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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

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Form 10-Q

|(Mark One)                             |                                                                                         
|-------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                      | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the quarter ended October 31, 2002
|OR                                    
|o                                      | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from
 to    

Commission file number 000-22009

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

|DELAWARE[State or other jurisdiction
of incorporation or organization]          |  | 77-0344424[I.R.S. Employer Identification No.]
|------------------------------------------------------------------------------- |  | ----------------------------------------------
|3250 Jay Street
Santa Clara, California[Address of principal executive offices] |  | 95054[Zip Code]                               
|(408) 988-7020Registrant's telephone number, including area code               

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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 ý    No o

The
number of shares of the Registrant's Common Stock, $.001 par value, outstanding at November 30, 2002 was 29,947,125

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NEOMAGIC CORPORATION

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FORM 10-Q  INDEX

|                                                        |                                                                                                       |  | PAGE 
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  | -----
|PART I.    CONSOLIDATED CONDENSED FINANCIAL INFORMATION |                                                                                                       | 
|Item 1.                                                 | Unaudited Consolidated Condensed Financial Statements:                                                |  |      
|                                                        | Consolidated Condensed Statements of Operations
Three and Nine months ended October 31, 2002 and 2001 |  | 3    
|                                                        | Consolidated Condensed Balance Sheets
October 31, 2002 and January 31, 2002                           |  | 4    
|                                                        | Consolidated Condensed Statements of Cash Flows
Nine months ended October 31, 2002 and 2001           |  | 5    
|                                                        | Notes to Unaudited Consolidated Condensed Financial Statements                                        |  | 6-12 
|Item 2.                                                 | Management's Discussion and Analysis of Financial Condition and Results of Operations                 |  | 12-27
|Item 3.                                                 | Quantitative and Qualitative Disclosures about Market Risk                                            |  | 27   
|Item 4.                                                 | Controls and Procedures                                                                               |  | 27   
|PART II.    OTHER INFORMATION                           |                                                                                                       | 
|Item 1.                                                 | Legal Proceedings                                                                                     |  | 28   
|Item 2.                                                 | Changes in Securities                                                                                 |  | 28   
|Item 3.                                                 | Defaults Upon Senior Securities                                                                       |  | 28   
|Item 4.                                                 | Submission of Matters to a Vote of Security Holders                                                   |  | 28   
|Item 5.                                                 | Other Information                                                                                     |  | 28   
|Item 6.                                                 | Exhibits and Reports on Form 8-K                                                                      |  | 28   
|                                                        | Signatures                                                                                            |  | 29   
|                                                        | Certifications                                                                                        |  | 30-31

2

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Part I.    Financial Information

Item 1.    Financial Statements

NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS  (In thousands, except per share data)  (Unaudited)

|                                                                                       |                                                      | Three Months Ended |                          | Nine Months Ended |  
|-------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------ | ------------------------ | ----------------- | -
|
|Net sales                                                                              |                                                      | $                  | 655                      |                   | $
|Cost of product sales                                                                  |                                                      |                    | 780                      |                   |  
|Impairment of certain acquired intangible assets                                       |                                                      |                    | 367                      |                   |  
|                                                                                       |                                                      |                    |                          |                   |  
|Total                                                                                  |                                                      |                    | 1,147                    |                   |  
|                                                                                       |                                                      |                    |                          |                   |  
|Gross margin (loss)                                                                    |                                                      |                    | (492                     | )                 |  
|Operating expenses:                                                                    |                                                      |                    |                          |                   |  
|                                                                                       | Research and development(1)                          |                    |                          | 5,662             |  
|                                                                                       | Sales, general and administrative(2)                 |                    |                          | 2,127             |  
|                                                                                       | Impairment of certain acquired intangible assets     |                    |                          | 506               |  
|                                                                                       | Special Charges                                      |                    |                          |                  |  
|                                                                                       |                                                      |                    |                          |                   |  
|                                                                                       |                                                      |                    | Total operating expenses |                   |  
|                                                                                       |                                                      |                    |                          |                   |  
|Loss from operations                                                                   |                                                      |                    | (8,787                   | )                 |  
|Other income (expense), net:                                                           |                                                      |                    |                          |                   |  
|                                                                                       | Income, net of expenses, from the sale of DVD assets |                    |                          |                  |  
|                                                                                       | Interest income and other income                     |                    |                          | 277               |  
|                                                                                       | Interest expense                                     |                    |                          |                  |  
|                                                                                       |                                                      |                    |                          |                   |  
|Loss before income tax benefit and cumulative effect of change in accounting principle |                                                      |                    | (8,510                   | )                 |  
|Income tax benefit                                                                     |                                                      |                    |                         |                   |  
|                                                                                       |                                                      |                    |                          |                   |  
|Loss before cumulative effect of change in accounting principle                        |                                                      |                    | (8,510                   | )                 |  
|Cumulative effect of change in accounting principle                                    |                                                      |                    | (4,175                   | )                 |  
|                                                                                       |                                                      |                    |                          |                   |  
|Net loss                                                                               |                                                      | $                  | (12,685                  | )                 | $
|                                                                                       |                                                      |                    |                          |                   |  
|Basic and diluted net loss per share                                                   |                                                      | $                  | (0.44                    | )                 | $
|Weighted average common shares outstanding for basic and diluted                       |                                                      |                    | 29,157                   |                   |  

---

See
accompanying notes to consolidated condensed financial statements.

3

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NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED BALANCE SHEETS  (In thousands)

|                                     |                                              | October 31,
2002 |                                            | January 31,
2002(1) |  
|------------------------------------ | -------------------------------------------- | ---------------- | ------------------------------------------ | ------------------- | -
|
|ASSETS                               |                                              |                  |                                            |                     |  
|Current assets:                      |                                              |                  |                                            |                     |  
|                                     | Cash and cash equivalents                    |                  | $                                          | 44,912              |  
|                                     | Short-term investments                       |                  |                                            | 29,363              |  
|                                     | Accounts receivable, net                     |                  |                                            | 435                 |  
|                                     | Inventory                                    |                  |                                            | 726                 |  
|                                     | Income tax receivable                        |                  |                                            | 8                   |  
|                                     | Other current assets                         |                  |                                            | 1,612               |  
|                                     |                                              |                  |                                            |                     |  
|                                     |                                              |                  | Total current assets                       |                     |  
|Property, plant and equipment, net   |                                              |                  | 4,329                                      |                     |  
|Restricted cash                      |                                              |                  |                                           |                     |  
|Employee notes receivable            |                                              |                  | 1,300                                      |                     |  
|Goodwill                             |                                              |                  |                                           |                     |  
|Intangibles, net                     |                                              |                  | 4,789                                      |                     |  
|Other assets                         |                                              |                  | 474                                        |                     |  
|                                     |                                              |                  |                                            |                     |  
|                                     |                                              |                  | Total assets                               |                     | $
|                                     |                                              |                  |                                            |                     |  
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                              |                  |                                            |                     |  
|Current liabilities:                 |                                              |                  |                                            |                     |  
|                                     | Accounts payable                             |                  | $                                          | 2,169               |  
|                                     | Accrued compensation and related benefits    |                  |                                            | 1,447               |  
|                                     | Income taxes payable                         |                  |                                            | 3,522               |  
|                                     | Deferred rent                                |                  |                                            | 284                 |  
|                                     | Deferred gain on the sale of DVD assets      |                  |                                            |                    |  
|                                     | Other accrued liabilities                    |                  |                                            | 1,598               |  
|                                     | Current portion of capital lease obligations |                  |                                            | 744                 |  
|                                     |                                              |                  |                                            |                     |  
|                                     |                                              |                  | Total current liabilities                  |                     |  
|Capital lease obligations            |                                              |                  | 1,357                                      |                     |  
|Stockholders' equity:                |                                              |                  |                                            |                     |  
|                                     | Common stock                                 |                  |                                            | 30                  |  
|                                     | Additional paid-in-capital                   |                  |                                            | 88,979              |  
|                                     | Deferred compensation                        |                  |                                            | (186                | )
|                                     | Accumulated other comprehensive income       |                  |                                            | (10                 | )
|                                     | Retained earnings                            |                  |                                            | (11,986             | )
|                                     |                                              |                  |                                            |                     |  
|                                     |                                              |                  | Total stockholders' equity                 |                     |  
|                                     |                                              |                  |                                            |                     |  
|                                     |                                              |                  | Total liabilities and stockholders' equity |                     | $
|                                     |                                              |                  |                                            |                     |  

---

See
accompanying notes to consolidated condensed financial statements.

