<PAGE>

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                  UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C. 20549
                                          
                                     FORM 10-Q
                                          
(Mark One)
 
X    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarter ended July 31, 1998 
OR

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

For the transition period from ________ to __________

                          Commission file number 333-20031


                                NEOMAGIC CORPORATION
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
                 DELAWARE                               77-0344424   
       (State or other jurisdiction         (I.R.S. Employer Identification No.)
    of incorporation or organization)

              3260 Jay Street
           Santa Clara, California                         95054  
    (Address of principal executive offices)             (Zip Code)


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


Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act 
of 1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.  

                                  Yes  X        No

     The number of shares of the Registrant's Common Stock, $.001 par value per
               share, outstanding at August 23, 1998 was 24,614,000
                                          
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                                      Page 1 of 23
                                          
<PAGE>

                                NEOMAGIC CORPORATION
                                     FORM 10-Q
                                          
                                       INDEX
                                          
<TABLE>
<CAPTION>
                                                                                         PAGE
<S>                                                                                      <C>
PART I.  CONSOLIDATED CONDENSED FINANCIAL INFORMATION

Item 1.  Unaudited Consolidated Condensed Financial Statements:


          Consolidated Condensed Statements of Income
               Three and six months ended July 31, 1998 and 1997                         3

          Consolidated Condensed Balance Sheets
               July 31, 1998 and January 31, 1998                                        4

          Consolidated Condensed Statements of Cash Flows
               Six months ended July 31, 1998 and 1997                                   5
     
          Notes to Unaudited Consolidated Condensed Financial Statements                 6-7
     
Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations                                  8-21


PART II.  OTHER INFORMATION
          
Item 1.   Legal Proceedings                                                             22

Item 2.   Changes in Securities and Use of Proceeds                                     22

Item 3.   Defaults Upon Senior Securities                                               22

Item 4.   Submission of Matters to a Vote of Security Holders                           22

Item 5.   Other Information                                                             22

Item 6.   Exhibits and Reports on Form 8-K                                              22

Signatures                                                                              23
</TABLE>

                                  Page 2 of 23

<PAGE>

Part I.  Financial Information
Item I.  Financial Statements

                                NEOMAGIC CORPORATION
                    CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                       (In thousands, except per share data)
                                    (Unaudited)
                                          
<TABLE>
<CAPTION>
                                                Three Months Ended            Six Months Ended
                                                     July 31,                      July 31,
                                              -------------------------    -------------------------
                                                 1998           1997          1998           1997
                                              ---------      ----------    ----------      ---------
<S>                                           <C>            <C>           <C>             <C>
Net sales                                      $ 53,396       $ 24,570      $ 101,134       $ 42,851

Cost of sales                                    31,058         14,522         58,568         25,693
                                               --------       --------      ---------       --------

Gross margin                                     22,338         10,048         42,566         17,158

Operating expenses:
  Research and development                        7,314          3,338         13,566          5,805
  Sales, general and administrative               4,848          2,382          9,204          4,659
                                               --------       --------      ---------       --------
               Total operating expenses          12,162          5,720         22,770         10,464
                                               --------       --------      ---------       --------

Income from operations                           10,176          4,328         19,796          6,694

Other income (expense), net:
  Interest income and other                         919            646          1,894            962
  Interest expense                                 (372)          (314)          (696)          (538)
                                               --------       --------      ---------       --------

Income before income taxes                       10,723          4,660         20,994          7,118

Provision for income taxes                        3,753            699          7,348          1,068
                                               --------       --------      ---------       --------

Net income                                     $  6,970       $  3,961      $  13,646       $  6,050
                                               --------       --------      ---------       --------
                                               --------       --------      ---------       --------

Basic earnings per share                       $    .30       $    .18      $     .58       $    .29
Diluted earnings per share                     $    .27       $    .15      $     .52       $    .25

Weighted common shares outstanding               23,595         22,161         23,445         21,003
Weighted common shares outstanding, 
  assuming dilution                              26,033         25,893         26,066         24,646
</TABLE>

    See accompanying notes to consolidated condensed financial statements.

                                 Page 3 of 23

<PAGE>

                                NEOMAGIC CORPORATION
                       CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (In thousands)
                                    (Unaudited)
                                          
<TABLE>
<CAPTION>
                                               July 31,      January 31,
                                                1998            1998
                                               --------      -----------
<S>                                          <C>             <C>
                                   ASSETS

Current assets: 
  Cash and cash equivalents                  $   38,589      $  35,004
  Short-term investments                         31,245         36,016
  Accounts receivable, net                       11,099         11,236
  Inventory                                      13,785          9,342
  Other current assets                            4,249          3,730
                                             ----------      ---------
            Total current assets                 98,967         95,328

Property and equipment, net                       7,313          6,232
Deferred tax assets                               5,669          5,669
Other assets                                        597            354
                                             ----------      ---------

             Total assets                    $  112,546      $ 107,583
                                             ----------      ---------
                                             ----------      ---------

