NEOMAGIC CORP, S-1/A, 1997-03-10

NEOMAGIC CORP
S-1/A, 1997-03-10
SEMICONDUCTORS & RELATED DEVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1997
REGISTRATION NO. 333-20031
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- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------

NEOMAGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0344424
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

3260 JAY STREET
SANTA CLARA, CA 95054
(408) 988-7020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

PRAKASH C. AGARWAL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEOMAGIC CORPORATION
3260 JAY STREET
SANTA CLARA, CA 95054
(408) 988-7020
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

---------------

COPIES TO:
<TABLE>
<S> <C>
ARTHUR F. SCHNEIDERMAN JOSHUA L. GREEN
MICHAEL J. DANAHER ROBERT V. W. ZIPP
ROBERT D. SANCHEZ GLEN R. VAN LIGTEN
WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 2800 SAND HILL ROAD
PALO ALTO, CALIFORNIA 94304-1050 MENLO PARK, CA 94025
(415) 493-9300 (415) 854-4488
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.

---------------

IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [_]

IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [_]

IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(c)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [_]

IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [_]

---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)

Issued March 10, 1997 3,000,000 Shares

(LOGO OF NEOMAGIC CORPORATION)

COMMON STOCK

----------

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $7 AND $9. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE SHARES OF COMMON
STOCK OFFERED HEREBY HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "NMGC" SUBJECT TO OFFICIAL NOTICE
OF ISSUANCE. THE COMPANY ANTICIPATES THAT, CONCURRENTLY WITH THE
CLOSING OF THIS OFFERING, MITSUBISHI INTERNATIONAL CORPORATION
AND MC SILICON VALLEY, INC. WILL PURCHASE DIRECTLY FROM THE
COMPANY ADDITIONAL SHARES OF COMMON STOCK HAVING AN
AGGREGATE PURCHASE PRICE OF $1,500,000. SEE "DIRECT
SALES."

----------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 4 HEREOF.

----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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PRICE $ A SHARE

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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (3)................................... $ $ $
</TABLE>
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(1) See "Underwriters" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company and certain stockholders (the "Selling Stockholders") have
granted the Underwriters an option, exercisable within 30 days of the
date hereof, to purchase up to an aggregate of 350,000 and 100,000
additional Shares of Common Stock, respectively, at the price to public
less underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions,
proceeds to Company and proceeds to Selling Stockholders will be
$ , $ , $ , and $ , respectively. See
"Underwriters."

----------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Venture Law Group, A Professional Corporation, counsel for the Underwriters.
It is expected that delivery of the Shares will be made on or about , 1997
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.

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MORGAN STANLEY & CO.
Incorporated
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY

, 1997
<PAGE>

Issued March 10, 1997

(LOGO OF NEOMAGIC CORPORATION)
COMMON STOCK

-----------

THIS PROSPECTUS RELATES TO SHARES OF COMMON STOCK TO BE SOLD TO CERTAIN
PURCHASERS PURSUANT TO STOCK PURCHASE AGREEMENTS WITH THE COMPANY. SEE
"DIRECT SALE".

-----------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 4 HEREOF.

-----------

, 1997
<PAGE>

[LOGO OF NEOMAGIC--MOBILIZING MULTIMEDIA]

NeoMagic has pioneered a new approach to providing multimedia semiconductor
solutions for portable PC's that it believes overcomes the limitations of
traditional architectures. The Company believes that it has developed the
first commercially available high performance, low power silicon technology
that integrates large DRAM memory with analog and logic circuitry on a single
chip. NeoMagic's system on a chip is designed to bring desktop multimedia
performance to mobile computers without compromising battery life or system
size, weight or cost.

[PICTURE OF 5 NOTEBOOK PC'S OPENED TO DISPLAY SCREEN]

Eight of the world's ten largest notebook PC manufacturers have designed or
are designing notebook PCs to include MagicGraph128 products. The Company's
products are currently used in notebook PC's sold by Acer, Compaq, Dell,
Digital Equipment, Fujitsu, Hewlett-Packard, Hitachi, Mitsubishi, NEC, Sharp
and Texas Instruments.
<PAGE>

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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TABLE OF CONTENTS

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PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 4
The Company............................................................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 26
Management................................................................ 37
Certain Transactions...................................................... 44
Principal and Selling Stockholders........................................ 47
Description of Capital Stock.............................................. 49
Shares Eligible for Future Sale........................................... 52
Direct Sales.............................................................. 53
Underwriters.............................................................. 54
Legal Matters............................................................. 55
Experts................................................................... 55
Additional Information.................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information. Upon completion of
the offering contemplated hereby, the Company will be subject to the
informational requirements of the Securities and Exchange Act of 1934, and in
accordance therewith, will be filing reports and other information with the
Securities and Exchange Commission.

----------------

The Company's logo, MagicWare and MagicGraph128 are trademarks of the
Company. All other trademarks or trade names referred to in this Prospectus
are the property of their respective owners.

----------------

Except as otherwise noted herein, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option and (ii)
reflects the conversion of all of the Company's outstanding shares of
Preferred Stock into Common Stock upon the closing of this offering. See
"Underwriters." As of January 1996, the Company adopted a fiscal reporting
period consisting of a fifty-two week period ending on the Sunday closest to
the January month end. Fiscal years 1995, 1996 and 1997 ended on January 31,
28, and 26, respectively. For convenience, in the financial statements and
other financial data included herein, fiscal periods have been shown as ending
on the last day of the calendar month.

----------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK OF THE
COMPANY IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.

THE COMPANY

NeoMagic Corporation ("NeoMagic" or the "Company") designs, develops and
markets multimedia accelerators for sale to notebook PC manufacturers. The
Company, based on its knowledge of and experience in the industry, believes it
has developed the first commercially available silicon technology that
integrates large DRAM memory with analog and logic circuitry to provide high
performance multimedia solutions on a single chip. The Company's MagicGraph128
family of pin-compatible, multimedia accelerator products incorporates a 128-
bit memory bus. The Company believes these products enable notebook PC
manufacturers to deliver state-of-the-art multimedia capability while
decreasing power consumption, size, weight, system design complexity and cost.
Eight of the world's ten largest notebook PC manufacturers have designed or are
designing notebook PCs to include MagicGraph128 products. MagicGraph128
products are currently used in notebook PCs sold by Acer, Compaq, Dell, Digital
Equipment, Fujitsu, Hewlett-Packard, Hitachi, Mitsubishi, NEC, Sharp and Texas
Instruments.

NeoMagic's MagicGraph128 family of products ranges from accelerators designed
for notebook PCs that target cost-conscious consumers to fully-featured
multimedia systems designed for high-end notebook PCs. The Company introduced
its first MagicGraph128 product in March 1995, is currently in production with
three products and is sampling the fourth generation of its MagicGraph128
product family. NeoMagic has established strategic relationships with
Mitsubishi Electric Corporation and Toshiba Corporation to produce
semiconductor wafers for the Company's products. Pursuant to these strategic
relationships, NeoMagic designs the overall product, including the logic and
analog circuitry, and the manufacturing partner designs the DRAM module,
manufactures the wafers and performs memory testing and repair. NeoMagic is
focused on leveraging its core competencies in logic, analog and memory
integration, graphics/video multimedia technologies, driver and BIOS software,
and power management to continue developing solutions to further facilitate the
mobilization of multimedia applications.

THE OFFERING

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<S> <C>
Common Stock offered.... 3,000,000 shares
Common Stock to be
outstanding after the
offering............... 23,332,205 shares(1)
Use of proceeds......... For general corporate purposes, including working capital and
capital expenditures
Proposed Nasdaq National
Market symbol.......... NMGC
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
PERIOD FROM MAY 26, JANUARY 31,
1993 (INCEPTION) THROUGH -------------------------
JANUARY 31, 1994 1995 1996 1997
------------------------ ------- ------- -------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.................. $ -- $ -- $ 243 $40,792
Gross profit............... -- -- 78 12,161
Loss from operations....... (773) (4,891) (7,072) (1,108)
Net loss................... $(757) $(4,791) $(6,869) $ (788)
Pro forma net loss per
share(2).................. $ (.04)
Shares used in computing
pro forma net loss
per share(2).............. 21,555
</TABLE>

<TABLE>
<CAPTION>
JANUARY 31, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $13,458 $34,878
Working capital.......................................... 1,398 22,818
Total assets............................................. 27,464 48,884
Long-term obligations.................................... 1,194 1,194
Total stockholders' equity............................... 4,200 25,620
</TABLE>
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(1) Based on shares of Common Stock outstanding as of January 31, 1997.
Excludes shares to be sold in the Direct Sales. Also excludes 2,440,750
shares of Common Stock issuable upon the exercise of options under the
Company's Amended and Restated 1993 Stock Plan (the "Stock Plan"), 316,743
shares of Common Stock issuable upon the exercise of warrants outstanding
as of January 31, 1997, 2,427,387 shares reserved for future grant under
the Stock Plan as of January 31, 1997 and 500,000 shares of Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan. See
"Management--Employee Benefit Plans" and Note 6 of Notes to Consolidated
Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing pro forma net loss per
share.
(3) As adjusted to reflect the conversion of Preferred Stock to Common Stock
which will occur upon the closing of the offering and the sale by the
Company of 3,000,000 shares of Common Stock offered hereby at an assumed
offering price of $8.00 per share (after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company).
See "Use of Proceeds" and "Capitalization." Does not reflect the sale of
any shares pursuant to the Direct Sales.

3
<PAGE>

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the following risk factors
as well as those discussed elsewhere in this Prospectus.

Fluctuations in Operating Results. NeoMagic's quarterly and annual results
of operations are affected by a variety of factors that could materially
adversely affect net sales, gross profit and income from operations. These
factors include, among others, demand for the Company's products; changes in
product or customer mix, (i.e., the portion of the Company's revenues
represented by the Company's various products and customers); fluctuations in
manufacturing yields; incorrect forecasting of future revenues; availability
and cost of manufacturing capacity; unanticipated delays or problems in the
introduction or performance of the Company's next generation of products; the
Company's ability to introduce new products in accordance with OEM design
requirements and design cycles; market acceptance of the products of the
Company's customers; changes in the timing of product orders due to unexpected
delays in the introduction of products of the Company's customers or due to
the life cycles of such customers' products ending earlier than anticipated;
new product announcements or product introductions by NeoMagic's competitors;
competitive pressures resulting in lower selling prices; the volume of orders
that are received and can be fulfilled in a quarter; the rescheduling or
cancellation of orders by customers which cannot be replaced with orders from
other customers; supply constraints for the other components incorporated into
its customers' notebook PC products; foreign exchange rate fluctuations; the
unanticipated loss of any strategic relationship; seasonality associated with
the tendency of PC sales to increase in the second half of each calendar year;
the level of expenditures for research and development and sales, general and
administrative functions of the Company; costs associated with future
litigation; and costs associated with protecting the Company's intellectual
property. Any one or more of these factors could result in the Company failing
to achieve its expectations as to future revenues. The Company may be unable
to adjust spending sufficiently in a timely manner to compensate for any
unexpected sales shortfall, which could materially adversely affect quarterly
operating results. Accordingly, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year. In
certain future quarters, the Company's operating results may be below the
expectations of public market analysts or investors. In such event, the market
price of the Common Stock would be materially adversely affected.

Risks Associated with Dependence on the Notebook PC Market. The Company's
products are used only in notebook PCs. The notebook PC market is
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and significant price competition,
resulting in short product life cycles and regular reductions of average
selling prices over the life of a specific product. Although the notebook PC
market has grown substantially in recent years, there is no assurance that
such growth will continue. A reduction in sales of notebook PCs, or a
reduction in the growth rate of such sales, would likely reduce demand for the
Company's products. Moreover, such changes in demand could be large and
sudden. Since PC manufacturers often build inventories during periods of
anticipated growth, they may be left with excess inventories if growth slows
or if they have incorrectly forecast product transitions. In such cases, the
PC manufacturers may abruptly suspend substantially all purchases of
additional inventory from suppliers such as the Company until the excess
inventory has been absorbed. Any reduction in the demand for notebook PCs
generally, or for a particular product that incorporates the Company's
multimedia accelerators, could have a material adverse impact on the Company's
business, financial condition and results of operations.

The Company's ability to compete in the future will depend on its ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render the Company's products incompatible
with products developed by major hardware manufacturers and software
developers, including Intel Corporation and Microsoft Corporation. The Company
could be required, as a result, to invest significant time and effort to
redesign the Company's products to ensure compliance with relevant standards.
If the Company's products are not in compliance with prevailing industry
standards for a significant period of time,

4
<PAGE>

the Company could miss opportunities to achieve crucial design wins, which
could result in a material adverse change in the Company's business, financial
condition and results of operations. In addition, the Company's products are
designed to afford the notebook PC manufacturer significant advantages with
respect to product performance, power consumption and size. To the extent that
future developments in other notebook PC components or subassemblies
incorporate one or more of the advantages offered by the Company's products,
the market demand for the Company's products may be negatively impacted, which
could result in a material adverse change in the Company's business, financial
condition and results of operations.

Product Concentration; Risks Associated with Multimedia Products. The
Company's revenues are entirely dependent on the market for multimedia
accelerators for notebook PCs and on the Company's ability to compete in that
market. Since the Company has no other product line, the Company's revenues
and results of operations would be materially adversely affected if for any
reason it were unsuccessful in selling multimedia accelerators. The notebook
PC market frequently undergoes transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis.
If the Company's products are unable at the beginning of each such transition
to support the new feature sets or performance levels being required by
notebook PC manufacturers, the Company would be likely to lose design wins
and, moreover, not have the opportunity to compete for new design wins until
the next product transition occurred. Thus, a failure to develop products with
required feature sets or performance standards or a delay as short as a few
months in bringing a new product to market could significantly reduce the
Company's net sales for a substantial period, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

The notebook PC multimedia market is characterized by extreme price
competition. Leading-edge products may command higher average selling prices
but prices decline throughout the product life cycle as comparable and more
advanced products are introduced into the market. As a result, the Company's
ability to maintain average selling prices and gross margins depends
substantially on its ability to continue introducing new products. Its ability
to maintain gross margins is also dependent, but to a lesser extent, upon its
ability to reduce product costs throughout a product life cycle by instituting
cost reduction design changes and yield improvements, persuading customers to
adopt cost-reduced versions of its products and successfully managing its
manufacturing and subcontract relationships. The failure of the Company to
continue designing and introducing advanced products in a timely manner or to
continue reducing product costs would have a material adverse effect on the
Company's net sales, gross margins and results of operations.

Customer Concentration. The notebook PC market is highly concentrated, with
the top ten brand name OEMs by revenues accounting for more than 65% of unit
shipments during the third quarter of calendar 1996 (the most recent period
for which data is available). For this reason, the Company's sales are also
highly concentrated. Sales to the Company's top five customers accounted for
79.7% of the Company's total net sales for fiscal year 1997. The Company
expects that a small number of customers will continue to account for a
substantial portion of its net sales for the foreseeable future. As a result,
the Company's business, financial condition and results of operations could be
materially adversely affected by the decision of a single customer to cease
using the Company's products or by a decline in the number of notebook PCs
sold by a single customer or by a small number of customers.

Effects of Changes in DRAM Pricing. The Company's MagicGraph128 products
feature large DRAM memory integrated with analog and logic circuitry on a
single chip, while its competitors provide only the graphics/video analog and
logic circuitry on a separate chip to be used in conjunction with DRAMs
supplied by others. The prices of the Company's products reflect many factors,
including the prices of DRAM chips. As a result, the Company's business,
financial condition and results of operations may be materially adversely
affected by unanticipated changes in the price of DRAMs. Such changes are
typically sudden and dramatic and can extend over a significant period of
time. For example, the average price of 4-Mbit DRAMs declined by more than 80%
in 1996, and this decline affected the average selling prices of the Company's
products. A significant reduction in the price of DRAMs could cause the
Company's products to be less competitively priced, potentially affecting
ongoing product pricing as well as resulting in the loss of design wins for
new notebook PCs. In this

5
<PAGE>

circumstance, competitors without embedded DRAM could be potentially benefited
by DRAM price reductions, and the Company could be forced to respond to
pricing pressures precipitated by changes in the DRAM market by reducing the
average selling prices of its products to current and prospective system
manufacturer customers. Because the Company's product costs cannot be adjusted
as rapidly as changes in average selling prices to system manufacturers, the
Company's net sales and gross profit would be materially and adversely
impacted.

Dependence on Manufacturing Relationships. The Company's products require
wafers manufactured with state-of-the-art fabrication equipment and
techniques. All of the Company's products are currently manufactured by
Mitsubishi Electric Corporation ("Mitsubishi Electric") in Japan under the
terms of a five-year wafer supply agreement. Mitsubishi Electric is currently
producing six-inch wafers for the Company and expects to begin producing
eight-inch wafers utilizing Mitsubishi Electric's next generation of
manufacturing technologies for certain of the Company's new products in
calendar 1997. The Company also has entered into a five-year wafer supply
agreement with Toshiba Corporation ("Toshiba") in Japan to commence production
of the Company's next generation multimedia accelerator products. NeoMagic
does not expect that a significant portion of the Company's wafer requirements
will be met by Toshiba before calendar 1998. The Company expects that, for the
foreseeable future, each of its products will be single source manufactured.
Because the lead time needed to establish a strategic relationship with a new
DRAM partner is at least 12 months and the estimated time for Mitsubishi
Electric to switch to a new product line is four to six months, there is no
readily available alternative source of supply for any specific product. A
manufacturing disruption experienced by either of the Company's manufacturing
partners would impact the production of the Company's products for a
substantial period of time, which would have a material adverse effect on the
Company's business, financial condition and result of operations. Furthermore,
in the event that the transition to the next generation of manufacturing
technologies at Mitsubishi Electric or the relationship with Toshiba is
unsuccessful or delayed, the Company's business, financial condition and
results of operations would be materially and adversely affected.

There are many other risks associated with the Company's dependence upon
third party manufacturers, including: reduced control over delivery schedules,
quality assurance, manufacturing yields and cost; the potential lack of
adequate capacity during periods of excess demand; limited warranties on
wafers supplied to the Company; and potential misappropriation of NeoMagic
intellectual property. The Company is dependent on Mitsubishi Electric, and
expects in the future to be dependent upon Toshiba as well, to produce wafers
of acceptable quality and with acceptable manufacturing yields, to deliver
those wafers to the Company and its independent assembly and testing
subcontractors on a timely basis and to allocate to the Company a portion of
their manufacturing capacity sufficient to meet the Company's needs. On
occasion, the Company has experienced some of these difficulties. The
Company's wafer requirements represent a very small portion of the total
production of these companies. Although the Company's products are designed
using the process design rules of the particular manufacturer, there can be no
assurance that either Mitsubishi Electric or Toshiba will be able to achieve
or maintain acceptable yields or deliver sufficient quantities of wafers on a
timely basis or at an acceptable cost. Additionally, there can be no assurance
that either Mitsubishi Electric or Toshiba will continue to devote resources
to the production of the Company's products or continue to advance the process
design technologies on which the manufacturing of the Company's products are
based. Any such difficulties would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company's products are assembled and tested by third party
subcontractors. The Company does not have long term agreements with any of
these subcontractors. Such assembly and testing is conducted on a purchase
order basis. As a result of its reliance on third party subcontractors to
assemble and test its products, the Company cannot directly control product
delivery schedules, which could lead to product shortages or quality assurance
problems that could increase the costs of manufacturing or assembly of the
Company's products. Due to the amount of time normally required to qualify
assembly and test subcontractors, product shipments could be delayed
significantly if the Company is required to find alternative subcontractors.
Any problems associated with the delivery, quality or cost of the assembly and
test of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.

6
<PAGE>

Inventory Risk. Under its wafer supply agreements with Mitsubishi Electric
and Toshiba, the Company is obligated to provide rolling 12-month forecasts of
anticipated purchases and to place binding purchase orders four months prior
to shipment. If the Company cancels a purchase order, it must pay cancellation
penalties based on the status of work in process or the proximity of the
cancellation to the delivery date. Forecasts of monthly purchases may not
increase or decrease by more than a certain percentage from the previous
month's forecast without the manufacturer's consent. Thus, the Company must
make forecasts and place purchase orders for wafers long before it receives
purchase orders from its own customers. This limits the Company's ability to
react to fluctuations in demand for its products, which can be unexpected and
dramatic, and from time-to-time will cause the Company to have an excess or a
shortage of wafers for a particular product. As a result of the long lead time
for manufacturing wafers, semiconductor companies such as the Company from
time-to-time must take charges for excess inventory. For example, the Company
booked charges totaling $1.5 million for excess inventory in fiscal 1997.
Significant write-offs of excess inventory could materially adversely affect
the Company's financial condition and results of operations. Conversely,
failure to order sufficient wafers would cause the Company to miss revenue
opportunities and, if significant, could impact sales by the Company's
customers, which could adversely affect the Company's customer relationships
and thereby materially adversely affect the Company's business, financial
condition and results of operations.

Manufacturing Yields. The fabrication of semiconductors is a complex and
precise process. Because NeoMagic's products feature the integration of large
DRAM memory with analog and logic circuitry on a single chip, a manufacturer
must obtain acceptable yields of both the memory and logic portions of such
products, compounding the complexity of the manufacturing process. As a
result, the Company may face greater manufacturing challenges than its
competitors. Minute levels of contaminants in the manufacturing environment,
defects in masks used to print circuits on a wafer, difficulties in the
fabrication process or other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. Many of these problems are difficult to diagnose and time
consuming or expensive to remedy. As a result, semiconductor companies often
experience problems in achieving acceptable wafer manufacturing yields, which
are represented by the number of good die as a proportion of the total number
of die on any particular wafer. The Company purchases wafers, not die, and
pays an agreed price for wafers meeting certain acceptance criteria.
Accordingly, the Company bears the risk of final yield of good die. Poor
yields would materially adversely affect the Company's net sales, gross margin
and results of operations.

Semiconductor manufacturing yields are a function both of product design,
which is developed largely by the Company, and process technology, which is
typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be
analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process, and resolution of yield problems would
require cooperation by and communication between the Company and the
manufacturer. For example, a design error that resulted in lower than expected
yields of finished products caused the Company to take a $1.2 million charge
for the three months ended July 31, 1996. This risk is compounded by the
offshore location of the Company's manufacturers, increasing the effort and
time required to identify, communicate and resolve manufacturing yield
problems. As the Company's relationships with Toshiba and any additional
manufacturing partners develop, yields could be adversely affected due to
difficulties associated with adopting the Company's technology and product
design to the proprietary process technology and design rules of each
manufacturer. Because of the Company's limited access to wafer fabrication
capacity from its manufacturers, any decrease in manufacturing yields could
result in an increase in the Company's per unit costs and force the Company to
allocate its available product supply among its customers, thus potentially
adversely impacting customer relationships as well as revenues and gross
profit. There can be no assurance that the Company's manufacturers will
achieve or maintain acceptable manufacturing yields in the future. The
inability of the Company to achieve planned yields from its manufacturers
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the Company also faces the
risk of product recalls resulting from design or manufacturing defects which
are not discovered during the manufacturing and testing process. In the event
of a significant number of product returns, the Company's net sales and gross
profit could be materially adversely affected.

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<PAGE>

Dependence on New Product Development; Rapid Technological Change. The
Company's business, financial condition and results of operations will depend
to a significant extent on its ability to maintain its position in the market
for multimedia accelerator products that integrate large DRAM with analog and
logic circuitry on a single chip. As a result, the Company believes that
significant expenditures for research and development will continue to be
required in the future. The notebook PC market for which the Company's initial
products are designed is intensely competitive and is characterized by rapidly
changing technology, evolving industry standards and declining average selling
prices. Notebook PC manufacturers demand products incorporating rich features
and functionality in order to achieve product differentiation. The Company
must anticipate the features and functionality that the consumer of notebook
PCs will demand, incorporate those features and functionality into products
that meet the exacting design requirements of the notebook PC manufacturers,
price its products competitively, and introduce the products to the market
within the limited window of market demand. The success of new product
introductions is dependent on several factors, including proper new product
definition, timely completion and introduction of new product designs, the
ability of Mitsubishi Electric, Toshiba and any additional strategic
manufacturing partners to effectively design and implement the manufacture of
new products, quality of new products, differentiation of new products from
those of the Company's competitors and market acceptance of NeoMagic's and its
customers' products. There can be no assurance that the products the Company
expects to introduce will incorporate the features and functionality demanded
by system manufacturers and consumers of notebook PCs, will be successfully
developed or will be introduced within the appropriate window of market
demand. The failure of the Company to successfully introduce new products and
achieve market acceptance for such products would have a material adverse
effect on the Company's business, financial condition and results of
operations.

The integration of large DRAM memory with analog and logic circuitry on a
single chip is highly complex and is critical to the Company's success.
Because of the complexity of its products, however, NeoMagic has experienced
delays from time to time in completing development and introduction of new
products. In the event that there are delays in the completion of development
of future products, including the products currently expected to be announced
over the next year, the Company's business, financial condition and results of
operations would be materially adversely affected. Although the development
cycles for the memory and logic portions of the Company's products have been
relatively synchronized to date, there can be no assurance that this
synchronization will continue in the future. In addition, there can be no
assurance that fundamental advances in either the memory or logic components
of the Company's products will not significantly increase the complexity
inherent in the design and manufacture of MagicGraph128 products, rendering
the Company's product technologically infeasible or uncompetitive. The
multiple chip solutions offered by the Company's competitors are less complex
to design and manufacture than the Company's integrated MagicGraph128
products. As a result, these competitive solutions may be less expensive,
particularly during periods of depressed DRAM prices. The time required for
competitors to develop and introduce competing products may be shorter and
manufacturing yields may be better than those experienced by the Company.

As the markets for the Company's products continue to develop and
competition increases, NeoMagic anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average
selling prices and, in some cases, gross margin for each of the Company's
products will decline as such products mature. Thus, the Company will need to
introduce new products to maintain average selling prices. There can be no
assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
that products or technologies developed by others will not render NeoMagic's
products or technologies obsolete or uncompetitive, or that the Company's
products will be selected for design into the products of its targeted
customers. The failure of the Company's new product development efforts would
have a material adverse effect on NeoMagic's business, financial condition and
results of operations.

Competition. The market for multimedia accelerators for notebook PCs in
which the Company competes is intensely competitive and is characterized by
rapid technological change, evolving industry standards and declining average
selling prices. NeoMagic believes that the principal factors of competition in
this market are

8
<PAGE>

performance, price, features, power consumption, size and software support.
The ability of the Company to compete successfully in the rapidly evolving
notebook PC market depends on a number of factors, including success in
designing and subcontracting the manufacture of new products that implement
new technologies, product quality, reliability, price, the efficiency of
production, design wins for NeoMagic's integrated circuits, ramp up of
production of the Company's products for particular system manufacturers, end-
user acceptance of the system manufacturers' products, market acceptance of
competitors' products and general economic conditions. There can be no
assurance that the Company will be able to compete successfully in the future.

