
<PAGE>

Net Sales

      The Company's products are used in, and its business is dependent upon,
the converging Internet, digital media, entertainment and consumer electronics
markets. Sales of the Company's products are primarily in the United States with
some sales in Asia and Europe. Net sales were $54.8 million for the three months
ended September 30, 2001, a decrease of 60.9% from $140.0 million for the three
months ended September 30, 2000. Net sales were $134.2 million for the nine
months ended September 30, 2001, a decrease of 69.3% from $437.5 million for the
nine months ended September 30, 2000. Net sales decreased from 2000 to 2001 due
to the exclusion of revenues from the multimedia board business which was shut
down in the third quarter of fiscal 2000, the exclusion of revenues from the
graphics chips business which was transferred to a joint venture with VIA in
January 2001 and the exclusion of revenues from the professional graphics
division which was sold to ATI Technologies in March 2001. This was partially
offset by the inclusion of 2001 sales from the Company's recent acquisitions of
Sensory Science and, to a lesser extent, ReplayTV. Net sales for the three and
nine months ended September 30, 2001 consisted primarily of the Company's
Diamond brand modem, PDA and communications products, Rio digital audio players,
Sensory Science video products and net sales from the Company's S3-VIA joint
venture. Net sales for the three and nine months ended September 30, 2000 were
generated from the sale of the Company's graphics and multimedia accelerators,
connectivity products for the home and products for acquiring, managing and
experiencing music and spoken audio programming from the Internet.

      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 life cycles. Due to competitive price pressures, the Company's products
experience declining average selling prices over time, which at times can be
substantial.

      International sales accounted for 10% and 50% of net sales for the three
months ended September 30, 2001 and 2000, respectively, excluding the net sales
of S3-VIA, Inc. International sales accounted for 50% and 53% of net sales for
the nine months ended September 30, 2001 and 2000, respectively, excluding the
net sales of S3-VIA, Inc. Approximately 3% and 47% of international sales for
the three months ended September 30, 2001 and 2000, respectively, were to
affiliates of United States customers, excluding the net sales of S3-VIA, Inc.
Approximately 18% and 34% of international sales for the nine months ended
September 30, 2001 and 2000, respectively, were to affiliates of United States
customers, excluding the net sales of S3-VIA, Inc. The Company expects that
export sales will continue to represent a significant portion of net sales,
although there can be no assurances that export sales as a percentage of net
sales will remain at current levels. All sales transactions are denominated in
U.S. dollars.

      Two customers accounted for 16% and 10% of net sales in the three months
ended September 30, 2001, excluding the net sales of S3-VIA, Inc. One customer
accounted for 23% of net sales for the three months ended September 30, 2000.
Two customers accounted for 10% and 11% of net sales for the nine months ended
September 30, 2001, excluding the net sales of S3-VIA, Inc. One customer
accounted for 20% of net sales for the nine months ended September 30, 2000. The
Company expects a significant portion of its future sales to remain concentrated
within a limited number of strategic customers. Sales to any particular customer
may fluctuate significantly from quarter to quarter.

Gross Margin

      The Company had a positive gross margin of 15.0% for the three months
ended September 30, 2001, as compared with a negative gross margin of 14.5% for
the three months ended September 30, 2000. The Company had a negative gross
margin of 56.7% for the nine months ended September 30, 2001, as compared with a
negative gross margin of 0.4% for the nine months ended September 30, 2000. The
increase in margin for the three months ended September 30, 2001 was primarily
the result of adding the Sensory Science and ReplayTV product lines and supply
chain management efficiencies. The decrease in margin for the nine months ended
September 30, 2001 was primarily the result of costs associated with the exit of
the graphics board and chip businesses as well as production cancellation costs
and write-downs of tooling and obsolete inventory associated with the Company's
restructuring activities in the second quarter of 2001. The Company expects
additional modest gross margin improvements in the upcoming quarter due to
continuing efforts to improve supply chain management and its focus on higher
volume and margin products.

      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 and volume of
shipments of new products, the availability and cost of products from the
Company's suppliers, changes in the mix of products sold and the extent to which
the Company incurs additional licensing fees.

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 $6.6 million for
the three months ended September 30, 2001, a decrease of $15.1 million from
$21.7 million for the three months ended September 30, 2000. Research and
development expenses were $23.7 million for the nine months ended September 30,
2001, a decrease of $40.0 million from $63.7 million for the nine months ended
September 30, 2000. This decrease was primarily due to a reduction in headcount
and related personnel costs resulting from the shutdown of the Company's
multimedia board business and the transfer of its graphics chips business. The
Company intends to continue to focus on core technology and products while
concentrating on efforts to reduce overhead, headcount and related costs.

Selling, Marketing and Administrative Expenses

      Selling, marketing and administrative expenses consist primarily of
salaries, related benefits, selling costs and fees for professional services,
such as legal and accounting services. Selling, marketing and administrative
expenses were $19.2 million for the three months ended September 30, 2001, a
decrease of $11.8 million from $31.0 million for the three months ended
September 30, 2000. Selling, marketing and administrative expenses were $78.2
million for the nine months ended September 30, 2001, a decrease of $9.9 million
from $88.1 million for the nine months ended September 30, 2000. Selling,
marketing and administrative expenses decreased from the same period in the
prior year primarily due to a reduction in headcount and related personnel costs
resulting from


                                       13
<PAGE>

the shutdown of the Company's multimedia board business and the transfer of its
graphics chips business and restructuring activities in 2001. Management expects
a further reduction of these costs during the upcoming quarter, due to further
cost containment and as the benefits of the 2001 restructuring activities are
fully realized. As a percentage of revenue, selling, marketing and
administrative expenses increased from 20.1% in 2000 to 58.3% in 2001.

Amortization of Goodwill and Intangibles

      Amortization of goodwill and intangibles decreased from $11.8 million for
the three months ended September 30, 2000 to $5.1 million for the three months
ended September 30, 2001. Amortization of goodwill and intangibles decreased
from $33.4 million for the nine months ended September 30, 2000 to $27.4 million
for the nine months ended September 30, 2001. During the second quarter of 2001
the Company wrote off approximately $109.1 million of goodwill and other
intangibles, primarily related to the goodwill recorded at the time of the
acquisition of Diamond Multimedia Systems, Inc.

Gain on Sale of Manufacturing Joint Venture

      On December 31, 1997, the Company entered into an agreement with UMC, to
sell to UMC 80 million shares of stock of United Semiconductor Corporation, or
USC, for a price of 2.4 billion New Taiwan Dollars. The Company received the
sales price (approximately $68.0 million) in January 1998 upon closing. The gain
on the sale of stock in USC recorded in 1998 was $26.6 million.

      In June 1999, the Company amended its agreement with UMC. Under the terms
of the amended agreement, UMC agreed to pay the Company, subject to certain
conditions, 1.4 billion New Taiwan Dollars (totaling approximately $37.2 million
in cash over the period that the cash was received) and the Company agreed to
release UMC from contingencies associated with the sale of 80 million shares of
stock of USC in January 1998 (described in the preceding paragraph) and to grant
a license to UMC for 29 patents covering multimedia products and integrated
circuit manufacturing technology for use in products manufactured by UMC. The
Company recognized the gain on this transaction over five fiscal quarters
beginning in the quarter ended June 30, 1999, as payments were received. For the
nine months ended September 30, 2000, the gain recognized on the sale of the
stock in USC was $14.7 million. No gain was recognized in the nine months period
ended September 30, 2001 as payments have ceased under the agreement.

Gain (Loss) on UMC Investment

      In 1995, SONICblue entered into a joint foundry venture with United
Microelectronics Corporation, or UMC, to build United Semiconductor Corporation,
or USC, a semiconductor manufacturing facility in Taiwan, R.O.C. In January
2000, USC merged with UMC and, as a result of the merger, SONICblue received 252
million UMC shares in exchange for 252 million USC shares. The Company also
received stock dividends of approximately 50 and 32 million shares of UMC stock,
in April 2000 and August 2001, respectively. The Company sold 15 million shares
of UMC stock in 2000 and 136 million shares in the first nine months of 2001 on
the Taiwan Stock Exchange. Under the terms of the USC merger with UMC, a portion
of the original number of UMC shares received by SONICblue are subject to
restrictions on their sale that lapse over a three-year period from the date of
the merger. At September 30, 2001, approximately 76 million shares were subject
to restrictions that will lapse in one year or more and are recorded at adjusted
cost as a long-term investment. The unrestricted shares and shares where the
restrictions will lapse in one year or less are recorded as a current asset and
are marked to market value through other comprehensive income as required by
SFAS 115.

       At December 31, 2000, the market value of the investment in UMC had
declined to an amount significantly below its original cost basis. It was
determined at that point that this decline was related to the downturn in the
semiconductor industry as a whole and was temporary in nature due to the
historically cyclical nature of the industry. During the first and second
quarters of 2001, the Company concluded that the downturn in the semiconductor
industry and the economy in general appeared to be more severe than previously
anticipated and that there was a great deal of uncertainty regarding when the
semiconductor industry would recover from this down cycle. Because SONICblue
concluded that the decline in value of UMC was other than temporary, it reported
an unrealized loss on the UMC investment of $468 million for the six months
ended June 30, 2001 based on the market value at June 20, 2001. At September 30,
2001, the market value of the investment in UMC had declined to an amount
significantly below its adjusted cost basis. Due to the recent unsettled world
events and related market volatility, the Company determined that this decline
was temporary in nature and no further impairment was recorded during the third
quarter of 2001. For the nine months ended September 30, 2001, the Company
realized a loss of $78 million related to its sale of 136 million UMC shares.

      As of September 30, 2001, SONICblue's 183 million UMC shares were worth
approximately $143 million, based on the closing price of UMC shares on the
Taiwan Stock Exchange and the prevailing U.S. dollar to New Taiwan Dollar
exchange rate on that date. The Company's available-for-sale portion of the
investment will be marked to market through other comprehensive income as
required by SFAS 115 for changes in market value subsequent to September 30,
2001 unless a further decline in market value is considered to be other than
temporary. If the existing decline, or any further decline, is considered to be
other than temporary, the decrease in value of both the available-for-sale and
long term portions of the Company's UMC investment will be recorded as an
expense in the statement of operations.

