NEOMAGIC CORP, 10-K, 2000-03-10

NEOMAGIC CORP
10-K, 2000-03-10
SEMICONDUCTORS & RELATED DEVICES

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

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FORM 10-K

(MARK ONE)

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 31, 2000,

/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-20031
</TABLE>

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NEOMAGIC CORPORATION
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 77-0344424
State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization

3260 JAY STREET
SANTA CLARA, CALIFORNIA 95054
Address of principal executive offices Zip Code
</TABLE>

Registrant's telephone number, including area code (408) 988-7020

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10K. / /

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $125,411,786 as of February 27, 2000, based upon
the closing price on the Nasdaq National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purposes.

The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at February 27, 2000 was 25,592,118.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Registrant's Proxy Statement related to the 2000 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission subsequent to the date hereof--Part III.

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NEOMAGIC CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I.

Item 1. Business.................................................... 1

Item 2. Properties.................................................. 10

Item 3. Legal Proceedings........................................... 10

Item 4. Submission of Matters to a Vote of Security Holders......... 10

PART II.

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11

Item 6. Selected Consolidated Financial Data........................ 11

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13

Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 31

Item 8. Financial Statements and Supplementary Data................. 31

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 32

PART III.

Item 10. Directors and Executive Officers of the Registrant.......... 33

Item 11. Executive Compensation...................................... 33

Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 33

Item 13. Certain Relationships and Related Transactions.............. 33

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 33

Signatures............................................................ 54
</TABLE>
<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL

NeoMagic Corporation (the "Company" or "NeoMagic") was incorporated as a
California corporation in May 1993. The Company was subsequently reincorporated
as a Delaware corporation in February 1997. The Company's initial public
offering occurred in March 1997. The Company operates in one industry segment.
NeoMagic designs, develops and markets high-performance semiconductor solutions
for sale to original equipment manufacturers ("OEMs") of mobile computing
products. To date, all the Company's net sales have been derived from the sale
of multimedia accelerators to the notebook PC market.

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
historically lagged those of desktop computers. Until 1997, this limited the
effectiveness of multimedia applications in notebook PCs.

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

The Company, based on its knowledge of and experience in the industry, 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. NeoMagic pioneered a new technology to
provide multimedia semiconductor solutions for notebook PCs, which overcomes the
limitations of traditional architectures. Using this technology, the Company
developed its first two product lines: the MagicGraph128 and the MagicMedia256
families of pin-compatible, multimedia (graphics, text and video) accelerator
products incorporating a 128-bit and a 256-bit memory bus, respectively. These
products provide state-of-the art multimedia capability while decreasing power
consumption, size, weight, system design complexity and cost. The Company
introduced its first MagicGraph128 product in March 1995, and is currently in
production with the fourth generation of this product family. In June 1998, the
Company announced the industry's first 256-bit multimedia accelerator, the
MagicMedia256AV. This chip integrates audio and DVD video playback acceleration
with high-performance PC graphics, into a single twenty-one million transistor
chip, with a peak internal bandwidth of 3.2 gigabytes per second. Through
January 2000, the Company had shipped over twenty-two million units of its
multimedia accelerators.

The Company believes that the dramatic growth of the Internet has expanded
its market opportunities, by rich multimedia content to end-users at their
offices and in their homes. It is NeoMagic's strategy to participate in multiple
market opportunities driven by these trends towards multimedia, mobility, and
the Internet. To extend beyond the notebook arena, in 1998, the Company formed
the Consumer Products Division and announced plans to enter into two new market
areas: digital cameras and Digital Versatile Disk ("DVD") drive solutions. In
February, 1999, the Company completed two acquisitions to accelerate its new
market activities. The Company acquired the optical Drive Storage Group, located
in Manchester, England, from Mitel Semiconductor, and also acquired Associative
Computers, Ltd., ("ACL") located in Raanana, Israel from Robomatix. The
Company's plan included leveraging its MagicWare embedded DRAM technology with
the intellectual properties from these recent acquisitions to deliver innovative
solutions for the capture, storage, and playback of multimedia content for a
rich internet experience on mobile platforms. In February 2000, the Company
announced it had determined that embedded DRAM

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now provides less value in the current market for DVD products than initially
anticipated. The evolving DVD market is very cost sensitive, and has little
regard for low-power electronics or form-factor integration, taking this product
line further away from the Company's embedded DRAM technology roadmap over time.
As a result, the Company determined that it will no longer pursue opportunities
in the DVD market and, in February 2000, announced that it is seeking to sell
the product line, including the assets of the Optical Drive Storage Group
purchased in February 1999.

NeoMagic has established strategic relationships with third-party
manufacturing partners 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
partners design the DRAM modules, manufacture the wafers and perform memory
testing and repair. NeoMagic is focused on leveraging its core competencies in
logic, analog and memory integration, graphics/video, DVD, 3D and other
multimedia technologies, driver and BIOS software, and power management in its
continued development of solutions that facilitate the mobilization of
multimedia applications.

PRODUCTS

All of the Company's net sales in fiscal 2000 were from the sale of
multimedia accelerators to notebook PC OEMs, or to third-party subsystem
manufacturers who design and manufacture notebooks on behalf of the
OEMs. NeoMagic's products are currently used in notebooks sold by Acer, Compaq,
Dell, Fujitsu, IBM, Panasonic, Sharp, and Sony.

The products in the MagicGraph128 and MagicMedia256 product families
integrate DRAM with analog and logic circuitry on a single chip. NeoMagic's
products range from accelerators designed for notebook PCs that span across all
notebook categories including desktop replacement, mainstream, value-

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oriented, ultra-portable, and entry level systems. The following table sets
forth information with respect to the Company's main products:

<TABLE>
<CAPTION>
MEMORY KEY FEATURES ADDED
PRODUCT PROJECT STATUS SIZE WITH NEW GENERATION
- ------- ----------------- ---------- -----------------------------
<S> <C> <C> <C>
MagicGraph128XD.............. Volume production 2 MBytes Bus master for video
June 1997 acceleration, Spread spectrum
EMI* suppression, 1024x768
resolution with greater than
65,000 colors

MagicMedia256AV.............. Volume production 2.5 MBytes 256-bit integrated
August 1998 graphics/DVD integrated
audio, multiple display/dual
head, XGA/SXGA support,
camera port, and
MagicPass-TM- EMI reduction

MagicMedia256AV+............. Volume production 3 MBytes 256-bit integrated graphics/
January 2000 enhanced DVD integrated
audio, multiple display/dual
head, XGA/SXGA support,
camera port, and
MagicPass-TM- EMI reduction

MagicMedia256ZX.............. Volume production 4 MBytes 256-bit integrated
June 1999 graphics/DVD integrated
audio, multiple display/dual
head, highest 2D performance,
XGA/SXGA support, camera
port, and MagicPass-TM- EMI
reduction

MagicMedia256XL+............. Volume production 6 MBytes 256-bit integrated
November 1999 graphics/DVD integrated
audio, multiple display/dual
head, 3D pipeline, XGA/SXGA
support, camera port, and
MagicPass-TM- EMI reduction
</TABLE>

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* Electro-Magnetic Interference

MAGICGRAPH128XD. A pin-compatible alternative to the MagicGraph128ZV+, the
MagicGraph128XD offers higher display resolutions, a larger number of
displayable colors, and higher performance, providing value oriented notebooks
with flexibility in display features and price/performance levels.

MAGICMEDIA256AV. The MagicMedia256AV is the first 256-bit multimedia
accelerator, providing high-end 2D graphics performance, integrated PCI audio
controller functions, and DVD video playback acceleration in a single-chip
multimedia solution for notebook computers. To complete the PCI audio solution
of a PC, MagicMedia256AV customers would add an AC97 audio codec as a companion
chip. As an industry-standard component, the AC97 compliant codec can be
acquired from third-party sources or from NeoMagic as the MagicWave3DX.

MAGICMEDIA256AV+. The MagicMedia256AV+ offers more memory, 3 Megabytes, for
enhanced DVD playback acceleration in a 256-bit multimedia accelerator,
providing high-end 2D graphics performance, and integrated PCI audio controller
functions in a single-chip multimedia solution for notebook computers.

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MAGICMEDIA256ZX. The MagicMedia256ZX offers 4 Megabytes of embedded memory
for the highest performance in 2D graphics and enhanced DVD playback
acceleration in a 256-bit multimedia accelerator with integrated PCI audio
controller functions in a single-chip multimedia solution for notebook
computers.

MAGICMEDIA256XL+. The MagicMedia256XL+ offers 6 Megabytes of embedded
memory for high performance 2D graphics, enhanced DVD playback, and a 3D
pipeline in a 256-bit multimedia accelerator with integrated PCI audio
controller functions in a single-chip multimedia solution for notebook
computers.

RESEARCH AND DEVELOPMENT

The Company considers the timely development and introduction of new
products to be essential to maintaining its competitive position and
capitalizing on market opportunities. Research and development efforts focus on
the design of new products and the enhancement or redesign for cost reduction
purposes of existing products that will help to maintain or increase the
Company's participation in various product areas. At January 31, 2000, the
Company had approximately 179 employees engaged in research and development.
Research and development expenses in fiscal 2000, 1999, and 1998 were
$38.0 million, $31.8 million and $16.1 million, respectively. The Company has
made, and intends to continue to make, significant investments in research and
development by developing new and enhanced products to serve its identified
markets. However, given the Company's projections for downward revenue and its
corresponding cost control efforts, research and development expenses are
expected to decrease in absolute dollars in fiscal 2001. The development and
successful introduction of new products presents a variety of risks, and there
can be no assurance that these or other product development efforts will be
completed at the time the Company expects, or that new products will be accepted
in the marketplace.

SALES AND MARKETING

NeoMagic's sales and marketing strategy is an integral part of the Company's
effort to become the leading supplier of semiconductor solutions to the leading
manufacturers of mobile products. 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 deliveries
and maintaining a high level of customer satisfaction, which encourages
customers to utilize subsequent generations of NeoMagic's products.

In the United States, the Company sells its products to key customers
primarily through a direct sales force. 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
January 31, 2000, NeoMagic employed 37 individuals in its sales, marketing and
support organizations, and maintained regional sales offices in California,
Texas, Hong Kong and Taiwan.

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 OEM. The Company believes that this approach increases the
likelihood for design wins, improves the overall quality of support, and enables
the timely release of customer products to market. Although the Company will
continue to support sales and marketing activities, given the Company's
projections for downward revenue and its corresponding cost control efforts,
sales and marketing expenses will decrease in absolute dollars in fiscal 2001.

4
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MANUFACTURING

The Company's products require semiconductor wafers manufactured with
state-of-the-art fabrication equipment and technology. 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 partners design the DRAM product
modules and NeoMagic designs the overall product, including the analog and logic
circuitry. The DRAM partners then aid 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.

NeoMagic has strategic relationships with Mitsubishi Electric Corporation
("Mitsubishi Electric"), Toshiba Corporation ("Toshiba") and Infineon
Technologies ("Infineon"), formerly Siemens Aktiengesellschaft Semiconductor
Group ("Siemens"), to produce its semiconductor wafers. 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 cost and quality and at
acceptable manufacturing yields, and to deliver those products to the Company on
a timely basis. A manufacturing disruption experienced by any of the Company's
manufacturing partners would have an adverse effect on the Company's business,
financial condition and results of operations. Furthermore, in the event that
the transition to the next generation of manufacturing technologies at one of
the Company's suppliers is unsuccessful, the Company's business, financial
condition and results of operations would be materially and adversely affected.
Additionally, there can be no assurances that any of the Company's manufacturing
partners 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. Over the past year, the
Company has experienced insufficient allocation of manufacturing capacity for
its products by two of its manufacturing partners, inadequate manufacturing
yields and difficulties by one of its manufacturing partner to successfully
transition to a next generation manufacturing technology. These problems have
had a material adverse effect on the Company's business, financial condition and
results of operations and are likely to continue to have an adverse effect on
the Company's business, financial condition and results of operations in the
future.

The Company uses other third-party subcontractors to perform assembly and
testing of the Company's products. The Company develops its own software and
hardware for product testing. 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 manufacturing 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 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.

COMPETITION

The market for multimedia accelerators for notebook PCs in which the Company
participates 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 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

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new technologies, product quality and reliability, price, the efficiency of
production, 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. The
Company's ability to compete in the future will also 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 resources to redesign its
products or obtain license rights to technologies owned by third parties in
order to ensure compliance with relevant industry standards. There can be no
assurance that the Company could redesign its products or obtain the necessary
third-party licenses within the appropriate window of market demand. If the
Company's products are not in compliance with prevailing industry standards for
a significant period of time, the Company could miss crucial OEM design cycles,
which could result in a material adverse effect on 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 other future developments in 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. Over the past year, delays in the introduction and ramping of the
Company's new products have caused the Company to miss current OEM's design
cycles which has eroded the Company's market share and has had a material
adverse effect on the Company's business, financial condition and results of
operations.

NeoMagic competes with major domestic and international companies, some 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 ATI Technologies
("ATI"), Chips & Technologies, Inc. ("Chips & Technologies"--in January 1998,
Intel Corporation acquired Chips and Technologies), 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 companies currently selling products designed for desktop PCs. Certain
of the Company's competitors may offer products with more functionality and / or
higher processor speeds at the expense of battery life and power consumption
than the Company's product offerings. ATI, during 1999, produced and increased
market share with a Multi-Chip Module ("MCM") accelerator solution. The MCM
solution increases access memory both internally in the packaged module and
externally, with connections to discrete memory on the motherboard, for higher
performance at the expense of battery life and power consumption. Some of the
Company's competitors, including Chips & Technologies and Trident, have
announced or introduced multimedia accelerator products that integrate large
DRAM with analog and logic circuitry on a single chip. These feature sets may be
more competitive for certain applications than the Company's products. Potential
competition also could come from manufacturers that integrate the multimedia
accelerator with other systems components. For example, Intel Corporation is in
production with products that integrate microprocessors and graphics
accelerators. Further, several of the Company's competitors have announced plans
to develop products that integrate the multimedia accelerator with the core
logic chip set. The successful commercial introduction by competitors of
products that integrate DRAM with analog and logic circuitry on a single chip,
or that eliminate the need for a separate multimedia accelerator in notebook
PCs, could have a material adverse effect on the Company's business, financial
condition and operating results.