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Working capital line of credit             $        -     $   21,041
  Accounts payable                               20,999          9,490
  Accrued expenses                                9,635         10,652
  Obligations under capital leases                  962          1,273
                                             ----------     ----------
             Total current liabilities           31,596         42,456

Commitments and contingencies

Stockholders' equity:
  Common stock                                       25             24
  Additional paid-in-capital                     62,812         61,263
  Notes receivable from stockholders               (554)          (559)
  Deferred compensation                          (2,179)        (2,801)
  Retained earnings                              20,846          7,200
                                             ----------     ----------
             Total stockholders' equity          80,950         65,127
                                             ----------     ----------

             Total liabilities and 
               stockholders' equity          $  112,546     $  107,583
                                             ----------     ----------
                                             ----------     ----------
</TABLE>

  See accompanying notes to consolidated condensed financial statements.

                                  Page 4 of 23

<PAGE>

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

<TABLE>
<CAPTION>
                                                          Six Months Ended
                                                              July 31,
                                                      -------------------------
                                                         1998           1997
                                                      ---------      ----------
<S>                                                   <C>            <C>
OPERATING ACTIVITIES:
Net income                                            $  13,646      $   6,050
Adjustments to reconcile net income to net 
  cash provided by operating activities:
     Depreciation and amortization                        1,437            715
     Amortization of deferred compensation                  443            314
     Changes in operating assets and liabilities:
           Accounts receivable                              137         (3,037)
           Inventory                                     (4,443)        (3,135)
           Other current assets                            (519)          (246)
           Other assets                                    (243)           435
           Accounts payable                              11,509            550
           Accrued expenses                              (1,017)         1,998
                                                      ---------      ---------
Net cash provided by operating activities                20,950          3,644
                                                      ---------      ---------
                                                      ---------      ---------

INVESTING ACTIVITIES:
     Purchases of property and equipment                 (2,518)        (1,533)
     Purchases of short-term investments                (24,859)       (22,928)
     Maturities of short-term investments                29,630          1,000
                                                      ---------      ---------

Net cash provided by (used for) investing 
  activities                                              2,253        (23,461)
                                                      ---------      ---------
                                                      ---------      ---------

FINANCING ACTIVITIES:
     Payments on lease obligation                          (311)          (582)
     Proceeds from working capital line of credit             -         24,041
     Payments on working capital line of credit         (21,041)       (23,461)
     Net proceeds from issuance of common stock           1,734         37,900
     Amounts held as restricted cash                          -          2,224
                                                      ---------      ---------

Net cash provided by (used for) financing 
  activities                                            (19,618)        40,122
                                                      ---------      ---------
                                                      ---------      ---------

Net increase in cash and cash equivalents                 3,585         20,305
Cash and cash equivalents at beginning 
  of period                                              35,004         13,458
                                                      ---------      ---------
Cash and cash equivalents at end of period            $  38,589      $  33,763
                                                      ---------      ---------
                                                      ---------      ---------
Supplemental schedules of cash flow information
Cash paid during the year for:
     Interest                                         $     696      $     558
     Taxes                                            $   6,501      $       -
</TABLE>

    See accompanying notes to consolidated condensed financial statements.


                                  Page 5 of 23

<PAGE>

                                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 footnote 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.  Certain prior year amounts have been reclassified to conform to 
the current year presentation.  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 
July 31, 1998, the operating results for the three and six months ended July 
31, 1998 and 1997 and cash flows for the six months ended July 31, 1998 and 
1997.  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, 1998, included in the Company's Form 10-K filed with 
the Securities and Exchange Commission.

     The results of operations for the six months ended July 31, 1998 are not 
necessarily indicative of the results that may be expected for the year 
ending January 31, 1999.

     The second fiscal quarters of 1999 and 1998 ended on July 26, 1998 and 
July 27, 1997, respectively.  For ease of presentation, the accompanying 
financial statements have been shown as ending on the last day of the 
calendar month.

2.   Inventory:

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

<TABLE>
<CAPTION>

                                            July 31,    January 31,
                                              1998          1998
                                            --------    -----------
                                                 (in thousands)
<S>                                         <C>         <C>
Inventory consists of:   

Raw materials                               $ 1,606        $  989
Work in process                               2,065         1,904
Finished goods                               10,114         6,449
                                            -------        ------
    Total                                   $13,785        $9,342
                                            -------        ------
                                            -------        ------
</TABLE>

3.   Earnings Per Share
     
     The consolidated condensed financial statements are presented in 
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 
No. 128"), "Earnings per Share." Basic earnings per common share are computed 
using the weighted average number of common shares outstanding during the 
period. Diluted earnings per common share incorporate the common equivalent 
shares from convertible preferred stock (using the if-converted method) and 
the incremental shares issuable upon the assumed exercise of stock options 
and warrants (using the treasury stock method). 
     