NeoMagic competes with major domestic and international companies, most of
which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. The Company's principal competitors include
Chips & Technologies, Inc. ("Chips & Technologies"), Cirrus Logic, Inc.
("Cirrus Logic"), S3 Incorporated ("S3"), and Trident Microsystems, Inc.
("Trident"). NeoMagic may also face increased competition from new entrants
into the notebook PC multimedia accelerator market including from companies
currently selling products designed for desktop PCs. Furthermore, the Company
expects that many of its competitors will seek to develop and introduce
products that integrate large DRAM with analog and logic circuitry on a single
chip. For example, Chips & Technologies and Trident have recently announced
separate programs to introduce in conjunction with Samsung Electronics Company
Ltd. ("Samsung"), the world's largest DRAM manufacturer, an integrated
multimedia accelerator solution for the notebook PC market that would compete
directly with the Company's products. Potential competition also could come
from manufacturers that integrate a microprocessor with a multimedia
controller. Although Intel has not announced any such product, Cyrix
Corporation ("Cyrix") recently announced such a product. To the Company's
knowledge, the Cyrix product does not eliminate the need for multimedia
accelerators in notebook PCs. The successful commercial introduction of such a
product that eliminates the need for a separate multimedia accelerator in
notebook PCs could have a material adverse effect on the Company's business,
financial condition and results of operations.

Some of the Company's current and potential competitors operate their own
manufacturing facilities. Since the Company does not operate its own
manufacturing facility and must make binding commitments to purchase products,
it may not be able to reduce its costs and cycle time or adjust its production
to meet demand as rapidly as companies that operate their own facilities,
which could have a material adverse effect on its business, financial
condition and results of operations. In addition, the prices of the Company's
products reflect many factors, including the prices of DRAM chips and non-
integrated graphics chips. Therefore, in some cases, the Company's products
may be more expensive than competitive multiple chip solutions. The Company in
the past has lost and in the future may lose design wins due to this price
difference. Furthermore, a significant reduction in the price of DRAMs could
cause the Company's products to be less competitively priced, potentially
affecting ongoing product pricing as well as resulting in the loss of design
wins for new notebook PCs.

History of Operating Losses; Limited History of Operations. The Company was
founded in May 1993 and had losses from operations of $773,000, $4.9 million,
$7.1 million and $1.1 million for the period from inception (May 26, 1993)
through January 31, 1994, and in fiscal years 1995, 1996 and 1997,
respectively, and had an accumulated deficit of approximately $13.2 million as
of January 31, 1997. Although the Company first achieved profitability on a
quarterly basis during the three months ended October 31, 1996, there can be
no assurance that the Company will remain profitable on a quarterly or annual
basis, if at all.

Uncertainty Regarding Patents and Protection of Proprietary Rights. The
Company relies in part on patents to protect its intellectual property. In the
United States, the Company has been issued two patents, each covering certain
aspects of the design and architecture of the Company's multimedia
accelerators. In addition, the Company has several patent applications pending
in the United States Patent and Trademark Office (the "PTO"). There can be no
assurance that the Company's pending patent applications or any future
applications will be approved, or that any issued patents will provide the
Company with competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate the
Company's products or design around any patents that may be issued to the
Company.

9
<PAGE>

The Company also relies on a combination of mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its
intellectual property. Despite these efforts, there can be no assurance that
others will not independently develop substantially equivalent intellectual
property or otherwise gain access to the Company's trade secrets or
intellectual property, or disclose such intellectual property or trade
secrets, or that the Company can meaningfully protect its intellectual
property. A failure by the Company to meaningfully protect its intellectual
property could have a material adverse effect on the Company's business,
financial condition and results of operations.

As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. The Company in the past has been, and in the future may be, notified
that it may be infringing the intellectual property rights of third parties.
In November 1994, Cirrus Logic filed suit against the Company and certain of
its employees claiming, among other things, breach of fiduciary duty, breach
of and interference with contract and misappropriation of trade secrets. The
Company and Cirrus Logic settled the lawsuit in June 1996, but the Company
incurred an aggregate of $703,000 in expenses in connection with such
litigation during fiscal 1995 and fiscal 1996. This settlement did not involve
cash payments but did include a non-solicitation provision and certain
contingent cross-licensing provisions. In late February 1997, the Company
received a written notice from Cirrus Logic asserting that the Company's
MagicGraph128, MagicGraph128V and MagicGraph128ZV products infringe three
United States patents held by Cirrus Logic. The Company believes, based upon
advice rendered by its patent counsel, Townsend and Townsend and Crew LLP,
that the Company's MagicGraph128, MagicGraph128V and MagicGraph 128ZV products
do not infringe any of the claims of these patents. However, there can be no
assurance that Cirrus Logic will not file a lawsuit against the Company or
that the Company would prevail in any such litigation.

In October 1996 the Company was notified by two of its customers that they
had received a letter from the holder of a United States patent asserting that
the video/graphics subsystem in such customers' notebook PCs, which use the
Company's MagicGraph128 and MagicGraph128V products, infringe certain claims
of the patent. The Company has certain indemnification obligations to
customers with respect to the infringement of third-party intellectual
property rights by its products. There can be no assurance that the Company's
potential obligations to indemnify such customers will not have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes, based upon advice rendered by its patent
counsel, Townsend and Townsend and Crew LLP, that the Company's MagicGraph128
and MagicGraph128V products do not infringe any of the claims of such patent.
Although there have been no further communications regarding this matter since
October 1996, there can be no assurance that the holder of such patent will
not file a lawsuit against the Company or its customers, that the Company or
such customers would prevail in any such litigation, or that such customers
will continue to purchase the Company's products under the threat of potential
litigation.

Any patent litigation, whether or not determined in the Company's favor or
settled by the Company, would at a minimum be costly and could divert the
efforts and attention of the Company's management and technical personnel from
productive tasks, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that infringement claims by third parties or claims for
indemnification by other customers or end users of the Company's products
resulting from infringement claims will not be asserted in the future or that
such assertions, if proven to be true, will not materially adversely affect
the Company's business, financial condition and results of operations. In the
event of any adverse ruling in any such matter, the Company could be required
to pay substantial damages, which could include treble damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or to obtain a license under the intellectual property
rights of the third party claiming infringement. There can be no assurance,
however, that a license would be available on reasonable terms or at all. Any
limitations on the Company's ability to market its products, or delays and
costs associated with redesigning its products or payments of license fees to
third parties, or any failure by the Company to develop or license a
substitute technology on commercially reasonable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.

10
<PAGE>

Dependence on International Sales and Suppliers. Export sales are a critical
part of the Company's business. Sales to customers located outside the United
States (including sales to foreign operations customers headquartered in the
United States and foreign system manufacturers that sell to United States-
based OEMs) accounted for 90.0% and 96.2% of the Company's net sales for
fiscal 1996 and fiscal 1997, respectively. The Company expects that net sales
derived from international sales will continue to represent a significant
portion of its total net sales. Some of the Company's international sales are
supported by letters of credit issued by its customers. Because the Company's
international sales have to date been denominated in United States dollars,
increases in the value of the United States dollar could increase the price in
local currencies of the Company's products in foreign markets and make the
Company's products relatively more expensive than competitors' products that
are denominated in local currencies. All of the Company's wafers are and for
the foreseeable future will be produced by foreign manufacturers. In addition,
many of the components used by the Company are procured from international
sources. Under the Company's wafer supply agreements with Mitsubishi Electric
and Toshiba, products are priced in Japanese yen. As a result, the Company's
cost of goods sold are subject to fluctuations in the yen-dollar exchange
rates. The Company has in the past hedged its exposure to fluctuations in such
foreign currency exchange rate by purchasing forward contracts and may
continue to do so in the future. However, there can be no assurance that such
hedging will be adequate. Significant wafer or component price increases,
fluctuations in currency exchange rates or the Company's hedging against
currency exchange rate fluctuations could have a material adverse effect on
the Company's business, financial condition and results of operations.

International sales and manufacturing operations are subject to a variety of
risks, including fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles, potentially adverse
tax consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally including
foreign government regulation, political and economic instability and
unexpected changes in diplomatic and trade relationships. Moreover, the laws
of certain foreign countries in which the Company's products may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's intellectual property rights to the same extent as do the laws of
the United States, thus increasing the possibility of piracy of the Company's
products. There can be no assurance that one or more of these risks will not
have a material adverse effect on the Company's business, financial condition
and results of operations.

Need for Additional Capital. The Company requires substantial working
capital to fund its business, particularly to finance inventories and accounts
receivable and for capital expenditures. The Company believes that the net
proceeds of this offering, together with its existing capital resources, will
be sufficient to meet the Company's capital requirements through the next 12
months, although the Company could be required, or could elect, to seek to
raise additional capital during such period. The Company's future capital
requirements will depend on many factors, including the rate of net sales
growth, the timing and extent of spending to support research and development
programs and expansion of sales and marketing, the timing of introductions of
new products and enhancements to existing products, and market acceptance of
the Company's products. The Company expects that it may need to raise
additional equity or debt financing in the future. There can be no assurance
that additional equity or debt financing, if required, will be available on
acceptable terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

Management of Expanded Operations. The Company has experienced, and may
continue to experience, periods of rapid growth and expansion, which have
placed, and could continue to place, a significant strain on the Company's
limited personnel and other resources. To manage these expanded operations
effectively, the Company will be required to continue to improve its
operational, financial and management systems. Given its relatively early
stage of development, the Company is dependent upon its ability to
successfully hire, train, motivate and manage its employees, especially its
management and development personnel. If the Company's management is unable to
manage its expanded operations effectively, the Company's business, financial
condition and results of operations could be materially adversely affected.

11
<PAGE>

Dependence on Qualified Personnel. The Company's future success depends in
part on the continued service of its key engineering, sales, marketing,
manufacturing, finance and executive personnel, and its ability to identify,
hire and retain additional personnel. There is intense competition for
qualified personnel in the semiconductor industry, and there can be no
assurance that the Company will be able to continue to attract and train
qualified personnel necessary for the development of its business. The
Company's anticipated growth is expected to place increased demands on the
Company's resources and will likely require the addition of new management
personnel and the development of additional expertise by existing management
personnel. Loss of the services of, or failure to recruit in a timely manner,
key technical and management personnel could be significantly detrimental to
the Company's product development programs or otherwise have a material
adverse effect on the Company's business, financial condition and results of
operations.

Absence of Prior Public Market and Possible Volatility of Stock Price. Prior
to this offering, there has been no public market for the Common Stock and
there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price for Common Stock to be sold by
the Company was determined by negotiations among the Company and the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of this offering. See "Underwriting" for
factors considered in determining such offering price. The market price of the
Common Stock could be subject to significant fluctuations in response to
variations in the Company's anticipated or actual operating results,
announcements of new products, technological innovations or setbacks by the
Company or its competitors, conditions in the semiconductor and notebook PC
industries, the commencement of, developments in or outcome of litigation,
changes in estimates of the Company's performance by securities analysts, and
other events or factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of many high technology companies and that have
often been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock.

Concentration of Ownership. Following this offering, the Company's
directors, executive officers and principal stockholders and certain of their
affiliates will own beneficially approximately 65.0% of the outstanding shares
of Common Stock. Accordingly, these stockholders will have the ability to
influence significantly the election of the Company's directors as well as
most other stockholder actions.

Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock (including shares issued upon the exercise of outstanding options
and warrants) in the public market following this offering could adversely
affect the market price for the Common Stock. Such sales could also make it
more difficult for the Company to sell its equity or equity-related securities
in the future at a time and price that the Company deems appropriate. Upon
completion of this offering, the Company will have outstanding an aggregate of
23,332,205 shares of Common Stock assuming no exercise of the Underwriters'
over-allotment option, no exercise of outstanding options under the Stock Plan
and no issuance of shares pursuant to the Direct Sales. Of these outstanding
shares of Common Stock, the 3,000,000 shares sold in this offering and any
shares sold in the Direct Sales will be freely tradeable without restriction
or further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act. The remaining 20,332,205
shares of Common Stock outstanding upon completion of this offering and held
by existing stockholders will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). The
holders of 20,134,705 Restricted Shares, including all officers and directors
of the Company, are subject to "lock-up" agreements with the Representatives
of the Underwriters and/or the Company providing that they will not offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
the shares of Common Stock owned by them or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company for a
period of 180 days after the date of this Prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated and/or the Company, as
applicable. The Company has agreed with the Representatives of the
Underwriters not to release any holders from such agreements without the prior
consent of Morgan Stanley & Co. Incorporated. Such lock-up agreements may be
released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Morgan Stanley & Co. Incorporated. Of the
20,134,705 shares

12
<PAGE>

of Common Stock that will first become eligible for sale in the public market
180 days after the date of this Prospectus, 5,524,824 shares will be
immediately eligible for sale without restriction under Rule 144(k) or Rule
701 under the Securities Act of 1933, as amended, and 14,609,881 shares will
be immediately eligible for sale subject to certain volume and other
restrictions pursuant to Rule 144. Shortly after the effectiveness of this
offering, the Company intends to register 4,868,137 shares of Common Stock
reserved for issuance under its stock option and stock purchase plans or
currently subject to outstanding options. See "Shares Eligible for Future
Sale."

Anti-Takeover Provisions. Immediately after the closing of this offering,
the Board of Directors will have the authority to issue up to 2,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of holders of
any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock may delay, defer or prevent a change in control of the Company
as the terms of the Preferred Stock that might be issued could potentially
prohibit the Company's consummation of any merger, reorganization, sale of
substantially all of its assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the outstanding shares of
the Preferred Stock. Additionally, the issuance of Preferred Stock could have
a dilutive effect on shareholders of the Company. The Company has no present
plans to issue shares of Preferred Stock. In addition, Section 203 of the
Delaware General Corporation Law, to which the Company is subject, restricts
certain business combinations with any "interested stockholder" as defined by
such statute. The statute may delay, defer or prevent a change in control of
the Company.

Dilution. Purchasers of the Common Stock in this offering will suffer
immediate and substantial dilution of $6.90 per share in the net tangible book
value of the Common Stock from the initial public offering price. To the
extent that outstanding options to purchase the Common Stock are exercised,
there will be further dilution.

Broad Management Discretion in Use of Proceeds. The principal purposes of
this offering are to obtain additional capital, create a public market for the
Company's Common Stock and facilitate future access by the Company to public
equity markets. As of the date of this Prospectus, the Company has no specific
plans as to the use of the net proceeds of this offering or the net proceeds
from the Direct Sale. The Company ultimately expects to use such net proceeds
from this offering for general corporate purposes, including working capital
and capital expenditures. A portion of the proceeds may also be used to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies; however, there are no plans,
negotiations or discussions with respect to any such transactions at the
present time. Pending use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing,
investment grade obligations. Accordingly, the Company's management will
retain broad discretion as to the allocation of the net proceeds from this
offering and subject to certain exceptions will be able to use and allocate
such net proceeds without first obtaining stockholder approval.

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<PAGE>

THE COMPANY

NeoMagic Corporation ("NeoMagic" or the "Company") designs, develops and
markets multimedia accelerators for sale to notebook PC manufacturers. The
Company, based on its knowledge of and experience in the industry, believes it
has developed the first commercially available silicon technology that
integrates large DRAM memory with analog and logic circuitry to provide high
performance multimedia solutions on a single chip. The Company's MagicGraph128
family of pin-compatible, multimedia accelerator products incorporates a 128-
bit memory bus. The Company believes these products enable notebook PC
manufacturers to deliver state-of-the-art multimedia capability while
decreasing power consumption, size, weight, system design complexity and cost.
Eight of the world's ten largest notebook PC manufacturers have designed or
are designing notebook PCs to include MagicGraph128 products. MagicGraph128
products are currently used in notebook PCs sold by Acer, Compaq, Dell,
Digital Equipment, Fujitsu, Hewlett-Packard, Hitachi, Mitsubishi, NEC, Sharp
and Texas Instruments.

Advances in the multimedia capabilities and features of personal computers
and software applications have fueled the demand for personal computers and
enhanced the usefulness of the PC as a platform for work, entertainment,
communication and collaboration. In particular, the effectiveness of
multimedia for many applications, such as on-site presentations and training,
education, video conferencing, e-mail and entertainment, is maximized in a
mobile environment, giving rise to significant demand for multimedia-capable
notebook PCs.

Multimedia accelerators for desktop PCs traditionally use multiple chip
solutions involving separate DRAM and analog/logic chips. However, the non-
integrated multiple chip solution has disadvantages in the notebook PC
environment, where tolerance for power consumption, heat generation and size
is more limited, and has forced notebook PC manufacturers to compromise
multimedia performance in order to satisfy mobile system design requirements.
NeoMagic has recognized a significant opportunity to "mobilize multimedia" by
making desktop quality multimedia acceleration practical in the notebook PC
environment through the integration of large DRAM with analog and logic
circuitry on a single chip.

NeoMagic has established strategic relationships with two leading DRAM
manufacturers, Mitsubishi Electric Corporation ("Mitsubishi Electric") and
Toshiba Corporation ("Toshiba"), to produce semiconductor wafers for the
Company's products. The Company has entered into five-year wafer supply
agreements with each of these companies. In each case, NeoMagic designs the
overall product, including the logic and analog circuitry, and the
manufacturing partner designs the DRAM module, manufactures the wafers and
performs memory testing and repair. Upon delivery of finished wafers by the
DRAM partner, the Company uses subcontractors to perform assembly, packaging
and final testing of its products. This manufacturing approach enables
NeoMagic to concentrate its resources on product design and development.

To meet customer requirements, NeoMagic's sales and marketing personnel work
closely with customers, business partners and key industry trend setters to
define product features, performance, price, and market timing of new
products. Additionally, the Company employs a highly trained team of
application engineers to assist customers in designing, testing and qualifying
system designs that incorporate NeoMagic products. The Company's experience
has been that the depth and quality of this design support are key to
improving customers' time-to-market, maintaining a high level of customer
satisfaction and encouraging customers to utilize subsequent generations of
NeoMagic's products.

The Company was incorporated in California in May 1993 and reincorporated in
Delaware in February 1997. The Company's executive offices are located at 3260
Jay Street, Santa Clara, California 95054, its telephone number at that
location is (408) 988-7020 and its Web site is located at
http:\\\\www.neomagic.com. Information contained in the Company's Web site is
not a part of this Prospectus.

14
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of 3,000,000 shares of Common
Stock being offered hereby, at an assumed initial public offering price of
$8.00 per share, are estimated to be approximately $21,420,000 (approximately
$24,024,000 if the Underwriters' over-allotment option is exercised in full),
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The net proceeds to the Company from
the Direct Sales, if concluded, are expected to be $1,500,000. The principal
purposes of this offering are to obtain additional capital, create a public
market for the Company's Common Stock and facilitate future access by the
Company to public equity markets. As of the date of this Prospectus, the
Company has no specific plans as to the use of the net proceeds of this
offering or the net proceeds from the Direct Sale. The Company ultimately
expects to use such net proceeds from this offering for general corporate
purposes, including working capital and capital expenditures. A portion of the
proceeds may also be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies; however,
there are no plans, negotiations or discussions with respect to any such
transactions at the present time. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment grade obligations. In the event that the
Underwriters' over-allotment option is exercised, the Company will not receive
any proceeds from the sale of Common Stock by the Selling Stockholders. See
"Risk Factors--Broad Management Discretion in Use of Proceeds."

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock or other securities. The Company currently anticipates that it will
retain all of its future earnings for use in the expansion and operation of
its business and does not anticipate paying any cash dividends in the
foreseeable future.

15
<PAGE>

CAPITALIZATION

The following table sets forth current obligations under capital leases and
the total capitalization of the Company (i) as of January 31, 1997, and (ii)
as adjusted to reflect the automatic conversion of all outstanding shares of
Preferred Stock into Common Stock upon the closing of this offering and the
receipt by the Company of the estimated net proceeds from the sale of the
3,000,000 shares of Common Stock offered by the Company at an estimated
initial public offering price of $8.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company.

<TABLE>
<CAPTION>
JANUARY 31, 1997
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS,
EXCEPT SHARE
DATA)
<S> <C> <C>
Current obligations under capital leases.................... $ 1,054 $ 1,054
======== =======
Long-term obligations....................................... $ 1,194 $ 1,194
Stockholders' equity:
Noncumulative Convertible Preferred Stock, $.001 par value,
12,868,315 shares authorized, 12,259,614 shares issued and
outstanding, actual; 2,000,000 shares authorized, no
shares issued and outstanding, as adjusted(1)............. 12 --
Common Stock, $.001 par value, 60,000,000 shares
authorized, 8,072,591 shares issued and outstanding,
actual; 23,332,205 shares issued and outstanding, as
adjusted(1)............................................... 8 23
Additional paid-in capital................................. 18,207 39,624
Notes receivable from stockholders......................... (822) (822)
Accumulated deficit........................................ (13,205) (13,205)
-------- -------
Total stockholders' equity............................... 4,200 25,620
-------- -------
Total capitalization.................................. $ 5,394 $26,814
======== =======
</TABLE>
- --------
(1) Does not reflect the sale of any shares pursuant to the Direct Sales.
Excludes 2,440,750 shares of Common Stock issuable upon the exercise of
options under the Stock Plan, 316,743 shares of Common Stock issuable upon
the exercise of warrants outstanding as of January 31, 1997, 2,427,387
shares of Common Stock reserved for future grant under the Stock Plan as
of January 31, 1997 and 500,000 shares of Common Stock reserved for
issuance under the Employee Stock Purchase Plan. See "Direct Sales,"
"Management--Employee Benefit Plans" and Note 6 of Notes to Consolidated
Financial Statements.

16
<PAGE>

DILUTION

The net tangible book value of the Company as of January 31, 1997 was
$4,200,000 or $.21 per share of Common Stock. Net tangible book value per
share is determined by dividing the tangible book value of the Company (total
tangible assets less total liabilities) by the number of outstanding shares of
Common Stock at that date. After giving effect to the sale by the Company of
the 3,000,000 shares of Common Stock offered hereby (based upon an assumed
initial public offering price of $8.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company), the Company's net tangible book value at January 31, 1997
would have been $25,620,000 or $1.10 per share. This represents an immediate
increase in net tangible book value to existing stockholders of $.89 per share
and an immediate dilution to new public investors of $6.90 per share. The
following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $8.00
Net tangible book value per share as of January 31, 1997......... $.21
Increase per share attributable to new public investors.......... .89
----
Net tangible book value per share after offering.................. 1.10
-----
Dilution per share to new public investors........................ $6.90
=====
</TABLE>

The following table sets forth on a pro forma basis as of January 31, 1997
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid, and the average price per share paid by
the existing stockholders and by the new public investors (based upon an
assumed initial public offering price of $8.00 per share before deduction of
estimated underwriting discounts and commissions and offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 20,332,205 87.1% $18,286,914 43.2% $.90
New public investors(1).... 3,000,000 12.9 24,000,000 56.8 8.00
---------- ----- ----------- -----
Total.................... 23,332,205 100.0% $42,286,914 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The foregoing table does not reflect the sale of any shares pursuant to
the Direct Sales and assumes no exercise of stock options or warrants.
Excludes 2,440,750 shares of Common Stock issuable upon the exercise of
options under the Stock Plan and 316,743 shares of Common Stock issuable
upon the exercise of warrants outstanding as of January 31, 1997. Such
options and warrants were issued at a weighted average exercise price of
$3.86 per share and $1.32 per share, respectively. In addition, as of
January 31, 1997, an additional 2,427,387 shares of Common Stock were
reserved for future grant under the Stock Plan. Also excluded are 500,000
shares of Common Stock reserved for issuance under the Employee Stock
Purchase Plan. To the extent that any of these options or warrants are
exercised, there will be further dilution to new public investors. See
"Capitalization," "Management--Employee Benefit Plans" and Note 6 of Notes
Consolidated Financial Statements.

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data is qualified by reference
to, and should be read in conjunction with, the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The selected balance sheet data as of January 31, 1996 and 1997 and selected
consolidated statement of operations data for each of the three years in the
period ended January 31, 1997 have been derived from and should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto included elsewhere in this Prospectus. The selected
consolidated statement of operations data for the period from May 26, 1993
(inception) through January 31, 1994 and the selected consolidated balance
sheet data as of January 31, 1994 and 1995 have been derived from audited
consolidated financial statements and notes thereto not included in this
Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
MAY 26, 1993
(INCEPTION) FISCAL YEAR ENDED
THROUGH JANUARY 31,
JANUARY 31, -------------------------------
1994 1995 1996 1997
----------------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales...................... $ -- $ -- $ 243 $ 40,792
Cost of sales.................. -- -- 165 28,631
------- --------- --------- ---------
Gross profit................... -- -- 78 12,161
Operating expenses:
Research and development...... 465 2,423 4,934 8,467
Sales, general and
administrative............... 308 968 1,606 6,305
Legal costs(1)................ -- 1,500 610 (1,503)
------- --------- --------- ---------
Total operating expenses..... 773 4,891 7,150 13,269
Loss from operations........... (773) (4,891) (7,072) (1,108)
Other income (expense), net:
Interest income and other .... 16 194 385 1,366
Interest expense.............. -- (94) (182) (1,046)
------- --------- --------- ---------
Net loss..................... $ (757) $ (4,791) $(6,869) $ (788)
======= ========= ========= =========
Pro forma net loss per
share(2)....................... $ (.04)
=========
Shares used in computing pro
forma net loss per share(2)... 21,555
</TABLE>

<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1994 1995 1996 1997
----- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 530 $4, 902 $6,877 $13,458
Working capital................................... 618 2,846 4,069 1,398
Total assets...................................... 1,039 5,956 8,749 27,464
Long-term obligations............................. 185 452 749 1,194
Total stockholders' equity........................ 753 3,313 4,542 4,200
</TABLE>
- -------
(1) Relates to amounts provided by the Company for estimated legal fees
associated with litigation which was dismissed in the second quarter of
fiscal 1997. The $1.5 million benefit in legal costs during the year ended
January 31, 1997 was due to the reversal of previously provided legal fees
as a result of such dismissal. See Note 8 of Notes to Consolidated
Financial Statements.

(2) See Note 1 of Notes to Consolidated Financial Statements.

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

NeoMagic designs, develops and markets multimedia accelerators for sale to
notebook computer manufacturers. The Company has developed the first
commercially available high performance silicon technology that integrates
large DRAM memory with analog and logic circuitry to provide a high
performance multimedia solution on a single chip. The Company's MagicGraph128
family of pin-compatible multimedia accelerators incorporates a 128-bit memory
bus. The Company believes these products enable notebook PC manufacturers to
deliver state-of-the-art multimedia capability while decreasing power
consumption, size, system design complexity and cost.

Since its inception in May 1993 through the end of fiscal 1996, NeoMagic was
in the development stage and was primarily engaged in product development,
product testing and the establishment of strategic relationships with
customers and suppliers. Accordingly, the majority of the Company's operating
expenses during such period were related to research and development
activities. Since inception, the Company has incurred losses in each fiscal
year. At January 31, 1997, the Company had an accumulated deficit of
approximately $13.2 million. The Company first recognized revenue on product
sales in the first quarter of fiscal 1996. Operating results to date in fiscal
1997 have benefited from increased market acceptance of the Company's
products. The Company generally recognizes revenue at the time of product
shipment. Although the Company has made no sales to distributors to date, the
Company's policy is to defer recognition of revenue on shipments to
distributors until the product is sold by such distributors.

All of the Company's net sales in fiscal 1996 and 1997 were derived from
sales of its multimedia accelerator products, and the Company expects this
trend to continue for the foreseeable future. Historically, a majority of the
Company's sales have been to a limited number of customers. Sales to the
Company's top five customers accounted for 100% and 79.7% of the Company's net
sales for fiscal 1996 and fiscal 1997, respectively. The Company expects that
a substantial portion of sales of its products will continue to be to a
limited number of customers for the foreseeable future. The customers
contributing significant amounts of net sales have varied and will continue to
vary depending on the timing and success of new product introductions by such
customers.