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INTELLECTUAL PROPERTY

The Company relies in part on patents to protect its intellectual property.
The Company has been issued numerous patents worldwide, each covering certain
aspects of the design and architecture of the Company's multimedia accelerators.
In Fiscal 2000, the Company also acquired and/or licensed intellectual
properties, the majority of which were in the areas of mixed signal analog
design and array-based processing as part of the February 1999 acquisitions of
the Optical Drive Development Group and ACL. Additionally, the Company and its
newly acquired businesses have patent applications pending. There can be no
assurance that the Company's pending patent applications, or any future
applications will be approved. Further, there can be no assurance that any
issued patents will provide the Company with significant intellectual property
protection, 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. In addition, 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.

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.
In December 1998, the Company filed a lawsuit in the United States District
Court for the District of Delaware against Trident Microsystems, Inc. The suit
alleges that Trident's embedded DRAM graphics accelerators infringe certain
patents held by the Company. In January 1999, Trident filed a counter claim
against the Company alleging an attempted monopolization in violation of
antitrust laws, arising from NeoMagic's filing of the patent infringement action
against Trident in December. The Court has stayed all litigation concerning
Trident's antitrust claim pending resolution of NeoMagic's claim for patent
infringement. The patent infringement claim is scheduled for trial to commence
on July 31, 2000. Management believes the Company has valid defenses against
Trident's claims. There can be no assurance as to the results of the patent
infringement suit and the counter-suit for antitrust filed by Trident.

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. For
example, in February 1997, Cirrus Logic Inc. ("Cirrus Logic") sent the Company
written notice asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe six United States patents held by Cirrus
Logic. Since receiving the notice of alleged infringement, the Company has
advised Cirrus Logic that the Company does not believe that any of its products
infringe any claims of the patents. The Company also has undergone a
confidential external infringement review and has conducted its own internal
infringement review, and the Company continues to believe that the Cirrus Logic
infringement allegations are unfounded. However, there can be no assurances that
Cirrus Logic will not file a lawsuit against the Company or that the Company
would prevail in any such litigation. Any protracted litigation by Cirrus Logic
or the success of Cirrus Logic in any such litigation could have a material and
adverse effect on the Company's financial position or results of operations.

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Company's business, financial condition and results of operations. There can be
no assurance that current or future 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.

BACKLOG

Sales of the Company's products are primarily made pursuant to standard
purchase orders that are cancelable without significant penalties. These
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. Also, many of the Company's
customers are moving to "just in time" relationships with their vendors, whereby
orders for product deliveries are not provided to the supplier until just prior
to the requested delivery. 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 is a meaningful indicator of
future sales.

EMPLOYEES

As of January 31, 2000, the Company employed a total of 278 full-time
employees, including 179 in research and development, 17 in customer service and
applications engineering, 20 in sales and marketing, 27 in manufacturing and 35
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.

MANAGEMENT

EXECUTIVE OFFICERS

The executive officers of the Company as of January 31, 2000 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ---------------------------------------------------
<S> <C> <C>
Prakash C. Agarwal........................ 46 President, Chief Executive Officer and Director
Kamran Elahian............................ 45 Chairman of the Board
Amnon Fisher*............................. 52 Vice President, General Manager--Consumer Products
Daniel Hauck.............................. 44 Vice President, Worldwide Sales
Ibrahim Korgav............................ 51 Vice President, Manufacturing Operations
Dr. Clement Leung......................... 50 Vice President, R&D NeoMagic Technology Labs
Merle McClendon........................... 44 Vice President, Finance and Chief Financial Officer
Deepraj Puar *............................ 53 Vice President, Technology
Mark Singer............................... 40 Vice President, Corporate Marketing
</TABLE>

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* Resigned as Officers of the Company effective February 1, 2000

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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 20 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. In addition to his duties as President of the Company,
Mr. Agarwal is on the Board of Directors of TelenComm, Inc. Mr. Agarwal holds a
BS and a MS degree in Electrical Engineering from the University of Illinois.

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 of
PlanetWeb, Inc., Centillium Communications, Inc., Actelis Networks, Cahoots,
KangarooNet, and Co-Chairman and founder of Schools Online, a not for profit
company. Mr. Elahian holds a BS degree in Computer Science and Mathematics and a
Masters of Engineering from the University of Utah.

Amnon Fisher joined the Company in June 1998 as Senior Vice President and
General Manager of the Consumer Products division. Mr. Fisher has over 20 years
experience in product development, marketing, and general management in the
semiconductor industry. Prior to joining NeoMagic, Mr. Fisher served as vice
president and general manager of LSI Logic Corporation, Consumer Products
Division. Prior to that, Mr. Fisher held management positions at Fujitsu
Microelectronics, Digital Equipment Corporation, and National Semiconductor
Corporation. Mr. Fisher holds a BS in Electrical Engineering from the Israel
Institute of Technology and a MS in Electrical Engineering from the City College
of New York.

Daniel Hauck joined the Company in March 1998 as Vice President, Worldwide
Sales. Mr. Hauck has over 18 years of sales experience. Prior to joining
NeoMagic, he was employed at Cirrus Logic where he spent 12 years in a variety
of senior sales management positions, most recently as Vice President, Business
Development & Asia Pacific Sales. Prior to Cirrus Logic, Mr. Hauck was employed
by Technology Marketing, Inc. and Rockwell International. Mr. Hauck is a
graduate of The Ohio Institute of Technology where he received his BS in
Electronic Engineering Technology.

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

Dr. Clement Leung, a co-founder of the Company, served as Vice President,
Engineering from the Company's inception in 1993 until March 1998, when he
became Vice President, R&D, NeoMagic Technology Labs. Dr. Leung has 14 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 a SB, a SM and a Ph.D.
degree from the Massachusetts Institute of Technology.

Merle McClendon joined the Company in January 1997 as Vice President,
Finance and Chief Financial Officer. Ms. McClendon has 20 years of finance
experience. From 1993 through 1996, Ms. McClendon was Vice President and
Corporate Controller at S3 Inc., a semiconductor company. From 1980 to 1993,
Ms. McClendon was employed by Deloitte & Touche, most recently as a Senior
Manager. Ms. McClendon is on the Board of Directors of Schools Online, a not for
profit company, is a Certified Public Accountant and holds a BS degree in
Business Administration from San Jose State University.

9
<PAGE>
Deepraj Puar, a co-founder of the Company, has been Vice President,
Technology since the Company's inception in 1993. Mr. Puar has over 30 years of
engineering and management experience in the semiconductor industry, primarily
in the area of Memory and ASIC chip development. Prior to joining the Company,
Mr. Puar worked at Cirrus Logic, Signetics and Texas Instruments. Mr. Puar holds
a B.TECH degree from the Indian Institute of Technology, Kanpur (India) and a
MSEE degree from Michigan State University.

Mark Singer joined NeoMagic in March 1997 as a Senior Staff member managing
Strategic Business Planning and Corporate Communications. Mr. Singer has over
17 years management experience in the semiconductor industry. Prior to joining
NeoMagic, Mr. Singer was employed at Cirrus Logic, where he was a co-founder. A
California native, Mr. Singer holds a BS degree from the University of
California, Berkeley, School of Business.

ITEM 2. PROPERTIES

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 90,000 square feet under leases which
expire on April 30, 2003. The Company leases offices in Manchester, England,
Raanana, Israel, India, Hong Kong, Taiwan and Texas under operating leases that
expire at various times through September 2004. The Company believes its
existing facilities are adequate for its current needs, but that additional
space for growth will be required in the future.

ITEM 3. LEGAL PROCEEDINGS

In December 1998, the Company filed a lawsuit in the United States District
Court for the District of Delaware against Trident Microsystems, Inc. The suit
alleges that Trident's embedded DRAM graphics accelerators infringe certain
patents held by the Company. In January 1999, Trident filed a counter claim
against the Company alleging an attempted monopolization in violation of
antitrust laws, arising from NeoMagic's filing of the patent infringement action
against Trident in December. The Court has stayed all litigation concerning
Trident's antitrust claim pending resolution of NeoMagic's claim for patent
infringement. The patent infringement claim is scheduled for trial to commence
on July 31, 2000. Management believes the Company has valid defenses against
Trident's claims. There can be no assurance as to the results of the patent
infringement suit and the counter-suit for antitrust filed by Trident.

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. For
example, in February 1997, Cirrus Logic Inc. sent the Company written notice
asserting that the Company's MagicGraph128, MagicGraph128V and MagicGraph128ZV
products infringe six United States patents held by Cirrus Logic. Since
receiving the notice of alleged infringement, the Company has advised Cirrus
Logic that the Company does not believe that any of its products infringe any
claims of the patents. The Company also has undergone a confidential external
infringement review and has conducted its own internal infringement review, and
the Company continues to believe that the Cirrus Logic infringement allegations
are unfounded. However, there can be no assurances that Cirrus Logic will not
file a lawsuit against the Company or that the Company would prevail in any such
litigation. Any protracted litigation by Cirrus Logic or the success of Cirrus
Logic in any such litigation could have a material and adverse effect on the
Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

10
<PAGE>
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock trades on the Nasdaq National Market under the symbol NMGC.
The high and low closing sales prices set forth below are as reported on the
Nasdaq National Market.

<TABLE>
<CAPTION>
QUARTERLY DATA 1(ST) 2(ND) 3(RD) 4(TH)
FISCAL 2000 -------- -------- -------- --------
<S> <C> <C> <C> <C>
Price range common stock:
Low....................................................... $ 9.84 $ 7.31 $ 7.63 $ 7.78
High...................................................... $14.19 $11.88 $10.13 $11.69

FISCAL 1999
Price range common stock:
Low....................................................... $15.75 $12.63 $10.69 $14.00
High...................................................... $21.81 $22.50 $17.13 $22.88
</TABLE>

The Company had 202 stockholders of record as of February 27, 2000. The
Company has not paid any dividends on its common stock. The Company currently
intends to retain earnings for use in its business and does not anticipate
paying cash dividends to stockholders.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data is qualified in its entirety by and
should be read in conjunction with the more detailed consolidated financial
statements and related notes included elsewhere herein.

FIVE YEAR SUMMARY

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $259,698 $240,503 $124,654 $40,792 $ 243
Cost of sales............................... 181,332 142,881 73,171 28,650 165
-------- -------- -------- ------- -------
Gross margin................................ 78,366 97,622 51,483 12,142 78
Operating expenses:
Research and development.................. 37,957 31,756 16,091 8,606 4,934
Sales, general and administrative......... 18,505 20,740 12,290 6,522 1,606
Acquired in-process research and
development(3).......................... 5,348 -- -- -- --
Legal costs(1)............................ -- -- -- (1,503) 610
-------- -------- -------- ------- -------
Total operating expenses................ 61,810 52,496 28,381 13,625 7,150
Income (loss) from operations............... 16,556 45,126 23,102 (1,483) (7,072)
Interest income and other................. 3,793 3,810 2,643 1,366 385
Interest expense.......................... (838) (1,339) (1,298) (1,046) (182)
-------- -------- -------- ------- -------
Income (loss) before income taxes........... 19,511 47,597 24,447 (1,163) (6,869)
Provision for income taxes.................. 6,806 16,395 3,667 -- --
-------- -------- -------- ------- -------
Net income (loss)........................... $ 12,705 $ 31,202 $ 20,780 $(1,163) $(6,869)
======== ======== ======== ======= =======
Basic net income (loss) per share(2)........ $ .51 $ 1.32 $ .95 $ (.07)
Diluted net income (loss) per share(2)...... $ .49 $ 1.19 $ .82 $ (.07)
Weighted common shares outstanding(2)....... 24,898 23,710 21,924 17,238
Weighted common shares outstanding assuming
dilution(2)............................... 25,834 26,153 25,336 17,238
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 33,097 $ 36,631 $ 35,004 $13,458 $6,877
Short-term investments 63,429 56,097 36,016 -- --
Working capital.............................. 101,948 92,839 53,518 1,398 4,069
Total assets................................. 149,136 144,374 107,583 27,464 8,749
Long-term obligations -- -- 646 1,194 749
Total stockholders' equity................... 120,215 103,395 65,127 4,200 4,542

OTHER DATA:
Number of employees.......................... 278 234 162 94 44
Revenue/employee............................. $ 934 $ 1,028 $ 769 $ 434 $ 6
</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 11 of Notes to Consolidated
Financial Statements.

(2) See Note 1 and Note 4 of Notes to Consolidated Financial Statements.

(3) See Note 3 of Notes to Consolidated Financial Statements.

12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS

When used in this discussion, the words "expects," "anticipates," "believes"
and similar expressions are intended to identify forward-looking statements.
Such statements, which include statements concerning the timing of availability
and functionality of products under development, the availability, cost and
yield of products from the Company's suppliers, product mix, trends in average
selling prices, the growth rate of the market for notebook PCs, competition, the
percentage of export sales and sales to strategic customers, the adoption or
retention of industry standards, are subject to risks and uncertainties,
including those set forth below under "Factors that May Affect Results," that
could cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein, to
reflect any changes in the Company's expectations with regard thereto or any
changes in events, conditions or circumstances on which any such statement is
based.

OVERVIEW

The Company designs, develops and markets high-performance semiconductor
solutions for sale to original equipment manufacturers of mobile computing
products including notebook PCs, and over the last several years, began
development of digital cameras and DVD drives. In February 2000, the Company
announced that it is seeking to sell the DVD product group which is still in the
research and development phase. The Company has determined that embedded DRAM
now provides less value in the current DVD market than anticipated. The DVD
market is very cost sensitive, and has little regard for low-power electronics
or form-factor integration, taking the product line further away from the
Company's embedded DRAM technology. The Company pioneered the first commercially
available high-performance silicon technology that integrates DRAM, complex
logic and analog circuits into a single chip. The Company's proprietary
MagicWare-TM- technology eliminates the need to drive signals off-chip to
discrete memory, achieving its performance advantage while actually lowering the
power consumption and extending the battery life for smaller, lighter weight
portable devices. The first commercial application for the Company's technology
is in the design, development and marketing of multimedia accelerators for sale
to notebook computer manufacturers. The Company's MagicGraph128 and
MagicMedia256 families of pin-compatible multimedia accelerators incorporate
128-bit and 256-bit memory buses, respectively.

All of the Company's net sales in fiscal 2000, 1999 and 1998 were derived
from sales of its multimedia accelerator products, and the Company expects this
trend to continue at least through fiscal 2002. The Company generally recognizes
revenue upon title passage for product sales directly to customers. The
Company's policy is to defer recognition of revenue of shipments to distributors
until the distributors sell the product. 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 77.1%, 64.9%, and 66.5% of the
Company's net sales for fiscal 2000, 1999 and 1998, 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
NeoMagic and its customers.