Gain (Loss) on Other Investments

      In the three months ended September 30, 2001 the Company recognized a loss
of $3.1 million primarily related to the write-down of certain equity
investments, and in the three months ended September 30, 2000 the Company
recognized no such losses. In the nine months ended September 30, 2001 the
Company recognized a loss of $24.6 million primarily related to the write-down
of certain other equity investments. During the nine months ended September 30,
2000 the Company recognized a gain of $5.9 million related to these investments.
The downturn in the economy, particularly in the high technology sector,
contributed to the decline in the market value of these securities. The
remaining value of these cost based equity investments totaled $17.3 million as
of September 30, 2001.


                                       14
<PAGE>

Equity Loss of Investees

      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. For the three months ended
September 30, 2001, the Company reported no losses from these entities, and for
the three months ended September 30, 2000, losses were $3.0 million. For the
nine months ended September 30, 2001, the Company's share of losses in these
entities was $0.1 million, and for the nine months ended September 30, 2000, the
losses were $9.4 million. The losses were principally due to the Company's share
of losses from RioPort, Inc. As a result of the Company recording such losses,
its remaining net basis in RioPort is zero and the Company has discontinued
recording any further share of RioPort's losses.

Other Income (Expense), Net

      Other income was $0.1 million for the three months ended September 30,
2001, compared to other expense of $(3.2) million for the three months ended
September 30, 2000. Other expense was $(7.2) million for the nine months ended
September 30, 2001, compared with other expense of $(2.5) million for the nine
months ended September 30, 2000. The increase in other expense for the nine
months ended September 30, 2001 was due primarily to interest expense and bank
fees associated with lines of credit and increased borrowings. For the three
months ended September 30, 2001, such expenses were offset by proceeds received
from ATI upon reaching certain milestones associated with the sale of the
Company's professional graphics division.

Income Taxes

      The Company's effective tax rate for the three months ended September 30,
2001 and 2000 was 0.0% and 28.9%, respectively. The Company's effective tax rate
for the nine months ended September 30, 2001 and 2000 was 23.3% and 41.6%,
respectively. The effective tax rate reflects expected tax payments on the
adjusted taxable income at the federal, state and international statutory rates.
Due to uncertainty associated with the Company's prospective ability to realize
the benefits of its tax assets, the Company has fully reserved the value of its
deferred tax assets and does not expect to record any tax benefit associated
with any further operating losses during the upcoming year.

LIQUIDITY AND CAPITAL RESOURCES

      Cash used for operating activities was $116.8 million for the nine months
ended September 30, 2001 and consisted primarily of the Company's net loss of
$703.6 million, which included a non-operating loss on its UMC investment of
$545.7 million, a deferred income tax benefit of $214.2 million and charges
related to the impairment of goodwill and intangibles of $109.1 million. Cash
used for operating activities for the nine months ended September 30, 2000 was
$247.9 million. The Company's net income of $380.3 million for the nine months
ended September 30, 2000 included a non-cash gain on its UMC investment of
$873.7 million, deferred tax expense of $221.9 million and the sale of its
manufacturing joint venture of $14.7 million. The decrease in cash used for
operating activities in 2001 was primarily the result of favorable changes in
working capital.

      Investing activities provided cash of $143.3 million for the nine months
ended September 30, 2001 and consisted primarily of $178.9 million received from
sales and maturities of short-term investments including cash received from the
sale of 136 million UMC shares on the Taiwan Stock Exchange, offset by funding
provided to ReplayTV and Sensory Science, in connection with SONICblue's
acquisition of those companies. Investing activities used cash of $69.5 million
for the nine months ended September 30, 2000 and consisted primarily of the sale
of short-term investments, net, and investments made in a number of privately
held companies with which the Company has business relationships and other
technology resulting from strategic investments.

      Financing activities used cash of $50.0 million for the nine months ended
September 30, 2001 and consisted of repayments of notes payable partially offset
by sales of common stock. Financing activities provided cash of $159.9 million
for the nine months ended September 30, 2000. Sales of common stock, including
$145.5 million received from the sale of stock to VIA, was the financing
activity generating cash during the nine months ended September 30, 2000 which
was offset partially by repayments of notes payable.

      The Company had a working capital deficit of $78.2 million at September
30, 2001 and positive working capital of $161.5 million at December 31, 2000.
The decrease in working capital is primarily attributable to the significant
degradation in the value of the Company's available-for-sale UMC holdings,
combined with continued operating losses and the Company's investments in
Sensory Science and ReplayTV. The Company has funded its 2001 operating losses
and investment activities primarily through the sale of a portion of its
holdings in UMC.

      Despite the working capital deficit, the Company believes it has
sufficient liquidity to fund operations for the upcoming year. In this regard,
the Company implemented significant restructuring activities during 2001 to
materially reduce its short term operating cash burn and to position itself to
achieve profitability and positive operating cash flow during 2002. Additional
Company actions underway include (a) efforts to obtain additional debt
financing, (b) discussions with certain trade creditors to extend payment terms,
(c) increased emphasis on working capital management, and (d) the exploration of
financial instruments that would allow the Company to monetize its long term UMC
holdings. Furthermore, a significant portion of the working capital deficit
relates to liabilities that are not expected to require cash outflows during the
upcoming year, such as deferred tax liabilities and deferred revenue.

      During the fourth quarter of 2001, the Company paid off its remaining loan
balance with China Trust of $19.4 million. The Company also expects to sell the
UMC shares which collateralized this loan in addition to its remaining
unrestricted UMC holdings, aggregating approximately 40 million shares, in a
derivative transaction. This transaction is expected to provide the Company
funds from the sale of the shares while allowing the Company to participate in
future increases in the value of UMC shares, if any.

      The Company also continues to explore alternative debt financing. The
Company is currently evaluating various alternatives to replace the asset-backed
line of credit held by its subsidiary, Sensory Science. This line is restricted
to Sensory Science and expires in the first quarter of 2002. Possible
alternatives include entering into an asset-backed line of credit for the
overall Company or replacing


                                       15
<PAGE>

or extending the Sensory Science line of credit. The Company has also evaluated
various convertible debt instruments. While the Company has currently chosen to
forgo such borrowing, due to its dilutive effect to existing stockholders at the
Company's current stock price, it may prospectively choose to enter into such
financing arrangements. The terms of any debt issued could impose restrictions
on the Company's operations.

      If the Company is unable to raise sufficient funds for short or long term
capital needs through these or other sources, it may not be able to fund product
development and expansion, take advantage of future opportunities, meet its
existing debt obligations or respond to competitive pressures or unanticipated
events or needs. The Company may also be required to consider curtailing its
operations significantly or to seek arrangements with strategic partners or
other parties that may require the Company to relinquish significant rights to
products, technologies or markets.

      The Company is currently a party to certain legal proceedings. Litigation
could result in substantial expense to the Company. See "Part II- OTHER
INFORMATION - Item 1. Legal Proceedings."



                                       16
<PAGE>

FACTORS THAT MAY AFFECT OUR RESULTS

SONICblue has recently changed the focus of its business and may be unsuccessful
or experience difficulties in implementing this change. If this occurs,
SONICblue may not be able to achieve operating profitability.

      In January 2001, SONICblue completed the transfer of its graphics chips
business to S3 Graphics Co., Ltd., a joint venture between VIA Technologies,
Inc. and a wholly owned subsidiary of SONICblue. While SONICblue continues to
own an interest in another joint venture which produces graphics chips,
SONICblue is realigning its resources to focus on its digital media, consumer
electronics, Internet appliance and home networking businesses. To that end,
SONICblue recently completed acquisitions of Sensory Science Corporation and
ReplayTV, Inc., both of which are in the consumer electronics and digital media
industries. SONICblue has a limited operating history with its digital media,
consumer electronics, Internet appliance and home networking businesses, and its
shift in focus may prove to be unsuccessful. In addition, the industry is new
and continually evolving. SONICblue's digital media, consumer electronics,
Internet appliance and home networking businesses compete with larger, more
established competitors, and SONICblue may be unable to achieve market success.
SONICblue's profitability depends on its ability to successfully implement its
new business strategy.

SONICblue experienced net operating losses in the past and may experience net
operating losses again in the future.

      SONICblue had a net loss of $703.6 million for the nine months ended
September 30, 2001, primarily resulting from the recognition of a loss of $545.7
million related to the decline in value of its UMC shares. SONICblue had net
income of $312.8 million for the year ended December 31, 2000, primarily from
recognizing a gain of $869.4 million on the UMC shares but not as a result of
income from operations. SONICblue had a net loss of $30.8 million for 1999, and
SONICblue's sales during that time consisted of primarily older generation and
lower price products that were sold into markets with significant price
competition. With the completion of the transfer of SONICblue's graphics chips
business, SONICblue's ability to achieve operating profitability depends
primarily on its success in refocusing its business resources and in executing
its business plan for its refocused business. In addition, SONICblue must
achieve positive gross margins at a level sufficient to offset its operating
expenses. SONICblue experienced negative gross margins in 2000 and in the first
six months of 2001 and could continue to experience negative gross margins.
Price competition and declining prices for consumer goods in the first six
months of 2001 contributed to the negative gross margins. SONICblue cannot
assure you that it will be able to maintain the positive gross margins it
achieved in the three months ended September 30, 2001, nor can SONICblue assure
you that it will be able to achieve operating profitability. If SONICblue is
unable to achieve operating profitability or incurs future losses and negative
cash flow, its stock price would likely decline.

SONICblue develops audio products for a new market, which may not develop if
consumers do not accept digital audio as their preferred method of listening to
music. Similarly, the market for ReplayTV digital video recorders may not
develop if consumers do not accept personal television.

