If you were about to write off NVIDIA (NASDAQ:NVDA), look out!

Yesterday, the graphics chipmaker reported a stronger-than-expected increase in third-quarter sales of 14% to $486.1 million. The company said that gross margins had bottomed out, and that seasonally weak fourth-quarter sales would be flat with the third quarter. As a result, NVIDIA shares are up 20% to $21.66 in early morning trading.

But business hasn't always been so hot.

Back in 2001, NVIDIA was a darling in a rough market. It had snatched up former Rule Breaker 3dfx, and was ready to bear the fruits of the Microsoft (NASDAQ:MSFT) Xbox. The stock more than tripled from January 2001 to $70 a share in January 2002. But weakness in its core platform business helped the company fail to meet lofty expectations, and the bottom fell out. NVIDIA dropped below $10 in August 2002.

More recently, Microsoft announced that rival ATI Technologies (NASDAQ:ATYT) would develop the graphics chip to be used in the next generation Xbox. Though that won't cut into NVIDIA for another few years, the Xbox did contribute 25% of NVIDIA's revenues in Xbox's seasonally strong third quarter.

But NVIDIA's core business is improving, with platform processor revenues rebounding 60% sequentially. That in itself probably didn't surprise anybody, as others have reported strong summer PC sales, and NVIDIA supplies Dell Computer (NASDAQ:DELL), IBM (NYSE:IBM), and Gateway (NYSE:GTW). But NVIDIA also said that strength across its product lines -- including its GeForce FX Go notebook GPUs -- would be enough to offset seasonally weak Xbox sales in the fourth quarter.

So not only are things not getting worse, they look better. Xbox 2 is a tough loss, but it might just be too early to call the end of NVIDIA the way NVIDIA ended 3dfx. The shares don't look cheap at first glance, but they rarely do. And anything can happen in the potentially explosive graphics chip business.

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Jeff Hwang can be reached at JHwang@fool.com.