The Company's products require semiconductor wafers manufactured with
state-of-the-art fabrication equipment and technology. NeoMagic currently has
strategic relationships with Mitsubishi Electric Corporation, Infineon
Technologies, formerly Siemens Aktiengesellschaft Semiconductor Group has also
purchased wafers from Toshiba Corporation during fiscal 2000 to produce its
semiconductor wafers and uses other independent contractors to perform assembly,
packaging and testing. The Company's foundry relationships are formalized in
separate five-year wafer supply agreements. 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

13
<PAGE>
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 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, the majority of the Company's wafer purchases, which
constitute a majority of its cost of sales, have been priced in Japanese yen. As
a result, exchange rate fluctuations can affect the Company's gross margin. The
Company experienced such fluctuations during fiscal 2000 which have negatively
impacted the Company's gross margin and earnings. 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 options and
may continue to do so in the future.

Under its wafer supply agreements, the Company is obligated to provide
rolling 12-month forecasts of anticipated purchases and place binding purchase
orders up to three to 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 forecast 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. Throughout fiscal 2000, the
Company has continued to devote resources to research and development efforts as
well as to make additional investments in sales, marketing, manufacturing and
administrative infrastructures to support the increased sales. The Company
expects to continue to devote substantial resources to research and development
efforts for the foreseeable future. However, given the Company's projections for
downward revenue and its corresponding cost control efforts, research and
development expenses are expected to decrease in absolute dollars in fiscal
2001. All of the Company's research and development costs have been expensed as
incurred.

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

14
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 69.8 59.4 58.7
----- ----- -----
Gross margin........................................... 30.2 40.6 41.3
Operating expenses:
Research and development............................. 14.6 13.2 12.9
Sales, general and administrative.................... 7.1 8.6 9.9
Acquired in process research and development......... 2.1 -- --
Total operating expenses........................... 23.8 21.8 22.8
----- ----- -----
Income from operations................................. 6.4 18.8 18.5
Interest income and other............................ 1.5 1.6 2.1
Interest expense..................................... (.4) (.6) (1.0)
----- ----- -----
Income before income taxes............................. 7.5 19.8 19.6
Provision for income taxes............................. 2.6 6.8 2.9
----- ----- -----
Net income............................................. 4.9% 13.0% 16.7%
===== ===== =====
</TABLE>

NET SALES

The Company's net sales to date have been generated from the sale of its
multimedia accelerators. The Company's products are used in, and its business is
dependent upon, the personal computer industry with sales primarily in Asia,
Japan, and the United States. Net sales were $259.7 million, $240.5 million and
$124.7 million in fiscal 2000, 1999 and 1998, respectively. Net sales increased
primarily from shipments of the Company's products in its MagicMedia256 and
MagicGraph128 product families, and the Company's investment in sales and
marketing activities. The Company expects that the percentage of its net sales
represented by any one product or type of product may change significantly from
period to period when new products are introduced and existing products reach
the end of their product life cycles. Due to competition, the life cycle of the
Company's products and the trend in the market toward lower cost notebook
computers, the Company's products have, and may continue to experience declining
unit average selling prices over time, which at times can be substantial. The
Company expects that net sales, for fiscal 2001 will decline over the current
year levels due to delays in new product introductions which have caused the
Company to lose design wins and market share. Over the past year, delays in the
introduction and ramping of the Company's new products have caused the Company
to miss current OEM's design cycles which has eroded the Company's market share
and has had a material adverse effect on the Company's business, financial
condition and results of operations.

Sales to customers located outside the United States (including sales to
foreign operations customers with headquarters in the United States, and foreign
system manufacturers that sell to United States-based OEMs) accounted for 80.2%,
83.6% and 83.2% of net sales in fiscal 2000, 1999 and 1998, respectively. The
Company expects that export sales will continue to represent a significant
portion of net sales, although there can be no assurance that export sales as a
percentage of net sales will remain at current levels. All sales transactions
were denominated in United States dollars.

Five customers accounted for 20.2%, 19.6%, 12.9%, 12.3% and 12.1%
respectively, of net sales in fiscal 2000. Three customers accounted for 19.8%,
17.1% and 10.5%, respectively, of net sales in fiscal 1999. Five customers
accounted for 14.4%, 13.6%, 13.5%, 13.3% and 11.7%, respectively, of net sales
in

15
<PAGE>
fiscal 1998. The Company expects a significant portion of its future sales to
remain concentrated with a limited number of strategic customers. There can be
no assurance that the Company will be able to retain its strategic customers, or
that such customers will not cancel or reschedule orders, or in the event orders
are canceled, that such orders will be replaced by other orders. In addition,
sales to any particular customer may fluctuate significantly from quarter to
quarter. The occurrence of any such events or the loss of a strategic customer
could have a material adverse effect on the Company's operating results.

GROSS MARGIN

Gross margin was $78.4 million, $97.6 million and $51.5 million in fiscal
2000, 1999, and 1998, respectively. The gross margin percentage decreased to
30.2% of net sales in fiscal 2000 from 40.6% of net sales in fiscal 1999 due
primarily to increases in wafer prices for the Company's MagicMedia256 product
line. Also affecting fiscal 2000 gross margin was a decrease in the dollar/yen
exchange rate throughout the year and low production yields on new product
ramp-ups. The gross margin percentage decreased to 40.6% of net sales in fiscal
1999 from 41.3% of net sales in fiscal 1998 due to declines in unit average
selling prices stemming from the market trend toward lower priced notebooks and
increased competition. These factors were mitigated in part by other product
cost decreases stemming from the Company's cost reduction efforts.

In the future, the Company's gross margin percentages may be affected by
increased competition and related decreases in unit average selling prices
(particularly with respect to older generation products), changes in the mix of
products sold, timing of volume shipments of new products, the availability and
cost of products from the Company's suppliers, manufacturing yields
(particularly on new products), continued trend in the market toward lower
priced notebooks, and foreign currency exchange rate fluctuations. The Company
has announced that it expects declines in revenues, gross margins, and results
of operations for fiscal 2001 based on the delay of the introduction of its new
products. As a result of this delay, the Company's existing products may
experience sharper declines in demand and average selling prices and the
Company's inventories on order may not be fully sellable at acceptable prices
which would necessitate inventory write-offs either for excess quantities or
lower of cost or market considerations. Such a write-off, when determined, would
have a material adverse effect on gross margins and results of operations.

RESEARCH AND DEVELOPMENT EXPENSES

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 $38.0 million,
$31.8 million and $16.1 million in fiscal 2000, 1999 and 1998, respectively. The
Company has made, and intends to continue to make, significant investments in
research and development to remain competitive by developing new and enhanced
products to serve its identified markets. Research and development expenses
increased in fiscal 2000 primarily as a result of increased employee related
expenses on higher headcount, increased prototyping costs associated with new
product development, and amortization of intangibles associated with the
acquisitions of ACL and the Optical Drive Development Group of Mitel
Corporation. Because the Company's projections for downward revenue will result
in corresponding cost control, research and development expenses are expected to
decrease in absolute dollars in fiscal 2001.

SALES, GENERAL AND ADMINISTRATIVE EXPENSES

Sales, general and administrative expenses were $18.5 million,
$20.7 million and $12.3 million in fiscal 2000, 1999, and 1998 respectively.
Sales, general and administrative expenses decreased in fiscal 2000 due
primarily to lower outside commissions and the Company's ongoing cost reduction
efforts. Sales, general and administrative expenses increased in fiscal 1999 as
a result of increased commissions associated with higher sales levels and
increased employee related expenses largely related to additional personnel and
legal costs related to the intellectual property lawsuit. Because the
Company's projections for downward revenue will result in decreased commissions
and cost control, sales, general and administrative expenses are expected to
decrease in absolute dollars in fiscal 2001.

16
<PAGE>
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

The Company incurred approximately $5.3 million of charges for acquired
in-process research and development ("IPRD") in connection with its fiscal 2000
acquisitions of the Optical Drive Storage Group from Mitel Semiconductor and
Associative Computers, Ltd., ("ACL"). The amount allocated to the acquired
in-process research and development was determined using the income approach,
which discounts expected future cash flows from each of the technologies under
development to their net present value, at an appropriate risk-adjusted rate of
return. The technologies under development were analyzed to determine their
technological accomplishments; the existence and utilization of core
technologies; the existence of any alternative future uses; their technological
feasibility; and the stage of completion of the development activities,
including the efforts required to complete the remaining development activities.
The technologies under development were classified as developed technology, IPRD
completed, IPRD to be completed or future development activities. Projected
future net cash flows attributable to each of these categories were discounted
to their net present value using a discount rate which was derived based on the
Company's estimated weighted average cost of capital plus a risk premium to
account for the inherent uncertainty surrounding the successful completion of
each project and the associated estimated cash flows. The IPRD charge includes
only the fair value of IPRD completed. The technologies underlying the IPRD
amounts were deemed to have no alternative future uses. The fair value assigned
to developed technology is included in other assets, and no value was assigned
to the IPRD to be completed or future development activities. The Company
believes that these fair values do not exceed the amount a third party would pay
for each such in-process technology. Failure to timely deliver commercially
viable products to the market, or to achieve market acceptance or the revenue
and expense forecasts could have a significant impact on the financial results
and operations of the acquired businesses.

The total charge for IPRD for the Optical Drive Storage Group transaction,
completed in February 1999, was approximately $2.0 million. The technologies
acquired from this group were mixed signal analog and digital video disk ("DVD")
optical storage read-channel technologies. The Optical Drive Storage Group's
development efforts were estimated to be approximately 50% complete at the date
of the acquisition. NeoMagic planned to integrate these technologies with its
embedded DRAM technologies and develop products for the DVD Notebook, DVD
Desktop and DVD Player/Recorder markets. Prior to the acquisition, the Optical
Drive Storage Group had generated no revenues. Revenue from commercially viable
products for these markets was not anticipated until late calendar 2000 or in
2001. The discount rates used for the IPRD technologies and developed
technologies were 40% and 25%, respectively.

The total charge for IPRD for the ACL transaction, completed in
February 1999, was approximately $3.3 million. The technologies acquired from
ACL were associative array (parallel) processing architectures that enabled high
speed computing. ACL's development efforts were estimated to be approximately
42% complete at the date of the acquisition. NeoMagic planned to integrate these
technologies with its embedded DRAM technologies and develop products for the
digital camera and camcorder markets. Prior to the acquisition, ACL had
generated no revenues. Revenues from commercially viable products for the above
markets were not anticipated until late calendar 2001. The discount rates used
for the IPRD technologies and developed technologies were each 50%.

Except for the Company's plans to no longer pursue the development
activities acquired from the Optical Drive Storage Group, there have been no
significant changes in the assumptions used in the IPRD analyses relating to the
timing of expected future revenues or the amount of development expenses and
efforts expected to be required to bring the in process research and development
technologies to completion and to achieve such revenues. Although management
believes it will realize its net investment in the technology and related net
assets acquired from the Optical Drive Storage Group ($1.5 million), significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of those assets in future financial periods. Should
impairment occur, the Company's financial condition and results of operations
could be materially adversely impacted.

17
<PAGE>
INTEREST INCOME AND OTHER

The Company earns interest on its cash and short-term investments. Interest
income and other was $3.8 million, $3.8 million and $2.6 million in fiscal 2000,
1999, and 1998, respectively. The increase in fiscal 1999 stemmed from higher
interest income earned on higher cash and short-term investment balances.

INTEREST EXPENSE

The Company pays interest and commissions on wafer purchases and interest on
its leases. Interest expense was $0.8 million, $1.3 million, and $1.3 million in
fiscal 2000, 1999 and 1998, respectively. The decrease in interest expense from
fiscal 1999 to fiscal 2000 reflects lower interest and commission rates. See
Note 6 of Notes to Consolidated Financial Statements for further discussion of
the working capital line of credit.

INCOME TAXES

The Company's effective tax rate was 35% in fiscal 2000, 34% in fiscal 1999
and 15% in fiscal 1998. The increase in the effective tax rate from fiscal 1999
to fiscal 2000 was due to the establishment of a valuation allowance related to
acquisitions during the year, offset by research and development credits. The
increase in the fiscal 1999 effective tax rate stems from net operating loss
carryforwards being fully utilized in fiscal 1998. The difference between the
Company's fiscal 2000 effective tax rate and the statutory rate is primarily due
to the utilization of research and development tax credits. The difference
between the Company's fiscal 1998 effective tax rate and the statutory rate is
primarily due to the utilization of the Company's net operating loss
carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents and short-term investments were
$96.5 million, $92.7 million, and $71.0 million as of the end of fiscal 2000,
1999 and 1998, respectively. The increase in cash, cash equivalents and
short-term investments in fiscal 2000 stems primarily from cash provided by
operating activities, offset in part by the two acquisitions completed in
February 1999 for $10.4 million and purchases of property, plant and equipment
of $7.4 million. The increase in cash, cash equivalents and short-term
investments in fiscal 1999 stems primarily from cash provided by operating
activities, offset in part by the pay-down of the working capital line of credit
and investments in property, plant and equipment. In January 1998, in exchange
for a lower commission rate, the payment terms on wafer purchases were changed
from payable in 90 days from shipment to payable in 30 days from shipment.
Working capital increased $9.1 million to $101.9 million at January 31, 2000
from $92.8 million at January 31, 1999.

Cash and cash equivalents provided from operating activities were
$19.6 million, $45.1 million and $15.4 million in fiscal 2000, 1999, and 1998
respectively. The cash provided from operating activities in fiscal 2000 stems
primarily from $12.7 million in net income and a decrease in inventory, offset
in part by a decrease in accounts payable. The cash provided from operating
activities in fiscal 1999 stems primarily from $31.2 million in net income, an
increase in accounts payable and a reduction in deferred taxes, offset in part
by increased accounts receivable, inventory and other assets. The cash provided
from operating activities in fiscal 1998 stems primarily from $20.8 million in
net income and increases in accrued expenses and accounts payable, offset by
increases in accounts receivable, inventory and deferred taxes.

Net cash used for investing activities in fiscal 2000, 1999 and 1998 was
$25.2 million, $25.5 million and $40.5 million respectively. Net cash used for
investing activities in fiscal 2000 related primarily to cash paid of
$10.4 million for two acquisitions, $7.3 million of net purchases of short-term
investments and $7.4 million of investments in property, plant and equipment.
Net cash used for investing activities in fiscal 1999 related primarily to
$20.1 million of net purchases of short-term investments and $5.4 million of
investments in property, plant and equipment. Net cash used for investing
activities in fiscal 1998 was related to net purchases of short-term investments
and investments in property, plant and equipment.