4

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NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  (In thousands)  (Unaudited)

|                                                                             |                                                                                                  | Nine Months Ended                 |        
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------------------- | -------
|
|Operating activities:                                                        |                                                                                                  |                                   |        
|Net loss                                                                     |                                                                                                  | $                                 | (25,713
|Adjustments to reconcile net loss to net cash used for operating activities: |                                                                                                  |                                   |        
|                                                                             | Depreciation and amortization                                                                    |                                   |        
|                                                                             | Loss on disposal of property, plant and equipment                                                |                                   |        
|                                                                             | Loss on restructuring of wafer purchase agreement                                                |                                   |        
|                                                                             | Income, net of expenses, from the sale of DVD assets                                             |                                   |        
|                                                                             | Amortization of deferred compensation                                                            |                                   |        
|                                                                             | Impairment of acquired intangible assets and goodwill                                            |                                   |        
|                                                                             | Changes in operating assets and liabilities:                                                     |                                   |        
|                                                                             |                                                                                                  | Accounts receivable               |        
|                                                                             |                                                                                                  | Inventory                         |        
|                                                                             |                                                                                                  | Income tax receivable             |        
|                                                                             |                                                                                                  | Other current assets              |        
|                                                                             |                                                                                                  | Restricted cash                   |        
|                                                                             |                                                                                                  | Other assets                      |        
|                                                                             |                                                                                                  | Accounts payable                  |        
|                                                                             |                                                                                                  | Compensation and related benefits |        
|                                                                             |                                                                                                  | Income taxes payable              |        
|                                                                             |                                                                                                  | Other accruals                    |        
|                                                                             |                                                                                                  |                                   |        
|Net cash provided by (used for) operating activities                         |                                                                                                  |                                   | 1,024  
|                                                                             |                                                                                                  |                                   |        
|Investing activities:                                                        |                                                                                                  |                                   |        
|                                                                             | Net proceeds from the sale of DVD assets                                                         |                                   |        
|                                                                             | Proceeds from sale of property, plant, and equipment                                             |                                   |        
|                                                                             | Purchases of property, plant and equipment                                                       |                                   |        
|                                                                             | Purchases of short-term investments                                                              |                                   |        
|                                                                             | Maturities of short-term investments                                                             |                                   |        
|                                                                             |                                                                                                  |                                   |        
|Net cash provided by investing activities                                    |                                                                                                  |                                   | 4,400  
|                                                                             |                                                                                                  |                                   |        
|Financing activities:                                                        |                                                                                                  |                                   |        
|                                                                             | Repayment on note receivable from stockholders                                                   |                                   |        
|                                                                             | Net proceeds from issuance of common stock                                                       |                                   |        
|                                                                             |                                                                                                  |                                   |        
|Net cash provided by financing activities                                    |                                                                                                  |                                   | 492    
|                                                                             |                                                                                                  |                                   |        
|Net increase (decrease) in cash and cash equivalents                         |                                                                                                  |                                   | 5,916  
|Cash and cash equivalents at beginning of period                             |                                                                                                  |                                   | 38,996 
|                                                                             |                                                                                                  |                                   |        
|Cash and cash equivalents at end of period                                   |                                                                                                  | $                                 | 44,912 
|                                                                             |                                                                                                  |                                   |        
|Supplemental schedules of cash flow information:                             |                                                                                                  |                                   |        
|Cash paid (received) during the period for:                                  |                                                                                                  |                                   |        
|                                                                             | Interest                                                                                         |                                   | $      
|                                                                             | Taxes                                                                                            |                                   | $      
|Supplemental disclosure of non-cash financing activities:                    |                                                                                                  |                                   |        
|                                                                             | Issuance of common stock in connection with restructuring of wafer purchasing agreement Interest |                                   | $      

See
accompanying notes to consolidated condensed financial statements.

5

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NEOMAGIC CORPORATION  NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.    Basis of Presentation:

The
unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of
NeoMagic Corporation and its wholly owned subsidiaries collectively ("NeoMagic" or the "Company"). Certain information and Note disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at October 31, 2002, the operating results for the three and nine
months ended October 31, 2002 and 2001, and the cash flows for the nine months ended October 31, 2002 and 2001. These financial statements and notes should be read in conjunction with
the Company's audited financial statements and notes thereto for the year ended January 31, 2002, included in the Company's most recent Form 10-K filed with the Securities
and Exchange Commission.

The
results of operations for the three and nine months ended October 31, 2002 are not necessarily indicative of the results that may be expected for the year ending
January 31, 2003.

The
third fiscal quarters of 2003 and 2002 ended on October 27, 2002 and October 28, 2001, respectively. For ease of presentation, the accompanying financial statements
have been shown as ending on the last day of the calendar month of October.

2.    Recent Accounting Pronouncements:

In
July 2002, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards No. 146 (SFAS 146) "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 addresses the financial accounting and reporting for obligations associated with an exit
activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees
and contracts and relocating plant facilities or personnel. SFAS 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that
liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management's intended future actions and, therefore, does not meet
the requirement for recognizing a liability and the related expense. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier
adoption encouraged. The Company does not anticipate that the adoption of SFAS 146 will have a material effect on its financial position or results of operations.

In
August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB
No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The Company adopted SFAS 144 on February 1, 2002. In accordance with SFAS 144, the
Company assesses the recoverability of its long-lived assets by comparing projected undiscounted net cash flows associated with those assets against their respective carrying amounts to
determine whether impairment exists. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. See Note 9 "Intangible Assets" for the effect of
adopting the provisions and the results of impairment assessments.

6

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NeoMagic
adopted Statement of Financial Accounting Standards No. 141 (SFAS 141) "Business Combinations", and Statement of Financial Accounting Standards No. 142
(SFAS 142) "Goodwill and Other Intangible Assets," in the first quarter of fiscal 2003. See Note 3 "Cumulative Effect of Accounting Change" for the effect of adopting the provisions and
the results of transitional impairment tests.

3.    Cumulative Effect of An Accounting Change:

On
February 1, 2002, NeoMagic adopted Statement of Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangibles Assets, which required companies to
discontinue the amortization of goodwill and certain intangible assets with an indefinite useful life. Instead, goodwill and intangible assets deemed to have an indefinite useful life must be reviewed
for impairment using a two step method upon adoption of SFAS 142 and annually thereafter, or more frequently when indicators of impairment exist.

Upon
adoption of the standard, the Company tested goodwill for impairment using the two-step process prescribed in SFAS 142. The Company completed the first of the two
required transitional impairment
tests of goodwill and indefinite lived intangible assets as of February 1, 2002 during the second quarter of fiscal 2003. The Company determined that there were indicators of impairment, as the
carrying value of the reporting unit exceeded fair value derived from the market capitalization model. The second step of the transitional impairment test, which is to determine the amount of
impairment, was completed in the third quarter of fiscal 2003 by comparing the implied values of the goodwill to the fair values of net tangible assets and identifiable intangibles. Based on the
results of the second transitional impairment test, the Company recorded a non-cash accounting change adjustment of $4.2 million, reflecting a reduction in the carrying value of its
goodwill, as a cumulative effect of an accounting change in the accompanying consolidated condensed statements of operations.

4.    Loss Per Share:

The
following data show the amounts used in computing loss per share and the effect on the weighted-average number of shares of diluted potential common stock.

Per
share information calculated on this basis is as follows:

|                                                    |                                                                                      | Three Months Ended
October 31, |         | Nine Months Ended
October 31, |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------ | ------- | ----------------------------- | -
|
|
|Numerator:                                          |                                                                                      |                                |         |                               |  
|                                                    | Loss from continuing operations                                                      |                                | $       | (8,510                        | )
|                                                    | Cumulative effect of an accounting change                                            |                                |         | (4,175                        | )
|                                                    |                                                                                      |                                |         |                               |  
|Net loss                                            |                                                                                      | $                              | (12,685 | )                             | $
|                                                    |                                                                                      |                                |         |                               |  
|Denominator:                                        |                                                                                      |                                |         |                               |  
|                                                    | Denominator for basic and diluted loss per shareweighted average shares outstanding |                                |         | 29,157                        |  
|                                                    |                                                                                      |                                |         |                               |  
|Loss per share from continuing operations           |                                                                                      | $                              | (.29    | )                             | $
|Cumulative effect per share of an accounting change |                                                                                      |                                | (.15    | )                             |  
|                                                    |                                                                                      |                                |         |                               |  
|Basic and diluted loss per share                    |                                                                                      | $                              | (.44    | )                             | $
|                                                    |                                                                                      |                                |         |                               |  

For
the three months ended October 31, 2002 and October 31, 2001 and for the nine months ended October 31, 2002 and October 31, 2001, respectively, basic
earnings per share equals diluted earnings per share due to the net loss for those periods.

