Joseph J. Tabacco, Jr. (75284)
Nicole Lavallee (165755)
BERMAN, DEVALERIO, PEASE &TABACCO
425 California Street, Suite 2025
San Francisco, CA 94104
Telephone: (415) 433-3200

Stanley M. Grossman
Patrick V. Dahlstrom
Michael A. Schwartz
POMERANTZ HAUDEK BLOCK &GROSSMAN
100 Park Avenue
New York, NY 10017
Telephone: (212) 661-1100

Plaintiff's Counsel

Plaintiff, individually and on behalf of all other persons similarly situated, by his undersigned attorneys, for his complaint, alleges upon personal knowledge as to himself and his own acts, and upon information and belief as to all other matters, based upon, inter alia, the investigation made by and through his attorneys, which investigation included, among other things, a review of the Securities and Exchange Commission ("SEC") filings and news releases of S3 Incorporated ("S3" or the "Company"):

Plaintiff, individually and on behalf of all other persons 1. Plaintiff brings this action as a class action on behalf of himself and all other persons who purchased shares of the common stock of S3 on the open market during the period October 20, 1997 through November 3, 1997, inclusive (the "Class Period"), to recover damages caused by defendants' violations of the federal securities laws with regard to the preparation and dissemination to the investing public of materially false and misleading information.

2. The materially false and misleading statements, which are described in detail below, concerned the Company's financial condition, and were contained in public statements and press releases. As a result of these false and misleading statements, the market price of the Company's common stock was artificially inflated during the Class Period.

3. During the Class Period, defendants' fraudulently or recklessly inflated S3's earnings and revenues by improperly recognizing between $40 million and $70 million in revenues from products shipped to distributors, which were not final sales. Defendants' improper recognition of revenue violated the Company's established revenue recognition policy and Generally Accepted Accounting Principles ("GAAP"), and caused the Company's financial statements to be materially overstated.

4. During the Class Period, shares of the Company's common stock traded as high as $11.44 per share. On November 4, 1997, the shares of the Company's common stock closed at $7.34 per share, down 16% from the previous day's close.

5. The claims alleged herein arise under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §78j(b) and 78t, and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.

6. The jurisdiction of this Court is based on Section 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331 (federal question jurisdiction).

7. Many of the acts alleged herein, including the dissemination to the investing public of the misleading statements at issue, occurred in substantial part in this District and further, the Company is headquartered in this District.

8. In connection with the acts, transactions and conduct alleged herein, defendants used the means and instrumentalities of interstate commerce, including the United States mails, interstate telephone communications and the facilities of national securities exchanges and markets.

9. Plaintiff Stanley Zinberg purchased 1,000 shares of S3 common stock during the Class Period at a price artificially inflated by defendants' misconduct, resulting in damages to plaintiff.

10. Defendant S3 Incorporated is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Delaware, with its principal office and place of business at 2801 Mission College Boulevard, Santa Clara, California 950252-8058.

11. Defendant Gary Johnson ("Johnson") was and had been at all relevant times the Company's Chief Executive Officer and President.

12. Defendant Walter Amaral ("Amaral") was and had been at all relevant times the Company's Chief Financial Officer and Senior Vice President of Finance.

13. Defendants Johnson and Amaral, as officers and directors of a publicly-held company, had a duty to promptly disseminate truthful and accurate information with respect to the Company and to promptly correct any public statements issued by or on behalf of the Company which had become false or misleading.

14. Defendants Johnson and Amaral made, reviewed and/or were aware of the false and/or misleading press releases and other statements complained of herein, knew or recklessly disregarded their false and/or misleading nature, and were in a position to control or influence their contents or otherwise cause corrective/accurate disclosures to have been made. Defendants engaged in a common course of conduct for which they are jointly and severally liable, the purpose and effect of which was, inter alia, to artificially inflate the market price of S3 common stock through the issuance of false and misleading statements to the public, all as particularized below.

15. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased the Company's common stock during the Class Period and who suffered damages thereby (the "Class"). Excluded from the Class are the defendants, members of defendants Johnson's and Amaral's immediate families, any entity in which any defendant has a controlling interest or is a parent or subsidiary of or is controlled by the Company, and the officers, directors, affiliates, legal representatives, heirs, predecessors, successors and assigns of any of the defendants.

16. The members of the Class are located in geographically diverse areas and are so numerous that joinder of all members is impracticable. There were approximately 50 million shares of the Company's common stock outstanding as of August 1997. The exact number of Class members is unknown to the plaintiff at this time and can only be ascertained through appropriate discovery, but plaintiff believes there are, at a minimum, thousands of members of the Class who purchased the common stock of S3 during the Class Period.

17. The Company's common stock is traded on the NASDAQ National Market under the symbol "SIII." During the Class Period, SIII was followed by securities analysts and the stock was traded actively in an efficient, open and well-informed market which assimilated the information disseminated publicly by and on behalf of the Company.

18. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:

a. Whether defendants engaged in acts or conduct in violation of the federal securities laws as alleged herein;

b. Whether defendants participated in and pursued the common course of conduct complained of herein;

c. Whether the challenged public statements disseminated to the investing public and to the members of the Class omitted or misrepresented material facts about the Company's financial condition, or became materially false and misleading during the Class Period;

d. Whether defendants had a duty to correct such statements when they learned they had become false and misleading;

e. Whether defendants acted knowingly or recklessly in making the materially false and misleading statements or in failing to correct such statements upon learning that they were materially false and misleading;

f. Whether the market prices of the Company's common stock were artificially inflated during the Class Period because of the defendants' conduct complained of herein; and

g. Whether the members of the Class have sustained damages and, if so, what is the proper measure of damages.

19. Plaintiff's claims are typical of the claims of the members of the Class as plaintiff and members of the Class sustained damages arising out of defendants' wrongful conduct in violation of federal law as complained of herein.

20. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation. Plaintiff has no interests antagonistic to or in conflict with those of the Class.

21. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all members of the Class is impracticable. Furthermore, because the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for the Class members individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

22. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine and allege that:

a. defendants made public misrepresentations or failed to disclose material facts during the Class Period;

b. the omissions and misrepresentations were material;

c. the securities of the Company traded in an efficient market;

d. the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company's securities; and

e. plaintiff and the members of the Class purchased their Company stock between the time the defendants misrepresented or failed to disclose material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.

23. Based upon the foregoing, plaintiff and the members of the Class are entitled to a presumption of reliance upon the integrity of the market.

BACKGROUND

24. S3 purports to be a leading supplier of multimedia acceleration hardware and its associated software for the personal computer ("PC") market. The Company's accelerators are designed to work cooperatively with a PC's central processing unit ("CPU"), implementing functions best suited for a dedicated accelerator while allowing the CPU to perform the more general purpose computing functions of today's advanced graphical user interface environment and applications.

S3's Revenue Recognition Policy

25. According to the Company's Form 10-K for the year ended December 31, 1996, S3's revenue recognition policy is simple and straightforward -- sales to distributors are only recognized as revenue if and when the distributor resells the product:

Revenue Recognition

Revenue from product sales to direct customers is generally recognized upon shipment. Accruals for estimated sales returns and allowances are recorded at the time of sale. Certain of the Company's sales are made to distributors under agreements allowing price protection and rights of return on unsold products by the distributors. The Company defers recognition of revenue on such sales until the product is sold by the distributors.

S3 Form 10-K, March 11, 1997, p. 36 (emphasis added).