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Continued operation of the Company's business may require higher levels of
capital equipment purchases, technology investments, foundry investments and
other payments to secure manufacturing capacity. The timing and amount of future
investments will depend primarily on the level of the Company's future revenues.

Net cash provided by financing activities in fiscal 2000 was $2.0 million,
compared to net cash used for financing activities of $18.0 million in fiscal
1999 and net cash provided by financing activities of $46.7 million in fiscal
1998. The net cash provided by financing activities in fiscal 2000 primarily
represents net proceeds from the issuance of common stock. The net cash used for
financing activities in fiscal 1999 related primarily to the pay-down of the
working capital line of credit of $21.0 million, offset in part by proceeds from
the issuance of common stock. The net cash provided by financing activities in
fiscal 1998 primarily represents net proceeds from the initial public offering
of $37.8 million, net proceeds related to the working capital line of credit and
the release of amounts previously held as restricted cash.

At January 31, 2000, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of $96.5 million. The Company
believes that it will not generate cash over the upcoming twelve months, and
believes the current cash, cash equivalents and short-term investments will
satisfy the Company's projected working capital and capital expenditure
requirements through the next twelve months. Investments will continue in new
product development in new and existing areas of technology. The Company's
future capital requirements will depend on many factors including the rate of
net sales, the timing and extent of spending to support research and development
programs, the timing of any new product introductions 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.

IMPACT OF CURRENCY EXCHANGE RATES

Because the Company currently purchases the majority of its wafers under
purchase contracts denominated in yen, significant appreciation in the value of
the yen relative to the value of the U.S. dollar would make the wafers
relatively more expensive to the Company, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company generally enters into foreign currency forward contracts to minimize
short-term 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. Notwithstanding
the measures the Company has adopted, due to the unpredictability and volatility
of currency exchange rates and currency controls, there can be no assurance that
the Company will not experience currency losses in the future, nor can the
Company predict the effect of exchange rate fluctuations upon future operating
results. The Company experienced such fluctuations during fiscal 2000 which have
negatively impacted the Company's gross margin and results of operations.

IMPACT OF YEAR 2000

As of the date of this filing, the Company has not incurred any significant
business disruptions as a result of Year 2000 issues. We are also not aware of
any material problems with our customers or vendors. Accordingly, we do not
anticipate incurring material expenses or experiencing any material disruptions
as a result of any Year 2000 issues.

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FACTORS THAT MAY AFFECT RESULTS

FLUCTUATIONS IN QUARTERLY 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
margin and income from operations. These factors include, among others,
availability and cost of manufacturing capacity, demand for the Company's
products, fluctuations in manufacturing yields, changes in product or customer
mix (i.e. the portion of the Company's revenues represented by the Company's
various products and customers), incorrect forecasting of future revenues,
foreign exchange rate fluctuations, 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, the Company's ability to leverage its technology
across new markets, market acceptance of the end-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 average 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, 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
and profits. 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 future quarters, the Company's operating results may
be below the expectations of public market analysts or investors. Since the
Company's announcement of its expectation of declining revenues, gross margins
and operating results, the market price of the Common Stock has been and is
expected to be for some time in the future, materially adversely affected.

RISKS ASSOCIATED WITH DEPENDENCE ON THE NOTEBOOK PC MARKET

The Company's products are currently 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
forecasted 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 in general, or for a particular product that
incorporates the Company's multimedia accelerators, could have a material
adverse effect 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

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software developers, including Intel Corporation and Microsoft Corporation. The
Company could be required, as a result, to invest significant time and effort to
redesign its 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, the Company could miss crucial OEM design cycles,
which could result in a material adverse effect on the Company's business,
financial condition and results of operations. Over the past year, delays in the
introduction and ramping of the Company's new products have caused the Company
to miss current OEM's design cycles which has eroded the Company's market share
and has had a material adverse effect on 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
other future developments in 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 effect on the Company's business, financial condition and
results of operations.

PRODUCT CONCENTRATION, RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS

The Company's revenues currently 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 revenue generating
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 or technology advances eliminated or reduced the demand
for such 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 were unable to support the new
feature sets or performance levels stemming from such a transition, the Company
would likely not have the opportunity to compete for new design wins until it
was able to incorporate the new feature sets or performance requirements into
its products. 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. In fiscal 2000, the
Company experienced a manufacturing delay in bringing its new product into the
market in the required time frame with the appropriate feature set, resulting in
an adverse effect to the Company's results of operations for fiscal 2000. These
events are expected to continue to cause a material adverse effect on the
Company's business, financial condition and results of operations in fiscal
2001.

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 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
subcontractor relationships. Failure by the Company to continually design and
introduce advanced products in a timely manner and to reduce product costs on
these older products would have, and is having, a material adverse effect on the
Company's net sales, gross margins and results of operations. As a result of the
delay and interruption of new product introductions, the Company will experience
a material adverse effect on revenues, gross margins and operating results for
fiscal 2001. Accordingly, the Company has announced its plan to restructure its
business for the expected decreased revenue related to its current expectations.

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CONSUMER PRODUCT EXECUTION

The Company announced the formation of the Consumer Products division in
June 1998. The division was formed to explore consumer semiconductor product
opportunities in emerging markets such as digital video disks, digital cameras,
and other consumer products that can benefit from the advantages of embedded
DRAM MagicWare-TM- technology pioneered by NeoMagic. In February 1999, the
Company completed two acquisitions to further the development efforts of the
Consumer Products division. The Company acquired the Optical Drive Development
Group and associated DVD intellectual properties from Mitel Semiconductor in
Manchester, England and the assets and intellectual properties of ACL of
Tel Aviv, Israel from Robomatix Technologies Ltd. The DVD and digital camera
markets are new and evolving. Any such new product development program faces
substantial risks and uncertainties, including risks as to the costs, timing and
results of engineering efforts, competitive risks and market development risks.
In February 2000, the Company announced that it is seeking to sell the DVD
product group that is still in the research and development phase. The Company
has determined that embedded DRAM now provides less value in the current DVD
market than previously anticipated. The evolving DVD market is very cost
sensitive, and has little regard for low-power electronics or form-factor
integration, taking the product line further away from the Company's embedded
DRAM technology. The Company's ability to compete in new markets such as digital
camera and other consumer products will depend on its ability to identify and
ensure compliance with evolving industry standards, develop and market
compelling semiconductor solutions, and deliver those solutions to the market in
a timely and cost effective manner. There can be no assurance that future
products the Company expects to introduce will incorporate the features,
functionality and pricing demanded by the market, 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 could have a material adverse effect on the Company's business,
financial condition and results of operations. As a result of the delay in
introducing its products in a time frame and cost structure that makes such
products competitive, the Company is currently reconsidering its product plans
and research and development efforts for fiscal 2001. The Company cannot predict
what impact these efforts will have on future periods.

CUSTOMER CONCENTRATION

The Company's sales are concentrated within a limited customer base in the
notebook PC market. 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. Furthermore, the majority of the Company's sales are made on
the basis of purchase orders rather than pursuant to long-term purchase
agreements. 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.

EFFECTS OF CHANGES IN DRAM PRICING

The Company's products feature large DRAM memory integrated with analog and
logic circuitry on a single chip, while its competitors often provide discrete
analog and logic circuitry to be used in conjunction with DRAM supplied by
others. The selling prices of the Company's products reflect many factors,
including the prices of DRAM chips. As the Company places firm purchase
commitments for wafers some 3 to 5 months in advance, significant reductions in
the market price of DRAM could cause the Company's products to become less
competitively priced relative to competing discrete solutions with
non-integrated DRAM. In this circumstance, 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
customers. Recently, the DRAM market has experienced significant price erosion,
which has been a factor in the overall decline in the average selling price of
the Company's products. Because the Company's product costs cannot be adjusted
as rapidly as changes in the market price of DRAM, the

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Company's business, financial condition and results of operations may be
materially adversely affected by unanticipated changes in the price of DRAM.

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
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, some 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 ATI Technologies
("ATI"), Chips & Technologies, Inc. ("Chips & Technologies"- in January 1998,
Intel Corporation acquired Chips and Technologies), 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 companies currently selling products designed for desktop PCs. Some of
the Company's competitors, including Chips & Technologies and Trident have
announced or introduced multimedia accelerator products that integrate large
DRAM with analog and logic circuitry on a single chip. Certain of the Company's
competitors may offer products with more functionality and / or higher processor
speeds at the expense of battery life and power consumption than the Company's
product offerings. These feature sets may be more competitive for certain
applications than the Company's products. ATI, during 1999, produced and
increased market share with a Multi-Chip Module (MCM) accelerator solution. The
MCM solution increases access memory both internally in the packaged module and
externally, with connections to discrete memory on the motherboard, for higher
performance at the expense of battery life and power consumption. Some of the
Company's competitors, including Chips & Technologies and Trident, have
announced or introduced multimedia accelerator products that integrate large
DRAM with analog and logic circuitry on a single chip. These feature sets may be
more competitive for certain applications than the Company's products. Potential
competition also could come from manufacturers that integrate the multimedia
accelerator with other systems components. For example, Intel Corporation is in
production with products that integrate microprocessors and graphics
accelerators. Further, several of the Company's competitors have announced plans
to develop products that integrate the multimedia accelerator with the core
logic chip set. The successful commercial introduction by competitors of
products that integrate DRAM with analog and logic circuitry on a single chip,
or that eliminate the need for a separate multimedia accelerator in notebook
PCs, could have a material adverse effect on the Company's business, financial
condition and operating results.

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 changing demand as rapidly as companies that operate their own
facilities, which could have a material adverse effect on the Company's results
of operations. The Company expects that its revenues will decline significantly
from the prior year's revenue and accordingly is monitoring its inventory levels
for product on hand and on order. The Company orders wafers for deliveries at
least 3-5 months in advance and with the additional time to assemble and test
wafers, the Company can have orders for finished goods that will not be
available for up to six months into the future. If the Company does not have
sufficient demand for its products and cannot cancel its current and future
commitments without material impact, the Company may experience excess
inventory, which will result in write-offs affecting gross margin and results of
operations.

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DEPENDENCE ON MANUFACTURING RELATIONSHIPS

The Company's products require wafers manufactured with state-of-the-art
fabrication equipment and techniques. Mitsubishi Electric and Toshiba in Japan
and Infineon in Germany currently manufacture the Company's wafers. Each of
these manufacturing relationships is covered under the terms of a five-year
wafer supply agreement. The Company expects that, for the foreseeable future,
some of its products will be manufactured by a single source. Since, in the
Company's experience, the lead time needed to establish a strategic relationship
with a new DRAM partner is at least 12 months, and the estimated time for a
foundry to switch to a new product line ranges from four to nine months, there
may be no readily available alternative source of supply for specific products.
A manufacturing disruption experienced by any of the Company's manufacturing
partners or the failure of one of the Company's manufacturing partners to
dedicate adequate resources to the production of the Company's products would
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, in the event that the transition to the
next generation of manufacturing technologies by the Company's manufacturing
partners is unsuccessful, 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, 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's intellectual property. The
Company is dependent on its manufacturing partners to produce wafers with
acceptable quality and manufacturing yields, deliver those wafers on a timely
basis to the Company's third party assembly subcontractors and to allocate to
the Company a portion of their manufacturing capacity sufficient to meet the
Company's needs. Although the Company's products are designed using the process
design rules of the particular manufacturer, there can be no assurance that the
Company's manufacturing partners 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 the Company's
manufacturing partners will continue to devote adequate 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.
Over the past year, the company has experienced supply-related issues including
insufficient allocation of manufacturing capacity, yield issues and difficulties
of its partner to successfully transition to a next generation manufacturing
technology. These problems have had a material effect on the Company's business,
financial condition and results of operations which the Company expects will
continue into fiscal 2001.

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 were 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.

INVENTORY RISK

Under its wafer supply agreements with Mitsubishi Electric, Toshiba and
Infineon, the Company is obligated to provide rolling 12-month forecasts of
anticipated purchases and to place binding purchase orders three to four months
prior to shipment from the suppliers. The Company expects that its revenues will
decline significantly from the prior year's revenue and accordingly is
monitoring its inventory levels for product on hand and on order. The Company
orders wafers for deliveries at least 3-5 months in advance

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and with the additional time to assemble and test wafers, the Company can have
orders for finished goods that will be available up to six months into the
future. If the Company does not have sufficient demand for its products and
cannot cancel its current and future commitments without material impact, the
Company may experience excess inventory, which will result in a write-off
affecting gross margin and results of operations. 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 shortage of wafers for a particular product.
Also, many of the Company's customers are moving to "just in time" relationships
with their vendors, which can shift the risk of carrying inventory back to the
supplier. As a result of the long lead-time for manufacturing wafers and the
increase in "just in time" ordering by PC manufacturers, semiconductor companies
such as the Company from time-to-time must take charges for excess inventory.
Significant write-offs of excess inventory could have a material adverse effect
on 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. At January 31, 2000, the Company has issued
outstanding purchase orders totaling over $45.0 million with its manufacturing
partners for the delivery of wafers over the next five months. If orders from
NeoMagic's customers do not meet the Company's expectations, the Company may be
required to incur cancellation charges related to the purchase orders with its
manufacturing partners and/or charges for the write off of excess inventory.

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 upon price for wafers meeting
certain acceptance criteria. Accordingly, the Company bears the risk of the
yield of good die from wafers purchased meeting the acceptance criteria. The
Company is currently experiencing such yield problems which has affected, and is
expected to continue to, materially adversely affect the Company's net sales,
gross margins and results of operations in fiscal 2001.

Semiconductor manufacturing yields are a function of both product design,
which is developed largely by the Company, and process technology, which is
typically proprietary to the manufacturer. Historically, the Company has
experienced lower yields on new products. 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 in fiscal 1997. This
risk is compounded by the

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offshore location of the Company's manufacturers, increasing the effort and time
required identifying, communicating and resolving manufacturing yield problems.
As the Company's relationships with new 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. Any significant decrease in manufacturing
yields could result in an increase in the Company's per unit product cost and
could force the Company to allocate its available product supply among its
customers, potentially adversely impacting customer relationships as well as
revenues and gross margins. 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
manufacturer for its newest product, the MagicMedia256XL+, has had, and is
expected to continue to have, a material adverse effect on the Company's net
sales, gross margins and results of operations in fiscal 2001.

