Jen-Hsun Huang, president and chief executive at Nvidia, said that the combined firms could bring GeForce-accelerated PhysX software to hundreds of millions of gamers around the world.
"The computer industry is moving towards a heterogeneous computing model, combining a flexible CPU and a massively parallel processor like the GPU to perform computationally intensive applications like real-time computer graphics, " he said.
Manju Hegde, co-founder and chief executive at Ageia, added: "Nvidia is the perfect fit for us. They have the world's best parallel computing technology."
However, some commentators believe that the acquisition could be bad news for AMD.
Intel acquired game developer Havok in September 2007 when Havok was working with AMD and Nvidia on the Havok FX physics engine which ceased following the buyout.
This means that AMD's two biggest competitors, Intel and Nvidia, now have strong physics development platforms, while AMD does not appear to have a competing technology.
The situation could be problematic for AMD if Intel and Nvidia push the integration of more complicated physics into video games.
The acquisition remains subject to customary closing conditions.
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