Export sales are a critical part of the Company's business. Sales to
customers located outside the United States (including sales to foreign
operations of customers headquartered in the United States and foreign system
manufacturers who sell to United States-based OEMs) accounted for 90.0% and
96.2% of the Company's net sales for fiscal 1996 and fiscal 1997,
respectively. The Company expects that the net sales derived from purchases by
international customers will continue to represent a significant portion of
its total net sales. All of the Company's sales are denominated in United
States dollars.

The Company's products require semiconductor wafers manufactured with state-
of-the-art fabrication equipment and technology. NeoMagic has established
strategic relationships with Mitsubishi Electric and Toshiba to produce its
semiconductor wafers and uses other independent contractors to perform
assembly, packaging and testing. The Company's relationships with Mitsubishi
Electric and Toshiba were recently formalized in separate five year wafer
supply agreements. NeoMagic does not expect that a significant portion of the
Company's wafer requirements will be met by Toshiba before calendar 1998.
These relationships enable the Company to concentrate its resources on product
design and development, where NeoMagic believes it has greater competitive
advantages, and to eliminate the high cost of owning and operating a
semiconductor wafer fabrication facility. The Company depends on these
suppliers to allocate to the Company a portion of their manufacturing capacity
sufficient to meet the Company's needs, to produce products of acceptable
quality and at acceptable manufacturing yields and to deliver those products
to the Company on a timely basis. The Company purchases wafers, not die, and
pays an agreed price for wafers meeting certain acceptance criteria. All of
the Company's products are assembled and tested by independent vendors. To
date, all of the Company's wafer purchases, which constitute a significant
part of its cost of goods sold, have been priced in Japanese yen. As a

19
<PAGE>

result, exchange rate fluctuations can affect the Company's gross margin. The
Company has in the past hedged its exposure to fluctuations in the exchange
rate between the Japanese yen and the United States dollar by purchasing
forward contracts and may continue to do so in the future.

Under its wafer supply agreements with Mitsubishi Electric and Toshiba, the
Company is obligated to provide rolling 12-month forecasts of anticipated
purchases and place binding purchase orders four months prior to shipment. If
the Company cancels a purchase order, the Company must pay cancellation
penalties based on the status of work in process or the proximity of the
cancellation to the delivery date. Forecasts of monthly purchases may not
increase or decrease by more than a certain percentage from the previous
month's forecast without the manufacturer's consent. Thus, the Company must
make forecasts and place purchase orders for wafers long before it receives
purchase orders from its own customers. This limits the Company's ability to
react to fluctuations in demand for its products, which can be unexpected and
dramatic and from time-to-time will cause the Company to have an excess or a
shortage of wafers for a particular product, which could cause the Company to
take charges for excess inventory or miss revenue opportunities.

Prior to fiscal 1997, the Company was primarily engaged in research and
development and testing of its products. Accordingly, the majority of its
operating expenses were related to research and development activities. In
fiscal 1997, in connection with the commencement of commercial sales of its
products, the Company accelerated its investment in sales, marketing,
manufacturing and administrative infrastructures. The Company expects to
continue to devote substantial resources to research and development efforts.
All of the Company's research and development costs have been expensed as
incurred.

The Company's fiscal year end is January 31. Any reference herein to a
fiscal year refers to the year ended January 31 of such year.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED JANUARY 31, 1995, 1996 AND 1997

Net Sales. Through fiscal 1995, the Company had no sales. Net sales for
fiscal 1996 and 1997 were $243,000 and $40.8 million, respectively. Prior to
fiscal 1997, the Company was in the development stage, primarily engaging in
product development, product testing, and the establishment of strategic
relationships with customers and suppliers. The substantial increase in net
sales from fiscal 1996 to 1997 was due to increased market acceptance of the
Company's products, the introduction by the Company of additional products in
its MagicGraph128 product family which expanded the portion of the market
addressed by NeoMagic's products, and the Company's investment in sales and
marketing personnel and activities. Although the Company achieved substantial
net sales growth between fiscal 1996 and 1997, the Company does not expect to
sustain this rate of sequential annual growth in future periods. The Company
expects that the average prices of its products will decline over the
respective lives of such products.

Gross Profit. Gross profit was $78,000 and $12.2 million for fiscal 1996 and
1997, respectively. The increase in gross profit from fiscal 1996 to fiscal
1997 was the result of the increase in net sales. The Company's future gross
profit will be affected by the overall level of sales, the mix of products
sold in a period, manufacturing yields and the Company's ability to reduce
product costs.

Research and Development. Research and development expenses include
compensation and associated costs relating to development personnel, operating
system software costs, and prototyping costs which are comprised of photomask
costs and pre-production wafer costs. Research and development expenses were
$2.4 million, $4.9 million and $8.5 million for fiscal 1995, 1996 and 1997,
respectively. The increases reflect increased personnel costs associated with
a general expansion in the Company's research and development activities and
higher prototype expenses. Research and development expenses as a percentage
of net sales declined substantially year to year due primarily to increases in
net sales. The market for the Company's products

20
<PAGE>

is characterized by frequent new product introductions and rapidly changing
technology and industry standards. As a result, the Company's success will
depend to a substantial degree upon its ability to develop and introduce in a
timely fashion new products, and enhancements to its existing products, that
meet changing customer requirements and emerging industry standards.
Accordingly, the Company expects to continue to make substantial investments
in research and development and anticipates that research and development
expenses will increase in absolute dollars in future periods.

Sales, General and Administrative. Sales, general and administrative
expenses were $968,000, $1.6 million and $6.3 million for fiscal 1995, 1996
and 1997, respectively. The increase from fiscal 1995 to 1996 resulted from
the addition of personnel in sales, marketing, and manufacturing
administration. The increase from fiscal 1996 to 1997 was due to increased
sales, marketing and administrative personnel and commission expense
associated with commencement of volume sales. Sales, general and
administrative expenses as a percentage of net sales declined substantially
year to year due primarily to increases in net sales. The Company expects
sales, general and administrative expenses to increase in absolute dollars in
future periods due to additional staffing in its marketing, sales and
administrative departments, continued expansion of its international
operations, and additional expenses related to being a public company.

Legal Costs. Legal costs consist of amounts provided by the Company for
estimated legal fees associated with the litigation with Cirrus Logic, which
was dismissed in the second quarter of fiscal 1997. In fiscal 1995, the
Company accrued $1.5 million for such legal costs. In fiscal 1996, an
additional accrual of $610,000 was recorded by the Company. In fiscal 1997,
based on the dismissal of such litigation, the remaining reserve balance of
$1.5 million was reversed. The settlement which gave rise to the dismissal did
not involve cash payments, but did include a non-solicitation provision and
certain contingent cross licensing provisions. The Company does not believe
that such settlement will have a material adverse effect on the Company's
future operations. See Note 8 of Notes to Consolidated Financial Statements.

Other Income (Expense), Net. The Company incurs interest expense on
borrowings under the Company's working capital line of credit and on lease
obligations used to finance certain equipment. The Company earns interest on
its cash and short-term investments. Other income (expense), net was $100,000,
$203,000, and $320,000 for fiscal 1995, 1996 and 1997, respectively. The
increase in other income (expense), net between fiscal 1995 and 1996 was due
to interest income on higher cash balances maintained during fiscal 1996. The
increase in other income (expense), net from fiscal 1996 to fiscal 1997 was
due to approximately $1.0 million in proceeds received for non-recurring
engineering services performed by NeoMagic, in addition to interest income
resulting from higher cash balances. Other income in fiscal 1997 was partially
offset by higher interest expense resulting from borrowings under the
Company's working capital line and additional lease obligations used to
finance certain equipment purchases. The Company does not anticipate
generating income from engineering services on a regular basis, if at all, in
future periods.

Provision for Income Taxes. The Company recorded no provision for federal or
state income taxes during fiscal 1995, 1996 or 1997. The Company expects to
record a provision for income taxes in fiscal 1998, the amount of which will
depend on several factors, including the availability of net operating loss
carryforwards, research and development tax credits and the portion of the
Company's business conducted through non-United States subsidiaries. As of
January 31, 1997, the Company had available net operating loss carryforwards
for federal and state tax purposes of approximately $13.2 million and $4.8
million, respectively. The Company's ability to utilize its net operating
losses may be limited in the future due to a deemed change of control as a
result of this offering. See Note 5 of Notes to Consolidated Financial
Statements.

21
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth the consolidated statements of operations
data, both in absolute dollars and as a percentage of net sales, for each of
the four quarters during the fiscal year ended January 31, 1997. This
information has been derived from the Company's unaudited consolidated
financial statements. In management's opinion, this unaudited information has
been prepared on the same basis as the audited consolidated financial
statements appearing elsewhere in this Prospectus, and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation thereof. The unaudited quarterly information should be read
in conjunction with the audited consolidated financial statements of NeoMagic
and the notes thereto included elsewhere herein. The growth in net sales and
improvement in operating results experienced by the Company in recent quarters
are not necessarily indicative of future results. In addition, in light of the
significant growth in the recent year, NeoMagic believes that period-to-period
comparisons of its financial results should not be relied upon as an
indication of future performance.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1996 1996 1996 1997
--------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales......................... $ 3,520 $ 5,954 $15,035 $16,283
Cost of sales..................... 2,815 5,481 9,989 10,346
------- ------- ------- -------
Gross profit...................... 705 473 5,046 5,937
Operating expenses:
Research and development......... 1,989 1,634 2,210 2,634
Sales, general and
administrative.................. 965 1,502 1,887 1,951
Legal costs...................... -- (1,503) -- --
------- ------- ------- -------
Total operating expenses...... 2,954 1,633 4,097 4,585
------- ------- ------- -------
Income (loss) from operations..... (2,249) (1,160) 949 1,352
Other income (expense), net:
Interest income and other........ 1,076 75 42 173
Interest expense................. (160) (210) (316) (360)
------- ------- ------- -------
Net income (loss)............. $(1,333) $(1,295) $ 675 $ 1,165
======= ======= ======= =======
Pro forma net income (loss) per
share............................. $ (.06) $ (.06) $ .03 $ .05
======= ======= ======= =======
Shares used in computing pro forma
net income (loss) per share...... 21,678 21,651 21,888 21,806
AS A PERCENTAGE OF NET SALES:
Net sales......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 80.0 92.1 66.4 63.5
------- ------- ------- -------
Gross profit...................... 20.0 7.9 33.6 36.5
Operating expenses:
Research and development......... 56.5 27.4 14.7 16.2
Sales, general and
administrative.................. 27.4 25.2 12.6 12.0
Legal costs...................... -- (25.2) -- --
------- ------- ------- -------
Total operating expenses...... 83.9 27.4 27.3 28.2
------- ------- ------- -------
Income (loss) from operations..... (63.9) (19.5) 6.3 8.3
Other income (expense), net:
Interest income and other........ 30.6 1.3 .3 1.1
Interest expense................. (4.6) (3.5) (2.1) (2.2)
------- ------- ------- -------
Net income (loss)............. (37.9)% (21.7)% 4.5% 7.2%
======= ======= ======= =======
</TABLE>

22
<PAGE>

Net Sales. Net sales were $3.5 million, $6.0 million, $15.0 million and
$16.3 million in the first, second, third and fourth quarters of fiscal 1997,
respectively. The Company's net sales increased from quarter to quarter during
fiscal 1997 due to a number of factors, including increased market acceptance
of the Company's products, introduction by the Company of additional products
in its MagicGraph128 product family which expanded the portion of the market
addressed by NeoMagic's products, and the Company's investment in sales and
marketing personnel and activities.

Gross Profit. Gross profit was $705,000, $473,000, $5.0 million and $5.9
million in the first, second, third and fourth quarters of fiscal 1997,
respectively. The decrease in gross profit between the first and second
quarter was negatively impacted by costs stemming from a design error for
which the Company recorded a $1.2 million reserve in the second quarter. The
impact of the design error was almost entirely offset by increased sales and a
decrease in product costs. The increase in gross profit between the second and
third quarters resulted primarily from an increase in sales and, to a lesser
extent, lower product costs. The increase in gross profit between the third
and fourth quarters resulted from, to approximately the same extent, increase
in sales and lower product costs.

Research and Development. Research and development expenses were $2.0
million, $1.6 million, $2.2 million and $2.6 million for the first, second,
third and fourth quarters of fiscal 1997, respectively. The higher research
and development costs in the first, third and fourth quarters of fiscal 1997
were primarily the result of timing of prototyping costs. Research and
development expenses for the fourth quarter of fiscal 1997 also included
additional compensation related accruals. The remainder of the fluctuations in
research and development expenses between the quarters resulted primarily from
additional engineering personnel and associated costs as the Company continued
to devote substantial resources to research and development efforts. Research
and development expenses as a percentage of net sales declined substantially
in each of the first three quarters of fiscal 1997 due primarily to the
quarter-to-quarter increases in net sales.

Sales, General and Administrative. Sales, general and administrative
expenses were $1.0 million, $1.5 million, $1.9 million and $2.0 million for
the first, second, third and fourth quarters of fiscal 1997, respectively.
These increases were due to the addition of sales, marketing, finance and
administration personnel and increased commission expenses associated with
increased sales levels. Sales, general and administrative expenses for the
fourth quarter of fiscal 1997 also included additional compensation-related
accruals.

Legal Costs. The benefit in legal costs of $1.5 million in the second
quarter of fiscal 1997 was due to the reversal of a reserve balance of
previously estimated legal costs. See Note 8 of Notes to Consolidated
Financial Statements.

Other Income (Expense), Net. Other income (expense), net was $916,000,
$(135,000), $(274,000) and $(187,000) for the first, second, third and fourth
quarters of fiscal 1997, respectively. Other income in the first quarter was
primarily attributable to $1.0 million in revenue from non-recurring
engineering services. Such services consisted primarily of consulting services
and allowing a customer access to certain technology, previously developed by
the Company for its own use, to construct complex logic. The Company does not
expect such engineering services to be provided on a regular basis, if at all,
in future periods. Therefore, the Company has classified such revenues in
other income. The decrease in other income, net from the second to the third
quarter resulted primarily from higher interest expense related to the
increase in the amounts outstanding under the working capital line. The
decrease in other income (expense), net between the third and fourth quarters
resulted from interest income related to higher cash balances partially offset
by higher interest expense for the fourth quarter.

NeoMagic's quarterly and annual results of operations are affected by a
variety of factors that could materially and adversely affect net sales, gross
profit and income from operations. These factors include, among others, demand
for the Company's products; changes in product or customer mix; fluctuations
in manufacturing yields; incorrect forecasting of future revenues;
availability and cost of manufacturing capacity; unanticipated delays or
problems in the introduction or performance of the Company's next generation
of products; the Company's ability to introduce new products in accordance
with OEM design requirements and design cycles;

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<PAGE>

market acceptance of the products of the Company's customers; changes in the
timing of product orders due to unexpected delays in the introduction of
products of the Company's customers or due to the life cycles of such
customers' products ending earlier than anticipated; new product announcements
or product introductions by NeoMagic's competitors; competitive pressures
resulting in lower selling prices; the volume of orders that are received and
can be fulfilled in a quarter; the rescheduling or cancellation of orders by
customers which cannot be replaced with orders from other customers; supply
constraints for the other components incorporated into its customers' notebook
PC products; foreign exchange rate fluctuations; the unanticipated loss of any
strategic relationship; seasonality associated with the tendency of PC sales
to increase in the second half of each calendar year; the level of
expenditures for research and development and sales, general and
administrative functions of the Company; costs associated with future
litigation; and costs associated with protecting the Company's intellectual
property. Any one or more of these factors could result in the Company failing
to achieve its expectations as to future revenues. The Company may be unable
to adjust spending sufficiently in a timely manner to compensate for any
unexpected sales shortfall, which could materially adversely affect quarterly
operating results. Accordingly, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year. In
certain future quarters, the Company's operating results may be below the
expectations of public market analysts or investors. In such event, the market
price of the Common Stock would be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
private sales of convertible preferred stock (raising net proceeds of
approximately $16.9 million) through borrowings from Mitsubishi International
Corporation ("Mitsubishi International"), under a working capital revolving
credit agreement (the "Credit Agreement") and through equipment leases.
Through January 31, 1997 the Company had purchased a total of approximately
$5.1 million of capital assets, a portion of which was purchased through lease
lines. The Company currently has no commitments for significant additional
capital expenditures. As of January 31, 1997, the Company had an accumulated
deficit of $13.2 million.

The Company's principal sources of liquidity as of January 31, 1997
consisted of $13.5 million in cash and cash equivalents and the Credit
Agreement. The Credit Agreement is used to finance wafer inventory purchases.
The Credit Agreement provides for 90 day extended credit terms totaling $15.0
million, with a compensating balance requirement for balances in excess of
$12.0 million. As of January 31, 1997, the Company had borrowings of $14.2
million under the Credit Agreement. For periods prior to January 1997, the
interest rate under the Credit Agreement was based on Mitsubishi
International's internal interest rate, which was required to be at least 1.5%
below the prime rate on the date of the invoice, generally approximately 30
days after the Company's receipt of the wafers. The Company also paid a
commission of 1.25% to 2.00% of its wafer purchases to Mitsubishi
International, based on the lending level under the Credit Agreement during
the prior calendar quarter. The Credit Agreement has been amended to provide
(i) that effective January 1997 Mitsubishi International's sole compensation
for the financing of wafer purchases from Mitsubishi Electric will be a
commission of 1.75% of such wafer purchases and (ii) for 60-day extended
credit terms. The term of the Credit Agreement expires on November 20, 1997,
subject to automatic extensions thereafter from year to year unless a notice
is given by either party. Under the terms of the Credit Agreement Mitsubishi
International maintains a security interest in all of the Company's inventory,
cash and investments, and accounts and notes receivable. See Note 3 of Notes
to Consolidated Financial Statements.

Net cash used in operating activities was $2.7 million in fiscal 1995 and
$6.4 million in fiscal 1996. This increase was primarily due to an increase of
approximately $2.1 million in net loss, which resulted primarily from
increased research and development activities, and $1.7 million of changes in
operating asset and liability accounts for fiscal 1996. Net cash used in
operating activities for fiscal 1997 was approximately $3.1 million which
resulted from substantial investments in inventories and accounts receivable
as sales levels increased during that period, offset partially by a reduction
in net loss and an increase in accounts payable.

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<PAGE>

Net cash used for investing activities was $900,000, $700,000 and $3.1
million for fiscal years 1995, 1996, and 1997, respectively, representing
investments in plant, property, and equipment. The Company currently expects
to make approximately $3.0 to $4.0 million in capital expenditures during the
next twelve months, consisting primarily of purchases of development tools and
software and personal computers. The timing and amount of future capital
expenditures will depend primarily on the growth of the Company's future
revenues.

Net cash provided by financing activities in fiscal 1995 and fiscal 1996 was
$8.0 million and $9.1 million, primarily representing private equity financing
of $7.3 million and $8.0 million, respectively, in addition to proceeds from
sale leaseback transactions. Net cash provided by financing activities for
fiscal 1997 was $12.8 million, representing net funding from the Credit
Agreement of $13.8 million and proceeds from sale leaseback transactions,
offset by $2.2 million held as restricted cash equivalents under the Credit
Agreement. See Notes 3 and 4 of Notes to Consolidated Financial Statements.

The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable. The Company
believes that the net proceeds of this offering, together with its existing
capital resources, will be sufficient to meet the Company's capital
requirements through the next 12 months, although the Company could be
required, or could elect, to seek to raise additional capital during such
period. The Company's future capital requirements will depend on many factors,
including the rate of net sales growth, the timing and extent of spending to
support research and development programs and expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's products. The
Company expects that it may need to raise additional equity or debt financing
in the future. There can be no assurance that additional equity or debt
financing, if required, will be available on acceptable terms or at all. See
"Risk Factors--Need for Additional Capital."

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<PAGE>

BUSINESS

The Company designs, develops and markets multimedia accelerators for sale
to notebook PC manufacturers. The Company, based on its knowledge of and
experience in the industry, believes it has developed the first commercially
available high performance silicon technology that integrates large DRAM
memory with analog and logic circuitry to provide multimedia solutions on a
single chip. The Company's MagicGraph128 family of pin-compatible, multimedia
accelerator products incorporates a 128-bit memory bus. The Company believes
these products enable notebook PC manufacturers to deliver state-of-the-art
multimedia capability while decreasing power consumption, size, weight, system
design complexity and cost. Eight of the world's ten largest notebook PC
manufacturers have designed or are designing notebook PCs to include
MagicGraph128 products. MagicGraph128 products are currently used in notebook
PCs sold by Acer, Compaq, Dell, Digital Equipment, Fujitsu, Hewlett-Packard,
Hitachi, Mitsubishi, NEC, Sharp and Texas Instruments.

NeoMagic's MagicGraph128 family of products ranges from accelerators
designed for notebook PCs that target cost-conscious consumers to fully-
featured multimedia systems designed for high-end notebook PCs. The Company
introduced its first MagicGraph128 product in March 1995, is currently in
production with three products and is now sampling the fourth generation of
its MagicGraph128 product family. NeoMagic has established strategic
relationships with Mitsubishi Electric and Toshiba to produce semiconductor
wafers for the Company's products. Pursuant to these strategic relationships,
NeoMagic designs the overall product, including the logic and analog
circuitry, and the manufacturing partner designs the DRAM module, manufactures
the wafers and performs memory testing and repair. NeoMagic is focused on
leveraging its core competencies in logic, analog and memory integration,
graphics/video multimedia technologies, driver and BIOS software, and power
management to continue developing solutions that facilitate the mobilization
of multimedia applications.

INDUSTRY BACKGROUND

Advances in the multimedia capabilities and features of PCs and software
applications over the past decade have fueled the demand for PCs and helped
make the PC an integral part of everyday life. Graphical user interface
technology, which proliferated in the early 1990s with the introduction of the
Microsoft Windows operating system, provided a more intuitive environment for
PC users than traditional character-based interfaces and opened the power of
the PC to a broader audience of users. Improvements in the ability of PCs to
process graphics, video and audio are enabling the production of applications
that deliver compelling multimedia content, enhancing the usefulness of the PC
as a platform for work, entertainment, communication and collaboration. The
effectiveness of multimedia for many applications, such as on-site
presentations and training, education, video conferencing, e-mail and
entertainment, is maximized in a mobile environment, giving rise to
significant demand for multimedia-capable notebook PCs.

Fueled by the continued globalization of businesses, the proliferation of
client/server computing and the Internet, the growing number of mobile
professionals, combined with the pervasive use of multimedia, the notebook PC
market has emerged as a rapidly growing market segment. The benefits of being
able to work, interact, instruct, learn and play "off the desktop" at any time
and any place have increased the demand for notebook computing solutions. A
leading industry analyst estimated in Fall 1996 that approximately 12 million
notebook PCs would be shipped in 1996 and that 23 million units will be
shipped in the year 2000.

Multimedia applications require the storage, processing and display of
enormous streams of data. As a result, multimedia PCs have evolved to
incorporate higher capacity storage and system memory, faster microprocessors,
improved specialized multimedia accelerators and higher quality displays.
However, due to the constraints imposed by the mobile form factor--the need
for low power consumption, small size, low weight, favorable thermal
characteristics and low cost, among others--the multimedia capabilities of
notebook PCs have lagged those of desktop computers. This has limited the
effectiveness of multimedia applications in notebook PCs.

Multimedia Acceleration Technology

A multimedia accelerator for graphics and video is a specialized subsystem
that offloads display and rendering functions from the PC's microprocessor,
enabling the CPU to devote more cycles to running

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<PAGE>

applications and improving the system's overall performance. The traditional
approaches to designing a multimedia accelerator subsystem have involved a
multiple chip solution consisting of a logic/analog chip (controller) and
separate DRAM memory chips (frame buffer memory). The performance of the
accelerator depends primarily on the memory bandwidth (measured in megabytes
per second), which is the rate at which data can be transferred between the
controller and the frame buffer memory. Memory bandwidth can be increased by
using a wider data bus between the controller and the frame buffer memory
(i.e., the data is passed in bigger blocks between the chips), and/or a faster
clock speed in the multimedia accelerator. During the last decade, designers
of multimedia accelerators for desktop PCs have increased memory bandwidth
through both of these approaches, widening the memory bus from 8 bits to 128
bits and implementing faster clocks.

Many of the design approaches that have been used to improve multimedia
accelerator performance for desktop PCs are suboptimal for notebook PCs. In a
conventional multimedia accelerator architecture, where memory and logic are
not integrated, the implementation of a wider bus requires the use of more
input/output ("I/O") pins between the controller and the frame buffer memory
chips. Since the transfer of data through I/O pins is a power intensive
process, increasing the number of I/O pins dramatically increases power
consumption and heat generation, which decreases battery life in notebook PCs
and may entail the addition of a costly and bulky heat sink. Increasing the
number of I/O pins also increases both the size of the chip packages and the
size of the board area needed for the interconnections, as well as increasing
system complexity and cost. Similar to the addition of I/O pins, the use of a
faster system clock to increase memory bandwidth results in greater power
consumption, heat generation and a more complex system design. As a
consequence, designers of multimedia accelerators for notebook PCs do not have
the same flexibility as designers for desktop PCs to increase the
accelerator's memory bandwidth through the use of additional I/O pins or a
faster clock.

To fully mobilize multimedia, the Company believes notebook PC manufacturers
require a new approach for developing multimedia accelerators which delivers
higher performance while minimizing power consumption and system size, weight,
complexity and cost.

NEOMAGIC SOLUTION

NeoMagic has pioneered a new technology to provide multimedia semiconductor
solutions for notebook PCs which overcome the limitations of traditional
architectures. This integrated solution, called "MagicWare" (Memory, Analog
and loGIC WARE) is the first commercially available high performance silicon
technology that integrates large DRAM memory with analog and logic circuitry
on a single chip. Using this technology, the Company has developed its first
product line: the MagicGraph128 family of pin-compatible, multimedia
(graphics, text and video) accelerators incorporating a 128-bit memory bus.
These products provide state-of-the-art multimedia capability while decreasing
power consumption, size and system design complexity. The Company introduced
its first MagicGraph128 product in March 1995, is currently in production with
three products and is sampling the fourth generation of its MagicGraph128
product family.

The Company's MagicGraph128 products provide the following important
advantages to notebook PC manufacturers and to end users:

Higher Performance. The Company believes that its MagicGraph128 products
provide the widest commercially available memory bus for notebook PC
multimedia accelerators. The Company's current products use a 128-bit memory
bus as compared to conventional multiple chip solutions which have generally
used 32-bit buses and are migrating to 64-bit buses. The Company's technology
enables faster and smoother output of graphics, video and animation while
maintaining high color depth to increase user productivity and improve the
user experience.

Lower Power Consumption. By integrating large DRAM with analog and logic
circuitry on a single chip, MagicGraph128 products eliminate the power-
consuming I/O pins used in conventional architectures for connections between
the logic/analog chip and the DRAM memory chips. The Company believes that, by
eliminating these I/O pins and using other advanced power management
techniques, the MagicGraph128 products consume approximately one-quarter of
the power used by conventional accelerators with equivalent feature sets,
potentially extending battery life.

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<PAGE>

Reduced Size and Weight. The MagicGraph128 single chip solution has a
smaller footprint than conventional multiple chip solutions and eliminates the
need for interconnections between chips, enabling the system manufacturer to
reduce board size and, in some cases, to eliminate boards or to add other
features for increased functionality without increasing board size. The
Company believes that MagicGraph128 products also can reduce the size and
weight of the notebook PC by allowing the manufacturer to use fewer or smaller
batteries and, in some cases, by eliminating the need for a heat sink.