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 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 on a timely
basis. For example, 3-D has become increasingly important for notebook PCs. The
Company's ability to compete may depend on its ability to incorporate these
features in its products. 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 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 Company
is currently unable to successfully introduce its new products and achieve
market acceptance for such products at the appropriate cost and feature set
within the window of market demand. This situation will have a material adverse
effect on the Company's business, financial condition and results of operations
in fiscal 2001.

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 will 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
the Company's products, rendering the Company's product technologically
infeasible or uncompetitive. The multiple chip solutions offered by some of the
Company's competitors are less complex to design and

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manufacture than the Company's integrated 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 the products mature. Thus, the Company will need to continue
introducing compelling new products at relatively higher average selling prices
in order to maintain overall average selling prices. There can be no assurance
that the Company will successfully identify new product opportunities or develop
and bring to market new products in a timely manner. The Company is currently
experiencing difficulties in bringing its latest product to market which will
have a material adverse impact on NeoMagic's business, financial condition and
results of operations for fiscal 2001. Further, there can be no assurance 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 new designs by its customers.

UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY RIGHTS

The Company relies in part on patents to protect its intellectual property.
The Company has been issued numerous patents worldwide, each covering certain
aspects of the design and architecture of the Company's multimedia accelerators.
In fiscal 2000, the Company also acquired and/or licensed intellectual
properties, the majority of which were in the areas of mixed signal analog
design and array-based processing as part of the February 1999 acquisitions of
the Optical Drive Development Group and ACL. Additionally, the Company and its
newly acquired businesses have patent applications pending. There can be no
assurance that the Company's pending patent applications, or any future
applications will be approved. Further, there can be no assurance that any
issued patents will provide the Company with significant intellectual property
protection, 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. In addition, 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.

27
<PAGE>
In February 1997, Cirrus Logic Inc. ("Cirrus Logic") sent the Company
written notice asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe six United States patents held by Cirrus
Logic. Since receiving the notice of alleged infringement, the Company has
advised Cirrus Logic that the Company does not believe that any of its products
infringe any claims of the patents. The Company also has undergone a
confidential external infringement review and has conducted its own internal
infringement review, and the Company continues to believe that the Cirrus Logic
infringement allegations are unfounded. However, there can be no assurances that
Cirrus Logic will not file a lawsuit against the Company or that the Company
would prevail in any such litigation. Any protracted litigation by Cirrus Logic
or the success of Cirrus Logic in any such litigation could have a material and
adverse effect on the Company's financial position or results of operations.

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 current or future 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.

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 the foreign
operations of customers with headquarters in the United States and foreign
system manufacturers that sell to United States-based OEMs) accounted for 80.2%,
83.6% and 83.2% of the Company's net sales for fiscal 2000, 1999, and 1998,
respectively. The Company expects that net sales derived from international
sales will continue to represent a significant portion of its total net sales.
Letters of credit issued by customers support a portion of the Company's
international sales. To date, the Company's international sales have been
denominated in United States dollars. Increases in the value of the U.S. dollar
relative to the local currency of the Company's customers could make the
Company's products relatively more expensive than competitors' products sold in
the customer's local currency.

International manufacturers produce all of the Company's wafers. In
addition, many of the assembly and test services used by the Company are
procured from international sources. Under the Company's wafer supply agreements
with Mitsubishi Electric and Toshiba, wafers are priced in Japanese yen. As a
result, the Company's costs 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 foreign currency exchange rate by purchasing foreign exchange
contracts and will continue to do so in the future. However, there can be no
assurance that such hedging will be adequate. The Company experienced such
fluctuations during fiscal 2000 which has negatively impacted the Company's
gross margin and results of operations. Significant wafer or assembly and test
service price increases, fluctuations in currency exchange rates or the
Company's inability to fully hedge against currency exchange rate fluctuations
could continue to have a

28
<PAGE>
material and sudden 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 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, timing and extent of spending to support research and development
programs in new and existing areas of technology, expansion of sales and
marketing support activities, and timing and customer acceptance for new
products and enhancements to existing products. The Company may 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.

MANAGEMENT OF EXPANDED OPERATIONS

The Company has experienced periods of rapid growth and expansion both
domestically and internationally, which have placed a significant strain on the
Company's limited personnel and other resources. To manage these expanded
operations effectively, including the operations of recently acquired entities
in the UK, and Israel, the Company will be required to continue to improve its
operational, financial and management systems. 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.

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 forthcoming restructuring 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. The Company has experienced the loss of
certain personnel and also anticipates including additional reductions of
personnel in its restructuring charge. If the Company's headcount is not
appropriate for its future direction and the Company fails to recruit key
personnel critical to its future direction in a timely manner, it may have a
material adverse effect on the Company's business, financial condition and
results of operations.

29
<PAGE>
VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock, like that of other
semiconductor companies, has been and is likely to continue to be, highly
volatile. The market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market price of the Company's Common Stock could be
subject to significant fluctuations in response to various factors, including
quarter-to-quarter variations in the Company's anticipated or actual operating
results, announcements of new products, technological innovations or setbacks by
the Company or its competitors, general conditions in the semiconductor and PC
industries, unanticipated shifts in the notebook PC market or industry
standards, loss of key customers, changes in DRAM pricing, litigation
commencement or developments, changes in or the failure by the Company to meet
estimates of the Company's performance by securities analysts, market conditions
for high technology stocks in general, and other events or factors. In future
quarters, the Company's operating results may be below the expectations of
public market analysts or investors. Since the Company's announcement of its
expectation of declining revenues, gross margins and operating results, the
market price of the Common Stock has been and is expected to be for some time in
the future, materially adversely affected.

30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY FLUCTUATIONS

The Company currently purchases all its wafers in Japanese yen, and utilizes
foreign currency forward contracts and options to minimize short-term foreign
currency fluctuation exposures related to these purchases. The Company does not
use derivative financial instruments for speculative or trading purposes. The
Company's accounting policy for these instruments is based on the Company's
designation of such instruments as hedge transactions. As of January 31, 2000,
and 1999 the Company's foreign currency forward contracts were as follows:

<TABLE>
<CAPTION>
JANUARY 31, 2000 1999
- ----------- --------------------- ---------------------
(IN MILLIONS) NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
- ------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Foreign Currency Forward Contracts...................... $18.0 $(0.6) $36.7 $(0.6)
</TABLE>

INVESTMENT PORTFOLIO

The primary objective of the Company's investment activities is to preserve
principal and liquidity while at the same time maximizing yields, without
significantly increasing risk. To achieve this objective, the Company places its
investments in instruments that meet high credit rating standards as specified
in the Company's investment policy. The Company's investment policy also
specifies limits on the type, concentration and maturity period of the Company's
investments. The Company does not use derivative financial instruments in its
investment portfolio.

The table below summarizes the Company's investment portfolio. The table
includes cash, cash equivalents, and short-term investment and related average
interest rates. Principal (notional) amounts as of January 31, 2000, and 1999
maturing in fiscal 2001 and fiscal 2000, respectively are as follows:

<TABLE>
<CAPTION>
JANUARY 31, 2000 1999
- ----------- ---------------------- ----------------------
FAIR VALUE FAIR VALUE
---------------------- ----------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) TAXABLE NON-TAXABLE TAXABLE NON-TAXABLE
- ---------------------------------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents........................... $32,035 $ 1,062 $34,616 $ 2,015
Weighted average interest rate.................... 4.8% 4.0% 4.2% 3.4%
Short-term investments 23,716 39,713 32,274 23,823
Weighted average interest rate.................... 5.8% 4.4% 5.3% 3.9%
------- ------- ------- -------
Total cash, cash equivalents and short-term
investments $55,751 $40,775 $66,890 $25,838
======= ======= ======= =======
</TABLE>

Interest earned on non-taxable investments is subject to preferential tax
treatment under the Internal Revenue Code.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANNUAL FINANCIAL STATEMENTS. See Part IV, Item 14 of this Form 10-K.

31
<PAGE>
SELECTED QUARTERLY DATA (unaudited, in thousands except per share data)
FISCAL 2000

<TABLE>
<CAPTION>
1(ST) 2(ND) 3(RD) 4(TH)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................................... $72,397 $60,320 $70,346 $56,635
Cost of sales............................................... 45,609 42,232 51,558 41,933
------- ------- ------- -------
Gross margin................................................ 26,788 18,088 18,788 14,702
Operating expenses:
Research and development.................................. 9,773 10,905 9,244 8,035
Sales, general and administrative......................... 5,246 4,311 4,537 4,411
Acquired in process research and development(2)........... 5,348 -- -- --
------- ------- ------- -------
Total operating expenses................................ 20,367 15,216 13,781 12,446
Income from operations...................................... 6,421 2,872 5,007 2,256
Interest income and other................................. 784 932 924 1,153
Interest expense.......................................... (252) (218) (197) (171)
------- ------- ------- -------
Income before income taxes.................................. 6,953 3,586 5,734 3,238
Provision for income taxes.................................. 3,692 1,076 1,614 424
------- ------- ------- -------
Net income.................................................. $ 3,261 $ 2,510 $ 4,120 $ 2,814
======= ======= ======= =======
Basic net income per share(1)............................... $ .13 $ .10 $ .16 $ .11
Diluted net income per share(1)............................. $ .13 $ .10 $ .16 $ .11
Weighted common shares outstanding(1)....................... 24,476 24,460 25,039 25,291
Weighted average common shares outstanding assuming
dilution(1)............................................... 25,636 26,073 25,761 26,180
</TABLE>

FISCAL 1999

<TABLE>
<CAPTION>
1(ST) 2(ND) 3(RD) 4(TH)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................................... $47,738 $53,396 $67,401 $71,968
Cost of sales............................................... 27,510 31,058 40,436 43,877
------- ------- ------- -------
Gross margin................................................ 20,228 22,338 26,965 28,091
Operating expenses:
Research and development.................................. 6,252 7,314 8,729 9,461
Sales, general and administrative......................... 4,356 4,848 5,845 5,691
------- ------- ------- -------
Total operating expenses................................ 10,608 12,162 14,574 15,152
Income from operations...................................... 9,620 10,176 12,391 12,939
Interest income and other................................. 975 919 1,039 877
Interest expense.......................................... (324) (372) (245) (398)
------- ------- ------- -------
Income before income taxes.................................. 10,271 10,723 13,185 13,418
Provision for income taxes.................................. 3,595 3,753 4,615 4,432
------- ------- ------- -------
Net income.................................................. $ 6,676 $ 6,970 $ 8,570 $ 8,986
======= ======= ======= =======
Basic net income per share(1)............................... $ .29 $ .30 $ .36 $ .37
Diluted net income per share(1)............................. $ .26 $ .27 $ .33 $ .34
Weighted common shares outstanding(1)....................... 23,295 23,595 23,828 24,120
Weighted average common shares outstanding assuming
dilution(1)............................................... 26,098 26,033 25,950 26,530
</TABLE>

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

(1) See Note 1 and 4 of Notes to Consolidated Financial Statements.

(2) See Note 3 of Notes to Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

Not applicable.

32
<PAGE>
PART III

Certain information required by Part III is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 2000 Annual Meeting of Stockholders (the "Proxy Statement").

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item with respect to directors is contained
in the section entitled "Election of Directors" in the 2000 Proxy Statement and
is incorporated herein by reference. The required information concerning
executive officers of the Company is contained in the section entitled
"Management" in Part I of this Form 10-K.

Item 405 of Regulation S-K calls for disclosure of any known late filing of
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this section relating to executive compensation
and transactions is contained in the sections entitled "Election of Directors"
"Director Compensation," and "Executive Compensation" in the 2000 Proxy
Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this section is contained in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
2000 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this section is contained in the section
entitled "Certain Relationships and Related Transactions" in the 2000 Proxy
Statement and is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements.

The financial statements listed in the accompanying index to financial
statements and financial statement schedules are filed as a part of this
report.

2. Financial Statement Schedule.

The financial statement schedule listed in the accompanying index to
financial statements and financial statement schedules is filed as a part
of this report and should be read in conjunction with the Consolidated
Financial Statements of NeoMagic Corporation.

3. Exhibits

The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this report.

(b) Reports on Form 8-K

None.

33
<PAGE>
INDEX TO FINANCIAL STATMENTS AND FINANCIAL STATEMENT SCHEDULES

(ITEM 14 (a))

<TABLE>
<CAPTION>
REFERENCE
PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 35

Consolidated Statements of Operations for the three fiscal
years ended January 31, 2000.............................. 36

Consolidated Balance Sheets January 31, 2000 and January 31,
1999...................................................... 37

Consolidated Statements of Cash Flows for the three fiscal
years ended January 31, 2000.............................. 38

Consolidated Statements of Stockholders' Equity for the
three fiscal Years ended
January 31, 2000.......................................... 39

Notes to Consolidated Financial Statements.................. 40

Valuation and Qualifying Accounts for the three fiscal years
ended January 31, 2000.................................... 55
</TABLE>

Schedules other that the one listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.

34
<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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and schedule referred
to above present fairly, in all material respects, the consolidated financial
position of NeoMagic Corporation at January 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth herein.

San Jose, California
February 15, 2000

35
<PAGE>
NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 2000 1999 1998
- ---------------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $259,698 $240,503 $124,654

Cost of sales............................................... 181,332 142,881 73,171
-------- -------- --------

Gross margin................................................ 78,366 97,622 51,483

Operating expenses:
Research and development.................................. 37,957 31,756 16,091
Sales, general and administrative......................... 18,505 20,740 12,290
Acquired in-process research and development.............. 5,348 -- --
-------- -------- --------
Total operating expenses.............................. 61,810 52,496 28,381

Income from operations...................................... 16,556 45,126 23,102
Interest income and other................................. 3,793 3,810 2,643
Interest expense.......................................... (838) (1,339) (1,298)
-------- -------- --------

Income before income taxes.................................. 19,511 47,597 24,447

Provision for income taxes.................................. 6,806 16,395 3,667
-------- -------- --------

Net income.................................................. $ 12,705 $ 31,202 $ 20,780
======== ======== ========

Basic net income per share.................................. $ .51 $ 1.32 $ .95
Diluted net income per share................................ $ .49 $ 1.19 $ .82

Weighted common shares outstanding.......................... 24,898 23,710 21,924
Weighted common shares outstanding assuming dilution........ 25,834 26,153 25,336
</TABLE>

See accompanying notes.