7

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5.    Divestitures:

In
April 2000, pursuant to an asset purchase agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets primarily consisted of
fixed assets and intangible assets. In exchange for the assets sold to the Buyer, the Company received $11.7 million in a lump-sum cash payment. An additional $2.3 million
was contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. The Company wrote-off approximately
$3.6 million in capitalized intellectual property, fixed assets and prepaid expenses related to the DVD product group that was transferred to the Buyer. In addition, the Company accrued
approximately $0.6 million in transaction costs and approximately $2.3 million in retention packages for the affected employees during the first quarter of fiscal 2001. During the second
quarter of fiscal 2001, the Company incurred additional costs of $0.3 million. During the third quarter of fiscal 2001, the Company received a $1.5 million cash payment which was
previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. As a result, the Company recorded a pre-tax
gain of approximately $6.5 million on the sale, which is recorded in Income, net of expenses, from the sale of DVD assets on the Consolidated Condensed Statements of Operations for the year
ended January 31, 2001. In the first quarter of fiscal 2003, the Company received a $1.6 million cash payment previously contingent on the transfer of licenses with third parties to the
Buyer, which is recorded as a gain in the Consolidated Condensed Statements of Operations for the nine months ended October 31, 2002.

6.    Inventories:

Inventories
are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method. The Company writes down the inventory value for
estimated excess and obsolete inventory, based on management's assessment of future demand and market conditions. If actual future demand or market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

Inventory consists of:

October 31,
2002

January 31,
2002(in thousands)Raw materials

$
175

$
Work in process


99


Finished goods


452


78Total

$
726

$
78


7.    Accumulated Other Comprehensive Income:

Total
accumulated other comprehensive loss was $10 thousand at October 31, 2002 compared to other comprehensive income of $19 thousand at January 31, 2002.
Accumulated other comprehensive income consists entirely of unrealized gains and losses on available for sale securities.

8.    Goodwill:

Effective
February 1, 2002, NeoMagic adopted SFAS 142, which was issued by the Financial Accounting Standards Board in July 2001. Under this standard, the Company
ceased amortizing goodwill effective February 1, 2002. The Company completed the transitional tests for goodwill impairment using the two-step process prescribed in SFAS 142.
See Note 3 "Cumulative Effect of Accounting Change" for the effects of adopting the provisions and the results of transitional impairment tests. In addition, on adoption of SFAS 142, the
Company reclassified certain intangibles with net book value $383 thousand, consisting of assembled workforce and acquisition costs, which are no longer defined as an acquired intangible under
SFAS 142, to goodwill. Accordingly, there was no

8

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amortization of assembled workforce and acquisition costs recognized during the nine months ended October 31, 2002.

The
following table presents a reconciliation of previously reported net loss and net loss per share to the amounts adjusted to exclude goodwill and acquired workforce amortization (in
thousands, except per share data):

|                                      |                                | Three Months Ended
October 31, |   | Nine Months Ended
October 31, |  
|------------------------------------- | ------------------------------ | ------------------------------ | - | ----------------------------- | -
|
|Net loss:                             |                                |                                |   |                               |  
|                                      | As reported                    |                                | $ | (12,685                       | )
|                                      | Goodwill amortization          |                                |   |                              |  
|                                      | Workforce amortization         |                                |   |                              |  
|                                      | Acquisition costs amortization |                                |   |                              |  
|                                      |                                |                                |   |                               |  
|                                      | As adjusted                    |                                | $ | (12,685                       | )
|                                      |                                |                                |   |                               |  
|Basic and diluted net loss per share: |                                |                                |   |                               |  
|                                      | As reported                    |                                | $ | (0.44                         | )
|                                      | Goodwill amortization          |                                |   |                              |  
|                                      | Workforce amortization         |                                |   |                              |  
|                                      | Acquisition costs amortization |                                |   |                              |  
|                                      |                                |                                |   |                               |  
|                                      | As adjusted                    |                                | $ | (0.44                         | )
|                                      |                                |                                |   |                               |  

9.    Intangible Assets:

The
following table provides a summary of the carrying amount of intangible assets that will continue to be amortized and excludes amounts originally allocated to an intangible asset
representing the value of the assembled workforce:

Intangible
assets subject to amortization were as follows (in thousands):

|October 31, 2002               |  | Cost |       | Accumulated
Amortization |   | Net   
|------------------------------ |  | ---- | ----- | ------------------------ | - | ------
|Licensed intellectual property |  | $    | 3,159 |                          | $ | (11   
|Core technology                |  |      | 1,800 |                          |   | (500  
|Developed technology           |  |      | 550   |                          |   | (333  
|Patents                        |  |      | 1,697 |                          |   | (1,573
|                               |  |      |       |                          |   |       
|                               |  | $    | 7,206 |                          | $ | (2,417
|                               |  |      |       |                          |   |       

|January 31, 2002               |  | Cost |       | Accumulated
Amortization |   | Net   
|------------------------------ |  | ---- | ----- | ------------------------ | - | ------
|Licensed intellectual property |  | $    | 1,811 |                          | $ | (327  
|Core technology                |  |      | 1,800 |                          |   | (49   
|Developed technology           |  |      | 900   |                          |   | (38   
|Customer relationships         |  |      | 700   |                          |   | (19   
|Patents                        |  |      | 1,690 |                          | $ | (1,256
|Assembled workforce            |  |      | 1,179 |                          |   | (885  
|Acquisition costs              |  |      | 354   |                          |   | (265  
|Other                          |  |      | 114   |                          |   | (4    
|                               |  |      |       |                          |   |       
|                               |  | $    | 8,548 |                          | $ | (2,843
|                               |  |      |       |                          |   |       

9

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Amortization
expense for other intangible assets was $450 thousand and $1,452 thousand for the three and nine months ended October 31, 2002, respectively. The
estimated annual amortization expense for other intangible assets is $423 thousand for the remaining quarter of fiscal 2003, $1,823 thousand for the fiscal year ended January 31,
2004, $1,603 thousand for the fiscal year ended January 31, 2005, and $939 thousand for the fiscal year ended January 31, 2006.

The
Company wrote off licensed intangible properties with a net book value of $531 thousand relating to licensed intellectual property that was no longer used by the Company in
the first quarter of fiscal 2003.

During
the third quarter of fiscal 2003, the Company determined that certain intangible assets purchased as part of the LinkUp Systems Corporation acquisition completed in
December 2001 were impaired and recorded a total impairment charge of $873 thousand during the period. Of the total impairment charge, $367 thousand related to impairment of
certain acquired intangibles that were capitalized relating to developed technology. The impairment was caused by a decline in the related sales forecasts of products associated with the intangibles.
The impairment charge relating to developed technology is included in the cost of sales section of the consolidated statements of operations. In addition, the Company also recorded a
$506 thousand impairment charge with respect to intangibles relating to customer relationships. Several key customers with whom the Company was engaged have abandoned their related product
plans, which led to the impairment. The impairment charge relating to customer relationships is included in the operating expenses section of the consolidated statements of operations.