Lower Complexity and Improved Reliability of Notebook PC System. The
Company's MagicGraph128 products can reduce design complexity of both the
multimedia system and of the entire notebook PC by reducing the number of
chips and interconnections, creating less heat and reducing electro-magnetic
interference ("EMI"). The Company believes that, as a result, the Company's
products can reduce system design time and simplify the manufacturing process,
and thereby enable notebook PC manufacturers to produce more reliable systems
and reduce time-to-market.

Lower System Cost. The MagicGraph128 products can lower the overall system
cost of notebook PCs by reducing the number of chips required for the
multimedia accelerator system, typically resulting in lower assembly and
printed circuit board costs, and in certain cases eliminating the need for
heat sinks. The decreased number of I/O pins also reduces the number of
soldered connections, which the Company believes can increase system
manufacturing yield. The reduction in power consumption can also save costs by
requiring lower capacity batteries to achieve the desired battery life.

System Upgradability. The Company's technology enables the Company to
provide single chip, pin-compatible products with different amounts of
embedded memory, thereby enabling notebook PC manufacturers to design product
upgrades without redesigning printed circuit boards. By comparison, increasing
the DRAM capacity of conventional multimedia systems typically requires adding
board space, increasing pin count and changing board design. The Company
believes that providing a pin-compatible product family enhances its ability
to achieve design wins through multiple product cycles, lowers system
manufacturers' design and support costs and improves customers' time to
market.

STRATEGY

NeoMagic's goal is to be a leading global supplier of multimedia
semiconductor solutions for the notebook PC market. The Company's strategy for
mobilizing multimedia includes the following elements:

Maintain Leadership in Providing Multimedia Accelerator Solutions for
Notebook PCs. The Company believes that its MagicGraph128 products are the
first commercially available multimedia accelerators that integrate large DRAM
memory with analog and logic circuitry on a single chip. NeoMagic is focused
on leveraging and building its core competencies in logic, analog and memory
integration, graphics/video multimedia technologies, driver and BIOS software,
and power management to continue developing solutions that facilitate the
mobilization of multimedia applications both in the notebook PC market and
eventually in other mobile product markets. The Company is currently sampling
its fourth generation MagicGraph128 product.

Cultivate Long Term Relationships with Leading Notebook PC Companies. The
Company seeks to establish close relationships with the world's leading
notebook PC companies. The Company has achieved design wins with eight of the
world's ten largest notebook PC manufacturers, and its MagicGraph128 products
are currently used in notebook PCs sold by Acer, Compaq, Dell, Digital
Equipment, Fujitsu, Hewlett-Packard, Hitachi, Mitsubishi, NEC, Sharp and Texas
Instruments. Long term relationships with its customers and partners enhance
the Company's ability to anticipate the needs of its target markets and
develop products that meet those needs in a timely manner. The Company's
strategy includes adding additional OEM companies to its customer portfolio
and enhancing its record of notebook PC design wins.

Establish Strategic Relationships with World-Class DRAM Partners. The
Company established a strategic relationship with Mitsubishi Electric in early
calendar 1994, and Mitsubishi Electric has manufactured all of the

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wafers for the Company's products to date. In January 1997, the Company
formalized its strategic relationship with Mitsubishi Electric in a five-year
wafer supply agreement. The Company has also established a strategic
relationship with Toshiba which has been formalized in a five-year wafer
supply agreement, and the Company expects that Toshiba will begin
manufacturing wafers for one of the Company's future products in the second
half of calendar 1997. The Company's DRAM partners design the DRAM portions of
the products, manufacture the wafers for the Company's products and perform
testing and repairs. These strategic relationships enable the Company to
benefit from its partners' standard DRAM design rules and manufacturing
processes and to accelerate product development by leveraging its partners'
technology expertise.

Extend Core Technology to Address New Market Opportunities. The Company
believes its MagicWare technology may be extended to a variety of other
applications. The Company intends to investigate opportunities to apply its
MagicWare technology to other product applications both inside and outside the
PC market. Potential applications being examined by the Company include mass
storage, communication and consumer devices, such as DVDs and Internet
appliances.

MARKETS AND PRODUCTS

The Company sells its products to notebook PC OEMs as well as to third-party
subsystem manufacturers who design and manufacture notebook PCs on behalf of
the brand name OEMs. Eight of the world's ten largest notebook PC
manufacturers have designed or are designing notebook PCs to include
MagicGraph128 products. MagicGraph128 products are currently used in notebook
PCs sold by the following companies:

Acer Hitachi
Compaq Mitsubishi
Dell NEC
Digital Equipment Sharp
Fujitsu Texas Instruments
Hewlett-Packard

The Company sells the MagicGraph128 line of pin-compatible 128-bit
multimedia accelerators for notebook PCs. Each product integrates large DRAM
with analog and logic circuitry on a single 176-pin chip. The MagicGraph128
family of products ranges from accelerators designed for notebook PCs that
target cost-conscious consumers to fully-featured multimedia systems designed
for high-end notebook PCs. The following table sets forth information with
respect to each of the Company's first four products:

<TABLE>
<CAPTION>
MEMORY
PRODUCT PRODUCT STATUS SIZE KEY NEW FEATURES
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
MagicGraph128 Volume production 7Mbits 128-bit multimedia accelerator
Feb 1996 Active and passive LCD panel interface
18 bit RAMDAC
Less than 500mW power dissipation
800x600 resolution with 256 colors
--------------------------------------------------------------------------------------
MagicGraph128V Volume production 9Mbits Video acceleration for MPEG playback
June 1996 24-bit RAMDAC
800x600 resolution with 64,000 colors
--------------------------------------------------------------------------------------
MagicGraph128ZV Volume production 9Mbits Zoom Video port for live video capture
September 1996 TV output support
--------------------------------------------------------------------------------------
MagicGraph128XD Prototypes available 16Mbits Bus master for 3D/video acceleration
November 1996 Spread spectrum EMI suppression
1024x768 resolution with 64,000 colors
</TABLE>

MagicGraph128. The Company believes that the MagicGraph128, its first
product, is the industry's first 128-bit, single-chip graphics accelerator for
notebook computers. The MagicGraph128 provides high

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<PAGE>

performance graphics for mainstream business and consumer notebooks while
decreasing power consumption, size, system design complexity and cost. The
Company has sold over 450,000 units of this product since volume production
commenced in February 1996.

MagicGraph128V. The MagicGraph128V builds on the capabilities of the
MagicGraph128 by adding support for more colors and full-motion video.
Optimized for mobile business professionals who perform multimedia
presentations with sound and motion, the MagicGraph128V provides MPEG playback
with full screen and full motion video at 30 frames per second with true
color.

MagicGraph128ZV. The MagicGraph128ZV adds zoom video capability (for
capturing and displaying TV or video images) and television output capability
to the MagicGraph128V. The MagicGraph128ZV provides a fully-featured
multimedia solution for mid-range and high-end notebook PCs with 800x600 LCD
displays.

MagicGraph128XD. By offering higher display resolutions, a larger number of
displayable colors, and higher performance, the MagicGraph128XD is designed to
provide desktop-replacement capabilities to high-end notebooks. The
MagicGraph128XD is designed to deliver performance enhancements for Microsoft
Direct3D. These enhancements accelerate animation, games and business
applications utilizing 3D in a Windows environment.

TECHNOLOGY

NeoMagic has pioneered MagicWare (Memory, Analog and loGIC WARE) technology
which integrates large DRAM with analog and logic circuitry on a single chip.
This integration represents a challenging problem because DRAM and logic
design and process technologies have evolved along different paths over the
past 15 years. DRAM process technology has been driven primarily by the need
for high density memory storage while logic process technology has been driven
primarily by the need to achieve greater speed and metal interconnect density.
As a result, a typical 16 Mbit DRAM process features densely packed,
relatively slow transistors with two layers of metal interconnect, while the
typical logic process utilizes a less dense configuration of relatively fast
transistors with three or more layers of metal interconnect. In addition,
DRAMs are characterized by a relatively high degree of electrical noise
compared to logic and analog circuits due to the sharp peaks in power demand
from the charging and synchronous discharging of large capacitances associated
with the data lines of DRAM memory cells. High levels of electrical noise tend
to disrupt the behavior and performance of analog circuits that share the same
silicon substrate with the DRAM.

The Company has focused on overcoming the difficulties of integrating large
DRAM with analog and logic circuitry by selecting manufacturing partners with
the most suitable DRAM process technology and by developing proprietary
technology in the following areas:

Performance. NeoMagic's embedded DRAM system architectures are designed to
optimize system performance and to scale performance as memory bandwidth
increases through process and architectural enhancements to the DRAM module
designs. NeoMagic has worked closely with Mitsubishi Electric to modify
Mitsubishi Electric's proven 16 Mbit DRAM designs to generate a 128-bit wide,
high bandwidth memory bus that delivers high performance capture and display
of multimedia data streams, as well as 2D and 3D graphics. The Company has
developed significant expertise in matching processing engine data paths,
buffer depth and width and arbitration schemes to the available memory
bandwidth, as well as in making system level (hardware and software) tradeoffs
to place hardware in the processing engine to balance the utilization of
system bus and memory bandwidth. The Company believes that the ability to
deliver scalable system performance will become increasingly important due to
the introduction of high bandwidth system buses for multimedia applications,
such as Intel's Accelerated Graphics Port ("AGP"), which is expected to be
incorporated into PC architectures in 1997.

Reduced Power Consumption. NeoMagic has implemented numerous system
architecture design techniques to reduce power consumption for its multimedia
solutions. The Company's integrated logic and DRAM products deliver
significant power savings through the elimination of the I/O pads which are
typically utilized in conventional solutions to connect discrete logic and
DRAM components. Power consumption in the

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<PAGE>

Company's products is further reduced due to their "granularity," which means
that they integrate no more than the amount of DRAM required for a given
application. For example, the Company's MagicGraph128V and MagicGraph128ZV
products integrate only the 9 Mbits of DRAM needed to accelerate an SVGA
display. In contrast, non-integrated solutions typically utilize 16 Mbits (2
megabytes) of DRAM due to the configuration of commercially available DRAMs.
NeoMagic has also developed additional power management techniques such as
sophisticated processing engine and memory module design to optimize memory
access time, page size, buffer size and processing pipeline stages while
achieving minimal power consumption and logic gate count without performance
degradation. Together with the incorporation of more traditional power
management techniques such as low power logic design, clock management and low
power cell library design, NeoMagic believes that its proprietary
architectures currently deliver the lowest power consumption available on
notebook PCs. The reduction in power consumption improves the battery life and
diminishes heat generation. The Company believes these same architectural
concepts have the potential to be used to achieve similar power savings on
other power-sensitive hardware platforms.

Manufacturing Test. NeoMagic and its DRAM manufacturing partners have
jointly developed cost-effective testing methodologies for products based on
the Company's MagicWare technology. These methodologies are based on the
synergistic combination of established test-and-repair techniques developed
for DRAM manufacturing and built-in self test techniques developed for logic
ICs.

Reduction of Electro-magnetic Interference. The FCC imposes strict limits on
EMI emissions from electronic devices including PCs. The reduction of EMI
often represents a challenging problem for the system designer, particularly
in small form factor mobile applications. All data transfer between logic and
memory occurs on a single chip in the Company's MagicGraph128 products,
inherently eliminating a significant source of EMI. NeoMagic also has
developed proprietary spread spectrum techniques to further reduce EMI in the
transmission of video and graphics data for display on high resolution LCD
panels. The Company believes that its ability to reduce EMI will become
increasingly important as DRAM speeds continue to increase to meet higher
memory bandwidth requirements for portable applications.

Design Methodology. The Company designs its products by utilizing a high-
level design language and a proprietary NeoMagic cell library for logic
synthesis. The Company verifies designs in the high-level language and at the
gate level using software simulators. Each design is further validated at the
system level through hardware emulation prior to committing the design to
silicon. In the physical design of placement and routing, NeoMagic has
developed proprietary layout technology to integrate large DRAM with analog
and logic circuitry on the same substrate while preserving signal integrity,
eliminating cross talk, minimizing clock skew and maximizing clock frequency.

Software Technology. NeoMagic has built a robust and flexible software base
to support Windows 3.1, Windows 95, Windows NT and OS/2 operating systems for
notebook PCs. The Company also provides customer specific control panels and
utilities for intelligent power management and the management of hardware and
software resources. The Company ensures software quality through a
comprehensive quality assurance process developed in consultation with its
customers. NeoMagic is focused on enhancing its software to support new levels
of functionality and performance demanded by more intuitive user interfaces
and more realistic multimedia experiences.

MANUFACTURING

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<PAGE>

The Company's products are designed to be manufactured in accordance with
the DRAM partners' design rules and manufacturing processes. Each DRAM partner
has a design team dedicated to NeoMagic product development. The DRAM partner
designs the DRAM product modules, and NeoMagic designs the overall product,
including the analog and logic circuitry. The DRAM partner then aids the
Company in design verification prior to production. The DRAM partners
manufacture the wafers, perform memory testing and repair, and sell the
Company finished wafers, with pricing determined on a quarterly basis. The
Company uses subcontractors to perform assembly, packaging and final test. The
Company develops its own software and hardware for product testing.

All of the Company's products are currently supplied by Mitsubishi Electric
in Japan. Mitsubishi Electric is currently producing six-inch wafers for the
Company and expects to begin producing eight-inch wafers for certain of the
Company's new products in calendar 1997. The Company also has established a
strategic relationship with Toshiba to commence production of the Company's
next generation multimedia accelerator products. NeoMagic does not expect that
a significant portion of the Company's wafer requirements will be met by
Toshiba before calendar 1998. The Company expects that, for the foreseeable
future, each of its products will be single source manufactured. Because the
lead time needed to establish a strategic relationship with a new DRAM partner
is at least twelve months and the estimated time for Mitsubishi Electric to
switch to a new product line is four to six months, there is no readily
available alternative source of supply for any specific product. A disruption
of manufacturing facilities at one of the partner's plants would disrupt the
Company's production of particular for a substantial period of time. In the
event that the process improvements at Mitsubishi Electric or the relationship
with Toshiba is unsuccessful or delayed beyond the Company's expectations, the
Company's business, financial condition and results of operation would be
materially and adversely affected.

Until recently, Mitsubishi Electric supplied wafers to the Company on a
purchase order basis. In January 1997, the Company and Mitsubishi Electric
entered into a five year wafer supply agreement setting forth the terms of
their relationship (the "Mitsubishi Electric Agreement"). In February 1997,
the Company entered into a similar five-year wafer supply agreement with
Toshiba (the "Toshiba Agreement"). Under the Mitsubishi Electric Agreement and
the Toshiba Agreement, the Company is obligated to provide a rolling 12 month
forecast of anticipated purchases and to place binding purchase orders four
months prior to shipment. If the Company cancels a purchase order, it must pay
cancellation penalties based on the status of work-in-process or the proximity
of the cancellation to the shipment date. Forecasts of monthly purchases may
not increase or decrease by more than a certain percentage from the previous
month's forecast without the manufacturer's consent. The Mitsubishi Electric
Agreement and the Toshiba Agreement also provide that the parties will
indemnify each other with respect to certain third party intellectual property
claims.

The Company's manufacturing arrangements require it to make forecasts and
place purchase orders for wafers long before it receives purchase orders from
its own customers. This limits the Company's ability to react to fluctuations
in demand for its products, which can be unexpected and dramatic, and often
will cause the Company to have an excess or shortage of wafers for a
particular product. As a result of the long lead time for manufacturing
wafers, semiconductor companies such as the Company from time to time must
take charges for excess inventory. For example, the Company booked charges
totaling $1.5 million for excess inventory in fiscal 1997. Significant write-
offs of excess inventory could materially and adversely affect the Company's
financial condition and results of operations. Conversely, failure to order
sufficient wafers would cause the Company to miss revenue opportunities and,
if significant, could impact sales by the Company's customers, which could
adversely affect the Company's customer relationships and thereby materially
adversely affect the Company's business, financial condition and results of
operations.

The Company's products are assembled and tested by third party
subcontractors. The Company does not have long-term agreements with any of
these subcontractors. As a result of this reliance on third party
subcontractors to assemble and test its products, the Company cannot directly
control product delivery schedules, which could lead to product shortages or
quality assurance problems that could increase the costs of manufacture or
assembly of the Company's products. Due to the amount of time normally
required to qualify assembly and test subcontractors, if the Company is
required to find alternative subcontractors, shipments could be delayed

32
<PAGE>

significantly. Any problems associated with the delivery, quality or cost of
the assembly and test of the Company's products could have a material adverse
effect on the Company's business, financial condition and results of
operations.

SALES AND MARKETING

NeoMagic's sales and marketing strategy is an integral part of the Company's
effort to become a leading supplier of multimedia accelerators to the leading
manufacturers of notebook PCs. To meet customer requirements and achieve
design wins, the Company's sales and marketing personnel work closely with its
customers, business partners and key industry trend setters to define product
features, performance, price, and market timing of new products. The Company
employs a sales force with a high level of technical expertise and product and
industry knowledge to support a lengthy and complex design win process.
Additionally, the Company employs a highly trained team of application
engineers to assist customers in designing, testing and qualifying system
designs that incorporate NeoMagic products. The Company believes that the
depth and quality of this design support are key to improving customers' time-
to-market, maintaining a high level of customer satisfaction and encouraging
customers to utilize subsequent generations of NeoMagic's products.

In many cases, notebook PCs are designed and manufactured by third party
system manufacturers on behalf of the final brand name OEM. NeoMagic focuses
on developing long-term customer relationships with both the system
manufacturer and the brand name OEMs. The Company believes that this approach
increases the likelihood of design wins, improves the overall quality of
support and enables timely release of customer product to market.

In the United States, the Company sells its products to key customers
primarily through direct sales. In Japan, DIA Semicon acts as the Company's
sales representative. In Taiwan, Regulus acts as the Company's sales
representative, with support from the Company's Taiwan country manager. As of
December 31, 1996, NeoMagic employed 18 individuals in its sales, marketing
and support organization and maintained regional sales offices in Austin,
Texas and Taipei, Taiwan.

During fiscal 1996, sales to Quanta, Compal and Hewlett-Packard accounted
for approximately 34.6%, 28.6% and 14.4% of net sales, respectively. During
fiscal 1997, sales to Sony, Compal and Arima accounted for approximately
31.6%, 19.8% and 14.6% of net sales, respectively. Quanta, Compal, Sony and
Arima are system manufacturers for brand name OEMs. No other customers
represented more than 10% of the Company's net sales for either of such
periods. Sales to the Company's top five customers accounted for 100% and
79.7% of net sales for fiscal 1996 and 1997, respectively. Sales to customers
located outside the United States accounted for 90.0% and 96.2% of the
Company's net sales for fiscal 1996 and 1997, respectively.

PROPRIETARY RIGHTS

The Company relies in part on patents to protect its intellectual property.
In the United States, the Company has been issued two patents, each covering
certain aspects of the design and architecture of the Company's multimedia
accelerators. In addition, the Company has several patent applications pending
in the United States Patent and Trademark Office (the "PTO"). There can be no
assurance that the Company's pending patent applications or any future
applications will be approved, or that any issued patents will provide the
Company with competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate the
Company's products or design around any patents that may be issued to the
Company.

33
<PAGE>

equivalent intellectual property or otherwise gain access to the Company's
trade secrets or intellectual property or disclose such intellectual property
or trade secrets or that the Company can meaningfully protect its intellectual
property. A failure by the Company to meaningfully protect its intellectual
property could have material adverse effect on the Company's business,
financial condition and results of operations.

In October 1996 the Company has notified by two of its customers that they
had received a letter from the holder of a United States patent asserting that
the video/graphics subsystem in such customers' notebook PCs, which use the
Company's MagicGraph128 and MagicGraph128V products, infringe certain claims
of the patent. The Company has certain indemnification obligations to
customers with respect to the infringement of third-party intellectual
property rights by its products. There can be no assurance that the Company's
potential obligations to indemnify such customers will not have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes, based upon advise rendered by its patent
counsel, Townsend and Townsend and Crew LLP, that the Company's MagicGraph128
and MagicGraph128V products do not infringe any of the claims of such patent.
Although there have been no further communications regarding this matter since
October 1996, there can be no assurance that the holder of such patent will
not file a lawsuit against the Company or its customers, that the Company or
such customers would prevail in any such litigation, or that such customers
will continue to purchase the Company's products under the threat of potential
litigation.

COMPETITION

The market for multimedia accelerators for notebook PCs in which the Company
competes is intensely competitive and is characterized by rapid technological
change, evolving industry standards and declining

34
<PAGE>

average selling prices. NeoMagic believes that the principal factors of
competition in this market are performance, price, features, power
consumption, size, weight and software support. The ability of the Company to
compete successfully in the rapidly evolving notebook PC market depends on a
number of factors, including success in designing and subcontracting the
manufacture of new products that implement new technologies, product quality,
reliability, price, the efficiency of production, design wins for NeoMagic's
integrated circuits, ramp up of production of the Company's products for
particular system manufacturers, end-user acceptance of the system
manufacturers' products, success of competitors' products and general economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the future.

NeoMagic competes with major domestic and international companies, most of
which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. The Company's principal competitors include
Chips & Technologies, Cirrus Logic, S3 and Trident. NeoMagic may also face
increased competition from new entrants into the notebook PC multimedia
accelerator market including from companies currently selling products
designed for desktop PCs. Furthermore, the Company expects that many of its
competitors will seek to develop and introduce products that integrate large
DRAM with analog and logic circuitry on a single chip. For example, Chips &
Technologies and Trident have recently announced separate programs to
introduce in conjunction with Samsung, the world's largest DRAM manufacturer,
an integrated multimedia acceleration solution for the notebook PC market that
would compete directly with the Company's products. Potential competition also
could come from manufacturers that integrate a microprocessor with a
multimedia controller. Although Intel has not announced any such product,
Cyrix recently announced such a product. To the Company's knowledge, the Cyrix
product does not eliminate the need for multimedia accelerators in notebook
PCs. The successful commercial introduction of such a product that eliminates
the need for a separate multimedia accelerator in notebook PCs could have a
material adverse impact on the Company's business, financial condition and
results of operations.

BACKLOG

Sales of the Company's products are made pursuant to standard purchase
orders that are cancelable without significant penalties. In addition,
purchase orders are subject to price renegotiations and to changes in
quantities of products and delivery schedules in order to reflect changes in
customers' requirements and manufacturing availability. A large portion of the
Company's sales are made pursuant to short lead time orders. In addition, the
Company's actual shipments depend on the manufacturing capacity of the
Company's suppliers and the availability of products from such suppliers. As a
result of the foregoing factors, the Company does not believe that backlog at
any give time is a meaningful indicator of future sales.

EMPLOYEES

As of January 31, 1997, the Company employed a total of 94 full-time
employees, including 47 in research and development, 9 in customer service and
applications engineering, 11 in sales and marketing, 10 in manufacturing and
17 in finance and administration. The Company also employs, from time to time,
a number of temporary and part-time employees as well as consultants on a
contract basis. The Company's employees are not represented by a collective
bargaining organization, and the Company believes that its relations with its
employees are good.

35
<PAGE>

FACILITIES

The Company's corporate headquarters, which is also its principal
administrative, selling and marketing, customer service, applications
engineering and product development facility, is located in Santa Clara,
California and consists of approximately 45,000 square feet under a lease
which expires on April 30, 2003. The Company has subleased approximately
12,000 square feet of its office space under a sublease that expires March 31,
1998, and approximately 3,200 square feet of office space under another
sublease that expires May 31, 1997. The Company also leases a small sales
office in Austin, Texas. The Company believes its existing facilities are
adequate for its current needs and that additional space for growth will be
met as the expiration of the current sublease arrangements occur.

36
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company as of February 25, 1997
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kamran Elahian.......................... 42 Chairman of the Board
Prakash C. Agarwal...................... 43 President, Chief Executive Officer and Director
Dr. Clement Leung....................... 47 Vice President, Engineering
Deepraj Puar............................ 51 Vice President, Technology
Ibrahim Korgav.......................... 48 Vice President, Manufacturing Operations
Ron Jankov.............................. 38 Vice President, Sales
Niall Bartlett.......................... 36 Vice President, Marketing
Merle McClendon......................... 41 Vice President, Finance and Chief Financial Officer
Irwin Federman(1)....................... 61 Director
Michael Moritz(1)....................... 42 Director
James Lally(2).......................... 52 Director
Brian P. Dougherty(2)................... 40 Director
</TABLE>
- --------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

Kamran Elahian, a co-founder of the Company, has been Chairman of the Board
since the Company's inception in 1993. Mr. Elahian has co-founded several
Silicon Valley companies since 1981, including CAE Systems, Inc., a computer-
aided engineering software company, Cirrus Logic, a semiconductor manufacturer
and Momenta Corporation, a pen-based computer company. In addition to his
duties as Chairman of the Company, Mr. Elahian is the Chairman and Chief
Executive Officer of PlanetWeb, Inc., an Internet software company
("PlanetWeb"). Mr. Elahian holds a BS in Computer Science, a BS in Mathematics
and a Masters of Engineering from the University of Utah.

Prakash C. Agarwal, a co-founder of the Company, has been President, Chief
Executive Officer, and a Director of the Company since its inception in 1993.
Mr. Agarwal has over 19 years of engineering, marketing, and general
management experience in the semiconductor industry. Prior to joining the
Company, he was employed as Vice President and General Manager of Cirrus
Logic's Portable Product Division. Mr. Agarwal holds a BS and a MS degree in
Electrical Engineering from the University of Illinois.

Dr. Clement Leung, a co-founder of the Company, has served as Vice
President, Engineering since the Company's inception in 1993. Dr. Leung has 12
years of engineering and management experience in the semiconductor industry,
primarily in the areas of integrated circuit design and computer-aided design
systems. Prior to joining the Company, he was employed as Director of
Engineering of Cirrus Logic's Portable Product Division. Dr. Leung holds an
SB, an SM and a Ph.D. degree from the Massachusetts Institute of Technology.

Deepraj Puar, a co-founder of the Company, has been Vice President,
Technology since the Company's inception in 1993. Mr. Puar has 26 years of
engineering and management experience in the semiconductor industry, primarily
in the area of memory design and development. Prior to joining the Company,
Mr. Puar was employed by Cirrus Logic as its Director of Memory and Circuits
Engineering. Mr. Puar holds a B.TECH degree from the Indian Institute of
Technology (India) and a MSEE degree from Michigan State University.

Ibrahim Korgav joined the Company in 1994 as Vice President, Manufacturing
Operations. Mr. Korgav has 20 years of experience in manufacturing management
in the semiconductor industry. Prior to joining the Company, Mr. Korgav was
the Vice President of Operations and a co-founder of Micro Linear Corporation,
a semiconductor manufacturer. Mr. Korgav holds a MS degree in Mechanical
Engineering from the University of Tulsa.

37
<PAGE>

Ron Jankov joined the Company in October 1995 as Vice President, Sales. Mr.
Jankov has 15 years of engineering, operations and sale management experience
in the semiconductor industry. From 1994 to 1995 he was employed by Cyrix
Corporation, a microprocessor manufacturer, as its Vice President of Asia
Operations. From 1990 to 1994, he served as General Manager of Accell, a
Taiwan-based semiconductor engineering and sales company. Mr. Jankov holds a
BS degree in Physics from Arizona State University.

Niall Bartlett joined the Company in November 1995 as Vice President,
Marketing. Mr. Bartlett has 12 years of marketing and engineering experience
in display and multimedia systems. From 1994 to 1995, he was employed as
Multimedia Business Unit Director at Integrated Circuit Systems, Inc., a
semiconductor manufacturer. From 1991 to 1994, Mr. Bartlett was Director of
Marketing and Development of the semiconductor division of Media Vision, Inc.,
a multimedia company. Mr. Bartlett holds a BS degree in Electronic Engineering
from the University of Southampton (England).