                                  Page 6 of 23

<PAGE>

<TABLE>
<CAPTION>
Per share information calculated on this basis is as follows:
(in thousands, except per share amount)

                                                 Three Months Ended             Six Months Ended
                                                      July 31,                      July 31,
                                               -----------------------      -------------------------
                                                 1998           1997           1998            1997
                                               ---------      --------      ---------       ---------
<S>                                            <C>            <C>           <C>             <C>
Numerator:
    
     Net income                                $  6,970       $  3,961      $  13,646       $  6,050
                                               --------       --------      ---------       --------

Denominator:
     Denominator for basic earnings per 
       share - weighted average shares 
       outstanding                               23,595         22,161         23,445         21,003
          
     Effect of dilutive securities:
         Employee stock options                   2,349          3,457          2,531          3,368
         Warrants                                    89            275             90            275
                                               --------       --------      ---------       --------
     Dilutive potential common shares             2,438          3,732          2,621          3,643
                                               --------       --------      ---------       --------
         Denominator for diluted earnings 
           per share - adjusted 
           weighted-average shares outstanding   26,033         25,893         26,066         24,646
Basic earnings per share                       $    .30       $    .18      $     .58       $    .29
Diluted earnings per share                     $    .27       $    .15      $     .52       $    .25
</TABLE>

4.   Comprehensive Income

     The Company adopted Statement of Financial Accounting Standards No. 130, 
"Reporting Comprehensive Income," ("SFAS 130") during the quarter ended April 
30, 1998.  SFAS 130 establishes new rules for the reporting and displaying of 
comprehensive income and its components; however, the adoption of this 
Statement had no impact on the Company's net income or stockholders' equity.  
SFAS 130 requires unrealized gains or losses on the Company's 
available-for-sale securities and foreign currency translation adjustments to 
be included in comprehensive income.  Gross unrealized gains and losses on 
available-for-sales securities and foreign currency translation adjustments 
at July 31, 1998 and 1997 were immaterial.
     
5.   Recently Issued Accounting Pronouncements
     
     In June 1998, the Financial Accounting Standards Board issued Statement 
No. 133, Accounting for Derivative Instruments and Hedging Activities, 
effective for fiscal years beginning after June 15, 1999. The standard will 
require the Company to recognize all derivatives on the balance sheet at fair 
value. Derivatives that are not hedges must be adjusted to fair value through 
income. If the derivative is a hedge, depending on the nature of the hedge, 
changes in the fair value of derivatives are either offset against the change 
in fair value of assets, liabilities, or firm commitments through earnings or 
recognized in other comprehensive income until the hedged item is recognized 
in earnings.  The change in a derivative's fair value related to the 
ineffective portion of a hedge, if any, will be immediately recognized in 
earnings. The Company expects to adopt the new standard in the fiscal quarter 
ended April 31, 2000.  The effect of adopting this standard is currently 
being evaluated, but it is not expected to have a material effect on the 
Company's financial position or results of operations. 


                                  Page 7 of 23

<PAGE>

PART I.  FINANCIAL INFORMATION

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

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

     The Company designs, develops and markets multimedia accelerators for 
sale to notebook computer manufacturers.  The Company has developed the first 
commercially available high performance silicon technology that integrates 
large DRAM memory with analog and logic circuitry to provide a high 
performance multimedia solution on a single chip.  The Company's 
MagicGraph128 and MagicMedia256 families of pin-compatible multimedia 
accelerators incorporates 128-bit and 256-bit memory buses.  The Company 
believes these products enable notebook PC manufactures to deliver 
state-of-the-art multimedia capabilities while decreasing power consumption, 
size, system design complexity and cost.

     The following information should be read in conjunction with the 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations" on  pages 8-20 of the Company's Fiscal 1998 Annual Report.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                 Three Months Ended             Six Months Ended
                                                        July 31,                    July 31,
                                                 ---------------------------------------------------
                                                  1998           1997           1998           1997
                                                 ------         ------         ------         ------
<S>                                              <C>            <C>            <C>            <C>
 Net sales                                       100.0%         100.0%         100.0%         100.0%
 Cost of sales                                    58.2           59.1           57.9           60.0
                                                 -----          -----          -----          -----
 Gross margin                                     41.8           40.9           42.1           40.0
 Operating expenses:
   Research and development                       13.7           13.6           13.4           13.5
   Selling, general and administrative             9.1            9.7            9.1           10.9
                                                 -----          -----          -----          -----
       Total operating expenses                   22.8           23.3           22.5           24.4
                                                 -----          -----          -----          -----
 Income from operations                           19.0           17.6           19.6           15.6
 Other income (expense), net:
       Interest income and other                   1.7            2.6            1.9            2.2
       Interest expense                            (.7)          (1.3)           (.7)          (1.2)
                                                 -----          -----          -----          -----
 Income before income taxes                       20.0           18.9           20.8           16.6
 Provision for income taxes                        7.0            2.8            7.3            2.5
                                                 -----          -----          -----          -----
 Net income                                       13.0%          16.1%          13.5%          14.1%
                                                 -----          -----          -----          -----
                                                 -----          -----          -----          -----
</TABLE>