10.    Wafer Purchase Agreement Restructuring Liability:

In
January 2001, the Company extended its wafer supply agreement with Infineon Technologies AG of Germany ("Infineon") through fiscal 2004 to ensure future wafer supply for the
Company's new product efforts. The terms of the agreement provided that NeoMagic would make use of Infineon's 0.20 micron and 0.17 micron embedded DRAM (eDRAM) process technologies. The agreement also
provided for access to additional capacity and to more advanced process technologies to be developed by Infineon. NeoMagic provided $15 million in guarantees towards its wafer purchases over
the term of the agreement. The amount of guarantee is included as restricted cash on the balance sheet at January 31, 2002. At the end of fiscal year 2002, due to uncertainties over Infineon's
continued eDRAM product development, the Company decided not to use Infineon's eDRAM technology for its future production. Discussions commenced between NeoMagic and Infineon on restructuring the
wafer supply
agreement with the intent to release NeoMagic from the related guarantee. During the nine-month period ended October 31, 2002, the Company has recorded $3.6 million in
charges, which reflects the value of the final settlement. These amounts are shown on the Consolidated Condensed Statements of Operations as a special charge for the nine months ended
October 31, 2002. As a result of the settlement, $15.0 million of restricted cash was released and reclassified to cash and cash equivalents on the Consolidated Condensed Balance Sheet.

11.    Obligations Under Capital Leases:

In
October 2002, the Company entered into a capital lease to finance software licenses used in the design of semiconductors. Obligations under capital leases represent the present
value of future payments under the lease agreements. Property, plant and equipment includes the following amounts for leases that have been capitalized:

October 31,

2002

2001(in thousands)Net property, plant and equipment under capital lease

$
1,589

$



10

---

These
amounts will be amortized over a three-year period.

Future
minimum payments under the capital leases consist of the following at October 31, 2002:

Fiscal year ending January 31,(in thousands)2003

$
2622004


8432005


8432006


422Total minimum lease payments


2,370Amount representing interest


269Present value of net minimum lease payments


2,101Less current portion


744Long-term portion

$
1,357


12.    Unaudited Pro Forma Information:

The
consolidated statements of operations of NeoMagic presented throughout this report include the operating results of LinkUp Systems from the date of acquisition, December 18,
2001. The following pro forma information for the nine months ended October 31, 2001 is presented as if the acquisition of LinkUp was consummated at the beginning of fiscal 2002. This unaudited
pro forma data does not purport to represent the Company's actual results of operations had the LinkUp acquisition occurred at the beginning of fiscal 2002 and should not serve as a forecast of the
Company's operating results for any future periods.

The
pro forma information for October 31, 2001 is based on historical results of operations of NeoMagic for the nine month period ended October 31, 2001 and historical
results of LinkUp from January 1, 2001 to October 31, 2001 (in thousands, except per share data).

|                                               |  | Three Months Ended
October 31, 2001 |        | Nine Months Ended
October 31, 2001 |  
|---------------------------------------------- |  | ----------------------------------- | ------ | ---------------------------------- | -
|Pro forma net sales                            |  | $                                   | 536    |                                    | $
|Pro forma net loss                             |  | $                                   | (8,524 | )                                  | $
|Pro forma basic and diluted net loss per share |  | $                                   | (0.31  | )                                  | $

13.    Significant Customers and Export Sales

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 90% and 73% of net sales in the three months ended October 31, 2002 and 2001, respectively. Export sales accounted for 89% and 92% of net sales
in the nine months ended October 31, 2002 and 2001, respectively. All sales transactions were denominated in United States dollars.

Four
customers accounted for 46%, 15%, 14%, and 10% of net sales for the three months ended October 31, 2002. One customer accounted for 87% of net sales for the three months
ended October 31, 2001. Four customers accounted for 21%, 20%, 20%, and 20% of net sales for the nine months ended October 31, 2002. Four customers accounted for 41%, 23%, 17% and 11% of
net sales for the nine months ended October 31, 2001.

In
some cases in Japan and Asia, NeoMagic sells its products through distributors. In these cases, "customers" are the distributors, not the original equipment manufacturer that actually
uses the

11

---

NeoMagic chip in its device. For instance, Sony Japan uses the NeoMagic NMC 1121 (companion chip) in two of its CLIE PDAs. However, the revenue is recognized as revenue from Macnica, NeoMagic's
Japanese distributor. This revenue accounts for 46% of NeoMagic's revenue in the third quarter. In short, revenue from products that are sold to OEMs outside of the United States is added
together according to the distributor who sold the product. Each distributor is then considered a "customer" and this total is assigned to that customer/distributor.

Part I.    Financial Information

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

This filing contains forward-looking statements within the meaning of the Securities Act of 1933. Examples of such forward-looking statements include statements
about our current expectations for future product sales and revenue growth, our cash position, market developments and visibility, as well as statements about the introduction of new members of the
MiMagic product family and the development of new technology. These statements reflect our current expectations. However, actual events and results could vary significantly based on a variety of
factors including but not limited to customer acceptance of new NeoMagic products, the market acceptance of handheld system products developed and marketed by customers that use the Company's
products, the Company's ability to execute product and technology development plans on schedule, and the Company's ability to access advanced manufacturing technologies in sufficient capacity without
significant cash pre-payments or investment. Additional risks that could affect the Company's future operating results are more fully described below in "Factors that May Affect Future
Results" and in our prior filings with the United States Securities and Exchange Commission (SEC), which are available online athttp://www.sec.gov.
NeoMagic may, from time to time, make additional written or oral forward-looking statements, including statements contained in filings with the SEC and reports to shareholders. NeoMagic does not
undertake the obligation to update any forward-looking statements that may be made by or on behalf of the company.

Overview

NeoMagic develops, manufactures and sells applications processors to enable new generations of handheld systems, offering low power, small
form-factor, and high performance multimedia features and performance. Previously, the Company provided semiconductor solutions for the Notebook PC Multimedia Accelerator marketplace. In
April 2000, the Company announced its intention to exit this market and is now focused solely on developing, manufacturing and selling applications processors and companion chips for the
Handheld Systems market. The Company is now generating revenues from this new product effort. Throughout the year, the Company expects to see customers introducing new handheld systems that use the
Company's chips, primarily in Japan, Europe, and the Far East. The Company also expects to launch additional new members of its MiMagic family of applications processors as fiscal 2003
and fiscal 2004 progress.

NeoMagic
has established strategic relationships with third-party manufacturing partners to produce semiconductor products for the Company. Pursuant to these strategic relationships,
NeoMagic designs the overall product, including the logic and analog circuitry, and the manufacturing partners
manufacture the wafers, perform testing and package the products. NeoMagic is focused on leveraging its core competencies in integrating logic, analog and memory, along with graphics, video, 3D and
other multimedia technologies, drivers, middleware and operating system software, and power management in its continued development of solutions that facilitate the mobilization of multimedia
applications.

The
Company's fiscal year end is January 31. Any references herein to a fiscal year refer to the year ended January 31 of such year. The third fiscal quarters of 2003 and
2002 ended on October 27,

12

---

2002 and October 28, 2001, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month of October.

Critical Accounting Policies and Estimates

NeoMagic's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to inventories, doubtful accounts, investments, intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the amount and timing of revenue
and expenses and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.

The
Company believes the following critical accounting policies involve more significant judgments and estimates in the preparation of the Company's consolidated financial statements:

Goodwill and Intangible Assets

NeoMagic has significant tangible and intangible assets on its balance sheet, including other purchased intangibles related to acquisitions.

As
a result of adopting SFAS 142, "Goodwill and Other Intangible Assets," on February 1, 2002, the Company discontinued the amortization of goodwill. Instead, goodwill was
reviewed for impairment upon adoption of SFAS 142 and again in the third quarter of fiscal 2002 because indicators of
impairment were present. Refer to Note 3 of the consolidated condensed financial statements for a discussion of the impact of adopting and applying SFAS 142.

Intangibles
assets are carried and reported at acquisition cost, net of accumulated amortization subsequent to acquisition. The acquisition cost is amortized over estimated useful lives,
which range from 2 to 3 years. Intangible assets are reviewed for impairment whenever events or circumstances indicate impairment might exist, or at least annually, in accordance with
SFAS 144, "Accounting for the impairment of Disposal of Long-Lived Assets." Projected undiscounted net cash flows expected to be derived from the use of those assets are compared to
the respective net carrying amounts to determine whether impairment exists. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. The determination of
the net carrying value of goodwill and intangible assets and the extent to which, in any, there is impairment are dependent on significant estimates and judgments on the Company's part, including the
useful life over which the intangible assets are to be amortized, and the estimates of the value of future cash flows, which are based upon further estimates of future revenue, expenses and operating
margins. Refer to Note 9 of the consolidated condensed financial statements for a discussion of the impact of adopting and applying SFAS 144.