36
<PAGE>
NEOMAGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JANUARY 31, 2000 1999
- ----------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 33,097 $ 36,631
Short-term investments.................................... 63,429 56,097

Accounts receivable, less allowance for doubtful accounts
of $206 at January 31, 2000 and $225 at January 31,
1999.................................................... 18,989 19,363
Inventory................................................. 13,184 19,046
Other current assets...................................... 2,170 2,681
-------- --------
Total current assets.................................. 130,869 133,818

Property, plant and equipment, net........................ 10,370 8,335
Deferred tax assets....................................... 1,034 1,034
Other assets.............................................. 6,863 1,187
-------- --------
Total assets.......................................... $149,136 $144,374
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,240 $ 31,296
Compensation and related benefits......................... 2,986 4,046
Income taxes.............................................. 2,207 3,059
Other accruals............................................ 2,334 1,876
Obligations under capital leases.......................... 154 702
-------- --------
Total current liabilities............................. 28,921 40,979
Commitments and contingencies...............................
Stockholders' equity:
Noncumulative convertible preferred stock, $.001 par
value:
Authorized shares--2,000,000............................
Issued and outstanding shares--none at January 31, 2000
and 1999.............................................. -- --
Common stock, $.001 par value: Authorized
shares--60,000,000......................................
Issued and outstanding shares--25,535,569 at January 31,
2000 and 24,890,291 at January 31, 1999................. 25 25
Additional paid-in-capital................................ 70,682 67,286
Notes receivable from stockholders........................ (525) (554)
Deferred compensation..................................... (1,074) (1,764)
Retained earnings......................................... 51,107 38,402
-------- --------
Total stockholders' equity............................ 120,215 103,395
-------- --------
Total liabilities and stockholders' equity............ $149,136 $144,374
======== ========
</TABLE>

See accompanying notes.

37
<PAGE>
NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31 2000 1999 1998
- --------------------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 12,705 $ 31,202 $ 20,780
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 5,368 3,281 1,679
Amortization of deferred compensation..................... 567 807 776
Deferred taxes............................................ 267 5,896 (8,571)
Acquired in-process research and development.............. 5,348 -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... 374 (8,127) (9,031)
Inventory............................................... 5,862 (9,704) (4,105)
Other current assets.................................... 244 (212) (485)
Other assets............................................ (600) (833) 248
Accounts payable........................................ (10,056) 21,806 4,315
Compensation and related benefits....................... (1,060) 1,041 1,864
Income taxes............................................ (852) (1,465) 4,524
Tax benefit from employee stock options................. 1,022 2,661 750
Other accruals.......................................... 458 (1,247) 2,647
--------- -------- --------
Net cash provided by operating activities................... 19,647 45,106 15,391
========= ======== ========
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (7,403) (5,384) (4,516)
Purchases of short-term investments....................... (158,385) (69,616) (58,649)
Maturities of short-term investments...................... 151,053 49,535 22,633
Purchase of the Optical Drive Development Group........... (3,901) -- --
Purchase of ACL........................................... (6,523) -- --
--------- -------- --------
Net cash used for investing activities...................... (25,159) (25,465) (40,532)
========= ======== ========
FINANCING ACTIVITIES
Payments on capital lease obligations..................... (548) (571) (975)
Proceeds from working capital line of credit.............. -- -- 59,760
Payments on working capital line of credit................ -- (21,041) (52,943)
Net proceeds from issuance of common stock and warrants,
net of repurchases...................................... 2,497 3,593 38,358
Payments received from notes receivable from
stockholders............................................ 29 5 263
Release of amounts held as restricted cash equivalents.... -- -- 2,224
--------- -------- --------
Net cash provided by (used for) financing activities........ 1,978 (18,014) 46,687
========= ======== ========
Net increase (decrease) in cash and cash equivalents........ (3,534) 1,627 21,546
Cash and cash equivalents at beginning of period............ 36,631 35,004 13,458
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 33,097 $ 36,631 $ 35,004
========= ======== ========
Supplemental schedules of cash flow information
Cash paid during the year for:
Interest................................................ $ 838 $ 1,339 $ 1,298
Taxes................................................... $ 5,836 $ 9,303 $ 6,964
Supplemental schedules of non-cash investing and financing
activities
Deferred compensation..................................... $ -- $ -- $ 1,688
</TABLE>

See accompanying notes.

38
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------------- --------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
(IN THOUSANDS, EXCEPT SHARE DATA) ----------- -------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997........ 12,259,614 $ 12 8,072,591 $ 8 $20,471 $(822) $(1,889)
=========== ==== ========== === ======= ===== =======
Issuance of common stock in
Conjunction with initial public
Offering......................... -- -- 3,475,000 4 37,756 -- --
Conversion of preferred stock to
Common stock in conjunction with
Initial public offering.......... (12,259,614) (12) 12,259,614 12 -- -- --
Exercise of warrants............... -- -- 206,498 -- -- -- --
Issuance of common stock under
Stock option plan................ -- -- 167,725 -- 259 -- --
Issuance of common stock under
Employee stock purchase
plan............................. -- -- 35,987 -- 367 -- --
Repurchase of common stock at
cost............................. -- -- (12,813) -- (28) -- --
Payment on promissory notes........ -- -- -- -- -- 263 --
Deferred compensation Relating to
stock options.................... -- -- -- -- 1,688 -- (1,688)
Amortization of deferred
Compensation relating to stock
options.......................... -- -- -- -- -- -- 776
Tax benefit attributable to stock
options.......................... -- -- -- -- 750 -- --
Net income and comprehensive
income........................... -- -- -- -- -- -- --
----------- ---- ---------- --- ------- ----- -------
Balance at January 31, 1998........ -- -- 24,204,602 24 61,263 (559) (2,801)
=========== ==== ========== === ======= ===== =======
Issuance of common stock under
Stock option plan................ -- -- 598,030 1 2,330 -- --
Issuance of common stock under
Employee stock purchase
plan............................. -- -- 117,679 -- 1,285 -- --
Repurchase of common stock at
cost............................. -- -- (30,020) -- (23) -- --
Payment on promissory notes........ -- -- -- -- -- 5 --
Deferred compensation Relating to
stock options.................... -- -- -- -- (230) -- 230
Amortization of deferred
Compensation relating to stock
options.......................... -- -- -- -- -- -- 807
Tax benefit attributable to stock
options.......................... -- -- -- -- 2,661 -- --
Net income and comprehensive
income........................... -- -- -- -- -- -- --
----------- ---- ---------- --- ------- ----- -------
Balance at January 31, 1999........ -- -- 24,890,291 25 67,286 (554) (1,764)
=========== ==== ========== === ======= ===== =======
Exercise of warrants............... -- -- 86,788 -- -- -- --
Issuance of warrant................ -- -- -- -- 313 -- --
Issuance of common stock under
stock option plan................ -- -- 404,418 -- 900 -- --
Issuance of common stock under
Employee stock purchase
plan............................. -- -- 189,279 -- 1,296 -- --
Repurchase of common stock at
cost............................. -- -- (35,207) -- (12) -- --
Payment on promissory notes........ -- -- -- -- -- 29 --
Deferred compensation Relating to
stock options.................... -- -- -- -- (123) -- 123
Amortization of deferred
Compensation relating to stock
options.......................... -- -- -- -- -- -- 567
Tax benefit attributable to stock
options.......................... -- -- -- -- 1,022 -- --
Net income and comprehensive
income........................... -- -- -- -- -- -- --
----------- ---- ---------- --- ------- ----- -------
Balance at January 31, 2000........ -- $ -- 25,535,569 $25 $70,682 $(525) $(1,074)
=========== ==== ========== === ======= ===== =======

RETAINED
EARNINGS TOTAL
(ACCUMULATED STOCKHOLDERS'
DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) ------------ -------------
<S> <C> <C>
Balance at January 31, 1997........ $(13,580) $ 4,200
======== ========
Issuance of common stock in
Conjunction with initial public
Offering......................... -- 37,760
Conversion of preferred stock to
Common stock in conjunction with
Initial public offering.......... -- --
Exercise of warrants............... -- --
Issuance of common stock under
Stock option plan................ -- 259
Issuance of common stock under
Employee stock purchase
plan............................. -- 367
Repurchase of common stock at
cost............................. -- (28)
Payment on promissory notes........ -- 263
Deferred compensation Relating to
stock options.................... -- --
Amortization of deferred
Compensation relating to stock
options.......................... -- 776
Tax benefit attributable to stock
options.......................... -- 750
Net income and comprehensive
income........................... 20,780 20,780
-------- --------
Balance at January 31, 1998........ 7,200 65,127
======== ========
Issuance of common stock under
Stock option plan................ -- 2,331
Issuance of common stock under
Employee stock purchase
plan............................. -- 1,285
Repurchase of common stock at
cost............................. -- (23)
Payment on promissory notes........ -- 5
Deferred compensation Relating to
stock options.................... -- --
Amortization of deferred
Compensation relating to stock
options.......................... -- 807
Tax benefit attributable to stock
options.......................... -- 2,661
Net income and comprehensive
income........................... 31,202 31,202
-------- --------
Balance at January 31, 1999........ 38,402 103,395
======== ========
Exercise of warrants............... -- --
Issuance of warrant................ -- 313
Issuance of common stock under
stock option plan................ -- 900
Issuance of common stock under
Employee stock purchase
plan............................. -- 1,296
Repurchase of common stock at
cost............................. -- (12)
Payment on promissory notes........ -- 29
Deferred compensation Relating to
stock options.................... -- --
Amortization of deferred
Compensation relating to stock
options.......................... -- 567
Tax benefit attributable to stock
options.......................... -- 1,022
Net income and comprehensive
income........................... 12,705 12,705
-------- --------
Balance at January 31, 2000........ $ 51,107 $120,215
======== ========
</TABLE>

See accompanying notes.

39
<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 in 1993 in California
and reincorporated in Delaware in February 1997. The Company pioneered the
integration of DRAM, complex logic and analog circuits into a single integrated
circuit. The Company designs, develops and markets high-performance
semiconductor solutions for sale to original equipment manufacturers ("OEMs") of
mobile computing products. The first commercial application of the Company's
technology is in the multimedia accelerator market for notebook PCs.

BASIS OF PRESENTATION

The Company's fiscal year consists of a fifty-two week period ending on the
Sunday closest to the January month end. Fiscal year 1998 ended on
January 25, 1998. Fiscal year 1999 ended on January 31, 1999 and was a
fifty-three week fiscal year. Fiscal year 2000 ended on January 30, 2000. For
convenience, the accompanying consolidated financial statements have been
presented as ending on the last day of the January calendar month.

PRINCIPALS OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, NeoMagic Japan (KK), NeoMagic International,
NeoMagic International (Hong Kong) Ltd., NeoMagic Israel Ltd., NeoMagic
U.K. Ltd., and NeoMagic Semiconductor India Private Ltd. 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 in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Third-party suppliers currently manufacture all of the Company's wafers,
each under the terms of five-year wafer supply agreements. A manufacturing
disruption experienced by any of the Company's manufacturing partners or the
failure of one of the Company's manufacturing partners to devote adequate
resources to the production of the Company's products would 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 three to
five months in advance and with the additional time to assemble and test wafers
and finished goods, the Company can have orders outstanding that will not be
available for delivery to customers for up to six months from the date the
purchase order is placed. 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. At January 31, 2000, the Company had outstanding purchase orders
totaling over $45.0 million with its manufacturing partners for the delivery of
wafers over the next five months. The Company has announced that it expects
declines in revenues, gross margins, and results of operations for fiscal 2001
based on the delay of the introduction of its new products. As a result of this
delay, the Company's existing products may experience sharper declines in

40
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
demand and average selling prices and the Company's inventories on order may not
be fully sellable at acceptable prices which would necessitate inventory
write-offs either for excess quantities or lower of cost or market
considerations. The Company is monitoring its inventory levels for product on
hand and on order. If orders from NeoMagic's customers do not meet the Company's
expectations, the Company may be required to incur cancellation charges related
to the purchase orders with its manufacturing partners and/or charges for the
write off of excess inventory or lower of cost or market conditions.

The Company has decided not to pursue the further development of
technologies acquired from Mitel for the DVD market. Although management
believes it will realize its net investment in the technology and related net
assets of $1.5 million at January 31, 2000, significant uncertainties exist, and
circumstances currently unknown may result in the need to recognize an
impairment of those assets in future financial periods. Should impairment occur,
the Company's financial condition and results of operations could be materially
adversely impacted.

FOREIGN CURRENCY TRANSACTIONS

Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts are measured using the current 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 utilizes derivative financial instruments to hedge wafer
inventory purchases, which are priced in yen. The Company utilizes foreign
currency forward contracts to minimize foreign currency fluctuation exposures
related to these purchase commitments. The Company does not use derivative
financial instruments for speculative or trading purposes. The Company's
accounting policy for these instruments is based on the Company's designation of
such instruments as a hedge transaction. The criteria the Company uses for
designating an instrument as a hedge include its effectiveness in risk reduction
and matching of derivative instruments to underlying transactions. Gains and
losses on currency forward contracts that are designated as hedges, for which a
firm commitment has been attained, are deferred and recognized in income in the
same period that the underlying transactions are settled. Gains and losses on
any instrument not meeting the above criteria would be recognized in income in
the current period. If an underlying hedged transaction is terminated earlier
than initially anticipated, the offsetting gain or loss on the related
derivative instrument would be recognized in income in the same period.

CASH AND CASH EQUIVALENTS

All highly liquid investments purchased with an original maturity of
90 days or less are considered cash equivalents. Investments with an original
maturity of greater than 90 days, but less than one year, are classified as
short-term investments.

The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS 115, 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.

41
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Held-to-maturity securities are stated at amortized cost with corresponding
premiums or discounts amortized to interest income over the life of the
investment. Securities not classified as held-to-maturity are classified as
available-for-sale and are reported at fair market value. Unrealized 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 interest income and other. The cost of securities
sold is based on the specific identification method.

All cash equivalents and short-term investments are classified as
available-for-sale and are recorded at fair market value. For all
classifications of securities, cost approximates fair market value as of
January 31, 2000 and 1999, and consists of the following (in thousands):

<TABLE>
<CAPTION>
JANUARY 31, 2000 1999
- ----------- -------- --------
<S> <C> <C>
Cash and cash equivalents:
Money market funds...................................... $ 6,465 $12,042
Commercial paper........................................ 22,041 21,074
Municipal bonds......................................... 1,062 2,015
Certificates of deposit................................. 3,002 --
Bank accounts........................................... 527 1,500
------- -------
Total................................................. $33,097 $36,631
======= =======
Short-term investments:
Market auction preferred--non-taxable................... $26,174 $21,811
Market auction preferred--taxable....................... -- 10,026
Medium term notes....................................... 1,002 9,272
Commercial paper........................................ 12,505 6,930
Corporate notes......................................... 1,010 4,165
Certificates of deposit................................. 1,037 --
U.S. Government agencies................................ 21,701 3,025
Corporate bonds......................................... -- 868
------- -------
Total................................................. $63,429 $56,097
======= =======
</TABLE>

Gross realized and unrealized gains and losses on available-for-sale
securities in fiscal 2000, 1999 and 1998 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.