                                  Page 8 of 23

<PAGE>

NET SALES

     The Company's net sales to date have been generated from the sale of its 
multimedia accelerators.  The Company's products are used in, and its 
business is dependent on, the personal computer industry, with sales 
primarily in Asia, Japan, and the United States.  Net sales were $53.4 
million for the three months ended July 31, 1998, compared to $24.6 million 
for the three months ended July 31, 1997.  Net sales were $101.1 million for 
the six months ended July 31, 1998, compared to $42.9 million for the six 
months ended July 31, 1997.  Net sales increased primarily as a result of 
increased market acceptance of the Company's MagicGraph128 products, 
introduction by the Company of additional products in its MagicMedia256 
product family which expanded the portion of the market addressed by NeoMagic 
products, and the Company's investment in sales and marketing activities.  
The Company expects that the percentage of its net sales represented by any 
one product or type of product may change significantly from period to period 
as new products are introduced and existing products reach the end of their 
product life cycles.  Due to competitive price pressures, the Company's 
products experience declining unit average selling prices over time, which at 
times can be substantial.

     Export sales accounted for 89.2% and 79.3% of net sales in the three 
months ended July 31, 1998 and 1997, respectively.  Export sales accounted 
for 87.8% and 82.5% of net sales in the six months ended July 31, 1998 and 
1997, respectively.  Approximately 58.6% and 61.0% of export sales for the 
three and six months ended July 31, 1998 were to affiliates of United States 
customers. The Company expects that export sales will continue to represent a 
significant portion of net sales, although there can be no assurance that 
export sales as a percentage of net sales will remain at current levels.  All 
sale transactions were denominated in U.S. dollars.

     Four customers accounted for 23.0%, 18.0%, 11.0% and 10.2% of net sales 
for the three months ended July 31, 1998. Five customers accounted for 18.2%, 
14.5%, 12.7%, 12.4% and 12.4% of net sales for the three months ended July 
31, 1997. Four customers accounted for 19.3%, 18.7%, 10.6% and 10.3% of net 
sales for the six months ended July 31, 1998.  Five customers accounted for 
18.9%, 16.1%, 13.7%, 11.9% and 11.4% of net sales for the six months ended 
July 31, 1997.  The Company expects a significant portion of its future sales 
to remain concentrated within a limited number of strategic customers.  There 
can be no assurance that the Company will be able to retain its strategic 
customers or that such customers will not cancel or reschedule orders or, in 
the event orders are canceled, that such orders will be replaced by other 
sales.  In addition, sales to any particular customer may fluctuate 
significantly from quarter to quarter. The occurrence of any such events or 
the loss of a strategic customer could have a material adverse effect on the 
Company's operating results.

GROSS MARGIN

     Gross margin was $22.3 million and $10.0 million for the three months 
ended July 31, 1998 and 1997, respectively. Gross margin percentages 
increased to 41.8% for the three months ended July 31, 1998 from 40.9% in the 
three months ended July 31, 1997.  Gross margin was $42.6 million and $17.2 
million for the six months ended July 31, 1998 and 1997, respectively.  Gross 
margin percentages increased to 42.1% for the six months ended July 31, 1998 
from 40.0% in the six months ended July 31, 1997.  The increase in gross 
margin percentage was due primarily to lower wafer pricing and improved 
yields on higher production volumes, partially offset by declining average 
selling prices.

     In the future, the Company's gross margin percentages may be adversely 
effected by increased competition and related decreases in unit average 
selling prices (particularly with respect to older generation products), 
timing of volume shipments of new products, the availability and cost of 
products from the Company's suppliers, obtaining satisfactory production 
yields and changes in the mix of products sold.


                                  Page 9 of 23

<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses were $7.3 million and $3.3 million for 
the three months ended July 31, 1998 and 1997, respectively.  Research and 
development expenses were $13.6 million and $5.8 million for the six months 
ended July 31, 1998 and 1997, respectively.  The Company has made, and 
intends to continue to make, significant investments in research and 
development to remain competitive by developing new and enhanced products to 
serve its identified markets. Research and development expenses increased 
primarily as a result of increased employee related expenses largely related 
to additional personnel and to a lesser extent consulting, engineering and 
equipment related expenses.  Research and development spending is expected to 
increase in absolute dollars in fiscal 1999 as compared to fiscal 1998. 

SALES, GENERAL AND ADMINISTRATIVE EXPENSES

     Sales, general and administrative expenses were $4.8 million and $2.4 
million in the three months ending July 31, 1998 and 1997, respectively.  
Sales, general and administrative expenses were $9.2 million and $4.7 million 
in the six months ending July 31, 1998 and 1997, respectively.  Sales, 
general and administrative expenses increased primarily as a result of 
increased commissions associated with higher sales and increased employee 
related expenses largely related to additional personnel.  The Company 
anticipates that sales, general and administrative expenses will increase in 
absolute dollars in fiscal 1999 as compared to fiscal 1998.