      The market for digital audio products is new and evolving. SONICblue's
digital audio products play music that consumers download from the Internet or
CDs. The success of SONICblue's digital audio products depends in part on
consumers using the Internet, rather than using solely traditional sources, such
as record stores where they buy CDs or cassette tapes, as a source of music. If
consumers do not access music on the Internet, or from their CDs, and download
it for use on SONICblue's digital audio products, a market for SONICblue's
digital audio products may not develop or may be limited. ReplayTV digital video
recorders are part of a new and largely untested market for personal television.
If television viewers do not accept and demand ReplayTV products and services,
the market for ReplayTV products will be limited.

A reduction in the availability or ease of downloading music from the Internet
will hurt the sales of SONICblue's products.

      SONICblue's digital audio products play music downloaded from the
Internet and CDs. Currently, litigation is pending that could decrease the
availability of downloadable music available on the Internet. The five major
record companies have sued Napster.com, an Internet service that allows its
users to swap songs. The lawsuits maintain that the swapping of music between
different users free of charge is a violation of the copyright laws in the
United States. If the record companies prevail in the litigation, and Napster or
companies offering similar services are forced to limit the selection of music
available for download or are forced to go out of business, there would be a
reduction in the amount of music available to consumers on the Internet. In
March 2001, the court issued an injunction that ordered Napster to prevent users
from trading copyrighted songs on its web site. Napster suspended its file
transfer services in July 2001, and while Napster reached a preliminary
settlement with the National Music Publishers Association, litigation continues
with respect to copyright infringement claims. Napster has announced plans to
launch a subscription-based service for digital music. Members of the music and
film industries have filed lawsuits against other web sites that offer file
transfer services similar to those previously offered by Napster.

      Some web sites and record companies are working to provide fee-based
downloading of copyright-protected music files. If these web sites are
unsuccessful in providing copyright-protected music files or if consumers find
the downloading too difficult or expensive, acceptance of the Internet as a
source of music would decline. In addition, the rate at which the major record
companies make their music available for digital purchases may discourage the
use of digital audio players or reduce SONICblue's sales. Some record companies
and Internet companies have announced plans to create CDs or digital music that
cannot be copied or can only be copied a limited number of times, which would
also limit the ability of users to download music from their own CD collections
or share their music with others. New copyright protection measures, such as
these, increased fees associated with making multiple copies of music from
personal collections, or changes in copyright laws, could diminish the ability
of consumers to download music to Rio players. Reductions in the availability or
ease of downloading music from the Internet, or limitations on copying from
personal CDs, could impair the use and sale of SONICblue's digital audio
products.


                                       17
<PAGE>

SONICblue historically has had significant product concentration and currently
depends on the health of the consumer electronics market. This means that a
decline in demand for a single product, or in the consumer electronics market in
general, could severely impact SONICblue's overall revenues and financial
results.

      SONICblue's revenues have historically been dependent on the markets for
graphics/video chips for PCs and on its ability to compete in those markets.
With the completion of the transfer of the graphics chips assets to a joint
venture between VIA and a wholly owned subsidiary of SONICblue, SONICblue's
remaining businesses continue to have significant product concentration.
SONICblue is dependent on the markets for digital audio players, digital and
analog video products, modems, and other consumer electronics products.
SONICblue's business would be materially harmed if it were unsuccessful in
selling digital audio players, including its Rio players, or its Go Video VCRs
and DVD players. For the six months ended June 30, 2001, Rio players and
products accounted for a substantial portion of SONICblue's net sales, excluding
net sales from S3-VIA, Inc. With the recent acquisitions of Sensory Science and
ReplayTV, for the three months ended September 30, 2001, Rio players and
products and Sensory Science's Go Video dual-deck VCRs and integrated DVD/VCR
products accounted for a substantial portion of SONICblue's net sales, excluding
net sales from S3-VIA, Inc. A decline in demand or average selling prices for
digital audio players or digital and analog video products would have a material
adverse effect on SONICblue's sales and operating results.

Because SONICblue's largest financial asset is its shares of United
Microelectronics Corporation, the volatility of SONICblue common stock may be
influenced by the volatility of UMC's stock price.

      SONICblue's largest financial asset is its UMC shares. The market price of
UMC's stock is subject to volatility due to general market conditions as well as
actual or anticipated changes in UMC's business prospects or quarterly or yearly
operating results. Because the UMC shares are SONICblue's largest asset, when
the price per share of UMC's stock increases or declines, the price of
SONICblue's common stock on the Nasdaq National Market tends to follow changes
in UMC's stock price. Fluctuations in the price of SONICblue common stock caused
by changes in UMC's stock price may or may not reflect SONICblue's actual or
anticipated business prospects or quarterly results. Also, fluctuations in UMC's
stock price may cause fluctuations in SONICblue's stock price when there is no
material news regarding SONICblue or any change in its results.

Because the price of the UMC shares has declined since SONICblue recorded their
carrying value, SONICblue may need to report a loss in other income and expense
if it determines that the decline in the value of UMC is not temporary.
SONICblue's ability to sell its UMC shares is subject to lockup and pledge
restrictions.

      As of September 30, 2001, SONICblue's 183 million UMC shares held as of
that date were worth approximately $143 million, based on the closing price of
UMC shares on the Taiwan Stock Exchange on that date and the U.S. dollar to New
Taiwan Dollar exchange rate prevailing on that date. The carrying value of such
shares on SONICblue's consolidated balance sheet was $171 million. If the value
of such holdings does not increase, SONICblue may be required to record a loss
in other income related to these shares in future periods. Future fluctuations
in the value of SONICblue's portfolio investments, including the UMC shares,
could negatively impact SONICblue's financial condition.

      In addition, due to Taiwan governmental restrictions, 50% of the initial
UMC shares, or 126 million shares, are subject to lockup restrictions, which are
being released over a three-year period ending in January 2003. As a result,
SONICblue's ability to sell its UMC shares is limited.

The information appliance market is new and evolving, and SONICblue's
information appliance business may not succeed in developing and bringing to
market information appliances for the home and vertical markets.

      SONICblue is engaged in the development of information appliances. The
market for information appliances is new and may not develop as SONICblue
anticipates, if at all. The potential size of this market opportunity and the
timing of its development are uncertain. Broad acceptance of information
appliances will depend on many factors, including the willingness of large
numbers of consumers to use devices other than PCs to access the Internet, and
the development of content and applications that are accessible from information
appliances.

      A number of companies who have attempted to develop and enter the
information appliance market have not succeeded in bringing products to market
or have discontinued them or scaled back their information appliance divisions.
SONICblue's information appliance product, ProGear, has been released in limited
quantities but has not yet been produced or deployed in volume. If SONICblue is
unable to obtain manufacturing capacity and develop efficiencies to successfully
produce ProGear in volume, it will be unable to supply information appliances in
the vertical markets. If the market for information appliances does not develop
or develops more slowly than SONICblue anticipates, or if SONICblue fails to
meet the demand of that market or otherwise fails to achieve market penetration
or price stability for its information appliance products, its information
appliance business will continue to experience losses that will harm SONICblue's
operating results.

Sales of digital media and connectivity products depend upon the widespread
availability and adoption of broadband Internet access.

      SONICblue's digital audio players and ProGear information appliance as
well as the recently announced ReplayTV 4000 digital video recorder rely or will
rely on high-speed access to the Internet to provide compelling content or, in
the case of the ReplayTV 4000, to access television programming information and
send recorded programs to friends. Since SONICblue does not have control over
the reliability, availability and quality of broadband access and related
services, it cannot guarantee that broadband access will be available to all
consumers who wish to use information appliances. Factors that may impede market
acceptance of broadband services and products that rely on high-speed Internet
access include:

      -   limited geographical service areas and lack of availability of
          cost-effective, high-speed service;

      -   inconsistent quality and reliability of broadband service;

      -   lack of interoperability among multiple vendors' network equipment;


                                       18
<PAGE>

      -   congestion in service providers' networks; and

      -   inability to meet demands for increasing bandwidth.

      These factors will likely affect SONICblue's ability to develop a market
for and obtain market acceptance of its products, particularly its information
appliances. SONICblue has invested, and is continuing to invest, substantial
resources to develop its ProGear information appliance and ReplayTV 4000
products. SONICblue would be unlikely to generate significant revenues from
sales of its information appliances or ReplayTV 4000, and will have expended
significant resources on products for which it is generating limited or no
revenues, if broadband access is not available and adopted on a widespread
basis.

SONICblue's business is dependent on the Internet and the development of the
Internet infrastructure.

      The acceptance and sale of SONICblue's products could decrease if the
infrastructure of the Internet does not continue to be developed and maintained.
For example, if consumers do not have the necessary speed and data capacity for
downloading music, rendering the Internet too slow of a method for obtaining
music, consumers may choose not to download music, which will decrease demand
for SONICblue's digital audio products. In addition, SONICblue's success will
depend in large part on increased use of the Internet which in turn can increase
demand for high-speed communications products and the products that benefit from
high-speed connections. SONICblue's success will also depend on businesses and
consumers using the Internet more frequently for applications that use
multimedia content and that require high bandwidth. Recent growth in Internet
use has caused frequent periods of performance degradation. Any perceived
degradation in the performance of the Internet as a whole could undermine the
benefits of SONICblue's connectivity and digital media products, such as ProGear
information appliances, Rio digital audio players and ReplayTV 4000 products.
The performance of SONICblue's products depends on the speed and reliability of
the Internet infrastructure itself. As a result, the emergence and growth of the
market for SONICblue's products will depend on improvements being made to the
entire Internet infrastructure.

Net sales from SONICblue's joint venture, S3-VIA, Inc., will likely decline in
the future, potentially resulting in a decline in SONICblue's consolidated
revenues.