Estimation of Inventory Valuations

The Company's inventory valuation policy stipulates that at the end of each reporting period we write-down or write-off our inventory for
estimated obsolescence or unmarketable inventory. The amount of the write-down or write-off is equal to the difference between the cost of the inventory and the estimated
market value of the inventory based upon reasonable assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional
inventory write-downs or write-offs may be required. Additionally, as we

13

---

introduce product enhancements and new products, and improve our manufacturing processes, demand for our existing products in inventory may decrease. In the first quarter of fiscal 2001, consistent
with this policy, we recorded a charge of $7.0 million for excess and obsolete write-downs related to restructuring the business. In the future, we may find that similar assessments may warrant
another write-down or write-off of inventory.

Revenue Recognition

The Company recognizes revenue from product sales when the products are shipped to the customer, title has transferred, and no significant obligations remain. In
addition, the Company requires the following: (i) execution of a written customer order, (ii) delivery of the product, (iii) fee is fixed and determinable, and
(iv) collectibility of the proceeds is probable. The Company's shipment terms are typically FOB shipping point.

With
respect to products shipped to distributors, the Company generally defers recognition of product revenue until the distributors sell its products to their customers. On occasion,
however, the Company will sell products with "End of Life" status to its distributors under special arrangements without any price protection or return privileges for which the Company recognizes
revenue upon transfer of title, typically upon shipment.

At
the end of each accounting period, the Company makes a determination of certain factors including sales returns and allowances, which could affect the amount of revenue recorded for
the period. Sales returns provisions include considerations for known but unprocessed sales returns and estimation for unknown returns based on historical experiences.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Based on the uncertainty of
future pre-tax income, the Company has presently fully reserved its deferred tax assets. In the event the Company was to determine that it would be able to realize its deferred tax assets
in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The Company has also provided for certain potential tax liabilities. If such
amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary.

Results of Operations

Net Sales

Net sales were $655 thousand and $1.5 million for the three months and nine months ended October 31, 2002, respectively, compared to
$83 thousand and $351 thousand for the three months and nine months ended October 31, 2001. Net sales increased due to the Company's shipments of its new applications processors
and companion integrated circuits for the Handheld Systems market in the three months and nine months ended October 31, 2002. Sales for the nine months ended October 2001 were of the
Company's legacy notebook products.

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 90% and 73% of net sales in the three months ended October 31,
2002 and 2001, respectively. Export sales accounted for 89% and 92% of net sales in the nine months ended October 31, 2002 and 2001, respectively. All sales transactions were denominated in
United States dollars.

14

---

Four
customers accounted for 46%, 15%, 14%, and 10% of net sales for the three months ended October 31, 2002. One customer accounted for 87% of net sales for the three months
ended October 31, 2001. Four customers accounted for 21%, 20%, 20%, and 20% of net sales for the nine months ended October 31, 2002. Four customers accounted for 41%, 23%, 17% and 11% of
net sales for the nine months ended October 31, 2001.

In
some cases in Japan and Asia, NeoMagic sells its products through distributors. In these cases, "customers" are the distributors, not the original equipment manufacturer that actually
uses the NeoMagic chip in its device. For instance, Sony Japan uses the NeoMagic NMC 1121 (companion chip) in two of its CLIE PDAs. However, the revenue is recognized as revenue from Macnica,
NeoMagic's Japanese distributor. This revenue accounts for 46% of NeoMagic's revenue in the third quarter. In short, revenue from products that are sold to OEMs outside of the United States is
added together according to the distributor who sold the product. Each distributor is then considered a "customer" and this total is assigned to that customer/distributor.

Gross Margin (Loss)

Gross margin (loss) was $(492) thousand and $82 thousand for the three months ended October 31, 2002 and 2001, respectively. Gross margin
(loss) was $(941) thousand and $343 thousand in the nine months ended October 31, 2002 and 2001, respectively. The negative gross margins in the three and nine month periods ended
October 31, 2002 are due to under absorption of manufacturing overhead resulting from low production levels and amortization and impairment charges of acquired intangible assets. The Company's
sales in the three and nine month periods ended October 31, 2001 were of its fully reserved legacy notebook products.

Research and Development Expenses

Research and development expenses include compensation and associated costs relating to development personnel, operating system costs and prototyping costs, which
are comprised of pre-production photomask costs, pre-production wafer costs, and amortization of intangibles relating to development stage products. Research and development
expenses were $5.7 million and $6.0 million for the three months ended October 31, 2002 and 2001, respectively. Research and development expenses were $18.1 million and
$19.3 million for the nine months ended October 31, 2002 and 2001, respectively. These expenses include amortization of deferred compensation of $0.1 million and
$0.5 million for the three
months ended October 31, 2002 and 2001, respectively and $0.9 million and $1.5 million for the nine months ended October 31, 2002 and 2001, respectively. The decreases of
$0.4 million and $1.2 million in total research and development expenses for the three months and nine months ended October 31, 2002 are primarily related to lower consulting
costs offset somewhat by increased amortization of acquired and licensed intangibles relating to products which are in the research and development stage. Included in the research and development
expenses for the nine months ended October 31, 2002, was a charge of $0.5 million to write off certain Licensed Intellectual Property. The Company has made, and intends to continue to
make, significant investments in research and development as it focuses on developing products for the Handheld Systems market.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $2.1 million and $1.9 million for the three months ended October 31, 2002 and 2001,
respectively. Sales, general and administrative expenses were $7.8 million and $5.8 million for the nine months ended October 31, 2002 and 2001, respectively. These expenses
include amortization of deferred compensation of $0.1 million and $0.1 million for the three months ended October 31, 2002 and 2001, respectively and $0.9 million and
$0.4 million for the nine months ended October 31, 2002 and 2001, respectively. Sales, general and administrative expenses increased in absolute dollars due primarily to increased sales
expenses related to the Company's new

15

---

product efforts for the Handheld Systems market as well as increased amortization of deferred compensation resulting from the acquisition of LinkUp Systems in December 2001.

Impairment of Certain Acquired Intangible Assets

NeoMagic adopted Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets," in the first quarter of fiscal 2003. In accordance with SFAS 144, the Company assesses the recoverability of its long-lived assets by comparing
projected undiscounted net cash flows associated with those assets against their respective carrying amounts to determine whether impairment exists. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets. During the third quarter of fiscal 2003, the Company determined that certain intangible assets purchased as part of the LinkUp Systems Corporation
acquisition completed in December 2001 were impaired and recorded a total impairment charge of $873 thousand during the period. Of the total impairment charge, $367 thousand
related to impairment of certain acquired intangibles that were capitalized relating to developed technology. The impairment was caused by a decline in the related sales forecasts of products
associated with the intangibles. The impairment charge relating to developed technology is included in the cost of sales section of the consolidated statements of operations. In addition, the Company
also recorded a $506 thousand impairment charge with respect to intangibles relating to customer relationships. Several key customers with whom the Company was engaged have abandoned their
related product plans, which led to the impairment. The impairment charge relating to customer relationships is included in the operating expenses section of the consolidated statements of operations.

Special Charges

In January 2001, the Company extended its wafer supply agreement with Infineon Technologies AG of Germany ("Infineon") through fiscal 2004 to ensure future
wafer supply for the Company's new product efforts. The terms of the agreement provided that NeoMagic would make use of Infineon's 0.20 micron and 0.17 micron embedded DRAM (eDRAM) process
technologies. The agreement also provided for access to additional capacity and to more advanced process technologies to be developed by Infineon. NeoMagic provided $15 million in guarantees
towards its wafer purchases over the term of the agreement. The amount of guarantee is included as restricted cash on the balance sheet at January 31, 2002. At the end of fiscal year 2002, due
to uncertainties over Infineon's continued eDRAM product development, the Company decided not to use Infineon's eDRAM technology for its future production. Discussions commenced between NeoMagic and
Infineon on restructuring the wafer supply agreement with the intent to release NeoMagic from the related guarantee. During the nine-month period ended October 31, 2002, the Company
has recorded $3.6 million in charges, which reflects the value of the final settlement. These amounts are shown on the Consolidated Condensed Statements of Operations as a special charge for
the nine months ended October 31, 2002. As a result of the settlement, $15.0 million of restricted cash was released and reclassified to cash and cash equivalents on the Consolidated
Condensed Balance Sheet.