OTHER INCOME (EXPENSE), NET

     Other income (expense), net increased to $547,000 in the three months 
ended July 31, 1998 from $332,000 in the three months ended July 31, 1997.  
Other income (expense), net increased to $1.2 million in the six months ended 
July 31, 1998 from $424,000 in the six months ended July 31, 1997.  The 
increase in other income (expense), net is due primarily to additional 
interest income resulting from higher average amounts of cash and short-term 
investments in the three and six months ended July 31, 1998 compared to the 
same periods in 1997. 

INCOME TAXES

     The Company's effective tax rate for the three and six months ended July 
31, 1998 was 35% compared to an effective tax rate for the three and six 
months ended July 31, 1997 of 15%.  The lower effective tax rate for the 
three and six months ended July 31, 1997 is primarily due to the utilization 
of the Company's net operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash, cash equivalents and short-term investments 
decreased $1.2 million in the six months ended July 31, 1998 to $69.8 million 
from $71.0 million at January 31, 1998.  The decrease is primarily due to 
increased payments against the working capital line of credit. In January 
1998, the working capital line of credit was revised such that for wafer 
shipments subsequent to January 31, 1998 payment for wafers must be made 
within 30 days of wafer shipment.  Working capital increased $14.5 million to 
$67.4 million at July 31, 1998 from $52.9 million at January 31, 1998.

     The Company generated approximately $21.0 million of cash and cash 
equivalents in its operating activities during the six months ended July 31, 
1998 compared to $3.6 million of net cash generated from operating activities 
during the comparable period in the prior year.  The increase in cash 
generated from operations is primarily attributable to an $11.0 million 
increase in accounts payable and a $7.6 million increase in net income from 
the six month period ended July 31, 1998 compared to the same period the 
prior year.  


                                  Page 10 of 23

<PAGE>

     Net cash provided by investing activities for the six months ended July 
31, 1998 was $2.3 million, compared to cash used by investing activities of 
$23.5 million for the six months ended July 31, 1997.  The increase in cash 
provided by investing activities for the six month period ended  July 31, 
1998 compared to the six month period ended July 31, 1997 was primarily due 
to a reduction in the net purchases of short-term investments of $26.7 
million, offset partially by an increase of $1.0 million of investments in 
property and equipment for the six month period ended  July 31, 1998 compared 
to the six month period ended July 31, 1997.  The higher purchase of 
short-term investments during the six months ended July 31, 1997 was related 
to the investment of funds generated from the initial public offering.  
Continued expansion of the Company's business may require higher levels of 
capital equipment purchases, technology investments, foundry investments and 
other payments to secure manufacturing capacity.  The timing and amount of 
future investments will depend primarily upon the growth of the Company's 
future revenues.

     Net cash used in financing activities for the six months ended July 31, 
1998 was $19.6 million compared to net cash provided by financing activities 
of $40.1 for the six months ended July 31, 1997.  Net cash used in financing 
activities for the six months ended July 31, 1998 relates primarily to 
repayments against the working capital line of credit of $21.0 million offset 
in part by net proceeds from the issuance of common stock.  Net cash provided 
by financing activities for the six months ended July 31, 1997 related 
primarily to net proceeds from the initial public offering of $37.8 million 
and the release of amounts previously held as restricted cash.

     At July 31, 1998 the Company's principal sources of liquidity included 
cash and cash equivalents and short-term investments of $69.8 million.  The 
Company believes these available funds and anticipated funds from operations 
will satisfy the Company's projected working capital and capital expenditure 
requirements through the next 12 months.  Cash may also be used to acquire 
technology through purchases and strategic acquisitions. The Company's future 
capital requirements will depend upon many factors including the rate of net 
sales growth, the timing and extent of spending to support research and 
development programs in new and existing areas of technology, expansion of 
sales and marketing, the timing of introductions of new products and 
enhancements to existing products and market acceptance of the Company's 
products.  The Company expects that it may need to raise additional equity or 
debt financing in the future.  There can be no assurance that additional 
equity or debt financing, if required, will be available on acceptable terms 
or at all.  

IMPACT OF YEAR 2000 

     Like many other companies, the year 2000 computer issue creates risks 
for NeoMagic Corporation.  If internal systems do not correctly recognize and 
process date information beyond calendar year 1999, there could be an adverse 
impact on the Company's operations. Computer programs that have 
time-sensitive software may recognize a date using "00" as the year 1900 
rather than the year 2000.  