42
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER ACQUIRED INTANGIBLES

The Company has goodwill and other acquired intangibles of $3.9 million as
of January 31, 2000 as a result of the purchases of the Optical Drive Storage
Group from Mitel Semiconductor and ACL. These assets are recorded in other
assets, net of amortization. Intangible assets, including goodwill, are being
amortized on a straight line basis over their estimated useful lives of four
years. Total amortization recorded as of January 31, 2000 was $1.3 million.
Reviews are regularly performed by the Company to determine whether the carrying
value of these assets is impaired. Impairment, if any, is based on the excess of
the carrying amount over the fair value of these assets. No impairment has been
indicated to date.

REVENUE RECOGNITION

Revenue from product sales is generally recognized upon passage of title,
net of estimated returns. Revenue on shipment to distributors is deferred until
the distributor sells the product.

CONCENTRATION OF CREDIT RISK

The Company sells its products to notebook PC OEMs as well as to third-party
system 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.

EARNINGS PER SHARE

Basic earnings per share represents the weighted average common shares
outstanding during the period and excludes any dilutive effects of options,
warrants, and convertible securities. The dilutive effects of options, warrants
and convertible securities are included in diluted earnings per share.

COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130") during the quarter ended
April 30, 1998. SFAS 130 establishes new standards for the reporting and
displaying of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's available
for-sale securities and foreign currency translation adjustments to be included
in comprehensive income. Gross unrealized gains and losses on available-for-sale
securities and foreign currency translation adjustments for fiscal years 2000,
1999 and 1998 were immaterial. The Company's comprehensive net income was the
same as its net income for the years ended January 31, 2000, 1999 and 1998.

SEGMENT INFORMATION

The Company has one operating segment by which the chief operating decision
maker evaluates performance and allocates resources. All of the Company's net
sales to date have been derived from the sale of multimedia accelerators, and
the Company expects this to continue through fiscal 2001.

43
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities." The Standard will require companies to
record all derivatives held on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, changes in the fair value of the derivative is either offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income until the value
related to the ineffective portion of a hedge, if any, is recognized in
earnings. The Company expects to adopt SFAS 133 as of the beginning of its
fiscal year 2002. The effect of adoption of the Standard is currently being
evaluated, but is not expected to have a material effect on the Company's
financial position or results of operations.

2. SUMMARIZED BALANCE SHEET DETAILS

<TABLE>
<CAPTION>
JANUARY 31, 2000 1999
- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Raw materials........................................... $ 3,035 $ 6,396
Work in process......................................... 3,085 4,717
Finished goods.......................................... 7,064 7,933
------- -------
Total..................................................... $13,184 $19,046
======= =======
Property, plant and equipment:
Computer equipment and software......................... $18,224 $12,179
Furniture and fixtures.................................. 1,836 1,645
Machinery and equipment................................. 2,217 1,139
------- -------
Total..................................................... 22,277 14,963
Less accumulated depreciation and amortization.......... (11,907) (6,628)
------- -------
Property, plant and equipment, net........................ $10,370 $ 8,335
======= =======
</TABLE>

3. ACQUISITIONS

The Company completed two acquisitions in February 1999. The Company
acquired the operations of ACL of Tel Aviv, Israel from Robomatix
Technology Ltd. for $6.0 million in cash and warrants to purchase up to 100,000
shares of NeoMagic common stock over a period of five years, at an exercise
price of $20 per share. The Company also acquired the operations of the Optical
Drive Development Group of Mitel Corporation for $4.0 million in cash. Both
acquisitions were accounted for as purchases.

For the ACL transaction, the excess purchase price over the estimated fair
value of net tangible assets has been allocated to intangible assets, primarily
consisting of patents ($1.5 million), assembled workforce ($1.2 million), and
goodwill ($0.2 million). In addition to the intangible assets acquired, the
Company recorded a $3.3 million charge, representing the write-off of acquired
in-process research and development ("IPRD").

44
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITIONS (CONTINUED)
For the Mitel transaction, the excess purchase price over the estimated fair
value of net tangible assets acquired has been allocated to intangible assets,
primarily consisting of patents ($1.2 million), assembled workforce
($0.2 million), and goodwill ($0.4 million). In addition to the intangible
assets acquired, the Company recorded a $2.0 million charge, representing the
write-off of acquired IPRD.

The Company has decided not to pursue the further development of
technologies acquired from Mitel for the DVD market. Although management
believes it will realize its net investment in the technology and related net
assets of $1.5 million at January 31, 2000, significant uncertainties exist, and
circumstances currently unknown may result in the need to recognize an
impairment of those assets in future financial periods. Should an impairment
occur, the Company's financial condition and results of operations could be
materially adversely impacted.

4. EARNINGS PER SHARE

In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98"). Under SAB 98, certain shares of
convertible preferred stock, options and warrants to purchase common stock,
issued at prices substantially below the per share price sold in the Company's
initial public offering in March 1997, previously included in the computation of
shares outstanding pursuant to Staff Accounting Bulletins Nos. 55, 64 and 83,
are now excluded from the computation.

Per share information calculated on this basis is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 2000 1999 1998
- ---------------------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income..................................... $12,705 $31,202 $20,780
======= ======= =======
Denominator:
Denominator for basic earnings per share--
weighted-average shares...................... 24,898 23,710 20,361
Effect of dilutive securities:
Employee stock options....................... 936 2,354 3,227
Warrants..................................... -- 89 185
Convertible preferred stock.................. -- -- 1,563
------- ------- -------
Dilutive potential common shares............... 936 2,443 4,975
------- ------- -------
Denominator for diluted earnings per Share--
adjusted weighted-average Shares and
assumed conversions........................ 25,834 26,153 25,336
======= ======= =======
Basic earnings per share......................... $ .51 $ 1.32 $ 1.02
Diluted earnings per share....................... $ .49 $ 1.19 $ .82
</TABLE>

The basic and diluted net income per share presented in the statements of
operations have been computed as described above and also gives effect, even if
antidilutive, to 12,259,614 preferred shares that were automatically converted
to common stock upon the closing of the Company's initial public offering in
March 1997, using the if-converted method.

45
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. DERIVATIVE FINANCIAL INSTRUMENTS

All of the Company's sales and the majority of its purchases are denominated
in U.S. dollars. However, the Company's wafer purchases are denominated in
Japanese yen. The Company enters into foreign exchange forward contracts to
hedge this foreign currency exposure. The notional amount of outstanding foreign
currency forward contracts at January 31, 2000 totaled $18.0 million. The
notional amount of outstanding foreign currency forward contracts at
January 31, 1999 totaled $36.7 million. The Company does not enter into
speculative foreign exchange contracts to profit on exchange rate fluctuations.

Using the exchange rate at the reporting date, the estimated fair market
value of the foreign currency forward contracts at January 31, 2000 is
($587,000).

6. LINES OF CREDIT

Prior to February 1998, the Company maintained a revolving credit agreement
("Working Capital Line") with Mitsubishi International Corporation ("MIC") that
provided extended payment terms to finance wafer purchases. In exchange for
the extended terms and other consulting and logistic support services provided
by MIC, the Company paid to MIC interest and commissions. In January 1998, in
exchange for a reduction in the commission rate, the Company and MIC amended the
agreement such that for shipments subsequent to January 31, 1998, payment for
wafers must be made 30 days after wafer shipment. In fiscal 2000 and fiscal
1999, all amounts owed to MIC for wafer purchases are reflected in accounts
payable.

7. OBLIGATIONS UNDER CAPITAL LEASES

The Company has entered into various capital leases, including transactions
to finance purchases of property, plant and equipment, software and masks.
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 common stock were granted as described in
Note 9. Property, plant and equipment includes the following amounts for leases
that have been capitalized and are active:

<TABLE>
<CAPTION>
JANUARY 31, 2000 1999
- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Property, plant and equipment under capital lease........... $46 $935
Accumulated amortization.................................... (28) (665)
--- ----
Net property, plant and equipment under capital lease....... $18 $270
=== ====
</TABLE>

Future minimum payments under capital leases consist of the following at
January 31, 2000:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31:
- ------------------------------
(IN THOUSANDS)
<S> <C>
2001........................................................ $157
----
Total minimum lease payments................................ 157
Amount representing interest................................ 3
----
Present value of net minimum lease payments................. 154
Less current portion........................................ 154
----
Long-term portion........................................... $ --
====
</TABLE>

46
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

Income before taxes and the provision for income taxes in fiscal 2000, 1999
and 1998 consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 2000 1999 1998
- ---------------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before taxes
U. S.......................................... $11,079 $33,849 $ 37,326
Foreign....................................... 8,432 13,748 (12,879)
------- ------- --------
Total income before taxes....................... $19,511 $47,597 24,447

Provision for taxes
Current:
Federal....................................... $ 6,006 $10,168 $ 11,300
State......................................... -- 331 938
------- ------- --------
$ 6,006 $10,499 $ 12,238

Deferred:
Federal....................................... $ 310 $ 5,640 $ (7,870)
State......................................... 490 256 (701)
------- ------- --------
800 5,896 (8,571)
------- ------- --------
Total provision for income taxes................ $ 6,806 $16,395 $ 3,667
======= ======= ========
</TABLE>

The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable for fiscal 2000 and 1999 by $1.0 million and
$2.7 million, respectively.

The Company's income tax provision differs from the federal statutory rate
of 35% due to the following:

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 2000 1999 1998
- ---------------------- -------- -------- --------
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Pretax income.................................. $19,511 $47,597 $24,447
Federal statutory rate......................... 35% 35% 35%
Expected tax................................... 6,829 16,659 8,556
State taxes (net of federal benefit)........... 130 381 154
Utilization of research and development tax
credits...................................... (1,521) (1,239) (844)
Valuation allowance............................ 1,761 -- --
Utilization of net operating losses not
previously benefited......................... -- -- (4,199)
Other.......................................... (393) 594 --
------- ------- -------
Provision for income taxes..................... $ 6,806 $16,395 $ 3,667
======= ======= =======
</TABLE>

The valuation allowance of $1.8 million for the year ended January 31, 2000,
is attributable to deferred tax assets from the acquisition costs of ACL and the
Optical Drive Storage Group of Mitel, which will not be deductible for several
years. These acquisition costs include book versus tax temporary differences
related to the acquired intangible assets of ACL and the Optical Drive Storage
Group of Mitel.

47
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES (CONTINUED)
Sufficient uncertainty exists regarding the realizability of certain of these
assets, and accordingly, a valuation allowance has been provided.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount 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 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 2000 1999
- ---------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Capitalized research and development..................... $ -- $ 490
Losses from foreign operations........................... -- 788
Acquisition costs........................................ 2,255 --
Reserves and accruals.................................... 1,244 1,110
Other.................................................... 138 287
------- ------
Total deferred tax assets.................................. 3,637 2,675
Valuation allowance........................................ (1,761) --
------- ------
Net deferred tax assets.................................... $ 1,876 $2,675
======= ======
</TABLE>

9. STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

In March 1997, the Company completed an initial public offering of 3,475,000
shares of common stock. The Company received net proceeds of $37.8 million. In
connection with the initial public offering, Series A, B, C and D preferred
stock, then outstanding, converted into 12,259,614 shares of common stock.

PREFERRED STOCK

The Board of Directors has approved an amendment to the Certificate of
Incorporation to allow 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.

WARRANTS

The Company granted warrants in connection with the acquisition of
Associative Computing Ltd. in February 1999. The warrants are for the purchase
of 100,000 ordinary shares of NeoMagic stock at an exercise price of $20 per
share and are fully transferable. The warrants are exercisable, in whole or in
part, for five years after February 1999, and the shares which will be issued
upon the exercise of the warrants shall be freely tradable as of the date of
exercise, except that commencing February 1999 warrants to purchase 50,000
shares are subject to a six month lock-up period, and 50,000 shares are subject
to a one year lock-up period. As of January 31, 2000, none of these warrants
were exercised.

48
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PLAN

In accordance with the 1993 Stock Plan (the "Plan") the Board of Directors
may grant incentive stock options, nonstatutory stock options and stock purchase
rights to employees, consultants and directors. The Company reserved 7,775,000
shares of common stock for issuance under the Plan. In June 1998, an additional
875,000 shares were approved by the Shareholders of the Company at the Annual
Shareholders meeting, and in June 1999 an additional 875,000 shares were
approved by the Shareholders of the Company at the Annual Shareholder meeting,
bringing the total reserved under the Plan to 9,525,000 shares. Unless
terminated sooner, the Plan will terminate automatically in December 2003. The
Board of Directors determines vesting provisions for stock purchase rights and
options granted under the Plan. 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. Certain of the 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. As of January 31, 2000, 75,637 shares of common stock were subject to
this repurchase provision. Other options granted under the Plan are exercisable
during their term in accordance with the vesting schedules set out in the option
agreement.

Under the 1998 Nonstatutory Stock Option Plan, the Board of Directors may
grant nonstatutory stock options to employees, consultants and directors. The
Company reserved 2,500,000 shares of common stock for issuance under the Plan.
In May 1999 an additional 2,500,000 shares were approved by the Board of
Directors of the Company, bringing the total reserved under the plan to
5,000,000 shares. Unless terminated sooner, the plan will terminate
automatically in June 2008.

A summary of the Company's stock option activity, and related information
for the three years ended January 31, 2000 follows:

<TABLE>
<CAPTION>
NUMBER OF
SHARES
OUTSTANDING WEIGHTED AVERAGE
(OPTIONS) EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balance at January 31, 1997....................... 2,440,750 $ 3.86
Granted......................................... 1,446,000 13.68
Exercised....................................... (167,725) 1.54
Canceled........................................ (56,000) 6.32
---------- ------
Balance at January 31, 1998....................... 3,663,025 $ 7.80
Granted......................................... 3,751,700 13.43
Exercised....................................... (598,030) 3.94
Canceled........................................ (2,485,350) 14.61
---------- ------
Balance at January 31, 1999....................... 4,331,345 $ 9.30
Granted......................................... 3,895,475 8.28
Exercised....................................... (404,418) 2.24
Canceled........................................ (1,378,002) 9.34
---------- ------
Balance at January 31, 2000....................... 6,444,400 $ 9.10
---------- ------
</TABLE>

49
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' EQUITY (CONTINUED)
At January 31, 2000, options to purchase 1,366,471 shares of common stock
were vested at prices ranging from $0.28 to $22.44 and 4,081,854 shares of
common stock were available for future grants under the Plan.