THE FALSE AND MISLEADING STATEMENTS

26. On October 20, 1997, defendants caused the Company to report financial results for S3's fiscal third quarter 1997 of $120.4 million in revenues and earnings per share of $0.08. According to defendants:

S3(R) Incorporated (Nasdaq: SIII) today reported that net revenues for the third quarter of 1997 were $120.4 million compared to $119.4 million for the third quarter of 1996. Net income for the quarter was $3.9 million, or $0.08 per share, compared to net income for the same quarter last year of $11.8 million, or $0.23 per share. Common and equivalent shares outstanding assuming full dilution for the third quarter 1997 were 52,380 million, compared to 52,932 million shares in the third quarter 1996.

Net revenues for the first nine months of 1997 increased 10% to $367.4 million, compared to $333.3 million for the first nine months of 1996. Net income for the first nine months of 1997 decreased 33% to $22.1 million, or $0.43 per share, compared to net income of $32.9 million or $0.65 per share in the first nine months of 1996. Common and equivalent shares outstanding assuming full dilution for the first nine months of 1997 were 51,477 million compared to 1996 of 51,031 million.

"S3 met the challenge of achieving double digit revenue growth in a highly competitive market during the third quarter by maintaining its leadership position in the mid and low-end segments of the graphics market," said Gary Johnson, president and CEO. . . ..

S3 Press Release, Oct. 20, 1997 (emphasis added).

27. On November 3, 1997, after the close of the stock market, the Company stunned the investment community when it announced that it was restating its previously reported financial results downwards to reflect $40 - $70 million less in revenues and $.14 to $.29 less in earnings per share. According to the Company's press release:

S3 Incorporated (Nasdaq: SIII) said today that the Company has uncovered material errors in the timing of its recognition of sales to several international distributors and consequently expects to restate its revenues downward for prior quarters by a cumulative total of between $40 million and $70 million. The Company currently expects the resulting net income effect for those quarters to be a cumulative decrease of 14 cents to 29 cents per share.

According to S3's accounting policies, which S3 does not believe have been fully adhered to, the company defers recognition of revenue on all sales to distributors until the product is actually sold by each distributor to its end customers.

. . ..

The audit committee of the Company's board of directors, which consists entirely of outside directors, and the company's management and independent auditors, are in the process of reviewing and resolving the revenue recognition matters raised by the Company's review, to date. The company expects the release of additional and more definitive information concurrent with the filing of its third quarter Form 10Q.

S3 Press Release, Nov. 3, 1997 (emphasis added).

28. Following the Company's revelation, the price of the Company's common stock fell 16%, indicative of the materiality of the disclosure.

29. Plaintiff repeats and realleges each of the allegations set forth in the foregoing paragraphs.

30. This Count is asserted against all defendants herein and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder.

31. Throughout the Class Period, defendants individually and in concert, directly and indirectly, and using the means or instrumentalities of interstate commerce or the mails, engaged in a continuous course of conduct and conspiracy to artificially inflate the revenues and earnings of S3. Defendants employed devices, schemes and artifices to defraud and engaged in acts, practices, and a course of conduct designed to assure investors that the Company's financial statements were prepared in accordance with GAAP, that revenue was recognized in accordance with the Company's stated revenue recognition policy, and that S3's financial statements were true and accurate. Such actions included the making of untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about the Company's 1997 fiscal third quarter revenues and earnings, in the light of the circumstances under which they were made, not misleading, and engaged in transactions, practices and courses of business which operated as a fraud and deceit upon the purchasers of S3 stock during the Class Period.

32. Specifically, the statements made by defendants as set forth above were materially false and misleading and/or failed to disclose facts necessary to render what was said true and accurate, because defendants improperly recognized $40 to $70 million in revenue from products shipped to distributors which were not final sales, in violation of GAAP and the Company's stated revenue recognition policy, which caused the Company's financial statements to be materially overstated.

33. Defendants are liable for each of the fraudulently misleading statements set forth above in that they directly or indirectly issued such statements.