     The Company has completed an assessment and does not believe that it 
will be required to modify or replace significant portions of its software so 
that its computer systems will function properly with respect to dates in the 
year 2000 and thereafter. The Company has also assessed the capability of its 
products sold to customers and believes that it has no exposure to 
contingencies related to the year 2000 issues for the products it has sold.  
Management believes that the likelihood of a material adverse impact due to 
problems with internal systems or products sold to customers is remote and 
expects that any costs to be incurred to assure year 2000 capability will not 
have a material adverse effect on the Company's financial position or results 
of operations. The Company is contacting critical suppliers of products and 
services to determine that the suppliers' operations and the products and 
services they provide are year 2000 capable.   In addition the Company has 
commenced work on a contingency plan to address potential problem areas 
within internal systems and with suppliers and other third parties.  It is 
expected that contingency planning will be on-going throughout calendar year 
1998 and 1999.


                                  Page 11 of 23

<PAGE>

     The Company has not incurred any costs to date related to preparing for 
and evaluating year 2000 issues.  Based on currently available information, 
management does not believe that the year 2000 matters discussed above 
related to internal systems or products sold to customers will have a 
material adverse impact on the Company's financial condition or overall 
trends in results of operations; however, it is uncertain to what extent the 
Company may be affected by such matters.  In addition, there can be no 
assurance that the failure to ensure year 2000 capability by a supplier or 
another third party would not have a material adverse effect on the Company.

FACTORS THAT MAY EFFECT RESULTS

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

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

RISKS ASSOCIATED WITH DEPENDENCE ON THE NOTEBOOK PC MARKET

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


                                  Page 12 of 23

<PAGE>

accelerators, could have a material adverse impact on the Company's business, 
financial condition and results of operations.

     The Company's ability to compete in the future will depend on its 
ability to identify and ensure compliance with evolving industry standards. 
Unanticipated changes in industry standards could render the Company's 
products incompatible with products developed by major hardware manufacturers 
and software developers, including Intel Corporation and Microsoft 
Corporation.  The Company could be required, as a result, to invest 
significant time and effort to redesign its products to ensure compliance 
with relevant standards.  If the Company's products are not in compliance 
with prevailing industry standards for a significant period of time, the 
Company could miss opportunities to achieve crucial design wins, which could 
result in a material adverse effect on the Company's business, financial 
condition and results of operations.  In addition, the Company's products are 
designed to afford the notebook PC manufacturer significant advantages with 
respect to product performance, power consumption and size.  To the extent 
that future developments in other notebook PC components or subassemblies 
incorporate one or more of the advantages offered by the Company's products, 
the market demand for the Company's products may be negatively impacted, 
which could result in a material adverse effect on the Company's business, 
financial condition and results of operations.

PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS

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

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

CUSTOMER CONCENTRATION

     The Company's sales are concentrated within a limited customer base.  
The Company expects that a small number of customers will continue to account 
for a substantial portion of its net sales for the foreseeable future.  
Furthermore, the majority of the Company's sales are made on the basis of 
purchase orders rather than pursuant to long-term agreements.  As a result, 
the Company's business, financial condition and results of operations could 
be materially adversely effected by the decision of a single customer to 
cease using the Company's products or by a decline in the number of notebook 
PCs sold by a single customer.


                                  Page 13 of 23

<PAGE>

EFFECTS OF CHANGES IN DRAM PRICING

     The Company's products feature large DRAM memory integrated with analog 
and logic circuitry on a single chip, while its competitors often provide 
only the graphics/video analog and logic circuitry on a separate chip to be 
used in conjunction with DRAMs supplied by others.  The prices of the 
Company's products reflect many factors, including the prices of DRAM chips.  
As a result, the Company's business, financial condition and results of 
operations may be materially and adversely effected by unanticipated changes 
in the price of DRAMs.  These changes are typically sudden and dramatic and 
can extend over a significant period of time.  Such changes are currently 
occurring in the market. A significant reduction in the price of DRAMs could 
cause the Company's products to be less competitively priced, potentially 
effecting ongoing product pricing as well as resulting in the loss of design 
wins for new notebook PCs.  In this circumstance, competitors without 
embedded DRAM potentially could be benefited by DRAM price reductions, and 
the Company could be forced to respond to pricing pressures precipitated by 
changes in the DRAM market by reducing the average selling prices of its 
products to current and prospective system manufacturer customers.  Because 
the Company's product costs cannot be adjusted as rapidly as changes in 
average selling prices to system manufacturers, the Company's net sales and 
gross margin would be materially and adversely impacted.