The following table summarizes information about stock options outstanding
at January 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.28 - $7.50.......................... 1,076,320 6.85 $ 5.75 1,026,320 $ 5.67
$7.53.................................. 2,309,854 9.37 7.53 1,547,437 7.53
$7.75 - $11.38......................... 986,767 9.39 9.43 174,021 9.22
$11.50................................. 1,531,751 8.05 11.50 1,328,982 11.50
$11.56 - $22.44........................ 539,708 8.60 15.13 184,784 15.04
--------- ----- ------ --------- ------
6,444,400 8.57 $ 9.10 4,261,544 $ 8.71
========= ===== ====== ========= ======
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

A total of 500,000 shares of common stock has been reserved for issuance
under the 1997 Purchase Plan which is intended to qualify under Section 423 of
the Internal Revenue Code and has 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. The 1997 Purchase Plan
permits eligible employees to purchase common stock through payroll deductions
of up to 10% of the employee's compensation. The price of common stock to be
purchased under the 1997 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.

In fiscal 2000, 1999 and 1998, 189,279, 117,679 and 35,987 shares,
respectively of common stock at an average price of $6.85, $10.92 and $10.20 per
share, respectively, were issued under the 1997 Purchase Plan. Shares available
for purchase under the Purchase Plan were 157,055 at January 31, 2000.

STOCK-BASED COMPENSATION

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
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 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.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that 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

50
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' EQUITY (CONTINUED)
the Company's options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially effect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.

In fiscal 2000, 1999 and 1998, the fair value of each option grant was
estimated on the date of the grant using the Black-Scholes option-pricing model
using a dividend yield of 0% and the following additional weighted-average
assumptions:

<TABLE>
<CAPTION>
EMPLOYEE STOCK
EMPLOYEE OPTION PLANS PURCHASE PLAN
------------------------------------ ------------------------------------
YEAR ENDED JANUARY 31, 2000 1999 1998 2000 1999 1998
- ---------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rates.......... 5.9% 4.8% 5.9% 5.7% 5.4% 5.5%
Volatility........................ .70 .65 .69 .87 .70 .74
Expected life of option in
years........................... 5.0 5.0 5.0 0.94 1.01 0.6
</TABLE>

Had compensation costs been determined based upon the fair value at the
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS 123, the Company's fiscal 2000 net income and earnings per
share would have decreased by approximately $7.5 million, or $0.30 per share and
$0.29 per share for basic and diluted earnings per share, respectively. The
Company's fiscal 1999 net income and earnings per share would have decreased by
approximately $8.9 million, or $0.38 per share and $0.34 per share for basic and
diluted earnings per share, respectively. The Company's fiscal 1998 net income
and earnings per share would have decreased by approximately $2.4 million, or
$0.12 per share and $0.09 per share for basic and diluted earnings per share,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized over the option's vesting period and stock purchased
under the 1997 Purchase Plan is amortized over the six month purchase period.
The effects on pro forma disclosure of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosure of future years.

There were no options granted during fiscal 2000 or fiscal 1999 with an
exercise price less than the market price at the date of grant. The weighted
average fair value of options granted during fiscal 1998 with exercise prices
less than the market price at the date of grant is $12.55 per share. The
weighted average fair value of options granted during fiscal 2000, 1999, 1998
with exercise prices equal to the market price at the date of grant is $8.28,
$13.40, and $8.39 per share, respectively.

DEFERRED STOCK COMPENSATION

In connection with the grant of certain stock options to employees in fiscal
1998, the Company recorded deferred stock compensation $1,688,000 for the
difference between the fair value of common stock for accounting purposes and
the option exercise price at the date of grant. The fiscal 1998 amount is
presented as a reduction of stockholders' equity and is amortized ratably over
the vesting period of the related options. In fiscal 2000 and fiscal 1999,
$123,000 and $230,000, respectively were recorded as reductions to deferred
stock compensation to reflect the unamortized portion of deferred stock
compensation related to the cancellation of options upon employee terminations.

51
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. 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. In
April 1998, the Company initiated a matching program whereby the Company
contributes $0.20 for every dollar the employee contributes to the plan up to
the first 6% of earnings. In April 1999, the Company contribution was increased
to $0.30 for every dollar the employee contributes to the plan up to the first
6% of earnings. The Company made matching contributions to employees of $254,000
and $128,000 in fiscal 2000 and fiscal 1999, respectively.

11. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

In May 1996, the Company moved its principal headquarters to a new facility
in Santa Clara, California, under a non-cancelable operating lease that expires
in April 2003. In January 1998, the Company entered into a second non-cancelable
operating lease for the building adjacent to its principal headquarters. This
lease has a co-terminous provision with the original lease expiring in
April 2003. The Company leases offices in India, Hong Kong, United Kingdom,
Israel, Taiwan and Texas under operating leases that expire at various times
through September 2004. Future minimum lease payments under operating leases as
of January 31, 2000 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31:
- ------------------------------
(IN THOUSANDS)
<S> <C>
2001........................................................ $2,152
2002........................................................ 2,201
2003........................................................ 2,215
2004........................................................ 571
2005........................................................ 0
------
Total minimum lease payments................................ $7,139
======
</TABLE>

Rent expense under operating leases was $2,421,000, $2,004,000, and $988,000
in fiscal 2000, 1999, and 1998, respectively.

In fiscal 1997, the Company began subletting a portion of its main operating
facility under operating leases expiring through March 1998. This sublease was
terminated in October 1997, prior to the expiration date of the sublease. Rent
income related to this sublease in fiscal 1998 was $168,000.

In January 1998, the Company signed an additional sublease agreement. The
sublease was terminated in March 1999. Rent income related to this sublease
agreement was $92,000 and $458,000 in fiscal 2000 and fiscal 1999, respectively.

In November 1999, the Company signed an additional sublease agreement. Rent
income related to this sublease agreement was $36,000 in fiscal 2000. As of
January 31, 2000, future minimum rents to be received under this sublease total
$181,000 in fiscal 2001.

At January 31, 2000, the Company had outstanding purchase orders totaling
over $45.0 million with its manufacturing partners for the delivery of wafers
over the next five months.

52
<PAGE>
NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCIES

In February 1997, Cirrus Logic Inc. ("Cirrus Logic") sent the Company
written notice asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe six United States patents held by Cirrus
Logic. Since receiving the notice of alleged infringement, the Company has
advised Cirrus Logic that the Company does not believe that any of its products
infringe any claims of the patents. The Company also has undergone a
confidential external infringement review and has conducted its own internal
infringement review, and the Company continues to believe that the Cirrus Logic
infringement allegations are unfounded. However, there can be no assurances that
Cirrus Logic will not file a lawsuit against the Company or that the Company
would prevail in any such litigation. Any protracted litigation by Cirrus Logic
or the success of Cirrus Logic in any such litigation could have a material and
adverse effect on the Company's financial position and results of operations.

12. SIGNIFICANT CUSTOMERS AND EXPORT SALES

In fiscal 2000 five customers accounted for 20.2%, 19.6%, 12.9%, 12.3% and
12.1%, respectively, of net sales. In fiscal 1999 three customers accounted for
19.8%, 17.1% and 10.5%, respectively, of net sales. In fiscal 1998, five
customers accounted for 14.4%, 13.6%, 13.5%, 13.3% and 11.7%, respectively, of
net sales. Fiscal 2000 net sales to customers in Taiwan, Japan, North America
and Europe totaled 52.2%, 26.9%, 19.8% and 1.1%, respectively, of net sales. Net
sales to customers in Taiwan, Japan, North America and Europe totaled 50.9%,
29.0%, 16.9% and 3.2%, respectively of net sales in fiscal 1999 and 50.3%,
29.7%, 16.9% and 3.2%, respectively of net sales in fiscal 1998.

53
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on March 9, 2000.

<TABLE>
<S> <C> <C>
NEOMAGIC CORPORATION

By: /s/ MERLE MCCLENDON
----------------------------------------
Merle McClendon
VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the date indicated:

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ KAMRAN ELAHIAN Chairman of the Board March 9, 2000
------------------------------------
Kamran Elahian

/s/ PRAKASH AGARWAL President, Chief Executive Officer and March 9, 2000
------------------------------------ Director (Principal Executive
Prakash Agarwal Officer)

/s/ MERLE MCCLENDON Vice President Finance, Chief March 9, 2000
------------------------------------ Financial Officer (Principal
Merle McClendon Financial Officer)

/s/ BRIAN P. DOUGHERTY Director March 9, 2000
------------------------------------
Brian P. Dougherty

/s/ JIM LALLY Director March 9, 2000
------------------------------------
Jim Lally

/s/ KLAUS WIEMER Director March 9, 2000
------------------------------------
Klaus Wiemer
</TABLE>

54
<PAGE>
NEOMAGIC CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 31, 2000, 1999, AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSE DEDUCTIONS OF YEAR
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended January 31, 1998........................... $ 25 $107 -- $132
Year ended January 31, 1999........................... $132 $ 93 -- $225
Year ended January 31, 2000........................... $225 -- $ 19 $206
</TABLE>

55
<PAGE>
INDEX TO EXHIBITS

The following Exhibits are filed as part of, or incorporated by reference
into, this Report:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <C> <S>
3.1 (1) Certificate of Incorporation of Registrant.
3.2 (1) 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 (1) Bylaws of Registrant.
10.1 (1) Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.1 (2) Lease Agreement, dated as of October 9,1997, between
Registrant and A&P Family Investments, as landlord for the
leased premises located at 3250 Jay Street.
10.2 (1) Amended and Restated 1993 Stock Plan and related agreements.
10.2 (2) Amendment 1, dated as of October 15, 1997, between
Registrant and A&P Family Investments, as landlord for the
leased premises located at 3260 Jay Street.
10.3 (2) Amendment to Agreement dated as of November 20, 1995,
between Registrant and Mitsubishi International Corporation,
as amended.
10.4 (1) Wafer Supply Agreement, dated as of January 21, 1997,
between NeoMagic International Corporation, actually-owned
subsidiary of Registrant, and Mitsubishi Electric
Corporation.
10.5 (1) Form of promissory note.
10.6 (1) Lease Agreement, dated as of February 5, 1996, between
Registrant and A&P Family Investments, as landlord.
10.8 (1) Master Lease Agreement, as amended, dated as of
November 24, 1993, between Registrant and Comdisco, Inc.,
and certain exhibits thereto.
10.9 (1) Master Lease Agreement, dated as of July 19, 1995, between
Registrant and Venture Lending & Leasing, Inc., and certain
exhibits thereto.
10.10 (1) Agreement, dated as of November 20, 1995, between Registrant
and Mitsubishi International Corporation as amended.
10.11 (1) General Security Agreement, dated November 15, 1995, between
Registrant and Mitsubishi International Corporation.
10.13 (1) 1997 Employee Stock Purchase Plan, with exhibit
10.14 (3) Amendment to Agreement dated as of November 20, 1995,
between Registrant and Mitsubishi International Corporation,
as amended.
10.15 (4) 1998 Nonstatutory Stock Option Plan
10.16 (4) Wafer Supply Agreement, dated as of March 15, 1999, between
NeoMagic International Corporation, actually-owned
subsidiary of Registrant, and Siemens Aktiengesellschaft
Semiconductor Group, now operating as Infineon Technologies.
21.0 NeoMagic Subsidiaries.
23.0 Consent of Ernst & Young LLP, Independent Auditors
27.0 Financial Data Schedule.
</TABLE>

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

(1) Incorporated by reference to the Company's S-1 for the year ended
January 31, 1997

(2) Incorporated by reference to the Company's Form 10-Q for the period ended
October 31, 1997.

(3) Incorporated by reference to the Company's Form 10-K for the year ended
January 31, 1998.

(4) Incorporated by reference to the Company's Form 10-K for the year ended
January 31, 1999.

(b) REPORTS ON FORM 8-K:

The Company did not file any reports on Form 8-K during the fiscal year
ended January 31, 2000.

<PAGE>
Exhibit 21.0

NEOMAGIC CORPORATION
SUBSIDIARIES
(All 100% Owned)

<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
NeoMagic International...................................... Cayman Islands
NeoMagic Japan K.K.......................................... Japan
NeoMagic Israel Ltd......................................... Israel
NeoMagic U.K. Ltd........................................... England
NeoMagic Semiconductor India Private Ltd.................... India
NeoMagic International (Hong Kong) Ltd...................... Hong Kong
</TABLE>

<PAGE>
EXHIBIT 23.0

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos 333-30843, 333-57217 and 333-88383) pertaining to the 1993 Stock
Plan, the 1997 Employee Stock Purchase Plan and the 1998 Nonstatutory Stock
Option Plan of our report dated February 15, 2000, with respect to the
consolidated financial statements and schedule of NeoMagic Corporation included
in the Annual Report (Form 10-K) for the year ended January 31, 2000.

/s/ ERNST & YOUNG LLP

--------------------------------------
ERNST & YOUNG LLP

San Jose, California
March 8, 2000

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEOMAGIC
CORPORATION'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-30-2000
<CASH> 33,097
<SECURITIES> 63,429
<RECEIVABLES> 18,989
<ALLOWANCES> 0
<INVENTORY> 13,184
<CURRENT-ASSETS> 130,869
<PP&E> 22,277
<DEPRECIATION> 11,907
<TOTAL-ASSETS> 149,136
<CURRENT-LIABILITIES> 28,921
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 120,190
<TOTAL-LIABILITY-AND-EQUITY> 149,136
<SALES> 259,698
<TOTAL-REVENUES> 259,698
<CGS> 181,332
<TOTAL-COSTS> 181,332
<OTHER-EXPENSES> 61,810<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 838
<INCOME-PRETAX> 19,511
<INCOME-TAX> 6,806
<INCOME-CONTINUING> 12,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,705
<EPS-BASIC> .51
<EPS-DILUTED> .49
<FN>
<F1>INCLUDES ONE-TIME CHARGE OF $5.3 MILLION FOR IN-PROCESS RESEARCH &
DEVELOPMENT.
</FN>

</TABLE>