      Although SONICblue completed the transfer of its wholly owned graphics
chip business assets to a joint venture between VIA and a wholly owned
subsidiary of SONICblue, in January 2001, SONICblue retained its ownership of
50.1% of the voting common stock of S3-VIA, Inc., a joint venture between
SONICblue and VIA. SONICblue consolidates the accounts of S3-VIA, Inc. in its
financial statements. S3-VIA, Inc. may not develop new technology or products.
As a result, the amount of net sales received by SONICblue through its ownership
interest in S3-VIA, Inc. is expected to decline as its product offerings age and
become obsolete. Because SONICblue consolidates S3-VIA, Inc.'s accounts into its
financial statements, a decline in S3-VIA, Inc.'s net sales will reduce
SONICblue's revenues.

      In addition, SONICblue may reduce or completely eliminate its holdings in
S3-VIA, Inc. as part of its strategy to exit the graphics business. If
SONICblue's interest in S3-VIA, Inc. falls below 50% of the voting common stock
or if SONICblue no longer maintains operating control of S3-VIA, Inc. SONICblue
will not consolidate S3-VIA, Inc.'s accounts in its financial statements and
SONICblue revenues will be reduced.

The joint venture with VIA will require SONICblue to pay specified liquidated
damages if certain events occur, and earn-out payments to SONICblue from the
joint venture are subject to the joint venture meeting aggressive profitability
goals.

      The Amended and Restated Investment Agreement, dated as of August 28, 2000
between SONICblue, VIA and S3 Graphics provides that under certain
circumstances, SONICblue is required to pay VIA significant liquidated damages
if a court enjoins S3 Graphics from utilizing SONICblue's patent cross-license
with Intel or if SONICblue enters into a settlement agreement with Intel such
that S3 Graphics can no longer operate under the patent cross-license. In
September, 2001, Intel Corporation ("Intel") filed a patent infringement lawsuit
against S3 Graphics and SONICblue's joint venture partner, VIA. Although
SONICblue is not a party to the lawsuit, under certain circumstances SONICblue
could be required to pay VIA significant liquidated damages if S3 Graphics is
enjoined from utilizing SONICblue's patent cross license with Intel. The
liquidated damages payments could harm SONICblue's financial condition or
results of operations. In addition, SONICblue will receive earn-out payments
only if S3 Graphics meets aggressive profitability goals specified in the joint
venture agreement between the parties. There can be no assurance that S3
Graphics will be able to meet these profitability goals.

SONICblue may not be able to successfully manage the growth and expansion of its
business.

      In the past two years, particularly following its merger with Diamond and
with its recent acquisitions of Sensory Science and ReplayTV, SONICblue has
experienced a significant expansion in the overall level of its business and the
scope of its operations, including manufacturing, research and development,
marketing, technical support, customer service, sales and logistics. This
expansion has resulted in significant challenges, and a need for substantial
investment in, infrastructure, process development and information systems,
including:

      -   attracting, integrating and retaining key employees;

      -   integration of management information, product data management,
          internal control, accounting, telecommunications and networking
          systems;

      -   establishment of a significant worldwide web and e-commerce presence;

      -   consolidation of geographically dispersed manufacturing and
          distribution facilities;

      -   coordination of suppliers, rationalization of distribution channels,
          establishment and documentation of business processes and procedures;
          and


                                       19
<PAGE>

      -   integration of various functions and groups of employees.

      SONICblue may not successfully address these challenges. SONICblue's
future operating results will depend in large measure on its ability to
implement operating, manufacturing and financial procedures and controls,
improve communication and coordination among the different operating functions,
integrate functions such as sales, procurement and operations, strengthen
management information and telecommunications systems, and continue to hire
additional qualified personnel in key areas. SONICblue may be unable to manage
these activities and implement these additional procedures, controls and systems
successfully. Any failure to do so could cause SONICblue's short-term and
long-term operating results to suffer.

SONICblue's quarterly and annual operating results are subject to fluctuations
caused by many factors, any of which could result in SONICblue's failure to
achieve its revenue or profitability expectations.

      SONICblue's quarterly and annual results of operations have varied
significantly in the past and are likely to continue to vary in the future due
to a number of factors, many of which are beyond SONICblue's control. Any one or
more of the factors listed below or other factors could cause SONICblue to fail
to achieve its revenue or profitability expectations. The failure to meet market
expectations would likely cause a decline in SONICblue's stock price. These
factors include:

      -   SONICblue's ability to develop, introduce, produce in volume
          quantities and market successfully new or enhanced products;

      -   SONICblue's ability to introduce and market products in accordance
          with market demand and short design cycles;

      -   changes in the relative volume of sales of various products with
          sometimes significantly different margins;

      -   market acceptance of and changes in demand for SONICblue's products;

      -   rapid changes in electronic commerce on which SONICblue or its
          customers may not capitalize or which erode SONICblue's current
          business base;

      -   gains or losses of significant customers, distributors or strategic
          relationships;

      -   unpredictable volume and timing of customer orders;

      -   the availability, pricing and timeliness of delivery of components for
          SONICblue's products, including flash memory;

      -   substantial disruption in SONICblue's suppliers' operations, either as
          a result of natural disaster, equipment failure or other cause;

      -   fluctuations in the availability of manufacturing capacity or
          manufacturing yields and related manufacturing costs;

      -   the timing of new technological advances, product announcements or
          introductions by SONICblue or by its competitors;

      -   product obsolescence and the management of product transitions and
          inventory;

      -   production delays;

      -   decreases in the average selling prices of products;

      -   rates of product return in excess of those forecasted or expected;

      -   seasonal fluctuations in sales;

      -   general consumer electronics industry conditions, including changes in
          demand and associated effects on inventory and inventory practices;
          and

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

      Some or all of these factors could adversely affect demand for SONICblue's
products and its future operating results. Most of SONICblue's operating
expenses are relatively fixed in the short term. SONICblue may be unable to
rapidly adjust spending to compensate for any unexpected sales shortfall, which
could harm its quarterly operating results. Because the lead times of firm
orders are typically short in the consumer products industry, SONICblue does not
have the ability to predict future operating results with any certainty. Because
of the above factors, you should not rely on period-to-period comparisons of
results of operations as an indication of future performance.

The demand for SONICblue's products has historically been weaker in certain
quarters, which makes it difficult to compare its quarterly results.

      Due to industry seasonality, demand for digital audio and other consumer
electronic products is strongest during the fourth quarter of each year and is
generally slower in the period from March through August. This seasonality may
become more pronounced and material in the future to the extent that:

      -   a greater proportion of SONICblue's sales consist of sales into the
          retail/mass merchant channel;


                                       20
<PAGE>

      -   SONICblue's net revenues become increasingly based on
          entertainment-related products, including products such as its Rio
          digital audio players, Sensory Science dual-deck VCRs and combination
          DVD/VCR units and ReplayTV digital video recorders; or

      -   to the extent SONICblue expands its European sales, it may experience
          relatively weak demand in the third calendar quarter due to
          historically weak summer sales in Europe.

      In addition, SONICblue generally ships 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 being higher towards the end of the month. This
pattern is likely to continue and makes future quarterly operating results less
predictable. Because the consumer products market experiences substantial
seasonal fluctuations, with more sales occurring toward the end of the year,
SONICblue's quarterly results will be difficult to compare.

General economic conditions and political and military conditions associated
with current worldwide conflicts and similar events may prevent consumers from
purchasing SONICblue's products, which would harm its revenues.

      Sales of consumer electronic products have historically been dependent
upon discretionary spending by consumers, which may be adversely affected by
general economic conditions. The slowdown in the United States economy may cause
consumers to defer decisions to purchase SONICblue's products. Some analysts
have predicted a further decline in the United States economy will result from
the terrorist attacks in the United States and any related conflicts or similar
events worldwide. If the economy continues to decline as a result of recent
economic, political and social turmoil, consumers may reduce discretionary
spending and may not purchase SONICblue's products.

The markets in which SONICblue operates are intensely and increasingly
competitive, and if it is unable to compete successfully, its revenues could
decline.

      The consumer digital media, consumer electronics, Internet appliance and
home networking markets in which SONICblue competes are intensely competitive
and are likely to become more competitive in the future. Because of this
competition, SONICblue faces a constant and increasing risk of losing customers
to its competitors. The competitive environment also creates downward pressure
on prices and requires higher spending to address the competition, both of which
tend to keep gross margins lower. SONICblue believes that the principal
competitive factors for its products are:

      -   performance and quality;

      -   ability to conform and adapt to, or upgrade for, current and evolving
          industry standards, including audio formats;

      -   access to customers and distribution channels;

      -   reputation for quality and strength of brand;

      -   manufacturing capabilities and cost of manufacturing;

      -   price;

      -   product support; and

      -   ability to bring new products to the market in a timely manner.

      Many of SONICblue's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources. Some of these competitors may also have greater name recognition and
market presence, longer operating histories, greater market power and product
breadth, lower cost structures and larger customer bases. As a result, these
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, some of SONICblue's principal
competitors may have the advantage of producing their own component parts and
therefore benefit from capacity, cost and technical advantages.

      In some markets where SONICblue is a relatively new entrant, including
digital audio or Internet music players, digital video products and Internet
appliances, it faces dominant competitors that include Apple (digital audio
players), Compaq (Internet appliances and digital audio players), 3Com (home
networking and modems), Creative Technology under the name Creative Labs (modems
and digital audio players), Handspring (personal digital assistants, or PDAs,
and digital audio player add-ons to PDAs), Gateway (home networking, home
network digital audio players and Internet appliances), Intel (home networking
and digital audio players), Microsoft (digital video recorders), Motorola
(Internet appliances and handheld consumer electronics), Palm (PDAs), Panasonic
(combination TV/DVD/VCR units), Samsung (digital audio players, digital audio
player mobile telephones, combination DVD/VCR players and Internet appliances),
Sony (consumer electronic music, digital audio players and a recently announced
Internet appliance), Thompson Multimedia (digital audio players), TDK (CD MP3
players) and TiVo (digital video recorders). Some of SONICblue's products face a
variety of competitive sources. For example, digital audio players compete
against traditional stereos and CD players, and ProGear information appliances
face competition from manufacturers of stand alone Internet appliances, wireless
portable Internet appliances, PDAs, and manufacturers of PCs. In addition, the
markets in which SONICblue competes are expected to become increasingly
competitive as PC products support increasingly more robust multimedia functions
and companies that previously supplied products providing distinct functions
(for example, companies today primarily in the sound, modem, microprocessor or
motherboard markets) emerge as competitors across broader or more integrated
product categories.