Merle McClendon joined the Company in January 1997 as its Vice President,
Finance and Chief Financial Officer. Ms. McClendon has 18 years of finance
experience. From 1993 through 1996, Ms. McClendon was Vice President and
Corporate Controller at S3 Incorporated, a semiconductor company. From 1980 to
1993, Ms. McClendon was employed by Deloitte and Touche, most recently as a
Senior Manager. Ms. McClendon is a Certified Public Accountant and holds a BS
degree in Business Administration from San Jose State University.

Irwin Federman has served as a Director of the Company since March 1994. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture
capital firm, since 1990. Mr. Federman serves on the Boards of Directors of
TelCom Semiconductor, Inc., a semiconductor products company, SanDisk
Corporation, a semiconductor company, Western Digital Corporation, a disk
drive manufacturer, Komag Incorporated, a thin film media manufacturer and
CheckPoint Software Technologies, Ltd, a network security software company. He
received a BS degree in Accounting from Brooklyn College and holds an honorary
Doctorate of Engineering Science from Santa Clara University.

Michael Moritz has served as a Director of the Company since July 1993. Mr.
Moritz joined Sequoia Capital, a venture capital firm, in 1986. He also serves
on the Board of Directors of Visigenic Software, Inc., a software company,
Yahoo! Inc., an Internet directory company and Flextronics International,
Inc., a contract electronics manufacturer. Mr. Moritz received an MBA from the
Wharton School in 1978 and an MA in History at Oxford University in 1976.

Jim Lally has served as a Director of the Company since July 1993. Mr. Lally
has been a general partner of Kleiner Perkins Caufield & Byers, a venture
capital firm, since 1981. He currently serves on the boards of NetFRAME
Systems, a network server company, Visioneer Communications, Inc., a computer
peripherals manufacturer, and Ascend Communications, Inc., a networking
company. He holds a BS degree in Electrical Engineering from Villanova
University.

Brian P. Dougherty joined the Company as a Director in January 1997. Mr.
Dougherty is a founder and serves as Chairman of Wink Communications, a
developer of interactive television software. From its inception in 1983
through 1994, Mr. Dougherty served as Chief Executive Officer of Geoworks, a
consumer computing device operating system manufacturer, and continues to
serve as its Chairman. Mr. Dougherty holds a BS degree in Electrical
Engineering from the University of California at Berkeley.

Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors. There are no family relationships between any of the directors or
executive officers of the Company.

BOARD COMMITTEES

The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee, which is comprised of Messrs. Dougherty and Lally,
administers the Stock Plan, the Purchase Plan

38
<PAGE>

and all matters concerning executive compensation. The Audit Committee, which
is comprised of Messrs. Federman and Moritz, approves the Company's
independent auditors, reviews the results and scope of annual audits and other
accounting related services, and evaluates the Company's internal audit and
control functions. These committees were established in January 1997.

DIRECTOR COMPENSATION

The Company does not pay any compensation to directors for serving in that
capacity, nor does it reimburse directors for expenses incurred in attending
board meetings. However, the Chairman is compensated for certain services
provided to the Company. See "Certain Transactions-Arrangements with
Chairman."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company did not have a Compensation Committee during its fiscal 1997.
During fiscal 1997, all decisions regarding executive compensation were made
by the full Board of Directors. No interlocking relationship exists between
the Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other Company, nor has any such
interlocking relationship existed in the past.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for liability (i)
for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
agents and other agents to the fullest extent permitted by law. The Company
believes that indemnification under its Bylaws covers at least negligence and
gross negligence on the part of indemnified parties. The Company's Bylaws also
permit the Company to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the Bylaws would permit indemnification.

The Company has entered into agreements to indemnify its directors and
officers, in addition to indemnification provided for in the Company's Bylaws.
These agreements, among other things, indemnify the Company's directors and
officers for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in the right of the Company, arising
out of such person's services as a director or officer of the Company, any
subsidiary of the Company or any other Company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.

39
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation paid
by the Company during the fiscal year ended January 31, 1997 to the Company's
Chief Executive Officer and each of the Company's other most highly
compensated executive officers who earned in excess of $100,000 during such
fiscal year (collectively, the "Named Officers").

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS (#) COMPENSATION(1)
--------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
Prakash C. Agarwal
President and Chief Executive
Officer............................. $189,313 650,000 $6,577
Dr. Clement Leung
Vice President, Engineering......... 125,102 225,000 4,800
Deepraj Puar
Vice President, Technology.......... 125,194 225,000 6,558
Ron Jankov
Vice President, Sales............... 167,521 100,000 2,338
Niall Bartlett
Vice President, Marketing........... 120,053 90,000 5,311
</TABLE>
- --------
(1) Consists of premiums paid on health and term life insurance.

40
<PAGE>

OPTION GRANTS IN FISCAL 1997

The following table provides information concerning grants of options to
purchase the Company's Common Stock made to each of the Named Officers during
fiscal 1997.

OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
NUMBER OF % OF TOTAL TERM(3)
SECURITIES UNDERLYING OPTIONS GRANTED EXERCISE PRICE EXPIRATION -----------------------
NAME OPTIONS GRANTED TO EMPLOYEES PER SHARE(2) DATE 5% 10%
---- --------------------- --------------- -------------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Prakash C. Agarwal...... 500,000(4) 14.8% $ .80 03/07/06 $ 251,558 $ 637,497
Prakash C. Agarwal...... 150,000(5) 4.4% 7.50 12/12/06 707,506 1,792,960
Dr. Clement Leung....... 175,000(4) 5.2% .80 03/07/06 88,045 223,124
Dr. Clement Leung....... 50,000(5) 1.5% 7.50 12/12/06 235,835 597,653
Deepraj Puar............ 175,000(4) 5.2% .80 03/07/06 88,045 223,124
Deepraj Puar............ 50,000(5) 1.5% 7.50 12/12/06 235,835 597,653
Ron Jankov.............. 50,000(5) 1.5% .80 03/07/06 25,156 63,750
Ron Jankov.............. 50,000(6) 1.5% 3.50 10/10/06 110,057 278,905
Niall Bartlett.......... 50,000(5) 1.5% .80 03/07/06 25,156 63,750
Niall Bartlett.......... 40,000(7) 1.2% 7.50 12/12/06 188,668 478,123
</TABLE>
- --------
(1) All options granted during the fiscal year were granted under the Stock
Plan. Each option becomes exercisable according to a vesting schedule,
subject to the employee's continued employment with the Company. See
"Employee Benefit Plans."

(2) The exercise price per share of options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
respective options were granted as determined by the Board. The Company's
Common Stock was not traded publicly at the time of the option grants to
the Named Officers.

(3) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the deemed fair market value are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future
financial performance of the Company, overall market conditions and the
option holders' continued employment through the vesting period. This
table does not take into account any appreciation in the deemed fair
market value of the Common Stock from the date of grant to the date of
this Prospectus, other than the columns reflecting assumed rates of
appreciation of 5% and 10%.

(4) This option was granted by the Board on March 7, 1996, with vesting to
commence on July 1, 1997. This option will vest ratably on a monthly basis
over a period of 30 months.

(5) This option was granted by the Board on December 12, 1996, with vesting to
commence on January 1, 2000. This option will vest ratably on a monthly
basis over a period of 12 months.

(6) This option was granted by the Board on October 10, 1996, with vesting to
commence on October 10, 1996. One-fourth of the shares covered by this
option will vest on October 10, 1997 and 1/48 of the shares will vest
ratably each month thereafter.

(7) This option was granted by the Board on December 12, 1996, with vesting to
commence on January 1, 1997. One-fourth of the shares covered by this
option will vest on January 1, 1998 and 1/48 of the shares will vest
ratably each month thereafter.

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<PAGE>

OPTION EXERCISES AND HOLDINGS

The following table sets forth for each of the Named Officers certain
information concerning the number of shares subject to both exercisable and
unexercisable stock options at January 31, 1997. Also reported are values for
"in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and the fair market
value of the Company's Common Stock as of January 31, 1997, as determined by
the Board of Directors.

AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL 1997 VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JANUARY 31, 1997(2) JANUARY 31, 1997(1)(2)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(2) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Prakash C. Agarwal...... 500,000 $ -- 150,000 -- $ -- --
Dr. Clement Leung....... -- -- 225,000 -- 1,172,500 --
Deepraj Puar............ -- -- 225,000 -- 1,172,500 --
Ron Jankov.............. 50,000 -- 50,000 -- 200,000 --
Niall Bartlett.......... -- -- 90,000 -- 335,000 --
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at January 31, 1997 ($7.50 per share,
as determined by the Board of Directors) and the exercise price of the
options.

(2) Options granted under the Stock Plan may be exercised immediately upon
grant and prior to full vesting, subject to the optionee's entering a
restricted stock purchase agreement with the Company with respect to any
unvested shares.

EMPLOYEE BENEFIT PLANS

AMENDED AND RESTATED 1993 STOCK PLAN

The Company's Amended and Restated 1993 Stock Plan provides for the granting
to employees of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
and for the granting to employees, directors and consultants of nonstatutory
stock options and stock purchase rights ("SPRs"). The original plan was
approved initially by the Board of Directors and the stockholders in July
1993. The Stock Plan was approved by the Board of Directors in December 1996
and by the stockholders in February 1997. Unless terminated sooner, the Stock
Plan will terminate automatically in December 2003. A total of 7,775,000
shares of Common Stock are currently authorized for issuance pursuant to the
Stock Plan, of which 2,427,387 were available for issuance at January 31,
1997. As of January 31, 1997, 3,443,487 shares had been issued upon the
exercise of stock options or stock purchase rights granted under the Stock
Plan, and 2,440,750 shares were subject to outstanding options.

The Stock Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code.
The Committee has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability thereof, and the form of consideration
payable upon such exercise. In addition, the Committee has the authority to
amend, suspend or terminate the Stock Plan, provided that no such action may
affect any share of Common Stock previously issued and sold or any option
previously granted under the Stock Plan.

Options and SPRs granted under the Plan are not generally transferable by
the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the

42
<PAGE>

Stock Plan must generally be exercised within 30 days of the end of optionee's
status as an employee or consultant of the Company, or within twelve months
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term. In the case of SPRs,
unless the Committee determines otherwise, the Restricted Stock Purchase
Agreement shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The purchase price for
shares repurchased pursuant to the Restricted Stock Purchase Agreement shall
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Committee. The exercise price of all
incentive stock options granted under the Stock Plan must be at least equal to
the fair market value of the Common Stock on the date of grant. The exercise
price of nonstatutory stock options and SPRs granted under the Stock Plan is
determined by the Committee, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must at least
be equal to the fair market value of the Common Stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110%
of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options granted
under the Stock Plan may not exceed ten years.

The Stock Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted for as described in the
preceding sentence, the Optionee shall fully vest in and have the right to
exercise the option or SPR as to all of the optioned stock, including shares
as to which it would not otherwise have been vested and be exercisable. In the
event that an option or SPR becomes exercisable in full in the event of a
merger or sale of assets, the Committee shall notify the optionee that the
option or SPR shall be fully vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the option or SPR will terminate
upon the expiration of such period.

1997 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1996 and approved by the
stockholders in February 1997. A total of 500,000 shares of Common Stock has
been reserved for issuance under the Purchase Plan. The Purchase Plan, which
is intended to qualify under Section 423 of the Internal Revenue Code, is
implemented by consecutive and overlapping twenty-four month offering periods
that begin every six months. Each twenty-four month offering period includes
four six-month purchase periods, during which payroll deductions are
accumulated and at the end of which, shares of Common Stock are purchased with
a participant's accumulated payroll deductions, except for the first such
offering period which commences on the first trading day on or after the
effective date of this Offering and ends on the last trading day on or before
March 1, 1999. The Purchase Plan is administered by the Board of Directors or
by a committee appointed by the Board. Employees are eligible to participate
if they are customarily employed by the Company or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year. The Purchase Plan permits eligible employees to purchase Common
Stock through payroll deductions of up to 10% of an employee's compensation
(excluding commissions, overtime and other bonuses and incentive
compensation), subject to the limitations of Section 423(b)(8) of the Internal
Revenue Code. The price of stock purchased under the Purchase Plan is 85% of
the lower of the fair market value of the Common Stock at the beginning of the
offering period or at the end of the relevant purchase period. Employees may
end their participation at any time during an offering period, and they will
be paid their payroll deductions to date. Participation ends automatically
upon termination of employment with the Company.

Rights granted under the Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the Purchase Plan. The Purchase Plan provides that, in

43
<PAGE>

the event of a merger of the Company with or into another corporation or a
sale of substantially all of the Company's assets, the Board of Directors
shall shorten the offering period then in progress (so that employees' rights
to purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets). The Purchase Plan will terminate in December 2007. The Board
of Directors has the authority to amend or terminate the Purchase Plan, except
that no such action may adversely affect any outstanding rights to purchase
stock under the Purchase Plan.

CERTAIN TRANSACTIONS

On July 20, 1993 and September 16, 1993, the Company sold in the aggregate
3,050,200 shares of Series A Preferred Stock at a price per share of $.50. On
February 11, 1994, the Company issued 10,250 shares of Series A Preferred in
exchange for shares of Common Stock held by the Company's founders (including
executive officers and the Chairman of the Board) at an exchange ratio of 500
shares of Common Stock for each share of Series A Preferred. This exchange
ratio was negotiated among such founders, the Company and the other Series A
Preferred Stock investors pursuant to a recapitalization of the Company. The
500-to-1 ratio reflects the ratio of the purchase price of the Series A
Preferred Stock and the purchase price of the Common Stock at the time of its
acquisition. On March 10, 1994, the Company issued 2,539,999 shares of Series
B Preferred Stock at a price per share of $.625 pursuant to the exercise of
warrants issued on July 20, 1993 and September 16, 1993. On July 6, 1994 and
August 30, 1994, the Company sold in the aggregate 3,839,165 shares of Series
C Preferred Stock at a price per share of $1.50. On June 30, 1995 and August
10, 1995, the Company sold in the aggregate 2,820,000 shares of Series D
Preferred Stock at a price per share of $2.85. Simultaneously with the
consummation of this offering, all shares of Preferred Stock will be converted
into an aggregate of 12,259,614 shares of Common Stock.

Listed below are those directors, executive officers and five percent
stockholders who have made equity investments in the Company during the last
three fiscal years. The Company believes that the shares issued in these
transactions were sold at the then fair market value and that the terms of
these transactions were no less favorable than the Company could have obtained
from unaffiliated third parties.

<TABLE>
<CAPTION>
AGGREGATE
SERIES A SERIES B SERIES C SERIES D CASH
STOCKHOLDER PREFERRED PREFERRED PREFERRED PREFERRED CONSIDERATION
----------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Entities associated with
Japan Associated
Finance Co., Ltd........ -- -- 1,000,000 350,877 $2,500,000
Entities associated with
Kleiner Perkins
Caufield & Byers (1).... 1,500,000 833,333 833,333 350,877 3,520,832
Entities associated with
Sequoia Capital(2)...... 1,500,000 833,333 833,333 350,877 3,520,832
Entities associated with
U.S. Venture
Partners(3)............. -- 833,333 833,333 421,053 2,970,834
</TABLE>
- --------
(1) KPCB VI Associates, which is the general partner of each of these
entities, has seven general partners, each of whom share investment and
voting power over the shares held by KPCB VI Associates. James Lally, a
director of the Company, is a general partner of KPCB VI Associates. Mr.
Lally disclaims beneficial ownership of the shares except to the extent of
his proportionate interest therein.

(2) Each of these entities are affiliated with Sequoia Partners (O). Sequoia
Partners (O) has eight general partners. Each of these general partners
shares voting and investment power over the shares held by Sequoia
Partners (O). Michael Moritz, a director of the Company, is a general
partner of Sequoia Partners (O). Mr. Moritz disclaims beneficial ownership
of the shares held by such entities to the extent of his proportionate
interest therein.

(3) Presidio Management Group IV, L.P. ("Presidio"), which is the general
partner of each of these entities, has five general partners, each of whom
shares voting and investment power over the shares held by Presidio. Irwin
Federman, a director of the Company, is a general partner of Presidio. Mr.
Federman disclaims beneficial ownership of the shares held by Presidio
except to the extent of his proportionate interest therein.

44
<PAGE>

The Company has entered into an Indemnification Agreement with each of its
executive officers and directors.

The Company has granted options to certain of its executive officers. See
"Management--Option Grants in Last Fiscal Year."

Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights."

Kamran Elahian, Chairman of the Board of the Company, receives an annual
salary in the amount of $70,000 for services rendered to the Company, which
include participation in the establishment and management of key customer and
manufacturing relationships. In addition, on March 7, 1996 Mr. Elahian was
granted an option to purchase 175,000 shares of the Company's Common Stock at
an exercise price of $.80 per share, subject to vesting, and on December 12,
1996 was granted an option to purchase 30,000 shares of the Company's Common
Stock at an exercise price of $7.50 per share, subject to vesting. Both
options were granted pursuant to the Stock Plan.

In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Prakash Agarwal, the President,
Chief Executive Officer, and a director of the Company, in the principal
amount of $34,925 at an annual interest rate of 4.01%, pursuant to a
promissory note secured by a pledge of 1,397,000 shares of Common Stock held
by Mr. Agarwal. In April 1996, in connection with the exercise of an option to
purchase 500,000 shares of Common Stock, the Company provided a loan to
Mr. Agarwal in the aggregate principal amount of $400,000 at an annual
interest rate of 5.88% pursuant to two promissory notes secured by a pledge of
an aggregate of 500,000 shares of Common Stock held by Mr. Agarwal. As of
January 31, 1997, an aggregate amount of $456,650 remained outstanding on the
three promissory notes, which is the largest aggregate amount of indebtedness
outstanding as of such date under such note.

In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Dr. Clement Leung, the Vice
President, Engineering of the Company in the principal amount of $22,450 at an
annual interest rate of 4.01%, pursuant to a promissory note secured by a
pledge of 898,000 shares of Common Stock held by Dr. Leung. As of January 31,
1997, an aggregate amount of $25,076 remained outstanding on the promissory
note, which is the largest aggregate amount of indebtedness outstanding under
such note.

In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Deepraj Puar, the Vice President,
Technology of the Company in the principal amount of $22,450 at an annual
interest rate of 4.01%, pursuant to a promissory note secured by a pledge of
898,000 shares of Common Stock held by Mr. Puar. As of January 31, 1997, an
aggregate amount of $25,076 remained outstanding on the promissory note, which
is the largest aggregate amount of indebtedness outstanding under such note.

In June 1994, in connection with the purchase of restricted shares of Common
Stock, the Company provided a loan in the principal amount of $15,000 to
Ibrahim Korgav, Vice President of Manufacturing, at an annual interest rate of
6.80% pursuant to a promissory note secured by a pledge of 300,000 shares of
Common Stock held by Mr. Korgav. As of January 31, 1997, an aggregate amount
of $16,658 remained outstanding on the promissory note, which is the largest
aggregate amount of indebtedness outstanding as of such date under such note.
In July 1994, in connection with his offer of employment with the Company, the
Company provided a loan to Mr. Korgav in the principal amount of $63,956.93 at
an annual interest rate of 5.63%, pursuant to a promissory note. The loan was
used to repay certain obligations owed by Mr. Korgav to his former employer
and to exercise certain options to purchase shares of such employer. Mr.
Korgav repaid to the Company $14,000 of the principal and accrued interest in
July 1995 and paid the remaining balance of principal and accrued interest in
December 1995. The largest aggregate indebtedness outstanding under such notes
in the last three fiscal years was $83,662.71.

45
<PAGE>

In December 1995, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Ron Jankov, the Vice President,
Sales of the Company in the principal amount of $76,950 at an annual interest
rate of 5.91% pursuant to a promissory note secured by a pledge of 270,000
shares held by Mr. Jankov. In April 1996, in connection with the exercise of
option to purchase 50,000 shares of Common Stock, the Company provided a loan
to Mr. Jankov in the principal amount of $40,000 at an interest rate of 5.88%
pursuant to a promissory note secured by a pledge of 50,000 shares of Common
Stock held by Mr. Jankov. As of January 31, 1997, an aggregate amount of
$123,641 remained outstanding on the two promissory notes, which is the
largest aggregate amount of indebtedness outstanding under such notes.

In December 1995, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Niall Bartlett, Vice President,
Marketing of the Company in the principal amount of $57,000 at an annual
interest rate of 5.91% pursuant to a promissory note secured by a pledge of
200,000 shares held by Mr. Bartlett. As of January 31, 1997, an aggregate
amount of $60,649 remained outstanding on this promissory note, which is the
largest aggregate amount of indebtedness outstanding under such notes.

In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Chet Bassetti, the Flat-Panel
Technology Manager, in the principal amount of $22,450 at an annual interest
rate of 4.01% pursuant to a promissory note secured by a pledge of 898,000
shares of Common Stock held by Mr. Bassetti. On December 26, 1996, Mr.
Bassetti repaid the remaining $25,000 in principal and interest. The largest
aggregate amount of indebtedness outstanding during the last three years was
$25,000.

In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Kamran Elahian, the Chairman of
the Board, in the principal amount of $22,450 at an annual interest rate of
4.01% pursuant to a promissory note secured by a pledge of 898,000 shares of
Common Stock held by Mr. Elahian. In April 1996, in connection with the
exercise of an option to purchase 125,000 shares of Common Stock, the Company
provided a loan to Mr. Elahian in the principal amount of $100,000 at an
annual interest rate of 5.88% pursuant to a promissory note secured by a
pledge of the Common Stock so acquired. As of January 31, 1997, and aggregate
amount of $129,486 remained outstanding on the two promissory notes, which is
the largest aggregate amount of indebtedness outstanding under such notes.

In September 1996, in connection with the resignation of the Company's then
current Chief Financial Officer, Lori Holland, the Company agreed to pay Ms.
Holland $12,500 per month through February 28, 1997. In addition, the Company
released 97,500 shares of Common Stock held by Ms. Holland from a right of
repurchase in favor of the Company set forth in the agreement pursuant to
which Ms. Holland purchased such shares from the Company.

In June 1996, the Company entered into a Sublease Agreement with PlanetWeb.
Kamran Elahian, a co-founder of the Company and its Chairman, is the founder
of PlanetWeb and is its Chairman and Chief Executive Officer. The Sublease
Agreement provides for a sublease of 3,166 square feet of office space at the
Company's principal office for a term beginning on May 28, 1996 through and
including May 31, 1997. Pursuant to the Sublease Agreement, PlanetWeb is
obligated to pay $300 per month for janitorial services and rent according to
the following schedule: $1.00 per square foot during months one through three,
$1.50 per square foot during months four through six and $1.75 per square foot
during months seven through 12.

The Company believes that all related-party transactions described above
were on terms no less favorable than could have been otherwise obtained from
unrelated third parties. All future transactions between the Company and its
principal officers, directors and affiliates will be approved by a majority of
the independent and disinterested members of the Board of Directors and will
be on terms no less favorable that could be obtained from unrelated third
parties. In addition, the Board of Directors has voted that any loans or
guarantees in the future by the Company for its officers, directors or
affiliates will be approved by a majority of the independent and disinterested
members of the Board on the basis that such loans or guarantees will be made
only for bona fide business purposes.

46
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of January 31, 1997 and
as adjusted to reflect the sale of Common Stock offered hereby for (i) each
person who is known by the Company to beneficially own more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Officers and (iv) all directors and officers as a group and (v) each selling
stockholder.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(2)(3)
------------ -----------------
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with KPCB VI Associates(4).. 3,517,543 17.3% 15.1%
2750 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with Sequoia Capital(5)..... 3,517,543 17.3 15.1
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with U.S. Venture Partners
IV, L.P.(6).................................... 2,087,719 10.3 8.9
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Japan Associated Finance Co., Inc.(7)........... 1,350,877 6.6 5.8
Tekko Building
1-8-2, Marunouchi, Chiyoda-Ku
Tokyo, Japan 100
Kamran Elahian(8)............................... 1,054,800 5.2 4.5
Irwin Federman(6)............................... 2,087,719 10.3 8.9
Michael Moritz(5)............................... 3,517,543 17.3 15.1
James Lally(4).................................. 3,517,543 17.3 15.1
Chet Bassetti(9)................................ 927,800 4.6 4.0
Prakash C. Agarwal(10).......................... 1,449,800 7.1 6.2
Dr. Clement Leung(11)........................... 1,118,800 5.4 4.7
Deepraj Puar(12)................................ 524,800 2.6 2.2
Ron Jankov(13).................................. 370,000 1.8 1.6
Ibrahim Korgav(14).............................. 387,500 1.9 1.7
Niall Bartlett(15).............................. 290,000 1.4 1.2
All directors and officers as
a group(4), (5), (6), (8), (10)-(15)........... 14,318,505 67.7% 59.2%
OTHER SELLING STOCKHOLDERS
Additional Selling Stockholders (3 persons),
each holding less than 1% of Common Stock prior
to offering.................................... 173,000 * *
</TABLE>
- --------
* Less than 1% of the outstanding shares.
(1) Assumes no exercise of the Underwriter's over-allotment option. Except
pursuant to applicable community property laws or as indicated in the
footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.

(2) Percent of the outstanding shares of Common Stock, treating as
outstanding all shares of Common Stock issuable on exercise of options
held by the particular beneficial owner that are included in the first
column.

(3) This column assumes no exercise of the Underwriter's over-allotment
option and does not reflect the issuance of any shares pursuant to the
Direct Sales. If, however, the Underwriters' over-allotment option is
exercised in full, certain stockholders will sell an aggregate of
100,000 shares of Common Stock. Specifically, in such event, in addition
to those share amounts set forth in the table above, (i) Kamran

47
<PAGE>

Elahian will sell an aggregate of 15,000 shares and will beneficially own
1,039,800 shares, which is 4.4% of the Company's outstanding Common Stock,
after completion of this Offering, (ii) Chet Bassetti will sell an
aggregate of 10,000 shares and will beneficially own 917,800 shares, which
is 3.9% of the Company's outstanding Common Stock, after completion of the
Offering, (iii) Prakash Agarwal will sell an aggregate of 15,000 shares
and will beneficially own 1,434,800 shares, which is 6.0% of the Company's
outstanding Common Stock, after completion of the Offering, (iv) Dr.
Clement Leung will sell an aggregate of 15,000 shares and will
beneficially own 1,103,800 shares, which is 4.6% of the Company's
outstanding Common Stock, after completion of the Offering, (v) Deepraj
Puar will sell an aggregate of 15,000 shares and will beneficially own
509,800 shares, which is 2.1% of the Company's outstanding Common Stock,
after completion of the Offering, (vi) Ibrahim Korgav will sell an
aggregate of 15,000 shares and will beneficially own 372,500 shares, which
is 1.6% of the Company's outstanding Common Stock, after completion of the
Offering, (vii) Niall Bartlett will sell an aggregate of 10,000 shares and
will beneficially own 280,000 shares, which is 1.6% of the Company's
outstanding Common Stock, after completion of the Offering, and (viii)
three other stockholders, each of whom owns less than 1% of the Company's
outstanding stock, will sell an aggregate of 5,000 shares and will
beneficially own 168,000 shares, which is .7% of the Company's outstanding
Common Stock, after completion of the Offering.