Income, Net of Expenses, from Sale of DVD Assets

In April 2000, pursuant to an asset purchase agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets
primarily consisted of fixed assets and intangible assets. In exchange for the assets sold to the Buyer, the Company received $11.7 million in a lump-sum cash payment. An additional
$2.3 million was contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. The Company wrote-off
approximately $3.6 million in capitalized intellectual property, fixed assets and prepaid expenses related to the DVD product group that was transferred to the Buyer. In addition, the Company
accrued approximately $0.6 million in transaction costs and approximately $2.3 million in

16

---

retention packages for the affected employees during the first quarter of fiscal 2001. During the second quarter of fiscal 2001, the Company incurred additional costs of $0.3 million. During
the third quarter of fiscal 2001, the Company received a $1.5 million cash payment which was previously contingent on the Company's performance of certain obligations related to the transfer of
licenses with third parties to the Buyer. As a result, the Company recorded a pre-tax gain of approximately $6.5 million on the sale, which is recorded in Income, net of expenses,
from the sale of DVD assets on the Consolidated Condensed Statements of Operations for the year ended January 31, 2001. In the first quarter of fiscal 2003, the Company received a
$1.6 million cash payment previously contingent on the transfer of licenses with third parties to the Buyer, which is recorded as a gain in the Consolidated Condensed Statements of Operations
for the nine months ended October 31, 2002.

Interest and Other Income

The Company earns interest on its cash equivalents, short-term investments, and restricted cash. Interest and other income was $0.3 million and
$0.8 million for the three months ended October 31, 2002 and 2001, respectively. Interest and other income was $1.6 million and $3.0 million for the nine months ended
October 31, 2002 and 2001, respectively. The decrease in interest and other income is primarily due to significantly lower interest rates.

Interest Expense

Interest expense was $0 for both the three months ended October 31, 2002 and 2001. Interest expense was $0 and $11,000 for the nine months ended
October 31, 2002 and 2001, respectively.

Income Taxes

The Company recorded a $6.3 million tax benefit in the second quarter of fiscal 2003, primarily related to changes in the federal tax law. The Job Creation
and Worker Assistance Act of 2002 was enacted on March 9, 2002 and contained provisions extending the net loss carry-back period from two to five years. This change allowed the
Company to utilize net operating losses incurred in fiscal 2002 to recover taxes paid in prior periods. The $6.3 million benefit represents additional refunds that the Company claimed on the
2002 net operating loss carry-back due to the change in tax law.

Cumulative Effect of Change in Accounting Principle

The Company completed the transitional impairment testing of goodwill using the two-step process prescribed in SFAS 142 during the third
quarter of fiscal 2003. As a result, the Company recorded a $4.2 million non-cash charge to reduce the carrying value of its goodwill to zero, which is shown as a cumulative effect
of a change in accounting principle in the third quarter of fiscal 2003.

Liquidity and Capital Resources

The Company's cash, cash equivalents and short-term investments increased $2.4 million in the nine months ended October 31, 2002 to
$74.3 million from $71.9 million at January 31, 2002.

Cash
and cash equivalents provided by operating activities for the nine months ended October 31, 2002 was $1.0 million, compared to $28.5 million of net cash used in
operating activities for the nine months ended October 31, 2001. The cash provided by operating activities stems primarily from non-cash charges for depreciation expense, deferred
compensation amortization, and goodwill and other acquired intangible asset impairment charges, a decrease in restricted cash, income tax receivable and other current assets, and increases in accounts
payable and compensation and related benefits partially offset by a net loss of $25.5 million, increases in accounts receivable, inventory and other assets and decreases in income taxes payable
and other accruals.

17

---

Net
cash provided by investing activities for the nine months ended October 31, 2002, was $4.4 million, compared to $4.0 million of net cash provided by investing
activities for the nine months ended October 31, 2001. Net cash provided by investing activities for the nine months ended October 31, 2002 related primarily to net proceeds from the
maturities of short-term investments of $3.5 million and proceeds from the sale of DVD assets of $1.6 million, partially offset by purchases of property, plant and equipment
of $0.7 million.

Net
cash provided by financing activities was $0.5 million for the nine months ended October 31, 2002, compared to $0.6 million of net cash provided by financing
activities for the nine months ended October 31, 2001. The net cash provided by financing activities primarily represents proceeds from the issuance of common stock.

At
October 31, 2002, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of $74.3 million. The Company
believes that it will not generate cash from operations during the next twelve months. The Company 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. After this period, capital requirements will depend on many factors, including general economic
conditions, 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. To the extent that existing cash, cash equivalents and short-term investment balances and any cash from operations are insufficient to fund
the Company's future activities, the Company 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.

In
January 2001, the Company extended its wafer supply agreement with Infineon Technologies AG of Germany ("Infineon") through fiscal 2004 to ensure future wafer supply for the
Company's new product efforts. The terms of the agreement provided that NeoMagic would make use of Infineon's 0.20 micron and 0.17 micron embedded DRAM (eDRAM) process technologies. The agreement also
provided for access to additional capacity and to more advanced process technologies to be developed by Infineon. NeoMagic provided $15 million in guarantees towards its wafer purchases over
the term of the agreement. The amount of guarantee is included as restricted cash on the balance sheet at January 31, 2002. At the end of fiscal year 2002, due to uncertainties over Infineon's
continued eDRAM
product development, the Company decided not to use Infineon's eDRAM technology for its future production. Discussions commenced between NeoMagic and Infineon on restructuring the wafer supply
agreement with the intent to release NeoMagic from the related guarantee. During the nine-month period ended October 31, 2002, the Company has recorded $3.6 million in
charges, which reflects the value of the final settlement. These amounts are shown on the Consolidated Condensed Statements of Operations as a special charge for the nine months ended
October 31, 2002. As a result of the settlement, $15.0 million of restricted cash was released and reclassified to cash and cash equivalents on the Consolidated Condensed Balance Sheet.

The
Company leases software licenses under capital leases. Refer to note 9 of the consolidated condensed financial statements for additional information.

The
Company has a PrimeXsys wireless platform license agreement with ARM Ltd. for intellectual property that requires payments of $425 thousand and $850 thousand in
February 2003 and May 2003, respectively.

18

---

The
Company leases offices in Santa Clara, California, India and Israel under operating leases that expire at various times through April 2010. Future minimum lease payments under
non-cancelable operating leases as of October 31, 2002 are as follows:

Fiscal year ending January 31:(in thousands)2003*

$
5342004*


1,1852005


1,0572006


1,0832007


1,095Thereafter


3,497Total minimum lease payments

$
8,451


---

Factors that May Affect Future Results

We Expect to Continue to Incur Significant Losses in Fiscal 2004

The Company has been incurring substantial losses as it invests heavily in new product development in advance of achieving significant customer sales. This is
expected to continue in fiscal year 2004. The Company's ability to achieve cash flow breakeven is likely to depend on the success of its MiMagic 5, which has recently been released, and the success of
other products and technology still in development and scheduled for release in the second half of fiscal year 2004. However, even if the MiMagic 5 and subsequent products achieve widespread
customer acceptance, the length of customer design-in cycles would preclude significant product shipments in fiscal year 2004. Accordingly, even if these new products are successful, the
Company will incur significant additional losses in fiscal year 2004.

We Depend on New Product Development to Meet Rapid Market and Technological Change

The Company is now focused on providing high-performance semiconductor solutions for sale to original equipment manufacturers of handheld systems. New
product planning is primarily focused on application processors for handheld systems, and multimedia technologies for integration into such processors, such as MPEG-4 video compression,
image processing, graphics, and audio technologies. The Company's future business, financial condition and results of operations will depend to a significant extent on its ability to develop new
products that address these market opportunities. As a result, the Company believes that significant expenditures for research and development will continue to be required in the future.

The
markets for handheld systems are emerging opportunities, characterized by rapidly changing infrastructure, evolving industry standards and uncertain average selling prices. The
Company must anticipate the features and functionality that consumers and infrastructure providers will demand,
incorporate those features and functionality into products that meet the exacting design requirements of equipment manufacturers, price its products competitively and introduce the products to the
market on a timely basis. 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 to create or acquire intellectual property, 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 the Company'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, will

19

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be successfully developed, or will be introduced within the appropriate window of market demand, nor can there be assurance that customers who utilize the Company's semiconductor products will
achieve the levels of market success with their own system products that they may project to the Company.