                                       21
<PAGE>

SONICblue operates in markets that are highly cyclical and vulnerable to sharp
declines in demand and average selling prices.

      SONICblue operates in the digital media and consumer electronics markets.
These markets have in the past experienced, and may in the future experience,
significant downturns. In the event of a downturn, SONICblue would likely
experience significantly reduced demand for its products and may be pressured to
reduce average selling prices. Although SONICblue is changing its focus to
concentrate on its Internet-related and digital media businesses, substantially
all of its revenues during 1999 and 2000 were derived from products sold for use
in or with personal computers. In the near term, SONICblue expects to derive
most of its revenues from the sale of digital audio products, such as Rio
players, and video products, such as Go Video dual-deck VCR's and combination
DVD/VCR units and ReplayTV digital video recorders. Changes in demand in digital
media and consumer electronics markets could be large and sudden. Since
retailers often build inventories during periods of anticipated growth, they may
be left with excess inventories if market growth slows or if they have
incorrectly forecasted product transitions. In these cases, the retailers may
abruptly stop purchasing additional inventory from suppliers like SONICblue
until the excess inventory has been used. This suspension of purchases or any
reduction in demand for SONICblue's products would negatively impact its
revenues and financial results. SONICblue may experience substantial
period-to-period fluctuations in results of operations due to these general
industry conditions.

If SONICblue is unable to continue to develop and market new and enhanced
products, its average selling prices and gross margins will likely decline.

      SONICblue must continue to develop new products in order to maintain
average selling prices and gross margins. As the markets for its products
develop and competition increases, SONICblue anticipates that product life
cycles will shorten and average selling prices will decline. In particular,
average selling prices and, in some cases, gross margins, for each of its
products will decline as products mature. A decline in selling prices may cause
the net sales in a quarter to be lower than those of a preceding quarter or
corresponding quarter in a prior year, even if more units were sold during that
quarter than in the preceding or corresponding quarter of a prior year. To
minimize the effect of declining average selling prices, SONICblue must
successfully identify new product opportunities and develop and bring new
higher-end and higher-margin products to market in time to meet market demand.
The availability of new products is typically restricted in volume early in a
product's life cycle. If customers choose to wait for the new version of a
product instead of purchasing the current version, SONICblue's ability to secure
the manufacture of sufficient volumes of these new products to meet customer
demand will be limited. If this happens, SONICblue's revenues and operating
margins could be harmed.

If SONICblue fails to identify new product opportunities or develop and market
new and enhanced products, it will not be able to compete successfully.

      The markets for which SONICblue's products are designed are intensely
competitive and are characterized by rapidly changing technology, evolving
industry standards and short product life cycles. For example, the life cycles
of the Rio audio players typically range from 12 to 18 months. If SONICblue
fails to introduce new products successfully within a given time frame,
SONICblue could lose revenues and market share. Further, continued failure to
develop, introduce and market competitive new products that meet customer
demands on time could also damage SONICblue's brand name, reputation and
relationships with its customers and cause longer-term harm to its financial
condition. SONICblue may not successfully enter the various product markets that
it identifies. In addition, the sale of new products may not become significant
or profitable. To succeed in this environment, SONICblue must anticipate the
features and functionality that customers will demand. SONICblue must then
incorporate those features and functionality into products that meet the design,
performance, quality and pricing requirements of the digital media and consumer
electronics markets in which it competes and the timing requirements of retail
selling seasons. SONICblue believes this will require continued significant
expenditures for research and development activities. SONICblue has in the past
experienced delays in completing the development and introduction of new
products and may experience similar delays in the future. In the past,
SONICblue's business was seriously harmed when it developed products that failed
to achieve significant market acceptance and therefore was unable to compete
successfully in its markets. This type of failure could occur again in the
future.

SONICblue must manage product transitions successfully in order to remain
competitive.

      The introduction of a new product or product line is a complex task,
involving significant expenditures in research and development, training,
promotion and channel development, and management of existing product
inventories to reduce the cost associated with returns and slow moving channel
inventory. As new products are introduced, SONICblue attempts to monitor closely
the inventory of products to be replaced, and to phase out their manufacture in
a controlled manner. There can be no assurance that product transitions will be
executed without harming SONICblue's operating results. Failure to develop
products with required features and performance levels or any delay in bringing
a new product to market could significantly reduce SONICblue's revenues and harm
SONICblue's competitive position.

SONICblue depends on a limited number of suppliers from whom it does not have a
guarantee of adequate supplies, increasing the risk that a loss of or problems
with a single supplier could result in impaired margins, reduced production
volumes, strained customer relations and loss of business.

      SONICblue obtains several of the components used in its products,
including flash memory for its Rio players, semiconductors, hard drives, program
guide data and set-top box compatibility information for its ReplayTV digital
video recorders and service, and LCD screens for its ProGear information
appliances, from single or limited sources. If component manufacturers do not
allocate a sufficient supply of components to meet its needs or if current
suppliers do not provide components of adequate quality or compatibility,
SONICblue may have to obtain these components from distributors or on the spot
market at a higher cost. SONICblue rarely has guaranteed supply arrangements
with its suppliers, and suppliers may not be able to meet its current or future
component requirements. If SONICblue is forced to use alternative suppliers of
components, it may have to alter its product designs to accommodate these
components. Alteration of product designs to use alternative components could
cause significant delays and reduce its production of the related products. In
addition, from time to time SONICblue has experienced difficulty meeting certain
product shipment dates to customers for various reasons. These reasons include
component delivery delays, component shortages and component quality
deficiencies. Delays in the delivery of components, component shortages and
supplier product quality deficiencies


                                       22
<PAGE>

will likely continue to occur in the future. These delays or problems have in
the past and could in the future result in impaired margins, reduced production
volumes, strained customer relations and loss of business. For example, flash
memory components, which are used in SONICblue's Rio digital audio players,
significantly increased in price in September 1999 due in part to supply
interruptions arising from the earthquake in Taiwan. These price increases and
shortages may have an adverse impact on SONICblue's gross margin in future
periods.

      Also, in an effort to avoid actual or perceived component shortages,
SONICblue may purchase more of certain components than it may otherwise require.
Excess inventory resulting from over-purchases, obsolescence or a decline in the
market value of such inventory could result in inventory write-offs, which would
have a negative effect on SONICblue's financial results.

If a new storage medium becomes the industry standard for digital audio and
SONICblue is unable to adapt its products, SONICblue may not be able to compete.

      SONICblue's digital audio players currently include flash memory as their
storage medium. If the digital audio industry adopts a new storage medium as the
industry standard instead of flash memory, SONICblue may not be able to adapt
its products to be compatible with the storage medium. Further, even if
SONICblue is able to adapt its products to a new industry standard storage
medium, SONICblue may experience component shortages, particularly if that
storage medium is based on technology that is proprietary in nature or produced
by a limited number of suppliers.

If SONICblue is unable to predict market demand for its individual products, and
focus its inventories and development efforts to meet market demand, it could
lose sales opportunities and experience declines in revenues.

      SONICblue offers a variety of products within each product line or
division. In order to arrange for the manufacture of sufficient quantities of
products and avoid excess inventories, SONICblue needs to accurately predict
market demand for each product. For example, if SONICblue predicted that
consumers would purchase the Rio Volt and plans its manufacturing accordingly,
but instead consumer demand is for the Rio 800, SONICblue would have excess
inventory of the Rio Volt and lost sales opportunities for the Rio 800, as well
as lost market share and brand confidence. SONICblue expects that it will become
even more difficult to forecast demand as it introduces and supports multiple
products and product lines and as competition in the market for its products
intensifies. Significant unanticipated fluctuations in demand could cause
problems in SONICblue's operations. SONICblue may not be able to accurately
predict market demand in order to properly allocate its manufacturing and
distribution resources among its products. As a result, SONICblue may experience
declines in its revenues and lose, or fail to gain, market share.

Demand for SONICblue's digital audio and video products may decrease if the same
capabilities provided by its products become available in or as add-ons to other
personal electronics products.

      A substantial portion of SONICblue's net sales in 2000 and the first nine
months of 2001 were derived from the sale of digital audio players. There is a
trend within the personal electronics industry for functionality from individual
products to be integrated with other personal electronics products. For example,
Samsung, Fuji, Handspring and others have developed or announced plans to
develop personal electronic products, such as mobile telephones, digital cameras
or PDA plug-ins that integrate digital audio functions, and in the digital video
market, Panasonic offers combination TV/DVD/VCR units and DirectTV offers
satellite receiver set top boxes with TiVo software installed. These products
could significantly reduce the demand for SONICblue's products. As a result of
these trends of technology migration and product integration, SONICblue's
success largely depends on its ability to continue to develop products that
incorporate new and rapidly evolving technologies into its products.

      SONICblue must continue to expand the scope of its research and
development efforts to provide the latest in digital audio and video technology
products, which will require that it hire and retain engineers skilled in these
areas and promote additional coordination among its design and engineering
groups. Alternatively, SONICblue may find it necessary or desirable to license
or acquire technology to enable it to provide these functions. This technology
may not be available for license or purchase on terms acceptable to SONICblue,
if at all.

SONICblue depends on third parties for the manufacture of its products.