(4) Includes 3,052,211 shares held by Kleiner Perkins Caufield & Byers VI and
465,332 shares held by KPCB VI Founders Fund. KPCB VI Associates is the
general partner of Kleiner Perkins Caufield & Byers VI and KPCB VI
Founders Fund. KPCB VI Associates has seven general partners. Each of
these general partners shares voting and investment power over the shares
held by KPCB VI Associates. James Lally, a director of the Company, is a
general partner of KPCB VI Associates. Mr. Lally disclaims beneficial
ownership of the shares held by such entities except to the extent of his
proportionate interest therein.

(5) Includes 3,200,964 shares held by Sequoia Capital VI, 175,878 shares held
by Sequoia Technology Partners VI, 93,333 shares held by Sequoia XXIII
and 47,368 shares held by Sequoia XXIV each of which is affiliated with
Sequoia Partners (O). Sequoia Partners (O) is the general partner of
Sequoia Capital VI. Sequoia Partners (O) has eight general partners, who
are also the general partners of Sequoia Technology Partners VI. Each of
these general partners shares voting and investment power over the shares
held by Sequoia Partners (O). Michael Moritz, a director of the Company,
is a general partner of Sequoia Partners (O). Mr. Moritz disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate interest therein.

(6) Includes 1,837,193 shares held by U.S. Venture Partners IV, L.P., 41,755
shares held by USVP Entrepreneur Partner II, L.P. and 208,771 shares held
by Second Ventures II, L.P. Presidio Management Group IV, L.P.
("Presidio") is the general partner of each of these entities. Presidio
has five general partners. Each of these general partners shares voting
and investment power over the shares held by Presidio. Irwin Federman, a
director of the Company, is a general partner of Presidio. Mr. Federman
disclaims beneficial ownership of the shares held by such entities except
to the extent of his proportionate interest therein.

(7) Includes 235,088 shares held by Japan Associated Finance Co., Ltd.,
398,067 shares held by JAFCO G-5 Investment Enterprise Partnership,
185,981 shares held by JAFCO R-1(A) Investment Enterprise Partnership,
185,981 shares held by JAFCO R-1(B) Investment Enterprise Partnership,
170,321 shares held by JAFCO R-2 Investment Enterprise Partnership. Japan
Associated Finance Co., Inc. is the general partner of each of these
entities. Also includes 175,439 shares held by U.S. Information
Technology Investment Enterprise Partnership. Japan Associated Finance
Co., Inc. and JAFCO America Ventures, Inc. are the general partners of
U.S. Information Technology Investment Enterprise Partnership.

(8) Includes an option to purchase 30,000 shares, exercisable within 60 days
of January 31, 1997.

(9) Includes an option to purchase 28,000 shares, exercisable within 60 days
of January 31, 1997.

(10) Includes an option to purchase 150,000 shares, exercisable within 60 days
of January 31, 1997.

48
<PAGE>

(11) Includes 15,000 shares registered in the name of Lau Sek Lan, 15,000
shares registered in the name of Yim Lai Ting, 10,000 shares registered
in the name of Elizabeth T. Lau, 10,000 shares registered in the name of
Kin Mun Leung, 10,000 shares registered in the name of Christopher K.
Leung, and 10,000 shares registered in the name of Chung Ki Wong Leung.
Each such person is a family member of Dr. Leung. Dr. Leung disclaims
beneficial ownership of such shares. Includes an option to purchase
225,000 shares exercisable within 60 days of January 31, 1997.

(12) Includes 20,000 shares registered in the name of Yuvraj Singh Puar, Mr.
Puar's brother, and 20,000 shares registered in the name of Nandita Puar,
Mr. Puar's sister-in-law. Mr. Puar disclaims beneficial ownership of such
shares. Includes 20,000 shares registered in the name of Dhruv Raj Puar
and 20,000 shares registered in the name of Rahul Raj Puar, who are Mr.
Puar's children. Includes an option to purchase 225,000 shares,
exercisable within 60 days of January 31, 1997.

(13) Includes an option to purchase 50,000 shares, exercisable within 60 days
of January 31, 1997.

(14) Includes 20,000 shares registered in the name of Kirk Steven Hayes, as
Trustee of the Ibrahim Korgav and Sandra Lee Korgav 1989 Irrevocable
Trust dated 10/2/89. Mr. Korgav may be deemed the beneficial owner of
such shares. Includes an option to purchase 87,500 shares, exercisable
within 60 days of January 31, 1997.

(15) Includes an option to purchase 90,000 shares, exercisable within 60 days
of January 31, 1997.

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this Offering, the authorized capital stock of the
Company consists of 60,000,000 shares of Common Stock, $.001 par value, and
2,000,000 shares of Preferred Stock, $.001 par value.

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation which is included as an exhibit to the Registration Statement of
which this Prospectus is a part and by the provisions of applicable law.

COMMON STOCK

As of January 31, 1997, there were 20,332,205 shares of Common Stock
outstanding (assuming conversion of Preferred Stock and assuming no exercise
of outstanding options or warrants) before giving effect to the sale of Common
Stock offered hereby and before giving effect to the Direct Sales.

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for the payment of dividends. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares
of Preferred Stock. Holders of Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and non-assessable.

PREFERRED STOCK

Pursuant to the Company's Restated Certificate of Incorporation effective
after conversion of previously outstanding shares of Preferred Stock into an
aggregate of 12,259,614 shares of Common Stock, which conversion will be
effected simultaneously with the consummation of this offering, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 2,000,000 shares of Preferred Stock in

49
<PAGE>

one or more series and to fix the designations, powers, preferences,
privileges, and relative participating, optional or special rights and the
qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences any or all of which may be greater than the rights of the Common
Stock. The Board of Directors, without stockholder approval, can issue
Preferred Stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of Common Stock.
Preferred Stock could thus be issued quickly with terms calculated to delay or
prevent a change in control of the Company or make removal of management more
difficult. Additionally, the issuance of Preferred Stock may have the effect
of decreasing the market price of the Common Stock, and may adversely affect
the voting and other rights of the holders of Common Stock. At present, there
are no shares of Preferred Stock outstanding and the Company has no plans to
issue any of the Preferred Stock.

COMMON STOCK WARRANTS

As of the date of this Prospectus, the Company has warrants outstanding
exercisable to purchase an aggregate of 316,743 shares of Common Stock.

In connection with a software lease entered into in November 1993, the
Company issued to the lessor a warrant to purchase up to an aggregate of
120,000 shares of the Company's Series A Preferred Stock and, upon the closing
of this Offering, such warrant will become a warrant exercisable to purchase
the same number of shares of Common Stock with an exercise price of $.50 per
share and a term of ten years from the date of execution of such warrant.

In connection with an equipment lease, the Company issued two warrants to
purchase up to an aggregate of 91,200 shares of the Company's Series B
Preferred Stock. Upon the consummation of this Offering, one of such warrants,
exercisable for up to 48,000 shares of Series B Preferred, will become
exercisable to purchase the same number of shares of Common Stock with an
exercise price of $.625 per share and a term of ten years from the date of
execution of such warrant or five years from the effective date of the
Company's initial public offering, whichever is longer. The second of such
warrants, exercisable for up to 43,200 shares of Series B Preferred, will
become exercisable to purchase the same number of shares of Common Stock with
an exercise price of $.625 per share and a term of seven years from the date
of execution of such warrant or five years from the effective date of the
Company's initial public offering, whichever is longer.

In connection with a combined software and equipment lease entered into in
July 1994, the Company issued to the lessor a warrant to purchase 36,666
shares of the Company's Series C Preferred Stock and, upon the closing of this
Offering, such warrant will become exercisable to purchase the same number of
shares of Common Stock with an exercise price of $1.50 per share. At the same
time, the Company issued to the lessor a warrant to purchase 15,789 shares of
the Company's Series D Preferred Stock and, upon the of this Offering, such
warrant will become exercisable to purchase the same number of shares of
Common Stock with an exercise price of $2.85 per share. Each of these warrants
is exercisable for a period of seven years from August 1, 1994 or five years
from the effective date of the Company's initial underwritten public offering,
whichever is longer.

In connection with a capital equipment lease entered into in July 1995, the
Company issued to the lessor a warrant to purchase 35,088 shares of the
Company's Series D Preferred Stock and, upon the closing of this Offering,
such warrant will become exercisable to purchase the same number of shares of
Common Stock with an exercise price of $2.85 per share. Each of these warrants
is exercisable until December 31, 2001.

In connection with a combined mask, software and equipment lease entered
into in June 1996, the Company issued to the lessor a warrant to purchase
18,000 shares of the Company's Series D Preferred Stock and, upon the closing
of this Offering, such warrant will become exercisable to purchase the same
number of shares of Common Stock with an exercise price of $5.70 per share.
Each of these warrants is exercisable until December 31, 2001.

50
<PAGE>

REGISTRATION RIGHTS

The holders of an aggregate of 12,576,357 shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of certain registration rights
agreements, holders of Common Stock benefitting from these rights may require
the Company to file a registration statement under the Securities Act at its
expense with respect to their shares of Common Stock, and the Company is
required to use its best efforts to effect such registration, subject to
certain conditions and limitations. The rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering subject to the registration to limit the number of shares included in
such registration. In addition, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include such
shares of Common Stock in the registration. Furthermore, such holders may
require the Company to file additional registration statements on Form S-3
subject to certain conditions and limitations.

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW

Upon the completion of the Company's reincorporation in the State of
Delaware prior to closing of this offering, the Company will be subject to
Section 203 of the Delaware General Corporation Law ("Section 203"), which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentiality whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the Board of Directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.

The Company's Certificate of Incorporation continues to entitle stockholders
to use cumulative voting in the election of directors and to take action by
written consent.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe. Its address is 150 Royall Street, Canton, Massachusetts, 02021, and
its telephone number is 617-575-2000.

51
<PAGE>

LISTING

The Company's Common Stock has been approved for listing on the Nasdaq
National Market under the trading symbol NMGC. The Company has not applied to
list its Common Stock on any other exchange or quotation system. See "Risk
Factors--Absence of Prior Public Market and Possible Volatility of Stock
Price."

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company. Therefore, future sales of substantial amounts of Common Stock in the
public market could adversely affect the prevailing market price from time to
time. Furthermore, because only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

Upon completion of this offering, the Company will have outstanding an
aggregate of 23,332,205 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option, no exercise of outstanding options under
the Stock Plan and no issuances of shares pursuant to the Direct Sales. Of
these outstanding shares of Common Stock, the 3,000,000 shares sold in this
offering and any shares sold in the Direct Sales will be freely tradeable
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"), unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 20,332,205 shares of Common Stock outstanding upon completion of
this offering and held by existing stockholders will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares").

The holders of 20,134,705 Restricted Shares, including all officers and
directors of the Company, are subject to "lock-up" agreements with the
Representatives of the Underwriters and/or the Company providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of the shares of Common Stock owned by them or that could be
purchased by them through the exercise of options to purchase Common Stock of
the Company for a period of 180 days after the date of this Prospectus without
the prior written consent of Morgan Stanley & Co. Incorporated and/or the
Company, as applicable. The Company has agreed with the Representatives of the
Underwriters not to release any holders from such agreements without the prior
written consent of Morgan Stanley & Co. Incorporated. Such lock-up agreements
may be released at any time as to all or any portion of the shares subject to
such agreements at the sole discretion of Morgan Stanley & Co. Incorporated.
Of the 20,134,705 Restricted Shares that will first become eligible for sale
in the public market 180 days after the date of this Prospectus, 5,524,824
shares will be immediately eligible for sale without restriction under Rule
144(k) or Rule 701, and 14,609,882 shares will be immediately eligible for
sale subject to certain volume and other restrictions pursuant to Rule 144.
All 14,609,882 shares will be eligible for sale pursuant to Rule 144 upon the
expiration of one-year holding periods, all of which will expire on or before
September 15, 1997.

On February 20, 1997, the Securities and Exchange Commission announced the
adoption of certain changes to Rule 144 to reduce the holding period
requirements contained in Rule 144 to permit the resale of limited amounts of
restricted securities by any person after a one-year, rather than a two-year,
holding period. Such amendment also permits unlimited resales of restricted
securities held by non-affiliates of an issuer after a holding period of two
years, rather than three years. Such changes shall become effective on April
29, 1997.

In general, under the new Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including persons
who may be deemed to be "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 233,322 shares immediately after
this offering); or (ii)

52
<PAGE>

the average weekly trading volume of the Common Stock as reported through the
Nasdaq National Market during the four calendar weeks preceding the filing of
a Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
for at least two years the Restricted Shares proposed to be sold (including
the holding period of any prior owner except an affiliate), is entitled to
sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to certain compensatory benefit plans and contracts commencing
90 days after the issuer becomes subject to the reporting requirements of the
Exchange Act, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule
144. In addition, the Securities and Exchange Commission has indicated that
Rule 701 will apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options (including exercises after
the date of this Prospectus). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this Prospectus, may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its two-year
minimum holding period requirements.

The Company has also agreed not to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or enter into any swap or similar agreement
that transfers, in whole or in part, the economic risk of ownership of the
Common Stock, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated,
subject to certain limited exceptions.

The Company intends to file a registration statement under the Securities
Act covering approximately 4,868,137 shares of Common Stock subject to
outstanding options or reserved for issuance under the Stock Plan (which
includes a 2,000,000 share increase in the number of shares reserved for
future issuances under the Stock Plan that was approved by the Company's Board
of Directors in December 1996) and 500,000 shares of Common Stock reserved for
issuance under the Purchase Plan. See "Management--Employee Benefit Plans."
Such registration statement is expected to be filed simultaneously with the
effectiveness of the registration statement covering the shares of Common
Stock offered in this offering and will automatically become effective upon
filing. Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates and the
lapsing of the Company's repurchase options, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.

DIRECT SALES

The Company anticipates that concurrently with the closing of the offering
contemplated hereby, Mitsubishi International Corporation ("MIC") and MC
Silicon Valley, Inc. ("MC Silicon Valley") will purchase directly from the
Company shares of Common Stock having a purchase price of $1,000,000 and
$500,000, respectively. The Company anticipates that the shares of Common
Stock will be sold pursuant to stock purchase agreements between the Company
and MIC and MC Silicon Valley, respectively, and anticipates that such
agreements will be executed concurrently with the closing of the offering
contemplated hereby.

53
<PAGE>

UNDERWRITERS

Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Montgomery Securities and Robertson, Stephens &
Company LLC are serving as Representatives, have severally agreed to purchase,
and the Company and the Selling Stockholders have agreed to sell to them,
severally, the respective numbers of shares of Common Stock set forth opposite
their respective names below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Montgomery Securities..............................................
Robertson, Stephens & Company LLC..................................
---------
Total.......................................................... 3,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and
pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken.

The Underwriters initially propose to offer a portion of the shares of
Common Stock offered hereby directly to the public at the initial public
offering price set forth on the cover page hereof and a portion to certain
dealers at a price that represents a concession not in excess of $ per
share under the initial public offering price. The Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share to
other Underwriters or to certain other dealers.

Pursuant to the Underwriting Agreement, the Company and the Selling
Stockholders have granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 350,000
shares and 100,000 shares, respectively, of Common Stock at the initial public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The Underwriters may exercise such option to purchase solely
for the purpose of covering over-allotments, if any, incurred in the sale of
the shares of Common Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriters' name in the
preceding table bears to the total number of shares of Common Stock offered
hereby. If the Underwriters elect to purchase less than all of such additional
shares, the terms of the Underwriting Agreement provide that the Underwriters
shall purchase such additional shares first from the Company and then from the
selling stockholders on a pro rata basis.

The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales in excess of five percent of the
number of shares of Common Stock offered hereby to accounts over which they
exercise discretionary authority.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all Selling Stockholders, officers, directors and
certain other stockholders and option holders of the Company have agreed

54
<PAGE>

not to sell or otherwise dispose of Common Stock or convertible securities of
the Company for up to 180 days after the effective date of the offering,
without the prior consent of Morgan Stanley & Co. Incorporated. The Company
has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior consent of Morgan Stanley & Co. Incorporated,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, for a
period of 180 days after the date of this Prospectus.

The Company anticipates that, concurrently with the closing of the offering
contemplated hereby, MIC and MC Silicon Valley will purchase directly from the
Company, and not pursuant to the Underwriting Agreement, shares of Common
Stock having a purchase price of $1,000,000 and $500,000, respectively. The
Company anticipates that the shares of Common Stock will be sold pursuant to
stock purchase agreements between the Company and MIC and MC Silicon Valley,
respectively, and anticipates that such agreements will be executed
concurrently with the closing of the offering contemplated hereby.

PRICING OF THE OFFERING

Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company, representatives of the Selling Stockholders and the
Representatives of the Underwriters. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
the Company and its industry in general, sales, earnings and certain other
financial and operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Preliminary Prospectus is subject to
change as a result of market conditions and other factors.

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company and
the Selling Stockholders by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. Arthur F. Schneiderman, a member of Wilson Sonsini Goodrich &
Rosati, is Secretary of the Company. Certain legal matters in connection with
this offering will be passed upon for the Underwriters by Venture Law Group, A
Professional Corporation, Menlo Park, California. A director of Venture Law
Group and an investment partnership of which certain directors of Venture Law
Group are general partners beneficially own an aggregate of 40,000 shares of
the Company's Common Stock.

EXPERTS

The consolidated financial statements and financial statement schedule of
NeoMagic Corporation at January, 31, 1996 and 1997 and for each of the three
years in the period ended January 31, 1997 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.

The statements in this Prospectus as set forth under the captions "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary Rights"
and "Business--Proprietary Rights," insofar as they relate to patent matters,
have been passed upon by Townsend and Townsend and Crew LLP, Palo Alto,
California, patent counsel to the Company, as experts on such matters.

55
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the commission's Regional Offices at 75 Park Place, Room
1400, New York, New York 10007 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and its
principal reference facilities in New York, New York and Chicago, Illinois, at
a prescribed rate. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.

56
<PAGE>

NEOMAGIC CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Stockholders' Equity ........................... F-5
Consolidated Statements of Cash Flows ..................................... F-6
Notes to Consolidated Financial Statements ................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
NeoMagic Corporation

We have audited the accompanying consolidated balance sheets of NeoMagic
Corporation as of January 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of NeoMagic Corporation at January 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended January 31, 1997, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

San Jose, California

February 14, 1997, except for Note 10

as to which the date is February 26, 1997

F-2
<PAGE>

NEOMAGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
JANUARY 31, EQUITY
------------------ JANUARY 31,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 6,877 $ 13,458
Restricted cash equivalents................. -- 2,224
Accounts receivable, less allowance for
doubtful accounts of $0 at January 31, 1996
and $25 at January 31, 1997................ 138 2,205
Inventory................................... 331 5,237
Other current assets........................ 181 344
-------- --------
Total current assets..................... 7,527 23,468
Property, plant and equipment, net........... 1,103 3,395
Other assets................................. 119 601
-------- --------
Total assets............................. $ 8,749 $ 27,464
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit.............. $ 414 $ 14,224
Accounts payable............................ 569 5,175
Accrued expenses............................ 1,723 1,617
Current obligations under capital leases.... 752 1,054
-------- --------
Total current liabilities................ 3,458 22,070
Noncurrent obligations under capital leases.. 749 1,170
Other long-term liabilities.................. -- 24
-------- --------
Total liabilities........................ 4,207 23,264
Commitments and contingencies
Stockholders' equity:
Noncumulative convertible preferred stock,
$.001 par value:
Authorized shares--12,868,315 (2,000,000
pro forma)
Issued and outstanding shares--12,259,614
at January 31, 1996 and 1997 (no shares
outstanding pro forma) (aggregate
liquidation preference $16,913 at January
31, 1997) ................................ 12 12 $ --
Common stock, $.001 par value:
Authorized shares--60,000,000
Issued and outstanding shares--6,922,633 at
January 31, 1996 and 8,072,591 at January
31, 1997 (20,332,205 pro forma)........... 7 8 20
Additional paid-in capital.................. 17,302 18,207 18,207
Notes receivable from stockholders.......... (362) (822) (822)
Accumulated deficit......................... (12,417) (13,205) (13,205)
-------- -------- --------
Total stockholders' equity............... 4,542 4,200 $ 4,200
-------- -------- ========
Total liabilities and stockholders'
equity.................................. $ 8,749 $ 27,464
======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net sales.......................................... $ -- $ 243 $ 40,792
Cost of sales...................................... -- 165 28,631
------- ------- --------
Gross profit....................................... -- 78 12,161
Operating expenses:
Research and development.......................... 2,423 4,934 8,467
Sales, general, and administrative................ 968 1,606 6,305
Legal costs....................................... 1,500 610 (1,503)
------- ------- --------
Total operating expenses....................... 4,891 7,150 13,269
------- ------- --------
Loss from operations............................... (4,891) (7,072) (1,108)
Other income (expense), net:
Interest income and other......................... 194 385 1,366
Interest expense.................................. (94) (182) (1,046)
------- ------- --------
Net loss....................................... $(4,791) $(6,869) $ (788)
======= ======= ========
Pro forma net loss per share....................... $ (.04)
========
Shares used in computing pro forma net loss per
share............................................. 21,555
</TABLE>

See accompanying notes.

F-4
<PAGE>

NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES TOTAL
----------------- ------------------ PAID-IN RECEIVABLE FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
---------- ------ ---------- ------ ---------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31,
1994................... 3,050,000 $ 3 5,225,000 $ 5 $ 1,502 -- $ (757) $ 753
Conversion of
outstanding common
stock into Series A
preferred stock....... 10,450 -- (5,225,000) (5) 5 -- -- --
Issuance of common
stock in exchange for
promissory notes...... -- -- 5,213,550 5 126 (131) -- --
Issuance of common
stock under stock
option plan in
exchange for
promissory notes...... -- -- 625,000 1 30 (31) -- --
Issuance of common
stock under stock
option plan........... -- -- 344,480 -- 14 -- -- 14
Exercise of Series B
preferred stock
warrants.............. 2,539,999 3 -- -- 1,595 -- -- 1,598
Issuance of Series C
preferred stock, net
of issuance costs of
$20................... 3,839,165 3 -- -- 5,736 -- -- 5,739
Net loss............... -- -- -- -- -- -- (4,791) (4,791)
---------- --- ---------- --- ------- ----- -------- ------
Balance at January 31,
1995................... 9,439,614 9 6,183,030 6 9,008 (162) (5,548) 3,313
Issuance of Series D
preferred stock, net
of issuance costs of
$18................... 2,820,000 3 -- -- 8,044 -- -- 8,047
Issuance of common
stock under stock
option plan........... -- -- 1,008,257 1 262 (219) -- 44
Repurchase of common
stock at cost and
payments on promissory
notes................. -- -- (268,654) -- (12) 19 -- 7
Net loss............... -- -- -- -- -- -- (6,869) (6,869)
---------- --- ---------- --- ------- ----- -------- ------
Balance at January 31,
1996................... 12,259,614 12 6,922,633 7 17,302 (362) (12,417) 4,542
Issuance of common
stock under stock
option plan........... -- -- 1,465,750 1 997 (592) -- 406
Repurchase of common
stock at cost and
payments on promissory
notes ................ -- -- (315,792) -- (92) 109 -- 17
Payment of promissory
note.................. -- -- -- -- -- 23 -- 23
Net loss............... -- -- -- -- -- -- (788) (788)
---------- --- ---------- --- ------- ----- -------- ------
Balance at January 31,
1997................... 12,259,614 $12 8,072,591 $ 8 $18,207 $(822) $(13,205) $4,200
========== === ========== === ======= ===== ======== ======
</TABLE>

See accompanying notes.

F-5
<PAGE>

NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(4,791) $(6,869) $ (788)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 308 528 813
Changes in operating assets and liabilities:
Accounts receivable............................. -- (138) (2,067)
Inventory....................................... -- (331) (4,906)
Other current assets............................ 54 (46) (163)
Other assets.................................... 10 (103) (482)
Accounts payable................................ 235 314 4,606
Accrued expenses and other...................... 1,471 232 (82)
------- ------- -------
Net cash used in operating activities.............. (2,713) (6,413) (3,069)
------- ------- -------
INVESTING ACTIVITIES
Purchases of property, plant, and equipment....... (917) (728) (3,105)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from sale leaseback liability............ 929 1,243 1,689
Payments on lease liability....................... (278) (639) (966)
Proceeds from working capital line of credit...... -- 414 27,941
Payments on working capital line of credit........ -- -- (14,131)
Amounts held as restricted cash equivalents....... -- -- (2,224)
Net proceeds from issuances of noncumulative
convertible preferred stock...................... 7,337 8,047 --
Proceeds from issuance of common stock............ 14 51 446
------- ------- -------
Net cash provided by financing activities......... 8,002 9,116 12,755
------- ------- -------
Net increase in cash and cash equivalents......... 4,372 1,975 6,581
Cash and cash equivalents at beginning of period... 530 4,902 6,877
------- ------- -------
Cash and cash equivalents at end of period......... $ 4,902 $ 6,877 $13,458
======= ======= =======
Supplemental schedules of cash flow information
Cash paid during the year for:
Interest....................................... $ 81 $ 153 $ 1,045
Supplemental schedule of noncash investing and
financing activities:
Conversion of common stock to Series A preferred
stock............................................ $ 5 $ -- $ --
Issuance of common stock in exchange for
promissory notes................................. $ 162 $ 219 $ 592
</TABLE>

See accompanying notes.

F-6
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

NeoMagic Corporation (the "Company") was incorporated on May 26, 1993 in
California and reincorporated in Delaware on February 13, 1997. The Company
designs, develops and markets multimedia accelerator solutions for sale to
notebook PC manufacturers. The Company's MagicWare technology integrates large
DRAM memory with analog and logic circuitry to provide a high performance
multimedia solution on a single chip.

Basis of Presentation

As of January 1996, the Company adopted a fiscal reporting period consisting
of a fifty-two week period ending on the Sunday closest to the January month
end. Fiscal years 1995, 1996 and 1997 ended on January 31, 28, and 26,
respectively. For convenience, the accompanying financial statements have been
presented as ending on the last day of the calendar month.

Prior to fiscal 1997, the Company was in the development stage, primarily
engaged in product development, product testing and the establishment of
strategic relationships with customers and suppliers. Accordingly, the
majority of the Company's operating expenses during such period were related
to research and development activities.

Principals of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, NeoMagic Japan (KK) and NeoMagic
International. All significant intercompany balances and transactions have
been eliminated.

Risks and Uncertainties

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.

All of the Company's products are currently manufactured by a company in
Japan under the terms of a five-year wafer supply agreement. The Company also
has entered into a five-year wafer supply agreement with another manufacturer
in Japan to commence production of the Company's next generation multimedia
accelerator products. NeoMagic does not expect that a significant portion of
the Company's wafer requirements will be met by the new manufacturer before
calendar 1998. The Company expects that, for the foreseeable future, each of
its products will be single source manufactured. A manufacturing disruption
experienced by either of the Company's manufacturing partners would impact the
production of the Company's products for a substantial period of time, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Under the wafer supply agreements, the Company must provide rolling 12-month
forecasts of anticipated purchases and place binding purchase orders four
months prior to shipment. This limits the Company's ability to react to
fluctuations in demand for its products, which can be unexpected and dramatic.
To the extent the Company cannot accurately forecast the number of wafers
required, it may have either a shortage or an excess supply of wafers, which
could have an adverse effect on the Company's financial condition and results
of operations.

F-7
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Foreign Currency Transactions

Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts are measured using the foreign
exchange rate at the balance sheet date. Operating accounts and nonmonetary
balance sheet accounts are remeasured at the rate in effect at the date of
transaction. The effects of foreign currency remeasurement are reported in
current operations and have not been material to date.