34. Defendants Johnson and Amaral as officers and directors of S3, are liable as direct participants in the wrongs complained of herein. As officers and directors of a publicly traded corporation, these defendants had a duty to promptly disseminate accurate and truthful information with respect to the operations and financial results of S3, and to correct any previously issued statements that had become materially misleading or untrue, so that the market price of S3's publicly traded securities would be based on truthful and accurate information. Through their position of control and authority as officers and directors of S3, these defendants were able to and did control, directly or indirectly, the content of the financial statements and public statements disseminated by and through S3. With knowledge of the falsity and/or misleading nature of the statements contained therein, and in reckless disregard of the true financial condition and prospects of S3, these defendants caused the heretofore complained of public statements to contain material misstatements and omissions of material facts as alleged above, in violation of his aforementioned duties and of the federal securities laws.

35. These defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose the true facts, even though such facts were available to them, due to, inter alia, the fact that:

a. Under GAAP, the need to restate previously reported financials arises when the facts that necessitate the restatement were known or knowable at the time the financials were originally issued. The Company, by admitting the need to materially restate its prior financials, has indicated that defendants' improper recognition of $40 - $70 million of revenue was therefore known or recklessly ignored at the outset of the Class Period;

b. The Company's revenue recognition policy is simple: sales to distributors are not recognized as revenue until the distributor resells the product;

c. The proper implementation of the Company's revenue recognition policy is rudimentary: if and when the Company receives proper notification from its distributors that the product has been resold, S3 is then to recognize the sale as revenue;

d. Defendants', including S3's Chief Financial Officer's, failure to follow S3's simple revenue recognition policy and procedure, and improperly recognize as revenue $40 to $70 million of conditional sales to distributors, can only be attributed to knowing or reckless conduct;

e. The size of the restatement, which will cause the previously reported record earnings to be reduced by $40 to $70 million and earnings per share to be reduced between $.14 to $.29, is so material that defendants' failure to properly record such amounts can only be attributed to knowing or reckless conduct; and

f. The material amount of revenues attributed to sales to distributors arose out of important internal corporate developments of which top corporate officials, such as defendants, knew or recklessly ignored.

36. As a result of the dissemination of the false and misleading statements set forth above, the market price of S3 common stock was artificially inflated during the Class Period. In ignorance of the false and misleading nature of the statements described above, plaintiff and the other members of the Class relied, to their detriment, on the integrity of the market price of the stock in purchasing S3 common stock. Had plaintiff and the other members of the Class known the truth, they would not have purchased said shares or would not have purchased them at the inflated prices that were paid.

37. Plaintiff and the other members of the Class have suffered substantial damages as a result of the wrongs herein alleged in an amount to be proved at trial.

38. By reason of the foregoing, defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

39. Plaintiff repeats and reallege each of the allegations set forth in the foregoing paragraphs.

40. This Count is asserted against defendants Johnson and Amaral and is based upon Section 20(a) of the Exchange Act, 15 U.S.C. 78t(a).

41. Defendants Johnson and Amaral had the power and influence and exercised the same to cause S3 to engage in the illegal and improper conduct complained of herein. Because of their executive, managerial, and directorial positions at S3, these defendants had access to the non-public information alleged herein, and acted to conceal and/or omitted to disclose such information from plaintiff and the investing public, and caused the stock price of S3 to become artificially inflated as more fully described herein.

42. By reason of the conduct alleged in Count I, these defendants are liable for the aforesaid wrongful conduct, and are liable to plaintiff and to the other members of the Class for the substantial damages which they suffered in connection with their purchases of S3 common stock during the Class Period.

WHEREFORE, plaintiff on behalf of himself and the Class prays for judgment as follows:

A. Declaring this action to be a proper class action maintainable pursuant to Rule 23 of the Federal Rules of Civil Procedure and plaintiff to be proper class representatives;

B. Awarding plaintiff and the Class compensatory damages, together with appropriate prejudgment interest at the maximum rate allowable by law;

C. Awarding plaintiff and the Class their costs and expenses for this litigation including reasonable attorneys' fees and other disbursements; and

D. Granting such other and further relief as this Court deems to be just and proper.