      SONICblue relies on independent subcontractors to manufacture, assemble
and/or test its products. SONICblue procures its components, assembly and test
services and assembled products through purchase orders, and it does not have
specific volume purchase agreements with each of its subcontractors. Most of its
subcontractors could cease supplying the services, products or components at any
time with limited or no penalty. If SONICblue needs to replace a key
subcontractor, it could incur significant manufacturing set-up costs and delays.
Also, SONICblue may be unable to find suitable replacement subcontractors.
SONICblue's emphasis on maintaining low internal and channel inventory levels
may exacerbate the effects of any shortage that may result from the use of
sole-source subcontractors during periods of tight supply or rapid order growth.
Further, some of SONICblue's subcontractors are located outside the United
States, which may present heightened process control, quality control,
political, infrastructure, transportation, tariff, regulatory, legal, import,
export, economic or supply chain management risks.

      SONICblue faces competition for access to manufacturers and manufacturing
capacity. Many of the companies competing with SONICblue for this capacity have
longer operating histories and greater financial and market resources than
SONICblue. SONICblue may not be able to maintain access to adequate capacity of
high quality manufacturing if its subcontractors choose to offer their services
to other companies who can negotiate better terms due to their market presence,
pay higher prices, engage more manufacturing capacity or offer other incentives.
As SONICblue develops new products, such as its ProGear information appliances,
it will require manufacturing capacity to produce quantities to meet market
demand. If SONICblue is unable to obtain and maintain access to high quality
manufacturing capacity for its existing and future products, it will not be able
to fill distributor or customer orders, and its revenues will decline.


                                       23
<PAGE>

SONICblue's products could have defects or compatibility issues, which could be
costly to correct and could result in the rejection of its products and damage
to its reputation, as well as lost revenues, diverted development resources and
increased service costs and warranty claims.

      SONICblue's products could have design defects that could cause them to
malfunction. Product components may contain undetected errors or "bugs" when
first supplied to SONICblue that, despite testing by SONICblue, are discovered
only after SONICblue's products have been installed and used by customers. From
time to time, SONICblue has become aware of problems with components, product
designs and other defects. Errors or defects in SONICblue's products may arise
in the future, and, if significant or perceived to be significant, could result
in rejection of SONICblue's products, product returns or recalls, damage to
SONICblue's reputation, lost revenues, diverted development resources and
increased customer service and support costs and warranty claims. Errors or
defects in SONICblue's products could also result in product liability claims.

      SONICblue includes, or bundles, third party software, including operating
systems, with its hardware products. For example, SONICblue includes software
with its Rio players that the purchaser may use to download and store MP3 or WMA
files on the player. SONICblue also incorporates third party software in its
ProGear information appliances. The software products and SONICblue's hardware
products are complex and may contain undetected errors or failures when first
introduced or as new versions are released. SONICblue has distributed updates to
Rio players in the past when required to improve sound quality or to correct
minor audio problems. SONICblue generally provides warranties for its retail
products allowing the return or repair of defective products. Despite testing by
SONICblue, its suppliers or current or potential customers, errors may be found
in new products after commencement of commercial shipments. These errors could
result in loss of or delay in market acceptance or product acceptance or in
warranty returns. Losses, delays or damage to SONICblue's reputation due to
product defects would likely harm SONICblue's business, financial condition and
results of operations.

      Additionally, new versions or upgrades to operating systems, independent
software vendor titles or applications may require upgrades to the software
products SONICblue bundles with its hardware products, or the software products
that purchasers of SONICblue's products may obtain from other sources such as
the Internet, to maintain compatibility with the new versions or upgrades. The
sources for the software SONICblue bundles, or the other sources for purchasers
of SONICblue's products to obtain software, may not be successful in developing
new versions, upgrades or enhancements to their software products. If producers
of software experience delays or are unable to maintain compatibility with new
audio formats, operating systems and independent software vendor titles or
applications, the demand for SONICblue's products and SONICblue's reputation
could suffer. Loss of sales and damaged reputation could harm SONICblue's
revenues and profitability.

SONICblue is subject to risks relating to product returns and price protection,
which could limit SONICblue's revenues.

      SONICblue often grants limited rights to customers and distributors to
return unsold inventories of its products in exchange for new products, also
known as "stock rotation." Also, some of SONICblue's retail customers may accept
returned products from their own retail customers. These products are then
returned to SONICblue for credit. SONICblue has experienced a significant
percentage of returns of its Rio players and ReplayTV products. SONICblue
estimates stock rotation, warranty and other returns and accrues reserves for
such costs at the time of sale. SONICblue also often grants price protection on
unsold inventory, which allows customers to receive a price adjustment on
existing inventory when its published price is reduced. In an environment of
slower demand and abundant supply of products, price declines and channel
promotional expenses are more likely to occur and, should they occur, are more
likely to have a significant impact on SONICblue's operating results. Further,
in this environment, high channel inventory levels may result in substantial
price protection charges. These price protection charges have the effect of
reducing net sales and gross margin. Consequently, in taking steps to bring its
channel inventory levels down to a more desirable level, SONICblue may cause a
shortfall in net sales during one or more accounting periods. These efforts to
reduce channel inventory might also result in price protection charges if prices
are decreased to move product out to final consumers, having a further adverse
impact on operating results. Any estimates, reserves or accruals may be
insufficient and any future price reductions or product returns may seriously
harm its operating results.

SONICblue depends on sales through distributors and retailers. If relationships
with or sales through distributors or retailers decline, its operating results
will be harmed.

      SONICblue sells its products through a network of domestic and
international distributors, and directly to major retailers/mass merchants.
SONICblue's future success is dependent on the continued viability and financial
stability of its customer base. Retail channels historically have been
characterized by rapid change, including periods of widespread financial
difficulties and consolidation and the emergence of alternative sales channels,
such as direct mail order, telephone sales and electronic commerce on the
worldwide web. SONICblue may be unable to retain its retailers or distributors.
In addition, sales to any particular retailer or distributor may fluctuate
significantly from quarter to quarter. The loss of, or a reduction in, sales to
any of SONICblue's key retail or distribution customers as a result of changing
market conditions, competition or customer credit problems could materially and
adversely affect its operating results. Likewise, changes in distribution
channel patterns, such as increased electronic commerce via the Internet and
increased use of mail-order catalogues, could affect SONICblue in ways not yet
known.

SONICblue's ability to market and distribute its products depends in part upon
its current and future relationships with original equipment manufacturers, or
OEMs, and other strategic partners to market and distribute SONICblue's products
under their own brand names.

      In addition to direct distributors of SONICblue's products, SONICblue also
depends upon OEMs and other strategic partners to market and distribute its
products. For example, through a strategic partnership with Nike, SONICblue has
developed a digital audio player that is designed for fitness enthusiasts and
SONICblue's ReplayTV personal television digital video recorder technology is
offered by Panasonic under Panasonic's ShowStopper brand. If SONICblue is unable
to obtain and maintain relationships with OEMs and strategic partners, it will
not be able to increase sales of its products and achieve market acceptance as
efficiently, and its revenues may decline.


                                       24
<PAGE>

SONICblue relies on intellectual property and other proprietary information that
may not be adequately protected and that may be expensive to protect.

      The markets in which SONICblue competes are characterized by vigorous
protection and pursuit of intellectual property rights. SONICblue relies on a
combination of patent, trademark, copyright, and trade secret laws, employee and
third-party nondisclosure agreements and licensing arrangements to protect its
intellectual property. If SONICblue is unable to adequately protect its
intellectual property, its business may suffer from the piracy of its technology
and the associated loss of sales. Also, the protection provided to SONICblue's
proprietary technology by the laws of foreign jurisdictions, many of which offer
less protection than the United States, may not be sufficient to protect its
technology. It is common in the personal electronics and Internet device
industries for companies to assert intellectual property infringement claims
against other companies. Therefore, SONICblue's products may also become the
target of infringement claims. These infringement claims or any future claims
could cause SONICblue to spend significant time and money to defend its
products, redesign its products or develop or license a substitute technology.
SONICblue may be unsuccessful in acquiring or developing substitute technology
and any required license may be unavailable on commercially reasonable terms, if
at all. In addition, an adverse result in litigation could require SONICblue to
pay substantial damages, cease the manufacture, use, sale, offer for sale and
importation of infringing products, or discontinue the use of certain processes.
Any of these events could materially harm SONICblue's business.

      Litigation by or against SONICblue could result in significant expense and
could divert the efforts of its technical and management personnel, regardless
of the outcome of such litigation. However, even if claims do not have merit,
SONICblue may be required to dedicate significant management time and expense to
defending itself if it is directly sued, or assisting its customers in their
defense of these or other infringement claims pursuant to indemnity agreements.
This could have a negative effect on SONICblue's financial results.

SONICblue may not be able to attract, retain or integrate key personnel, which
may prevent it from succeeding.

      SONICblue may not be able to retain its key personnel or attract other
qualified personnel in the future. SONICblue's success will depend upon the
continued service of key management personnel. The loss of services of any of
the key members of SONICblue's management team or its failure to attract and
retain other key personnel could disrupt operations and have a negative effect
on employee productivity and morale, decreasing production and harming its
financial results. In addition, the competition to attract, retain and motivate
qualified technical personnel, such as engineers, as well as qualified sales and
operations personnel, is intense. SONICblue has at times experienced difficulty
recruiting qualified software and hardware development engineers.

SONICblue depends on a limited number of third party developers and publishers
that develop software products that will operate with and fully utilize the
capabilities of its Rio players.

      Only a limited number of software developers are producing software that
enables the download and use of digital audio players. SONICblue does not create
the software that is required to download or convert from CDs music to run on
its players but bundles third party software with its players. If SONICblue is
not able to license and bundle the software, or if users are not otherwise able
to obtain software free of charge or at an acceptable price, then demand for
SONICblue's digital audio players will decline. Likewise, difficult to use or
defective software could negatively impact SONICblue's product sales and
revenues.

SONICblue has significant exposure to international markets.

      Export sales account for a significant percentage of SONICblue's net
sales. In addition, a substantial proportion of SONICblue's products are
manufactured, assembled and tested by independent third parties in Asia. As a
result, SONICblue is 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 SONICblue's products in foreign markets or
          increase the cost of components purchased by SONICblue;

      -   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.