Derivative Financial Instruments

The Company's wafer inventory purchases are priced in yen. The Company from
time to time enters into foreign currency forward contracts to minimize
foreign currency fluctuation exposures related to these firm purchase
commitments. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an
instrument as a hedge include its effectiveness in risk reduction and one-to-
one matching of derivative instruments to underlying transactions. The
settlement dates of the forward contracts are no more than two months from the
date of contract. As of January 31, 1997 there were no outstanding forward
contracts. There were no significant gains or losses related to currency
forward contracts for fiscal 1995, 1996 and 1997.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid financial instruments, consisting
of investments in money market funds, commercial paper, and municipal bonds
with original maturities of 90 days or less at the time of acquisition.

Effective as of the beginning of fiscal 1995, the Company adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115"). Under FAS 115, management
classifies investments as available-for-sale or held-to maturity at the time
of purchase and periodically reevaluates such designations. Investments in
marketable equity securities and debt securities are classified as held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost with corresponding premiums or discounts amortized to interest income
over the life of the investment. Debt securities not classified as held-to-
maturity are classified as available-for-sale and are reported at fair value.
Unrecognized gains or losses on available-for-sale securities are included,
net of tax, in stockholders' equity until their disposition. Realized gains
and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income or expense. The
cost of securities sold is based on the specific identification method.

While the Company's intent is to hold debt securities to maturity, they are
classified as available-for-sale because the sale of such securities may be
required prior to maturity. All are stated at cost, which approximates fair
market value as of January 31, 1996 and 1997, and consist of the following:

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1996 1997
----------- -----------
<S> <C> <C>
Cash equivalents:
Money market funds.................................... $ 61,000 $ 6,803,000
Commercial paper...................................... 6,479,000 6,594,000
Municipal bonds....................................... -- 800,000
---------- -----------
Total............................................... $6,540,000 $14,197,000
========== ===========
</TABLE>

The above amounts include $254,000 and $1,970,000 of money market funds and
commercial paper, respectively, classified as restricted cash equivalents as
of January 31, 1997.

F-8
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Gross unrealized gains and losses on available-for-sale securities at
January 31, 1996 and 1997 and gross realized gains and losses on sales of
available-for-sale securities during the years ended January 31, 1995, 1996
and 1997 were immaterial.

Inventory

Inventories are stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method.

Property, Plant and Equipment

Property, plant and equipment is stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided on a
straight-line basis over the estimated useful life of the respective assets,
generally three to five years or, in the case of property under capital
leases, over the lesser of the useful life of the assets or lease term.

Revenue Recognition

Revenue from product sales is recognized upon shipment, net of estimated
returns. Although the Company has made no sales to distributors to date, the
Company's policy is that revenue on shipment to distributors are deferred
until the products are sold by the distributor.

Concentration of Credit Risk

The Company sells its products to notebook PC OEMs as well as to third-party
subsystem manufacturers who design and manufacture notebook PC's on behalf of
the brand name OEMs. The Company performs continuing credit evaluations of its
customers and, generally, does not require collateral. Letters of credit may
be required from its customers in certain circumstances.

Research and Development Expenses

Expenditures for research and development are expensed as incurred. In
connection with the Company's product development efforts, it develops
software (none of which is separately sold) that enable the Company's
multimedia accelerator products to work with various personal computer
operating systems. The development of such software generally occurs in
parallel with the related accelerator product development and, accordingly, is
expensed as incurred.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company adopted FAS 123 in fiscal 1997. The
Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25, and has adopted the "disclosure only"
alternative described in FAS 123.

Income Taxes

Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in
effect when the differences are expected to reverse.

F-9
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Net Loss Per Share and Pro Forma Net Loss Per Share

Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from convertible preferred stock (using the as-if-converted method) and from
stock options and warrants (using the treasury stock method) have been
excluded from the computation because their inclusion would be anti-dilutive,
except that pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalent shares issued by the
Company at prices below the initial public offering price during the twelve-
month period prior to the initial public offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the estimated initial public offering price). Per
share information calculated on this basis is as follows (in thousands except
per share information):
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net loss per share..................................... $(.60) $(.77) $(.08)
===== ===== =====
Shares used in computing net loss per share............ 7,926 8,863 9,296
</TABLE>

The pro forma calculation of net loss per share presented in the
consolidated statements of operations is computed as described above and also
gives effect to the conversion of all outstanding shares of convertible
preferred stock into common stock upon the closing of the Company's initial
public offering using the as-if-converted method.

Unaudited Pro Forma Stockholders' Equity

The Company's unaudited pro forma stockholders' equity as of January 31,
1997 gives effect to the conversion of all convertible preferred stock
outstanding into an aggregate of 12,259,614 shares of common stock, effective
upon the closing of the Company's initial public offering.

2. SUMMARIZED BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Inventory:
Raw materials....................................... $ 7,000 $ 464,000
Work in process..................................... 296,000 948,000
Finished goods...................................... 28,000 3,825,000
---------- ----------
Total................................................ $ 331,000 $5,237,000
========== ==========
Property, plant, and equipment:
Computer equipment and software..................... $1,677,000 $4,288,000
Furniture and fixtures.............................. 143,000 495,000
Machinery and equipment............................. 138,000 280,000
---------- ----------
Total................................................ 1,958,000 5,063,000
Less accumulated depreciation and amortization...... (855,000) (1,668,000)
---------- ----------
Property, plant, and equipment, net.................. $1,103,000 $3,395,000
========== ==========
Accrued Expenses:
Legal accrual....................................... $1,500,000 $ --
Compensation and related benefits................... 156,000 1,141,000
Deferred rent....................................... -- 255,000
Other accruals...................................... 67,000 221,000
---------- ----------
Total................................................ $1,723,000 $1,617,000
========== ==========
</TABLE>

F-10
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. WORKING CAPITAL LINE OF CREDIT

The Company maintains a revolving credit agreement ("Credit Agreement") with
Mitsubishi International. The Credit Agreement is used to provide 90 day
extended credit terms to finance wafer inventory purchases. Borrowings of up
to $15,000,000 under the Credit Agreement are permitted, with a compensating
balance requirement that the Company, unless otherwise notified by Mitsubishi
International, place amounts drawn in excess of $12,000,000 into an escrow
account accessible only with Mitsubishi International's approval. As of
January 31, 1997, $2,224,000 was held in escrow. For periods prior to January
31, 1997, the interest rate under the agreement was based on the lender's
internal interest rate which was required to be at least 1.5% below the prime
rate on the date of invoice, generally approximately thirty days after receipt
of the wafers. The Company also paid a commission of 1.25% to 2.00% based on
the lending level during the prior calendar quarter. The Credit Agreement has
been amended to provide (i) that effective January 1997, Mitsubishi
International's sole compensation for the financing of wafer purchases will be
a commission of 1.75% of wafer purchases and (ii) for 60 day extended credit
terms. The term of the Credit Agreement expires on November 20, 1997, subject
to automatic extensions thereafter from year to year unless a termination
notice is given by either party. Under the terms of the Credit Agreement,
Mitsubishi International maintains a security interest in all inventory, cash
and investments, and accounts and notes receivable of the Company. The Credit
Agreement contains standard events of default which if triggered can permit
Mitsubishi International to declare all amounts outstanding under the Credit
Agreement immediately due and payable. Such events of default include failure
to comply with the terms of the Credit Agreement, bankruptcy and default and
acceleration of any other indebtedness of the Company.

4. OBLIGATIONS UNDER CAPITAL LEASES

The Company enters into various capital leases, including sale and leaseback
transactions to finance purchases of property, plant and equipment, software
and masks. As of January 31, 1997, under various lease lines of credit, the
Company had $1,120,000 available for future purchases of property, plant and
equipment, software and masks that expire through June 30, 1997. Obligations
under capital leases represent the present value of future payments under the
equipment lease agreements. Under the terms of the lease agreements, warrants
to purchase the Company's preferred stock have been granted as described in
Note 6. Property, plant and equipment includes the following amounts for
leases that have been capitalized:

<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Property, plant and equipment under capital leases. $1,710,000 $ 2,686,000
Accumulated amortization........................... (744,000) (1,474,000)
---------- -----------
Net property, plant and equipment under capital
leases............................................ $ 966,000 $ 1,212,000
========== ===========
</TABLE>

F-11
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Future minimum payments under capital leases consist of the following at
January 31, 1997:

<TABLE>
<S> <C>
Fiscal year ending January 31:
1998........................................................... $1,281,000
1999........................................................... 668,000
2000........................................................... 619,000
2001........................................................... 53,000
----------
Total minimum lease payments..................................... 2,621,000
Amount representing interest..................................... 397,000
----------
Present value of net minimum lease payments...................... 2,224,000
Less current portion............................................. 1,054,000
----------
Long-term portion................................................ $1,170,000
==========
</TABLE>

5. INCOME TAXES

As of January 31, 1996 and 1997, the Company had federal net operating loss
carryforwards of approximately $10,800,000 and $13,200,000, respectively. As
of January 31, 1996 and 1997 the Company also had state net operating loss
carryforwards of approximately $2,700,000 and $4,800,000, respectively. The
Company had federal research and development tax credit carryforwards of
approximately $200,000 and $300,000 at January 31, 1996 and 1997,
respectively. The net operating loss and credit carryforwards will expire
beginning in 1999 through 2012, if not utilized.

Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change provision of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before
utilization.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities for federal and state
income taxes are as follows:

<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 3,800,000 $ 4,800,000
Research credit carryforwards.................... 300,000 500,000
Capitalized research and development............. 200,000 400,000
Litigation reserve............................... 550,000 --
Other............................................ 150,000 --
----------- -----------
Total deferred tax assets...................... 5,000,000 5,700,000
Valuation allowance................................ (5,000,000) (5,700,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>

The valuation allowance increased by $1,900,000, $2,800,000 and $700,000 for
the years ended January 31, 1995, 1996 and 1997, respectively.

F-12
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. STOCKHOLDERS' EQUITY

Noncumulative Convertible Preferred Stock

Preferred stock consists of the following:

<TABLE>
<CAPTION>
SHARES ISSUED AND
SHARES DESIGNATED OUTSTANDING
--------------------- ---------------------
JANUARY 31, JANUARY 31,
--------------------- ---------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Series A......................... 3,180,450 3,180,450 3,060,450 3,060,450
Series B......................... 2,631,199 2,631,199 2,539,999 2,539,999
Series C......................... 4,166,666 4,166,666 3,839,165 3,839,165
Series D......................... 2,890,000 2,890,000 2,820,000 2,820,000
---------- ---------- ---------- ----------
12,868,315 12,868,315 12,259,614 12,259,614
</TABLE>

The holder of each share of Series A, B, C, and D preferred stock is
entitled to receive, when and as declared by the Board of Directors,
noncumulative dividends at an annual rate equal to $.04, $.05, $.12, and $.228
per share, respectively. No dividends have been declared to date.

Each share of Series A, B, C, and D preferred stock is convertible, at the
holders' option, into common stock on a one-for-one basis, subject to certain
antidilution adjustments. Each share of preferred stock shall automatically be
converted into common stock immediately upon the closing of an underwritten
initial public offering of the Company's common stock for an aggregate
offering price of at least $15,000,000 and at a per share offering price of
not less that $4.25 per share. The preferred stockholders are entitled to one
vote for each share of common stock into which such shares can be converted.

The Series A, B, C, and D preferred stockholders are entitled to liquidation
preferences of $0.50, $0.625, $1.50, and $2.85 per share, respectively,
adjusted for any combinations, consolidations, or stock splits with respect to
such shares and, in addition, an amount equal to all declared but unpaid
dividends for each share of Series A, B, C, and D preferred stock then held.
If the assets and funds distributed among the holders of the Series A, B, C,
and D preferred stock is insufficient to permit the payment to such holders of
the full preferential amount, the entire assets and funds of the Company
legally available for distribution shall be distributed to the holders of the
Series A, B, C, and D preferred stock in proportion to the full preferential
amount each such holder is otherwise entitled to receive. After payment of
these liquidation preferences, the remaining assets will be distributed to the
holders of common stock and the preferred stock on a pro rata basis as if the
Series A, B, C, and D preferred stock were converted into common stock until
the holders of the Series D preferred stock have received an aggregate amount
equal to $3.28 per share, the holders of Series C preferred stock have
received an aggregate amount equal to $1.80 per share, and the holders of
Series A and B preferred stock have received an aggregate amount equal to $.81
per share. Any remaining amounts will be distributed to the holders of common
stock.

F-13
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Warrants

The Company periodically grants warrants in connection with certain lease
arrangements. The Company had the following warrants outstanding at January
31, 1997 to purchase shares of preferred stock:

<TABLE>
<CAPTION>
NUMBER OF PREFERRED EXERCISE PRICE DATE
SHARES STOCK SERIES PER SHARE ISSUED EXPIRATION OF WARRANTS
--------- ------------ -------------- ------ -------------------------------
<C> <C> <C> <C> <S>
120,000 A $0.50 11/93 November 2003
Later of November 2003 or five
48,000 B $0.625 11/93 years after IPO
Later of May 2001 or five years
43,200 B $0.625 5/94 after IPO
Later of August 2001 or five
36,666 C $1.50 7/94 years after IPO
Later of August 2001 or five
15,789 D $2.85 8/95 years after IPO
35,088 D $2.85 8/95 December 2001
18,000 D $5.70 6/96 December 2001
-------
316,743
</TABLE>

All of the outstanding warrants will become exercisable for common stock if
the Company completes an initial public offering of its common stock.

Stock Plan

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock awards because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation is recognized.

In July 1993, the Company adopted the 1993 Stock Plan (the "Plan") whereby
the Board of Directors may grant incentive stock options, nonstatutory stock
options and stock purchase rights to employees, consultants, and directors.
The Company has reserved 7,775,000 shares of common stock for issuance under
the Plan. Unless terminated sooner, the Plan will terminate automatically in
December 2003. Vesting provisions for stock purchase rights and options
granted under the Plan are determined by the Board of Directors. Stock options
expire no later than ten years from the date of grant. In the event of
voluntary or involuntary termination of employment with the Company for any
reason, with or without cause, all unvested options are forfeited and all
vested options must be exercised within a thirty-day period or they are
forfeited. Options and stock purchase rights are exercisable immediately upon
grant. However, common shares issued on exercise of options prior to vesting
are subject to repurchase by the Company if the holder is no longer employed
by the Company. As of January 31, 1997, 2,372,810 shares of common stock were
subject to this repurchase provision.

F-14
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A summary of the Company's stock option activity, and related information
for the three years ended January 31, 1997 follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE
(OPTIONS) PRICE
---------- --------
<S> <C> <C>
Balance at January 31, 1994 -- --
Granted................................................ 1,317,000 $ .07
Exercised.............................................. (969,480) .05
Canceled............................................... (30,000) .05
----------
Balance at January 31, 1995............................. 317,520 .15
Granted................................................ 1,448,100 .27
Exercised.............................................. (1,008,257) .26
Canceled............................................... (182,863) .22
----------
Balance at January 31, 1996............................. 574,500 .22
Granted................................................ 3,385,000 3.02
Exercised.............................................. (1,465,750) .61
Canceled............................................... (53,000) .77
----------
Balance at January 31, 1997............................. 2,440,750 $3.86
==========
</TABLE>

At January 31, 1997, options to purchase 57,125 shares of common stock were
vested at prices ranging from $.15 to $7.50 and 2,427,387 shares of common
stock were available for future grants under the Plan.

The following table summarizes information about stock options outstanding
at January 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND
EXERCISABLE
--------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE
------------------------ ----------- ----------- --------
<S> <C> <C> <C>
$0.15 -- $0.80......................... 995,250 9.01 $0.71
$1.00 -- $2.50......................... 212,000 9.51 1.33
$3.50 -- $7.50......................... 1,233,500 9.87 6.83
---------
2,440,750 9.49 $3.86
=========
</TABLE>

Pro forma information regarding net loss and net loss per share is required
by FAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
January 31, 1995 under the fair value method. The fair value for these options
was estimated at the date of grant using the minimum value method with the
below weighted-average assumptions for fiscal 1996 and 1997. The fair value of
stock options granted subsequent to January 31, 1997 will be estimated using
the Black-Scholes option pricing model. The minimum value method differs from
methods designed to estimate the fair value of an option, such as the Black-
Scholes option pricing model, because it does not consider the effect of
expected volatility.

<TABLE>
<CAPTION>
YEARS
ENDING
JANUARY
31,
----------
1996 1997
---- ----
<S> <C> <C>
Risk-free interest rates...................................... 5.6% 6.3%
Dividend yield................................................ 0% 0%
Volatility.................................................... 0% 0%
Expected life of option in years.............................. 5.0 4.7
</TABLE>

F-15
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for per share
information):

<TABLE>
<CAPTION>
YEARS ENDING
JANUARY 31,
--------------
1996 1997
------- -----
<S> <C> <C>
Pro forma net loss....................................... $(6,873) $(941)
Pro forma net loss per share............................. $ (.78) $(.10)
</TABLE>

The pro forma net loss per share above does not assume the conversion of
preferred stock effective upon the closing of the Company's initial public
offering, and is calculated using the weighted average number of shares of
common stock outstanding as described in Note 1. The effects on pro forma
disclosures of applying FAS 123 are not likely to be representative of the
effects on pro forma disclosures in future years.

The weighted average fair value of options granted during the years ended
January 31, 1996 and 1997 were $.06 and $.80, respectively.

Because FAS 123 is applicable only to options granted subsequent to January
31, 1995, its pro forma effect will not be fully reflected until fiscal 1999.

Proposed Public Offering of Common Stock

On October 10, 1996, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock in an
initial public offering. If the initial public offering is consummated as
presently anticipated, all of the currently outstanding preferred stock will
automatically convert into 12,259,614 shares of common stock. Unaudited pro
forma stockholders' equity at January 31, 1997 gives effect to the conversion
of 12,259,614 shares of convertible preferred stock into shares of common
stock upon the closing of the Company's initial public offering.

F-16
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Employee Stock Purchase Plan

The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors in December 1996. A total of 500,000
shares of common stock has been reserved for issuance under the 1997 Purchase
Plan. The 1997 Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code, is implemented by consecutive and overlapping
twenty-four month offering periods that begin every six months, commencing
after the completion of the initial public offering. Each twenty-four month
offering period includes four six-month purchase periods, during which payroll
deductions are accumulated and at the end of which shares of common stock are
purchased with a participant's accumulated payroll deductions, except for the
first such offering period which commences on the first trading day on or
after the effective date of the initial public offering. The 1997 Purchase
Plan permits eligible employees to purchase common stock through payroll
deductions of up to 10% of an employee's compensation. The price of common
stock to be purchased under the 1997 Purchase Plan will be 85% of the lower of
the fair market value of the common stock at the beginning of the offering
period or at the end of the relevant purchase period.

Common Stock

On January 28, 1997 the Company amended its Certificate of Incorporation
such that the authorized common stock became 60,000,000 shares.

Preferred Stock

On December 12, 1996, the Board of Directors approved an amendment to the
Certificate of Incorporation to allow, upon the completion of the initial
public offering, the issuance of up to 2,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights of those shares without any further vote or action by
the stockholders.

7. SAVINGS PLAN

The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, employees may contribute up to 20% of their pre-
tax salaries per year, but not more than the statutory limits. The Company
does not contribute to the plan.

8. COMMITMENTS AND CONTINGENCIES

Commitments

In May 1996 the Company moved its principal headquarters to a new facility
in Santa Clara, California, under a noncancellable operating lease that
expires in April 2003. The Company also leases a sales office under an
operating lease that expires in February 1997. Future minimum lease payments
under operating leases at January 31, 1997 are as follows:

<TABLE>
<S> <C>
Fiscal year ending January 31:
1998............................................................ $ 779,000
1999............................................................ 830,000
2000............................................................ 857,000
2001............................................................ 884,000
2002............................................................ 911,000
Thereafter...................................................... 1,175,000
----------
Total minimum lease payments..................................... $5,436,000
==========
</TABLE>

F-17
<PAGE>

NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Rental expense under operating leases was $70,000, $97,000 and $647,000, for
the years ended January 31, 1995, 1996 and 1997, respectively.

In fiscal 1997, the Company began subletting a portion of its main operating
facility under operating leases expiring through March 1998. As of January 31,
1997, future minimum rentals to be received under noncancelable subleases
totaled $268,000 and $42,000, for the years ending January 31, 1998 and 1999,
respectively. Rental income for the year ended January 31, 1997 was $175,000.

Contingencies

In November 1994, one of the Company's competitors (the "plaintiff") filed
an action against the Company, five of its employees, and its Chairman of the
Board of Directors. The plaintiff alleged that the Company interfered with
employment agreements, and misappropriated certain of the plaintiff's trade
secrets. In June 1996, the litigation was dismissed and no amounts were
required to be paid by the Company. The settlement agreement which gave rise
to the dismissal did however include a non-solicitation provision and certain
contingent cross-licensing provisions. In fiscal 1995 and 1996, the Company
recorded charges to operations totaling $1,500,000 and $610,000, respectively,
for estimated legal costs related to the litigation. In the second quarter of
fiscal 1997, due to the dismissal of the litigation, legal costs were reduced
by $1,503,000 due to the reversal of previously estimated legal fees.

In October 1996 the Company was notified by two of its customers that they
had received a letter from the holder of a United States patent asserting that
the video graphics subsystem in such customers' notebook PCs, which use the
Company's products, infringe certain claims of the patent. The Company
believes that these assertions are without merit.

9. SIGNIFICANT CUSTOMERS AND EXPORT SALES

For the year ended January 31, 1996, three customers accounted for 34.6%,
28.6% and 14.4%, respectively, of net sales. During the year ended January 31,
1997, three customers accounted for 31.6%, 19.8% and 14.6%, respectively, of
net sales. Net sales to customers in Asia-Pacific, Japan, and the United
States totaled 82%, 8% and 10%, respectively, of net sales for the year ended
January 31, 1996 and 61.7%, 34.5% and 3.8%, respectively, of net sales for the
year ended January 31, 1997.

10. SUBSEQUENT EVENT

In late February 1997, the Company received a written notice from Cirrus
Logic asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe three United States patents held by this
competitor. The Company believes, based upon advice rendered by its patent
counsel, that the Company's MagicGraph128, MagicGraph128V and MagicGraph128ZV
products do not infringe any of the claims of these patents. However, there
can be no assurance that Cirrus Logic will not file a lawsuit against the
Company or that the Company would prevail in such litigation.

F-18
<PAGE>

(Logo of NeoMagic Corporation)

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.

<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
Printer Fee and Expenses.............................................. $200,000
Registration Fee...................................................... 10,455
NASD Fee.............................................................. 3,950
Nasdaq Listing Fee.................................................... 50,000
Legal Fees and Expenses............................................... 300,000
Accounting Fees and Expenses.......................................... 200,000
Blue Sky Fees and Expenses............................................ 10,000
Transfer Agent Fees................................................... 5,000
Miscellaneous......................................................... 120,595
--------
Total............................................................... $900,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach or
alleged breach of their duty of care. In addition, as permitted by Section 145
of the Delaware General Corporation Law, the Bylaws of the Registrant provide
that: (i) the Registrant is required to indemnify its directors and executive
officers and persons serving in such capacities in other business enterprises
(including, for example, subsidiaries of the Registrant) at the Registrant's
request, to the fullest extent permitted by Delaware law, including in those
circumstances in which indemnification would otherwise be discretionary; (ii)
the Registrant may, in its discretion, indemnify employees and agents in those
circumstances where indemnification is not required bylaw; (iii) the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers in connection with defending a proceeding (except that it
is not required to advance expenses to a person against whom the Registrant
brings a claim for breach of the duty of loyalty, failure to act in good
faith, intentional misconduct, knowing violation of law or deriving an
improper personal benefit; (iv) the rights conferred in the Bylaws are not
exclusive, and the Registrant is authorized to enter into indemnification
agreements with its directors, executive officers and employees; and (v) the
Registrant may not retroactively amend the Bylaw provisions in a way that it
adverse to such directors, executive officers and employees.

The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum
indemnity allowed to directors and executive officers by Section 145 of the
Delaware General Corporation Law and the Bylaws, as well as certain additional
procedural protections. In addition, such indemnity agreements provide that
directors and executive officers will be indemnified to the fullest possible
extent not prohibited by law against all expenses (including attorney's fees)
and settlement amounts paid or incurred by them in any action or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors or executive officers of the Registrant
or as directors or officers of any other Company or enterprise when they are
serving in such capacities at the request of the Registrant. The Company will
not be obligated pursuant to the indemnity agreements to indemnify or advance
expenses to an indemnified party with respect to proceedings or claims
initiated by the indemnified party and not

II-1
<PAGE>

by way of defense, except with respect to proceedings specifically authorized
by the Board of Directors or brought to enforce a right to indemnification
under the indemnity agreement, the Company's Bylaw/s or any statute or law.
Under the agreements, the Company is not obligated to indemnify the
indemnified party (i) for any expenses incurred by the indemnified party with
respect to any proceeding instituted by the indemnified party to enforce or
interpret the agreement, if a court of competent jurisdiction determines that
each of the material assertions made by the indemnified party in such
proceeding was not made in good faith or was frivolous; (ii) for any amounts
paid in settlement of a proceeding unless the Company consents to such
settlement; (iii) with respect to any proceeding brought by the Company
against the indemnified party for willful misconduct, unless a court
determines that each of such claims was not made in good faith or was
frivolous; (iv) on account of any suit in which judgment is rendered against
the indemnified party for an accounting of profits made from the purchase or
sale by the indemnified party of securities of the Company pursuant to the
provisions of (S) 16(b) of the Exchange Act and related laws; (v) on account
of the indemnified party's conduct which is finally adjudged to have been
knowingly fraudulent or deliberately dishonest, or to constitute willful
misconduct or a knowing violation of the law; (vi) an account of any conduct
from which the indemnified party derived an improper personal benefit; (vii)
on account of conduct the indemnified party believed to be contrary to the
best interests of the Company or its stockholders; (vii) on account of conduct
that constituted a breach of the indemnified party's duty of loyalty to the
Company or its stockholders; or (ix) if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.

The indemnification provision in the Bylaws and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the
Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since January, 1994, the Registrant has issued and sold the following
securities:

1. From February 1, 1994 to January 31, 1997, the Registrant has issued
and sold 3,443,487 shares of Common Stock to directors, employees and
consultants at prices ranging from $.025 to $3.50 per share upon exercise
of stock options and restricted stock purchase rights pursuant to the
Registrant's 1993 Stock Plan. Such issuances were made in reliance upon the
exemption from registration set forth in Rule 701 promulgated under the
Securities Act or Section 4(2) of the Securities Act.

2. On July 20, 1993 and September 16, 1993, the Company sold in the
aggregate 3,060,450 shares of Series A Preferred Stock to a group of 7
third party venture capital, institutional and individual investors at a
price per share of $.50 for aggregate cash consideration of $1,530,225 and
warrants to a group of 7 third party venture capitial, institutional and
individual investors to purchase in the aggregate 2,539,999 shares of
Series B Preferred Stock at a purchase price of $.0001 per warrant for
aggregate cash consideration of $254 and an exercise price of $.625 per
warrant. Such issuances were made in reliance upon the exemption contained
in Section 4(2) of the Securities Act.

3. On February 11, 1994, the Company issued an aggregate of 10,250 shares
of Series A Preferred Stock to founders of the Company in exchange for an
aggregate of 5,125,000 shares of Common Stock held by such persons. Such
issuances were made in reliance upon the exemption contained in Section
4(2) of the Securities Act.