Because
of the complexity of its products, the Company has experienced delays from time to time in completing development and introduction of new products. In addition, the Company is
producing and continuing the development of new products in markets in which the Company has little history. In the event that there are delays in ramping production of current products, or in the
completion of development of future products, including the products currently under development for introduction over the next 12 to 18 months, the Company's potential future business,
financial condition, and results of operations will be materially adversely affected. In addition, the time required for competitors to develop and introduce competing products may be shorter,
manufacturing yields may be better, and production costs may be lower than those experienced by the Company.

The
Company has exited the Notebook PC market and is generating revenues from its handheld system products. Until the Company achieves substantial growth in revenue, it will continue to
incur substantial losses. There is no assurance as to how quickly revenues will grow.

Our Annual and Quarterly Performance May Fluctuate

The Company's quarterly and annual results of operations are affected by a variety of factors that could materially adversely affect net sales, gross margin and
operating results. These factors include, among others, the ability of the Company to increase its customer base and its sales, the abilities of manufacturing subcontractors to make adequate and
timely deliveries, access to advanced production process technologies from manufacturing subcontractors, recruiting and retaining employees including those with engineering expertise in new
disciplines. In particular, the Company's new product development efforts and customer engagements in System-on-Chip integration and supporting multimedia technologies such as
MPEG-4 streaming video represent new endeavors and consequently carry greater risks of successful and timely execution. Any one or more of these factors could result in the Company failing
to achieve its expectations as to future revenues and profits. Furthermore, the majority of the Company's sales were historically made, and are expected to continue to be made, on the basis of
purchase orders rather than pursuant to long-term purchase agreements, which increases the difficulty of forecasting sales. 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.

Our Financial Results could be Affected by Changes in Accounting Rules

In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 requires us
to perform impairment analysis on our long-lived assets, other than goodwill, to be held and used whenever events or changes in circumstances indicate the carrying amount may not be
recoverable. An impairment loss will be recognized if the carrying amount of a long-lived asset exceeds its fair value. SFAS 144 retains the fundamental provisions of
SFAS 121 related to (i) the recognition and measurement of the impairment of long-lived assets to be held and used, and (ii) the measurement of long-lived
assets to be disposed of by sale. As SFAS 144 excludes goodwill, certain long-lived assets may be subject to impairment charges sooner than they would have been recorded under
SFAS 121, which SFAS 144 replaces. During the third quarter of fiscal 2003, we recorded an impairment charge of $873 thousand related to our long-lived assets as a
result of our SFAS 144 analysis. If economic conditions in our industry continue to deteriorate and adversely affect

20

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our business, we could be required to record additional impairment charges related to our long-lived assets, which could have a material adverse effect on our results of operations and
financial condition. Refer to Note 2, "Recent Accounting Pronouncements," of Notes to Consolidated Condensed Financial Statements for further discussion.

Our
financial results could be affected by potential changes in the accounting rules governing the recognition of stock-based compensation expense. We measure compensation expense for
our employee stock plans under the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In addition, we
provide pro forma disclosures of our operating results in our Notes to Consolidated Financial Statements as if the fair value method of accounting had been applied in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation." Had we accounted for our compensation expense under the fair value method of accounting prescribed by SFAS 123, the charge would have
been significant, totaling $6.7 million, $6.3 million and $7.5 million during fiscal 2002, 2001 and 2000, respectively. Currently, the U. S. Congress, the Securities and Exchange
Commission and the Financial Accounting Standards Board are considering changes to accounting rules concerning the recognition of stock option compensation expense. If one or more of these proposals
are implemented, we and other companies may be required to measure compensation expense using the fair value method, which would adversely affect our results of operations by reducing our income or
increasing our losses by an amount equal to such stock option charges.

We have a Limited Customer Base

The Company's sales were historically concentrated within a limited customer base in the notebook PC market. The Company has now exited the notebook PC market and
is generating revenues from products for the Handheld Systems market. Four customers accounted for 46%, 15%, 14%, and 10% of net sales for the three months ended October 31, 2002. One customer
accounted for 87% of net sales for the three months ended October 31, 2001. Four customers accounted for 21%, 20%, 20%, and 20% of net sales for the nine months ended October 31, 2002.
Four customers accounted for 41%, 23%, 17% and 11% of net sales for the nine months ended October 31, 2001. The Company expects to have commitments from only a limited number of customers
during fiscal 2003. The Company expects that a small number of customers will account for a substantial portion of its net sales for the foreseeable future. As a result, the Company's business,
financial condition and results of operations could be materially adversely affected by the decision of a single customer to cease using the Company's products, or by a decline in the number of
handheld systems sold by a single customer.

We May Lose Our Customer Base

The Company's products are designed to afford the handheld systems manufacturer significant advantages with respect to product performance, power consumption and
size. To the extent that other future developments in 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.

We Face Intense Competition in Our Markets

The market for semiconductor solutions for handheld systems, in which the Company is now focused, 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 this new rapidly evolving Handheld Systems market depends on a number of factors including, success
in designing and subcontracting the manufacture of new products that implement new technologies, product quality and reliability, price,

21

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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, NeoMagic's ability to provide appropriate applications software support, and general economic conditions.

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 Intel's StrongARM and XScale product lines, Texas Instruments' OMAP product line, and a number
of vertically integrated electronics firms who are developing their own solutions. NeoMagic may also face increased competition from new entrants into the Handheld Systems Semiconductor market
including companies currently at developmental stages. 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.

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 may from
time-to-time 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 business, financial condition and results of operations.

Some
of the Company's current and potential competitors may secure preferential pricing due to volume agreements that may not be available to the Company which could result in an adverse
effect on the Company's business, financial condition and results of operations.

Our Products May be Incompatible with Evolving Industry Standards and Market Trends

The Company's ability to compete in the future will also depend on its ability to identify and ensure compliance with evolving industry standards and market
trends. Unanticipated changes in market trends and industry standards could render the Company's products incompatible with products developed by major hardware manufacturers and software developers.
As a result, the Company could be required 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 and market trends. There can be no assurance that the Company will be able to 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 market trends and 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.

We Depend on Third-Party Manufacturers to Produce Our Products

The Company's products require wafers manufactured with state-of-the-art fabrication equipment and techniques. The Company
currently utilizes several foundries for wafer fabrication. 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 wafer fabrication 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 the Company's manufacturing partners, the failure of the Company's manufacturing partners to dedicate adequate resources to
the production of the Company's products, or the financial instability of the Company's manufacturing partners 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

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of manufacturing technologies by the Company's manufacturing partner 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.

We Rely on Third-Party Subcontractors to Assemble and Test Our Products

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.

We May Encounter Inventory Excess or Shortage

The Company has wafer supply relationships with several foundries to support the Company's product efforts. Normally, 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. The Company orders wafers for deliveries 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 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 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.    As a result of the long
lead-time for manufacturing wafers and the increase in "just in time" ordering by manufacturers, semiconductor companies such as the Company from time-to-time must
take charges for excess inventory. The Company did in fact incur such charges in fiscal 2001 of $9.2 million. Significant write-offs of excess inventory have had and could continue
to 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,

23

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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.

Our Manufacturing Yields May Fluctuate

The fabrication of semiconductors is an extremely complex process, which typically includes hundreds of process steps. Minute levels of contaminants in the
manufacturing environment, defects in masks used to print circuits on a wafer, utilization of equipment with variations and numerous 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 often 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 experienced such yield problems in fiscal 2000, which materially adversely affected the Company's net sales, gross margins and results of
operations in fiscal 2000 and 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. This
risk is compounded by the 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.

Uncertainty and Litigation Risk Associated with Patents and Protection of Proprietary Rights

The Company relies in part on patents to protect its intellectual property. As of October 31, 2002, the Company has been issued 62 patents, each covering
certain aspects of the design and architecture of the Company's products. Additionally, the Company has numerous 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

24

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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 seeking damages and an injunction 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. The Court ruled that there was no infringement by Trident. The Company filed an appeal in the United
States Court of Appeals for the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court's judgment of
non-infringement on one patent and vacated the courts judgment of non-infringement of another patent, thereby remanding it to the lower court for further proceedings. In
November 2002, the lower court heard oral arguments on cross-motions for summary judgment on the matter, and we are currently awaiting its ruling. 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.