      In the past, SONICblue has experienced an adverse impact associated with
the economic downturn in Asia that contributed to decreases in net sales. In
addition, SONICblue's international operations are subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships. The People's Republic of China and Taiwan
have in the past experienced and are currently experiencing strained relations,
and a worsening of relations or the development of hostilities between them
could disrupt operations at the manufacturing facilities of SONICblue's
subcontractors and affect its Asian customers.


                                       25
<PAGE>

SONICblue has a significant level of debt, which may harm its ability to obtain
additional financing or adversely affect its liquidity. If the Company is unable
to generate or otherwise obtain sufficient funds, its financial condition and
operations may be harmed.

      At September 30, 2001, SONICblue had total debt and other liabilities
outstanding of $383 million. The degree to which SONICblue is leveraged could
harm its ability to obtain additional financing for working capital or other
purposes and could make SONICblue more vulnerable to economic downturns and
competitive pressures. SONICblue's significant leverage could also adversely
affect its 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, SONICblue could be forced to reduce other expenditures to be able to
meet such debt service requirements.

      If the Company is unable to raise sufficient funds for short or long term
capital needs, it may not be able to fund product development and expansion,
take advantage of future opportunities, meet its existing debt obligations or
respond to competitive pressures or unanticipated events or needs. The Company
may also be required to consider curtailing its operations significantly or to
seek arrangements with strategic partners or other parties that may require the
Company to relinquish significant rights to products, technologies or markets.

Minority investments could adversely affect SONICblue's liquidity and earnings.

      SONICblue holds minority interests in companies having operations or
technology in areas within its strategic focus. Some of these investments are in
research and development, start-up or development stage companies or companies
where operations are not yet sufficient to establish them as going concerns. As
a result, SONICblue may be called upon under contractual or other terms to
provide funding for operations of these companies and may share in their losses.
Further adverse changes in market conditions or poor operating results of
underlying investments could result in SONICblue incurring additional losses or
an inability to recover the carrying value of its investments.

SONICblue may pursue strategic acquisitions and could fail to successfully
integrate acquired businesses.

      SONICblue has engaged in acquisitions in the past, including its recent
acquisitions of Sensory Science and ReplayTV, and expects to evaluate
acquisition opportunities in the future that could provide additional product or
services offerings, technologies or additional industry expertise. Any proposed
or future acquisition could result in difficulties assimilating acquired
operations and products, diversion of capital and management's attention away
from other business issues and opportunities and amortization of acquired
intangible assets. Integration of acquired companies may result in problems
related to integration of technology and management teams. SONICblue could fail
to integrate the operations, personnel or products that it may acquire in the
future. If SONICblue fails to successfully integrate acquisitions or achieve any
anticipated benefits of an acquisition, its operations and business could be
harmed.

System failures, interruptions to the ReplayTV service or product defects may
have a negative impact on SONICblue's revenues, damage its reputation and
decrease its ability to attract new viewers.

      SONICblue's ability to provide high quality products, service and customer
support is critical to its success because consumers of television-related
products are not accustomed to, and may not accept, interruptions in their
television service. SONICblue's network, communications hardware and other
operating systems for the ReplayTV service are vulnerable to damage or
interruption from earthquakes, floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins, sabotage,
intentional acts of vandalism and similar misconduct. These types of
interruptions in the ReplayTV service may reduce SONICblue's revenues and
profits. In addition to placing increased burdens on SONICblue's engineering
staff, service outages will create numerous customer questions and complaints
that must be responded to by SONICblue's or its partners' customer support
personnel. Any frequent or persistent system failures could irreparably damage
SONICblue's reputation and brand.

      In addition, any delivery by SONICblue of products or upgrades with
undetected material product defects or software errors could harm SONICblue's
credibility and prevent market acceptance of the ReplayTV service. For example,
the hard disk used in the ReplayTV-enabled digital video recorder was originally
designed for use in personal computers, and as a result exhibits behaviors that
are viewed as typical and minimally disruptive when using a personal computer
but may result in the viewer momentarily facing a black television screen when
using the ReplayTV service. Any errors and product defects can result in delays
in releasing new versions of ReplayTV digital video recorders, affect system
uptime, result in returns and significant warranty and repair costs and cause
customer relations problems. Correcting errors in software and hardware design
requires significant time and resources, which could delay future product
releases and affect market acceptance of ReplayTV digital video recorders and
service.

SONICblue needs to safeguard the security and privacy of ReplayTV viewers'
confidential data, and any inability to do so may harm SONICblue's reputation
and brand and could result in lawsuits.

      The ReplayTV digital video recorder collects and stores viewer preferences
and other data that viewers may consider confidential. Any compromise or breach
of the encryption and other security measures that SONICblue uses to protect
this data could harm SONICblue's reputation and expose it to potential
liability. Advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments could compromise or breach the
systems SONICblue uses to protect its viewers' confidential information.
SONICblue may be required to make significant expenditures to protect against
security breaches or to remedy problems caused by any breaches.

      Viewers may be concerned about the use of personal information gathered by
the ReplayTV service in connection with the ReplayTV digital video recorder.
SONICblue does not release this data to third parties, and SONICblue is
committed to complying with all privacy laws and to protecting the
confidentiality of its viewers. Privacy concerns, however, could create
uncertainty in the marketplace for personal television and ReplayTV services. In
addition, privacy concerns or breaches, or consumers' dissatisfaction with any
privacy policy SONICblue may adopt, could reduce demand for ReplayTV products
and services, increase the cost of doing business as a result of litigation
costs or increased service delivery costs, or otherwise harm SONICblue's
reputation and business.


                                       26
<PAGE>

One of SONICblue's recently announced products is the subject of a copyright
infringement claim. If this or future claims against SONICblue's products are
decided against SONICblue, sales of SONICblue's products and its revenues could
decrease.

      In October 2001, a group of entertainment companies filed suit against
SONICblue to prevent shipment of the ReplayTV 4000 so long as the product
includes features that those companies allege would result in violations of the
entertainment companies' video programming copyrights. The lawsuit also alleges
that the Company's Go-Video VCRs featuring the commercial skipping technology
similarly violate the copyright laws. Litigation may be costly. Furthermore,
SONICblue may be forced to delay the release, or eliminate certain features of,
the ReplayTV 4000 and Go Video VCRs, which could result in decreased sales of
the product and a negative impact on SONICblue's revenues.

      Sensory Science, acquired by SONICblue in June 2001, has designed and
markets its dual-deck VCRs and combination DVD/VCRs for use as full-featured
videocassette recorders. The marketing literature and owner manuals caution
consumers that the dual-deck VCR should not be used in a manner that infringes
on the rights of owners of copyrighted material. However, SONICblue cannot
predict the likelihood that distribution of current or future dual-deck VCRs or
DVD/VCR models will be challenged. Federal legislation affecting all VCRs was
passed in October 1998, commonly referred to as The Digital Millenium Copyright
Act. As a result, Sensory Science modified the operations of its dual-deck VCRs
sold after April 2000 so that the VCRs would recognize a type of anticopying
signal to prevent consumers from making a usable copy of videotapes with that
type of signal. However, models purchased prior to April 2000 continued to
operate as originally designed for the lifetime of the VCR. SONICblue is unable
to determine what the effect of this or future required modifications may be on
future sales of dual-deck VCRs or combination DVD/VCRs.

SONICblue is a party to legal proceedings alleging securities violations that
could have a negative financial impact on SONICblue.

      Since November 1997, a number of complaints have been filed in federal and
state courts seeking unspecified damages on behalf of an alleged class of
persons who purchased shares of SONICblue's common stock at various times
between April 18, 1996 and November 3, 1997. The complaints name as defendants
SONICblue, certain of its officers and former officers, and certain directors of
SONICblue, asserting that they violated federal and state securities laws by
misrepresenting and failing to disclose certain information about SONICblue's
business. In addition, certain stockholders have filed derivative actions in the
state courts of California and Delaware seeking recovery on behalf of SONICblue,
alleging, among other things, breach of fiduciary duties by such individual
defendants. The plaintiffs in the derivative action in Delaware have not taken
any steps to pursue their case. 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. SONICblue has answered that
complaint. Discovery is proceeding. On January 22, 2001, four of the insurance
carriers which issued directors and officers insurance to SONICblue filed suit
against all parties named as defendants in the securities litigation, claiming
that the carriers have no obligation to provide coverage under the California
Insurance Code. In May 2001, the court entered an order staying the insurance
action pending resolution of the securities litigation. While management intends
to defend the actions against SONICblue vigorously, there can be no assurance
that an adverse result or settlement with regard to these lawsuits would not
have a material adverse effect on SONICblue's financial condition or results of
operations.

      SONICblue has received from the SEC a request for information relating to
SONICblue's restatement announcement in November 1997. SONICblue has responded
and intends to continue to respond to such requests.

      SONICblue has also been defending several putative class action lawsuits
naming Diamond, which were filed in June and July 1996 and June 1997 in the
California Superior Court for Santa Clara County and the U.S. District Court for
the Northern District of California. Certain former executive officers and
directors of Diamond are also named as defendants. The plaintiffs purport to
represent a class of all persons who purchased Diamond's common stock between
October 18, 1995 and June 20, 1996, or the Class Period. The complaints allege
claims under the federal securities laws and California law. The plaintiffs
allege that Diamond and the other defendants made various material
misrepresentations and omissions during the Class Period. The complaints do not
specify the amount of damages sought. On March 24, 2000, the District Court for
the Northern District of California dismissed the federal action without
prejudice. The parties have tentatively agreed to settle this matter, subject to
final documentation and court approval, for a payment of $15.0 million.
SONICblue funded $4.5 million of the settlement on November 1, 2000. SONICblue
previously accrued this amount in connection with the merger with Diamond.
SONICblue believes that Diamond's insurance covers the remaining $10.5 million
of the settlement and Diamond's insurers have funded that amount into the
settlement, although one of these insurers has served a notice of arbitration
disputing its obligation to pay $3 million of the $10.5 million.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

      The Company's exposure to market risk for changes in interest rates
relates primarily to its investment portfolio and its convertible subordinated
notes. The Company's investment portfolio principally consists of short term
fixed income securities. The primary objective of the Company's investment
activities is to maintain the safety of principal and preserve liquidity while
maximizing yields without significantly increasing risk. This is accomplished by
investing in marketable investment grade securities, and by limiting exposure to
any one issue or issuer. The Company does not use derivative financial
instruments in its investment portfolio and due to the nature of its
investments, does not expect its operating results or cash flows to be
significantly affected by potential changes in interest rates. At September 30,
2001, the market value of these investments approximated cost.