4. On March 4, 1994, the Company sold in the aggregate 4,989,000 shares
of Common Stock at a price per share of $.025 to five executive officers of
the Company in consideration of execution and delivery of promissory notes
to the Company in the aggregate principal amount of $124,725. Such
issuances were made in reliance upon the exemption contained in Section
4(2) of the Securities Act.

5. On March 10, 1994, the Company issued 2,539,999 shares of Series B
Preferred Stock to a group of 7 third party venture capital, institutional
and individual investors, at a price per share of $.625 for aggregate cash
consideration of $1,587,499 pursuant to the exercise of warrants issued on
July 20, 1993 and September 16, 1993. Such issuances were made in reliance
upon the exemption contained in Section 4(2) of the Securities Act.

II-2
<PAGE>

6. On June 15, 1994, the Company sold in the aggregate 300,000 shares of
Common Stock at a purchase price of $.05 per share to an executive officer
of the Company in consideration of execution and delivery of promissory
notes to the Company in the aggregate principal amount of $124,725. Such
issuance was made in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.

7. On July 6, 1994 and August 30, 1994, the Company sold in the aggregate
3,839,165 shares of Series C Preferred Stock to a group of 16 third party
venture capital, institutional and individual investors at a price per
share of $1.50 for aggregate cash consideration of $5,758,747.50. Such
issuances were made in reliance upon the exemption contained in Section
4(2) of the Securities Act.

8. On June 30, 1995 and August 10, 1995, the Company sold in the
aggregate 2,820,000 shares of Series D Preferred to a group of 34 third
party venture capital, institutional and individual investors at a price
per share of $2.85 for aggregate cash consideration of $8,037,000. Such
issuances were made in reliance upon the exemption contained in Section
4(2) of the Securities Act.

9. On November 9, 1995, the Company sold in the aggregate 470,000 shares
of Common Stock of the Company to two executive officers of the Company at
a price per share of $.285 in consideration of execution and delivery of
promissory notes to the Company in the aggregate principal amount of
$133,450. Such issuances were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.

The issuances of securities described in paragraphs 1-9 of Item 15 (other
than the issuances to employees in reliance on rule 701 of the Securities
Act) were deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act as transactions by an issuer
not involving any public offering. Such exemption was based upon the
limited number and the class of the purchasers, the purchasers' access to
information concerning the Company's business and the purchasers' stated
intention to hold their shares for investment purposes only.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of Incorporation of
Registrant to be filed upon the closing of the Offering made under the
Registration Statement.
3.3++ Bylaws of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
4.2+ Second Amended Rights Agreement, dated as of June 30, 1995, between
Registrant and the parties indicated therein.
4.3* Form of Stock Purchase Agreement between Registrant and MC Silicon
Valley, Inc.
4.4* Form of Stock Purchase Agreement between Registrant and Mitsubishi
International Corporation.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1+ Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers.
10.2+ Amended and Restated 1993 Stock Plan and related agreements.
10.3+ Second Amended and Restated Rights Agreement, dated as of June 30,
1995, between Registrant and the parties indicated therein (included
in Exhibit 4.2).
10.4**+ Wafer Supply Agreement, dated as of January 21, 1997, between NeoMagic
International Corporation, actually-owned subsidiary of Registrant,
and Mitsubishi Electric Corporation.
10.5+ Form of promissory note.
10.6+ Lease Agreement, dated as of February 5, 1996, between Registrant and
A&P Family Investments, as landlord.
10.7+ Sublease Agreement, dated as of June 25, 1996, between Registrant and
PlanetWeb, Inc.
</TABLE>

II-3
<PAGE>

<TABLE>
<C> <S>
10.8+ Master Lease Agreement, as amended, dated as of November 24, 1993,
between Registrant and Comdisco, Inc., and certain exhibits thereto.
10.9+ Master Lease Agreement, dated as of July 19, 1995, between Registrant
and Venture Lending & Leasing, Inc., and certain exhibits thereto.
10.10+ Agreement, dated as of November 20, 1995, between Registrant and
Mitsubishi International Corporation as amended.
10.11+ General Security Agreement, dated November 15, 1995, between
Registrant and Mitsubishi International Corporation.
10.12+ Escrow Agreement, dated September 27, 1996, between Registrant and
Mitsubishi International Corporation.
10.13+ 1997 Employee Stock Purchase Plan, with exhibits thereto.
10.14**+ Settlement Agreement, dated as of March 8, 1996, by and between
Registrant and Cirrus Logic, Inc.
10.15**+ Wafer Supply Agreement, dated as of January 21, 1997, between
NeoMagic International Corporation, a wholly-owned subsidiary of
Registrant, and Toshiba Corporation.
10.16**+ Product Joint Development Agreement, dated as of January 21, 1997,
between NeoMagic International Corporation, a wholly-owned subsidiary
of Registrant and Toshiba Corporation.
10.17+ Master Lease Agreement, dated as of June 28, 1996, between Registrant
and Venture Lending & Leasing, Inc., and certain exhibits thereto.
10.18+ Sublease Agreement, dated as of June 11, 1996, between Registrant and
Juniper Networks, Inc.
11.1+ Statement of computation of Net Loss Per Share and Pro Forma Net Loss
Per Share.
21.1+ Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors (See page II-7).
23.3 Consent of Townsend and Townsend and Crew (See page II-8).
24.1+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission. To be supplied by amendment.
+ Previously filed.

++ Refiled herewith.

(b) Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.

II-4
<PAGE>

ITEM 17. UNDERTAKINGS

The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-5
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PALO ALTO, STATE OF
CALIFORNIA, ON THIS 10TH DAY OF MARCH, 1997

Neomagic Corporation

By /s/ Prakash C. Agarwal
--------------------------------
PRAKASH C. AGARWAL PRESIDENT AND
CHIEF EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

SIGNATURES TITLE DATE

Kamran Elahian * Chairman of the March 10, 1997
- ------------------------------------- Board
KAMRAN ELAHIAN

/s/ Prakash C. Agarwal President and Chief March 10, 1997
- ------------------------------------- Executive Officer
PRAKASH C. AGARWAL (Principal
Executive Officer)

/s/ Merle McClendon Vice President of March 10, 1997
- ------------------------------------- Finance and
MERLE MCCLENDON Administration,
Chief Financial
Officer (Principal
Financial and
Accounting Officer)

Brian Dougherty * Director March 10, 1997
- -------------------------------------
BRIAN DOUGHERTY

Irwin Federman * Director March 10, 1997
- -------------------------------------
IRWIN FEDERMAN

James Lally * Director March 10, 1997
- -------------------------------------
JAMES LALLY

Michael Moritz * Director March 10, 1997
- -------------------------------------
MICHAEL MORITZ

*By /s/ Merle McClendon
----------------------------------
MERLE MCCLENDON
ATTORNEY-IN-FACT

</TABLE>
II-6
<PAGE>

CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 14, 1997, except for Note 10 as to which
the date is February 26, 1997 in Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-20031) and related Prospectus of NeoMagic Corporation for
the registration of 3,664,000 shares of its Common Stock.

/s/ Ernst & Young LLP

San Jose, California

March 10, 1997

II-7
<PAGE>

CONSENT OF TOWNSEND AND TOWNSEND AND CREW

We consent to the reference to our firm under the captions "Experts," "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary Rights"
and "Business--Proprietary Rights" in the Registration Statement on Form S-1
and related Prospectus of NeoMagic Corporation.

Townsend and Townsend and Crew

/s/ Paul C. Haughey
By___________________________________
PAUL C. HAUGHEY, PARTNER

Palo Alto, California

March 10, 1997

II-8
<PAGE>

REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS

We have audited the consolidated financial statements of NeoMagic
Corporation as of January 31, 1996 and 1997 and for each of the three years in
the period ended January 31, 1997, and have issued our report thereon dated
February 14, 1997, except for Note 10 as to which the date is February 26,
1997 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/Ernst & Young LLP

San Jose, California

February 14,
1997, except
for Note 10 as
to which the
date is
February 26,
1997

S-1
<PAGE>

SCHEDULE II

NEOMAGIC CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING COST AND ACCOUNTS BALANCE AT
OF YEAR EXPENSE WRITTEN-OFF END OF PERIOD
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended January 31, 1995. -- -- -- --
Year ended January 31, 1996. -- -- -- --
Year ended January 31, 1997. -- $25 -- $25
</TABLE>

S-2
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
1.1+ Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of
Incorporation of Registrant to be filed upon the
closing of the Offering made under the Registration
Statement.
3.3++ Bylaws of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
4.2+ Second Amended Rights Agreement, dated as of June 30,
1995, between Registrant and the parties indicated
therein.
4.3* Form of Stock Purchase Agreement between Registrant
and MC Silicon Valley, Inc.
4.4* Form of Stock Purchase Agreement between Registrant
and Mitsubishi International Corporation.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
10.1+ Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers.
10.2+ Amended and Restated 1993 Stock Plan and related
agreements.
10.3+ Second Amended and Restated Rights Agreement, dated
as of June 30, 1995, between Registrant and the
parties indicated therein (included in Exhibit 4.2).
10.4**+ Wafer Supply Agreement, dated as of January 21, 1997,
between NeoMagic International Corporation, actually-
owned subsidiary of Registrant, and Mitsubishi
Electric Corporation.
10.5+ Form of promissory note.
10.6+ Lease Agreement, dated as of February 5, 1996,
between Registrant and A&P Family Investments, as
landlord.
10.7+ Sublease Agreement, dated as of June 25, 1996,
between Registrant and PlanetWeb, Inc.
10.8+ Master Lease Agreement, as amended, dated as of
November 24, 1993, between Registrant and Comdisco,
Inc., and certain exhibits thereto.
10.9+ Master Lease Agreement, dated as of July 19, 1995,
between Registrant and Venture Lending & Leasing,
Inc., and certain exhibits thereto.
10.10+ Agreement, dated as of November 20, 1995, between
Registrant and Mitsubishi International Corporation
as amended.
10.11+ General Security Agreement, dated November 15, 1995,
between Registrant and Mitsubishi International
Corporation.
10.12+ Escrow Agreement, dated September 27, 1996, between
Registrant and Mitsubishi International Corporation.
10.13+ 1997 Employee Stock Purchase Plan, with exhibits
thereto.
10.14**+ Settlement Agreement, dated as of March 8, 1996, by
and between Registrant and Cirrus Logic, Inc.
10.15**+ Wafer Supply Agreement, dated as of January 21, 1997,
between NeoMagic International Corporation, a wholly-
owned subsidiary of Registrant, and Toshiba
Corporation.
10.16**+ Product Joint Development Agreement, dated as of
January 21, 1997, between NeoMagic International
Corporation, a wholly-owned subsidiary of Registrant
and Toshiba Corporation.
10.17+ Master Lease Agreement, dated as of June 28, 1996,
between Registrant and Venture Lending & Leasing,
Inc., and certain exhibits thereto.
10.18+ Sublease Agreement, dated as of June 11, 1996,
between Registrant and Juniper Networks, Inc.
11.1+ Statement of computation of Net Loss Per Share and
Pro Forma Net Loss Per Share.
21.1+ Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors
(See page II-7).
</TABLE>
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
23.3 Consent of Townsend and Townsend and Crew (See page
II-8).
24.1+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission. To be supplied by amendment.
+ Previously filed.

++ Refiled herewith.

<PAGE>

EXHIBIT 3.3

BYLAWS

NEOMAGIC CORPORATION
(a Delaware corporation)

<PAGE>

BYLAWS OF

NEOMAGIC CORPORATION
(a Delaware corporation)

TABLE OF CONTENTS

Page

ARTICLE I

CORPORATE OFFICES..................................................... 1
1.1 REGISTERED OFFICE............................................. 1
1.2 OTHER OFFICES................................................. 1

ARTICLE II

MEETINGS OF STOCKHOLDERS.............................................. 1
2.1 PLACE OF MEETINGS............................................. 1
2.2 ANNUAL MEETING................................................ 1
2.3 SPECIAL MEETING............................................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................. 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND
STOCKHOLDER BUSINESS.......................................... 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 3
2.7 QUORUM........................................................ 4
2.8 ADJOURNED MEETING; NOTICE..................................... 4
2.9 VOTING........................................................ 4
2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.................... 5
2.11 PROXIES....................................................... 5
2.12 ORGANIZATION.................................................. 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 6
2.14 WAIVER OF NOTICE.............................................. 6
2.15 ACTION BY CONSENT OF STOCKHOLDERS............................. 6
2.16 INSPECTORS OF ELECTION........................................ 6

ARTICLE III

DIRECTORS............................................................. 7
3.1 POWERS........................................................ 7
3.2 NUMBER OF DIRECTORS........................................... 7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS...................... 8

-i-
<PAGE>

TABLE OF CONTENTS

(Continued)
Page
----

3.4 RESIGNATION AND VACANCIES..................................... 8
3.5 REMOVAL OF DIRECTORS.......................................... 9
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 9
3.7 REGULAR MEETINGS.............................................. 9
3.8 SPECIAL MEETINGS; NOTICE..................................... 10
3.9 QUORUM....................................................... 10
3.10 WAIVER OF NOTICE............................................. 10
3.11 ADJOURNMENT.................................................. 10
3.12 NOTICE OF ADJOURNMENT........................................ 11
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............ 11
3.14 FEES AND COMPENSATION OF DIRECTORS........................... 11
3.15 APPROVAL OF LOANS TO OFFICERS................................ 11

ARTICLE IV

COMMITTEES........................................................... 12
4.1 COMMITTEES OF DIRECTORS...................................... 12
4.2 MEETINGS AND ACTION OF COMMITTEES............................ 12
4.3 COMMITTEE MINUTES............................................ 13

ARTICLE V

OFFICERS............................................................. 13
5.1 OFFICERS..................................................... 13
5.2 ELECTION OF OFFICERS......................................... 13
5.3 SUBORDINATE OFFICERS......................................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................... 13
5.5 VACANCIES IN OFFICES......................................... 14
5.6 CHAIRMAN OF THE BOARD........................................ 14
5.7 PRESIDENT.................................................... 14
5.8 VICE PRESIDENTS.............................................. 14
5.9 SECRETARY.................................................... 15
5.10 CHIEF FINANCIAL OFFICER...................................... 15
5.11 ASSISTANT SECRETARY.......................................... 15
5.12 ADMINISTRATIVE OFFICERS...................................... 16
5.13 AUTHORITY AND DUTIES OF OFFICERS............................. 16

-ii-

<PAGE>

TABLE OF CONTENTS

(Continued)

ARTICLE VI Page
----

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS......................................................... 16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................... 16
6.2 INDEMNIFICATION OF OTHERS.................................... 17
6.3 INSURANCE.................................................... 17

ARTICLE VII

RECORDS AND REPORTS.................................................. 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS........................ 18
7.2 INSPECTION BY DIRECTORS...................................... 18
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................. 18
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............... 18
7.5 CERTIFICATION AND INSPECTION OF BYLAWS....................... 19

ARTICLE VIII

GENERAL MATTERS...................................................... 19
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING....... 19
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................... 19
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........... 19
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES............. 20
8.5 SPECIAL DESIGNATION ON CERTIFICATES.......................... 21
8.6 LOST CERTIFICATES............................................ 21
8.7 TRANSFER AGENTS AND REGISTRARS............................... 21
8.8 CONSTRUCTION; DEFINITIONS.................................... 21

ARTICLE IX

AMENDMENTS........................................................... 22

-iii-
<PAGE>

BYLAWS
------

OF
--

NEOMAGIC CORPORATION
--------------------
(a Delaware corporation)

ARTICLE I

CORPORATE OFFICES
-----------------

1.1 REGISTERED OFFICE
-----------------

The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.

1.2 OTHER OFFICES
-------------

The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.

ARTICLE II

MEETINGS OF STOCKHOLDERS
------------------------

2.1 PLACE OF MEETINGS
-----------------

Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.

2.2 ANNUAL MEETING
--------------

The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the first day
of April in each year at 11:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.

2.3 SPECIAL MEETING
---------------
<PAGE>

A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting. No other person or
persons are permitted to call a special meeting.

If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.

2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------

All notices of meetings of stockholders shall be sent or otherwise given
in accordance with Section 2.6 of these bylaws not less than ten (10) nor more
than sixty (60) days before the date of the meeting. The notice shall specify
the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called (no business
other than that specified in the notice may be transacted) or (ii) in the case
of the annual meeting, those matters which the board of directors, at the time
of giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.

2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------

Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,

(a) nominations for the election of directors, and

(b) business proposed to be brought before any stockholder meeting

may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may

-2-
<PAGE>

nominate one or more persons for election as directors at a meeting or propose
business to be brought before a meeting, or both, only if such stockholder has
given timely notice in proper written form of their intent to make such
nomination or nominations or to propose such business. To be timely, such
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than one hundred twenty
(120) calendar days in advance of the date specified in the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received a reasonable time before the solicitation is made. To be in
proper form, a stockholder's notice to the secretary shall set forth:

(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the person
or persons to be nominated or of the business to be proposed;

(ii) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;

(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;

(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and

(v) if applicable, the consent of each nominee to serve as director of
the corporation if so elected.

The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.

2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------

Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing

-3-
<PAGE>

on the books of the corporation or given by the stockholder to the corporation
for the purpose of notice. Notice shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by telegram or other
means of written communication.

An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.

2.7 QUORUM
------

The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.

When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.

If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.

2.8 ADJOURNED MEETING; NOTICE
-------------------------

When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.

2.9 VOTING
------

The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections

-4-
<PAGE>

217 and 218 of the General Corporation Law of Delaware (relating to voting
rights of fiduciaries, pledgors and joint owners, and to voting trusts and other
voting agreements).

Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder and stockholders shall not be entitled to
cumulate their votes in the election of directors or with respect to any matter
submitted to a vote of the stockholders.

2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------

For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.

If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.

A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.

The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.

2.11 PROXIES
-------

Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.

2.12 ORGANIZATION
------------

-5-
<PAGE>

The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.

2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------

The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.

2.14 WAIVER OF NOTICE
----------------

Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.

2.15 ACTION BY CONSENT OF STOCKHOLDERS
---------------------------------

Unless otherwise restricted by the certificate of incorporation, any action
required or permitted to be taken at any annual or special meeting of the
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were

-6-
<PAGE>

present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.

2.16 INSPECTORS OF ELECTION
----------------------

Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.

Such inspectors shall:

(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;

(b) receive votes, ballots or consents;

(d) count and tabulate all votes or consents;

(e) determine when the polls shall close;

(f) determine the result; and

(g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.

-7-
<PAGE>

ARTICLE III

DIRECTORS
---------

3.1 POWERS
------

Subject to the provisions of the General Corporation Law of Delaware and
to any limitations in the certificate of incorporation or these bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.

3.2 NUMBER OF DIRECTORS
-------------------

The number of directors of the corporation shall be not less than five (5)
nor more than nine (9). The exact number of directors shall be six (6) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than six (6) cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to
vote thereon.

3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------

Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.

3.4 RESIGNATION AND VACANCIES
-------------------------

Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.

Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the

-8-
<PAGE>

affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum). Each director so elected
shall hold office until the next annual meeting of the stockholders and until a
successor has been elected and qualified.

Unless otherwise provided in the certificate of incorporation or these
bylaws:

(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.

(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.

If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.

If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.

3.5 REMOVAL OF DIRECTORS
--------------------

Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, if and so long as stockholders of the corporation are entitled to
cumulative voting, if less than the entire board is to be removed, no director
may be removed without cause if the votes cast against his

-9-
<PAGE>

removal would be sufficient to elect him if then cumulatively voted at an
election of the entire board of directors.

3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------

Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.

Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.

3.7 REGULAR MEETINGS
----------------

Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors. If
any regular meeting day shall fall on a legal holiday, then the meeting shall be
held at the same time and place on the next succeeding full business day.

3.8 SPECIAL MEETINGS; NOTICE
------------------------

Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.

Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the corporation.

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<PAGE>

3.9 QUORUM
------

A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.12
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.

A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.

3.10 WAIVER OF NOTICE
----------------

Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of the minutes of the meeting. A waiver of notice need not specify
the purpose of any regular or special meeting of the board of directors.

3.11 ADJOURNMENT
-----------

A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.

3.12 NOTICE OF ADJOURNMENT
---------------------

Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.9 of these
bylaws, to the directors who were not present at the time of the adjournment.

3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------

Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board of directors.

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<PAGE>

3.14 FEES AND COMPENSATION OF DIRECTORS
----------------------------------

Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.

3.15 APPROVAL OF LOANS TO OFFICERS
-----------------------------

The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.

ARTICLE IV

COMMITTEES
----------

4.1 COMMITTEES OF DIRECTORS
-----------------------

The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all

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<PAGE>

of the corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution or (v) amend the
bylaws of the corporation; and, unless the board resolution establishing the
committee, the bylaws or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.

4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------

Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the following provisions of Article III of these bylaws:
Section 3.6 (place of meetings; meetings by telephone), Section 3.8 (regular
meetings), Section 3.9 (special meetings; notice), Section 3.10 (quorum),
Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section 3.13
(notice of adjournment) and Section 3.14 (board action by written consent
without meeting), with such changes in the context of those bylaws as are
necessary to substitute the committee and its members for the board of directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.

4.3 COMMITTEE MINUTES
-----------------

Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.

ARTICLE V

OFFICERS
--------

5.1 OFFICERS
--------

The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more vice
presidents (however denominated), one or more assistant secretaries, a treasurer
and one or more assistant treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.

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<PAGE>

In addition to the Corporate Officers of the Company described above, there
may also be such Administrative Officers of the corporation as may be designated
and appointed from time to time by the president of the corporation in
accordance with the provisions of Section 5.12 of these bylaws.

5.2 ELECTION OF OFFICERS
--------------------

The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.

5.3 SUBORDINATE OFFICERS
--------------------

The board of directors may appoint, or may empower the president to appoint,
such other Corporate Officers as the business of the corporation may require,
each of whom shall hold office for such period, have such power and authority,
and perform such duties as are provided in these bylaws or as the board of
directors may from time to time determine.

The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.

5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------

Subject to the rights, if any, of a Corporate Officer under any contract of
employment, any Corporate Officer may be removed, either with or without cause,
by the board of directors at any regular or special meeting of the board or,
except in case of a Corporate Officer chosen by the board of directors, by any
Corporate Officer upon whom such power of removal may be conferred by the board
of directors.

Any Corporate Officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.

Any Administrative Officer designated and appointed by the president may be
removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.

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<PAGE>

5.5 VACANCIES IN OFFICES
--------------------

A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.

5.6 CHAIRMAN OF THE BOARD
---------------------

The chairman of the board, if such an officer be elected, shall, if present,
preside at meetings of the board of directors and exercise such other powers and
perform such other duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.

5.7 PRESIDENT
---------

Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.

5.8 VICE PRESIDENTS
---------------

In the absence or disability of the president, and if there is no chairman of
the board, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors, these bylaws, the president or the chairman of the board.

5.9 SECRETARY
---------

The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.

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<PAGE>

The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.

The secretary shall give, or cause to be given, notice of all meetings of the
stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.

5.10 CHIEF FINANCIAL OFFICER
-----------------------

The chief financial officer shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any director for a purpose reasonably related to his position as a
director.

The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.

5.11 ASSISTANT SECRETARY
-------------------

The assistant secretary, if any, or, if there is more than one, the assistant
secretaries in the order determined by the board of directors (or if there be no
such determination, then in the order of their election) shall, in the absence
of the secretary or in the event of his or her inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.

5.12 ADMINISTRATIVE OFFICERS
-----------------------

In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by

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<PAGE>

the president or the board of directors in order to assist the Corporate
Officers in the furtherance of their duties. In the performance of such duties
and the exercise of such powers, however, such Administrative Officers shall
have limited authority to act on behalf of the corporation as the board of
directors shall establish, including but not limited to limitations on the
dollar amount and on the scope of agreements or commitments that may be made by
such Administrative Officers on behalf of the corporation, which limitations may
not be exceeded by such individuals or altered by the president without further
approval by the board of directors.

5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------

In addition to the foregoing powers, authority and duties, all officers of
the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
-------------------------------------------------
AND OTHER AGENTS
----------------

6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------

The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.

The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.

The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final

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<PAGE>

disposition of such action, suit or proceeding shall be made only upon receipt
of an undertaking by the director or officer to repay all amounts advanced if it
should ultimately be determined that the director of officer is not entitled to
be indemnified under this Section 6.1 or otherwise.

The rights conferred on any person by this Article shall not be exclusive of
any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.

Any repeal or modification of the foregoing provisions of this Article shall
not adversely affect any right or protection hereunder of any person in respect
of any act or omission occurring prior to the time of such repeal or
modification.

6.2 INDEMNIFICATION OF OTHERS
-------------------------

The corporation shall have the power, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now exists or
may hereafter be amended, to indemnify any person (other than directors and
officers) against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred in connection with
any threatened, pending or completed action, suit, or proceeding, in which such
person was or is a party or is threatened to be made a party by reason of the
fact that such person is or was an employee or agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) shall mean any person (i) who is or was an employee
or agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.

6.3 INSURANCE
---------

The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.

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<PAGE>

ARTICLE VII

RECORDS AND REPORTS
-------------------

7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------

The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.

Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.

7.2 INSPECTION BY DIRECTORS
-----------------------

Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.

7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------

The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.

7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------

The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.

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<PAGE>

7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------

The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.

ARTICLE VIII

GENERAL MATTERS
---------------

8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------

For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.

If the board of directors does not so fix a record date, then the record date
for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.

8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------

From time to time, the board of directors shall determine by resolution which
person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.

8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------

The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.

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<PAGE>

8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------

The shares of the corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.

Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.

Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

The corporation may issue the whole or any part of its shares as partly paid
and subject to call for the remainder of the consideration to be paid therefor.
Upon the face or back of each stock certificate issued to represent any such
partly paid shares, or upon the books and records of the corporation in the case
of uncertificated partly paid shares, the total amount of the consideration to
be paid therefor and the amount paid thereon shall be stated. Upon the
declaration of any dividend on fully paid shares, the corporation shall declare
a dividend upon partly paid shares of the same class, but only upon the basis of
the percentage of the consideration actually paid thereon.

8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------

If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional

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<PAGE>

or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
that the corporation shall issue to represent such class or series of stock;
provided, however, that, except as otherwise provided in Section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing requirements there
may be set forth on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.

8.6 LOST CERTIFICATES
-----------------

Except as provided in this Section 8.6, no new certificates for shares shall
be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.

8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------

The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.

8.8 CONSTRUCTION; DEFINITIONS
-------------------------

Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both an entity and a natural person.

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<PAGE>

ARTICLE IX

AMENDMENTS
----------

The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.

Whenever an amendment or new bylaw is adopted, it shall be copied in the book
of bylaws with the original bylaws, in the appropriate place. If any bylaw is
repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.

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<PAGE>

CERTIFICATE OF ADOPTION OF BYLAWS

NEOMAGIC CORPORATION

ADOPTION BY INCORPORATOR
------------------------

The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of NeoMagic Corporation hereby adopts the foregoing bylaws,
comprising twenty-one (21) pages, as the Bylaws of the corporation.

Effective as of December 12, 1996.

/s/ MICHAEL J. DANAHER
-------------------------------------
Michael J. Danaher
Incorporator

Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------

The undersigned hereby certifies that he is the duly elected, qualified, and
acting Secretary of NeoMagic Corporation and that the foregoing Bylaws,
comprising twenty-one (21) pages, were adopted as the Bylaws of the corporation
effective as of December 12, 1996, by the person appointed in the Certificate
of Incorporation to act as the Incorporator of the corporation.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the
corporate seal this 12th day of December, 1996.

/s/ ARTHUR F. SCHNEIDERMAN
-------------------------------------
Arthur F. Schneiderman
Secretary