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.

We Depend on International Sales and Suppliers

Export sales have been 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 90% and 73% of the Company's net sales for the three months
ended October 31, 2002 and 2001, respectively. Export sales accounted for 89% and 92% of net sales in the nine months ended October 31, 2002 and 2001, respectively. The Company expects
that net sales derived from international sales will continue to represent a significant portion of its total net 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 have produced, and are expected to continue to produce for the foreseeable future, all of the Company's wafers. In addition, many of the assembly and test
services

25

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used by the Company are procured from international sources. Under the Company's purchase orders with manufacturing suppliers, the wafers are priced in U.S. dollars.

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, 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 and intellectual property. 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.

We May Need 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 of new 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.

We are Dependent 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 retain qualified personnel necessary for the development of its business. The Company has experienced the loss of certain key personnel and also reduced
personnel in its restructuring. 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.

Our Stock Price May Be Volatile

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 handheld
systems 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.

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Since the Company's decline in 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.

There
may not be an active, liquid trading market for our common stock. For several weeks in October 2002, our common stock traded below the $1 minimum bid price requirement of
the Nasdaq National Market. If we fail to comply with the continued listing requirements of the NASDAQ National Market, including the minimum bid price per share requirement, we may be delisted from
trading on such market, and thereafter trading in our common stock, if any, would be conducted through the Nasdaq Small Cap Market, the over-the-counter market or on the
Electronic Bulletin Board of the National Association of Securities Dealers, Inc. There is no guarantee that an active trading market for our common stock will be maintained on the NASDAQ
National Market. You may not be able to sell your shares quickly, at the market price or at all if trading in our stock is not active.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company's cash equivalents, short-term investments, and restricted cash are exposed to financial market risk due to fluctuations in interest
rates, which may affect our interest income. As of October 31, 2002, the Company's cash equivalents, short-term investments, and restricted cash earned interest at an average rate
of 1.6%. Due to the short-term nature of the Company's investment portfolio, operating results or cash flows are vulnerable to sudden changes in market interest rates. Assuming a decline
of 10% in the market interest rates at October 31, 2002, with consistent cash balances, interest income would be adversely affected by approximately $30,000 per quarter. The Company does not
use its investment portfolio for trading or other speculative purposes.

Foreign Currency Exchange Risk

Currently all of the Company's sales and the majority of its expenses are denominated in U.S. dollars. As a result, the Company has relatively little exposure to
foreign currency exchange rate risk. The Company does not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes.
However, in the event exposure to foreign currency risk increases, the Company may choose to hedge those exposures.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934 require public companies to maintain "disclosure controls and procedures," which are defined to mean a
company's controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our chief executive officer and chief financial officer, based on their evaluation
of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that our disclosure controls and procedures were effective for this purpose.

Changes in Internal Controls

There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect these controls subsequent to the
date of their evaluation.

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Part II. Other Information

Item 1.    Legal Proceedings

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 seeking damages and an injunction 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 for damages against the Company alleging an attempted monopolization in
violation of antitrust laws, arising from NeoMagic's filing of the patent infringement action against Trident. The Court ruled that there was no infringement by Trident. The Company filed an appeal in
the United States Court of Appeals for the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court's judgment of
non-infringement on one patent and vacated the court's judgment of non-infringement of another patent, thereby remanding it to the lower court for further proceedings. In
November 2002, the lower court heard oral arguments on cross-motions for summary judgment on the matter, and we are currently awaiting its ruling. 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.

Item 2.    Changes in Securities

On
September 10, 2002, the Company issued 1,667,000 shares of unregistered common stock and paid $1.5 million in cash to Infineon Technologies AG of Germany ("Infineon") to
release the Company from its wafer supply agreement with Infineon. Such shares were issued in reliance upon an exemption from registration pursuant to Section 4 (2) of the Securities Act
of 1933.

Item 3.    Defaults Upon Senior Securities

None.

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

None.

Item 5.    Other Information

Our
audit committee has considered whether any reasonably anticipated non-audit services to be rendered by Ernst & Young LLP during the course of fiscal 2003 are
compatible with maintaining Ernst & Young LLP's independence as auditors of our fiscal 2003 consolidated financial statements, and have approved the anticipated non-audit services,
maintaining they would not impair Ernst & Young's independence. The audit committee has approved the following non-audit services to be performed by Ernst & Young LLP:
quarterly review of the unaudited condensed consolidated financial statements as of April 30, July 31, and October 31, 2002; and state and local tax, as well as regulatory,
compliance services.

Item 6.    Exhibits and Reports on Form 8-K



The
exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Report on Form 10Q.



The
Company did not file any reports on Form 8-K during the three months ended October 31, 2002.

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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.

| |  | NEOMAGIC CORPORATION
(Registrant)                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                          
| |  |                                                                                                                          
| |  | /s/ Stephen T. LanzaSTEPHEN T. LANZAChief Financial Officer
(Principal Financial and Accounting Officer)December 11, 2002

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CERTIFICATIONS

I, Prakash Agarwal, Chief Executive Officer of NeoMagic Corporation, certify that:

1.    I
have reviewed this quarterly report on Form 10-Q of NeoMagic Corporation;

2.    Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|                        |  |                                                          
|----------------------- |  | ---------------------------------------------------------
|                        |  |                                                          
|Date: December 11, 2002 |  | /s/PRAKASH AGARWALPrakash Agarwal Chief Executive Officer

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I,
Stephen T. Lanza, Chief Financial Officer of NeoMagic Corporation, certify that:

1.    I
have reviewed this quarterly report on Form 10-Q of NeoMagic Corporation;

2.    Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|                        |  |                                                            
|----------------------- |  | -----------------------------------------------------------
|                        |  |                                                            
|Date: December 11, 2002 |  | /s/STEPHEN T. LANZAStephen T. Lanza Chief Financial
Officer

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EXHIBIT INDEX

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

|Number |     | Description                                                                                                                                                                                
|------ | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    | (1) | Amended and Restated Certificate of Incorporation                                                                                                                                          
|3.2    | (1) | Bylaws                                                                                                                                                                                     
|10.1   | (1) | Form of Indemnification Agreement entered into by the Company with each of its directors and executive officers.                                                                           
|10.2   | (2) | Lease Agreement, dated as of October 9, 1997, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.                              
|10.3   | (1) | Amended and Restated 1993 Stock Plan and related agreements.                                                                                                                               
|10.4   | (2) | Amendment No. 1, dated as of October 15, 1997, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.                             
|10.5   | (1) | Lease Agreement, dated as of February 5, 1996, between the Company and A&P Family Investments, as landlord.                                                                                
|10.6   | (1) | 1997 Employee Stock Purchase Plan, with exhibit.                                                                                                                                           
|10.7   | (4) | 1998 Nonstatutory Stock Option Plan.                                                                                                                                                       
|10.8   | (4) | Wafer Supply Agreement, dated as of March 15, 1999, between NeoMagic International Corporation and Siemens Aktiengesellschaft Semiconductor Group, now Infineon Technologies AG.           
|10.9   | (5) | General Amendment to the Wafer Supply Agreement with Product Sourcing Agreement, dated January 9, 2001, between NeoMagic International Corporation and Infineon Technologies AG.           
|10.10  | (6) | Employment Offer Letter dated May 10, 2000, between the Company and Sanjay Adkar.                                                                                                          
|10.11  | (6) | Employee Loan Agreement dated May 10, 2000, between the Company and Sanjay Adkar.                                                                                                          
|10.12  | (6) | Security Agreement dated September 1, 2001, between the Company and Stephen Lanza.                                                                                                         
|10.13  | (6) | Promissory Note dated September 1, 2001, between the Company and Stephen Lanza.                                                                                                            
|10.14  | (7) | Full and Final Release dated September 9, 2002, from the Wafer Supply Agreement and the Product sourcing Agreement between NeoMagic International Corporation and Infineon Technologies AG.
|10.15  |     | Amendment No. 1, dated as of February 26, 2002, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.                            
|10.16  |     | Amendment No. 2, dated as of April 7, 2000, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.                                
|10.17  |     | Amendment No. 3, dated as of February 26, 2002, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.                            
|21.1   | (6) | NeoMagic Subsidiaries.                                                                                                                                                                     
|99.1   |     | Certification by Prakash Agarwal and Stephen T. Lanza pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            

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