      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.
During 2000, $0.2 million in notes were converted into common stock. Beginning
in October 1999, the notes became redeemable at the option of the Company at an
initial redemption price of 102% of the principal amount. The market value of
the convertible subordinated notes at September 30, 2001 and 2000 was
approximately $62.9 million and $117.1 million, respectively.


                                       27
<PAGE>

Equity Price Risk

      The Company's largest financial asset is its UMC shares, which are traded
on the Taiwan Stock Exchange. The market price of UMC's stock is subject to
volatility due to general market conditions, including changes in the
semiconductor industry and the Taiwanese market, as well as actual or
anticipated changes in UMC's business prospects or quarterly or yearly operating
results. Because the UMC shares are SONICblue's largest asset, when the price
per share of UMC's stock increases or declines, the price of SONICblue's common
stock on the Nasdaq National Market tends to follow changes in UMC's stock
price. Fluctuations in the price of SONICblue common stock caused by changes in
UMC's stock price may or may not reflect SONICblue's actual or anticipated
business prospects or quarterly results. Also, fluctuations in UMC's stock price
may cause fluctuations in SONICblue's stock price when there is no material news
regarding SONICblue or any change in its results. Future fluctuations in the
value of SONICblue's UMC shares could negatively impact SONICblue's financial
condition.

Foreign Currency Exchange Rate Risk

      The Company invoices its customers in U.S. dollars for all products. The
Company is exposed to foreign exchange rate fluctuations as the financial
results of its foreign subsidiaries are translated into U.S. 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 nine months ended September 30, 2001 and 2000 was
not material. Since foreign currency exposure increases as intercompany
receivables grow, from time to time the Company has used foreign exchange
forward contracts as a means for hedging these balances. As of September 30,
2001, the Company held no exchange contracts.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

      Since November 1997, a number of complaints have been filed in federal and
state courts seeking unspecified damages on behalf of an alleged class of
persons who purchased shares of SONICblue's common stock at various times
between April 18, 1996 and November 3, 1997. The complaints name as defendants
SONICblue, certain of its officers and former officers, and certain directors of
SONICblue, and assert that they violated federal and state securities laws by
misrepresenting and failing to disclose certain information about SONICblue's
business. In addition, certain stockholders have filed derivative actions in the
state courts of California and Delaware seeking recovery on behalf of SONICblue,
alleging, among other things, breach of fiduciary duties by such individual
defendants. The plaintiffs in the derivative action in Delaware have not taken
any steps to pursue their case. 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. SONICblue has answered that
complaint. Discovery is proceeding. On January 22, 2001, four of the insurance
carriers which issued directors and officers insurance to SONICblue filed suit
against all parties named as defendants in the securities litigation, claiming
that the carriers have no obligation to provide coverage under the California
Insurance Code. In May 2001, the court entered an order staying the insurance
action pending resolution of the securities litigation. While management intends
to defend the actions against SONICblue vigorously, there can be no assurance
that an adverse result or settlement with regard to these lawsuits would not
have a material adverse effect on SONICblue's financial condition or results of
operations.

      SONICblue received from the SEC a request for information relating to
SONICblue's restatement announcement in November 1997. SONICblue responded and
intends to respond to any future requests.

      SONICblue has also been defending several putative class action lawsuits
naming Diamond, which were filed in June and July 1996 and June 1997 in the
California Superior Court for Santa Clara County and the U.S. District Court for
the Northern District of California. The plaintiffs alleged that Diamond and the
other defendants made various material misrepresentations and omissions during
the class period. The parties have tentatively agreed to settle this matter,
subject to final documentation and court approval, for a payment of $15.0
million. SONICblue funded $4.5 million of the settlement on November 1, 2000.
SONICblue previously accrued this amount in connection with the merger with
Diamond. SONICblue believes that Diamond's insurance covers the remaining $10.5
million of the settlement; Diamond's insurers have funded that amount into the
settlement, although one of these insurers has served a notice of arbitration
disputing its obligation to pay $3 million of the $10.5 million. SONICblue
intends to defend the arbitration vigorously.

      C3 Sales, Inc. filed suit against SONICblue on October 6, 1999 in the
Harris County (Houston), Texas District Court. The petition sought a judicial
declaration that a Sales Representative Agreement entered into between C3 and
SONICblue on May 19, 1999 was a valid contract that governed the relationship
between the two parties. In December 1999, SONICblue filed a summary judgment
motion seeking judgment against C3 on the grounds that no issues of material
fact remain to be determined regarding the declaratory judgment sought by C3. C3
responded by filing an amended petition alleging that the Sales Representative
Agreement applied to Diamond products, and that certain commissions due under
the agreement were not paid. The parties settled this matter in October 2001.
The amount of the settlement was fully reserved.

      On October 31, 2001, a group of entertainment companies including, among
others, Paramount Pictures Corporation, Disney Enterprise, Inc. and the three
major television networks filed a lawsuit against SONICblue Incorporated and
ReplayTV, Inc. in the U.S. District Court in Los Angeles, California. The
lawsuit alleges that the Company's planned manufacture and sale of the ReplayTV
4000, which will allow users to skip commercials and to use the Internet to send
recorded material to other ReplayTV 4000 users, will constitute contributory and
vicarious copyright infringement, among other claims. The lawsuit also alleges
that the Company's Go-


                                       28
<PAGE>

Video VCRs featuring the commercial skipping technology similarly violate the
copyright laws. The plaintiffs in the lawsuit are seeking an injunction
prohibiting the Company from including these features in its video products.
SONICblue intends to defend this action vigorously.

      On June 19, 2000, an individual, Valentin Pepelea, filed a lawsuit against
ReplayTV, Inc. in Santa Clara County Superior Court alleging that ReplayTV and
its founders misappropriated trade secrets allegedly disclosed by Mr. Pepelea in
discussions with the founders in the spring of 1997, and that he had been
promised a founder's share in ReplayTV. On January 17, 2001, Mr. Pepelea amended
his complaint to seek licensing royalties as a remedy. The parties are engaged
in discovery and have agreed to submit their dispute to non-binding arbitration.
The Company intends to defend vigorously against this action.

      The digital media, consumer appliance and home networking industries are
characterized by frequent litigation, including litigation regarding patent and
other intellectual property rights. SONICblue is party to various legal
proceedings that arise in the ordinary course of business. 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 SONICblue's financial position or results of operations.

Item 5. Other Information

      To be considered for inclusion in the Company's proxy statement and form
of proxy for its 2002 Annual Meeting of Stockholders, a stockholder proposal
must be received at the principal executive offices of the Company not later
than December 20, 2001.

      A stockholder proposal not included in the Company's proxy statement for
the 2002 Annual Meeting will be ineligible for presentation at that meeting
unless the stockholder gives timely notice of the proposal in writing to the
Secretary of the Company at the principal executive offices of the Company and
otherwise complies with the applicable provisions of the Company's Bylaws. To be
timely, the Company's Bylaws provide that the Company must have received the
stockholder's notice not less than 50 days nor more than 75 days prior to such
meeting. However, if notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders fewer than 65 days prior to the meeting
date, the Company must receive the stockholder's notice by the earlier of (i)
the close of business on the 15th day after the earlier of the day the Company
mailed notice of the annual meeting date or provided such public disclosure of
the meeting date and (ii) two days prior to the scheduled date of the annual
meeting. The Secretary should be contacted in writing at the address on the
first page of this Proxy Statement to obtain additional information as to the
proper form and content of notices of stockholder proposals. For the Company's
2002 Annual Meeting of Stockholders, which is scheduled to be held on May 22,
2002, stockholders must submit written notice to the Secretary in accordance
with the foregoing Bylaw provisions no later than April 2, 2002 but not prior to
March 8, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:

<TABLE>
<CAPTION>
       Exhibit No.      Description
       -----------      -----------
<S>                     <C>
       10.1             1989 Stock Plan of SONICblue Incorporated (Amended and
                        Restated dated as of May 16, 2001).

       10.2             Amendment to the 1993 Employee Stock Purchase Plan of
                        SONICblue Incorporated.
</TABLE>

(b)  Reports on Form 8-K:

      On July 12, 2001, SONICblue filed a current report on Form 8-K reporting
under Items 5 and 7 the completion of its acquisition of Sensory Science
Corporation.

      On August 16, 2001, SONICblue filed a current report on Form 8-K reporting
under Items 2 and 7 the completion of its acquisition of ReplayTV, Inc.




                                       29
<PAGE>


                                   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.


                                        SONICBLUE INCORPORATED
                                        (Registrant)


Date: November 13, 2001                            /s/ JOHN J. TODD
                                        ---------------------------------------
                                                       JOHN J. TODD
                                                 Senior Vice President,
                                                Chief Financial Officer
                                              and Chief Operating Officer
                                             (Duly authorized officer and
                                              principal financial officer)




                                       30
<PAGE>

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit No.     Description
-----------     -----------
<S>             <C>
10.1            1989 Stock Plan of SONICblue Incorporated (Amended and Restated
                dated as of May 16, 2001).

10.2            Amendment to the 1993 Employee Stock Purchase Plan of SONICblue
                Incorporated.
</TABLE>






                                       31