COMPETITION

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

     NeoMagic competes with major domestic and international companies, some 
of which have substantially greater financial and other resources than the 
Company with which to pursue engineering, manufacturing, marketing and 
distribution of their products.  The Company's principal competitors include 
ATI, Chips & Technologies, Inc. ("Chips & Technologies"- in January 1998, 
Intel Corporation acquired Chips and Technologies), S3 Incorporated ("S3") 
and Trident Microsystems, Inc. ("Trident").  NeoMagic may also face increased 
competition from new entrants into the notebook PC multimedia accelerator 
market including companies currently selling products designed for desktop 
PCs.  Furthermore, the Company expects that many of its competitors will seek 
to develop and introduce products that integrate large DRAM with analog and 
logic circuitry on a single chip.  For example, Chips & Technologies and 
Trident have publicly disclosed that they have or will begin sampling an 
integrated multimedia accelerator solution for the notebook PC market that 
would directly compete with the Company's products.  Certain of the Company's 
competitors offer more functionality and / or higher processor speeds at the 
expense of battery life and power consumption than the Company's product 
offerings.  These feature sets may be more competitive for certain 
applications than the Company's products. Potential competition also could 
come from manufacturers that integrate a microprocessor or other components 
with a multimedia controller.  Cyrix (acquired by National Semiconductor in 
July 1997) is in production of such a product.  The successful commercial 
introduction of such a product by competitors that integrates large DRAM with 
analog and logic circuitry on a single chip or a product that eliminates the 
need for a separate multimedia accelerator in notebook PCs could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.
     

                                  Page 14 of 23

<PAGE>

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

DEPENDENCE ON MANUFACTURING RELATIONSHIPS
     
     The Company's products require wafers manufactured with state-of-the-art 
fabrication equipment and techniques.  The Company's products are primarily 
manufactured by Mitsubishi Electric Corporation ("Mitsubishi Electric") in 
Japan.  In fiscal 1998, the Company began manufacturing wafers with Toshiba 
Corporation ("Toshiba") in Japan.  Each of these manufacturing relationships 
are covered under the terms of a five-year wafer supply agreement.  The 
Company expects that, for the foreseeable future, some of its products will 
be single source manufactured.  Because the lead time needed to establish a 
strategic relationship with a new DRAM partner is at least 12 months and the 
estimated time for a foundry to switch to a new product line is four to nine 
months, there may be no readily available alternative source of supply for 
any specific product.  A manufacturing disruption experienced by either of 
the Company's manufacturing partners would impact the production of the 
Company's product for a substantial period of time, which would have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  Furthermore, in the event that the transition to the 
next generation of manufacturing technologies at Mitsubishi Electric or 
Toshiba is unsuccessful, the Company's business, financial condition and 
results of operations would be materially and adversely effected.

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

     The Company's products are assembled and tested by third party 
subcontractors.  The Company does not have long term agreements with any of 
these subcontractors.  Such assembly and testing is conducted on a purchase 
order basis.  As a result of its reliance on third party subcontractors to 
assemble and test its products, the Company cannot directly control product 
delivery schedules, which could lead to product shortages or quality 
assurance problems that could increase the costs of manufacturing or assembly 
of the Company's products.  Due to the amount of time normally required to 
qualify assembly 


                                  Page 15 of 23

<PAGE>

and test subcontractors, product shipments could be delayed significantly if 
the Company is required to find alternative subcontractors. Any problems 
associated with the delivery, quality or cost of the assembly and test of the 
Company's products could have a material adverse effect on the Company's 
business, financial condition and results of operations.

INVENTORY RISK

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

MANUFACTURING YIELDS

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

     Semiconductor manufacturing yields are a function both of product 
design, which is developed largely by the Company, and process technology, 
which is typically proprietary to the manufacturer.  Historically, the 
Company has experienced lower yields on new products.  Since low yields may 
result from either design or process technology failures, yield problems may 
not be effectively determined or resolved until an actual product exists that 
can be analyzed and tested to identify process sensitivities relating to the 
design rules that are used.  As a result, yield problems may not be 
identified until well into the production process, and resolution of yield 
problems would require cooperation by and communication between the Company 
and the manufacturer.  For example, a design error that resulted in lower 
than expected yields of finished products caused the Company to take a $1.2 
million charge in fiscal 1997.  This risk is compounded by the offshore 
location of the Company's manufacturers, increasing the effort and time 
required to identify, communicate and resolve manufacturing yield problems.  
As the Company's relationships with additional manufacturing partners 
develop, yields could be adversely effected due to 


                                  Page 16 of 23

<PAGE>

difficulties associated with adopting the Company's technology and product 
design to the proprietary process technology and design rules of each 
manufacturer.  Because of the Company's limited access to wafer fabrication 
capacity from its manufacturers, any decrease in manufacturing yields could 
result in an increase in the Company's per unit costs and force the Company 
to allocate its available product supply among its customers, thus 
potentially adversely impacting customer relationships as well as revenues 
and gross margins.  There can be no assurance that the Company's 
manufacturers will achieve or maintain acceptable manufacturing yields in the 
future.  The inability of the Company to achieve planned yields from its 
manufacturers could have a material adverse effect on the Company's business, 
financial condition and results of operations.  Furthermore, the Company also 
faces the risk of product recalls resulting from design or manufacturing 
defects which are not discovered during the manufacturing and testing 
process.  In the event of a significant number of product returns, the 
Company's net sales and gross margin could be materially adversely effected.

DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE

     The Company's business, financial condition and results of operations 
will depend to a significant extent on its ability to maintain its position 
in the market for multimedia accelerator products that integrate large DRAM 
with analog and logic circuitry on a single chip.  As a result, the Company 
believes that significant expenditures for research and development will 
continue to be required in the future.   The notebook PC market for which the 
Company's products are designed is intensely competitive and is characterized 
by rapidly changing technology, evolving industry standards and declining 
average selling prices.  Notebook PC manufacturers demand products 
incorporating rich features and functionality in order to achieve product 
differentiation.  The Company must anticipate the features and functionality 
that the consumer of notebook PCs will demand, incorporate those features and 
functionality into products that meet the exacting design requirements of the 
notebook PC manufacturers, price its products competitively, and introduce 
the products to the market within the limited window of market demand.  For 
example, both 3-D and DVD functionality are becoming increasingly important 
for notebook PCs.  The Company's ability to compete may depend on its ability 
to incorporate these features in its products. The success of new product 
introductions is dependent on several factors, including proper new product 
definition, timely completion and introduction of new product designs, the 
ability of Mitsubishi Electric, Toshiba and any additional strategic 
manufacturing partners to effectively design and implement the manufacture of 
new products, quality of new products, differentiation of new products from 
those of the Company's competitors and market acceptance of NeoMagic's and 
its customers' products.  There can be no assurance that the products the 
Company expects to introduce will incorporate the features and functionality 
demanded by system manufacturers and consumers of notebook PCs, will be 
successfully developed, or will be introduced within the appropriate window 
of market demand.  The failure of the Company to successfully introduce new 
products and achieve market acceptance for such products would have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

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


                                  Page 17 of 23

<PAGE>

develop and introduce competing products may be shorter and manufacturing 
yields may be better than those experienced by the Company.

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

UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY RIGHTS

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

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

     As a general matter, the semiconductor industry is characterized by 
substantial litigation regarding patent and other intellectual property 
rights. The Company in the past has been, and in the future may be, notified 
that it may be infringing the intellectual property rights of third parties.  
In November 1994, Cirrus Logic Inc. ("Cirrus Logic") filed suit against the 
Company and certain of its employees claiming, among other things, breach of 
fiduciary duty, breach of and interference with contract and misappropriation 
of trade secrets. The Company and Cirrus Logic settled the lawsuit in June 
1996, but the Company incurred an aggregate of $703,000 in expenses in 
connection with such litigation during fiscal 1995 and fiscal 1996.  This 
settlement did not involve cash payments, but did include a non-solicitation 
provision and certain contingent cross-licensing provisions.  In February 
1997, Cirrus Logic sent the Company written notice asserting that the 
Company's MagicGraph128, MagicGraph128V and MagicGraph128ZV products infringe 
six United States patents held by Cirrus Logic.  Since receiving the notice 
of alleged infringement, the Company has advised Cirrus Logic that the 
Company does not believe that any of its products infringe any claims of the 
patents.  The Company also has undergone a confidential external infringement 
review and has conducted its own internal infringement review, and the 
Company continues to believe that the Cirrus Logic infringement allegations 
are unfounded.  However, there can be no assurances that Cirrus Logic will 
not file a lawsuit against the Company or that the Company would prevail in 
any such litigation.  Any protracted litigation by Cirrus Logic or the 


                                  Page 18 of 23

<PAGE>

success of Cirrus Logic in any such litigation could have a material and 
adverse effect on the Company's financial position or results of operations.

     Further, the Company was notified by certain of its customers that a law 
suit had been filed and served by a holder of a United States patent 
asserting that the video/graphics subsystem in such customers' notebook PCs, 
which use the Company's MagicGraph128 and MagicGraph128V products, infringe 
certain claims of the patent.  The Company may have certain indemnification 
obligations to customers with respect to the infringement of third-party 
intellectual property rights by its products.  There can be no assurance that 
the Company's potential obligations to indemnify such customers will not have 
a material adverse effect on the Company's business, financial condition and 
results of operations.  The Company believes that the Company's MagicGraph128 
and MagicGraph128V products do not infringe any of the claims of such patent. 
The Company's belief is based upon a legal opinion from its patent counsel, 
Townsend and Townsend and Crew LLP.  There can be no assurances that Company 
or such customers would prevail in any patent litigation, or that such 
customers will continue to purchase the Company's products while the Company 
is under the threat of litigation.

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

DEPENDENCE ON INTERNATIONAL SALES AND SUPPLIERS

     Export sales are a critical part of the Company's business.  Sales to 
customers located outside the United States (including sales to foreign 
operations of customers headquartered in the United States and foreign system 
manufacturers that sell to United States-based OEMs) accounted for 83.2%, 
96.2% and 90.0% of the Company's net sales for fiscal 1998, 1997 and 1996, 
respectively, and 87.8% for the first six months of fiscal 1999 ended July 
31, 1998.  The Company expects that net sales derived from international 
sales will continue to represent a significant portion of its total net 
sales.  Some of the Company's international sales are supported by letters of 
credit issued by its customers.  Because the Company's international sales 
have to date been denominated in United States dollars, increases in the 
value of the United States dollar could increase the price in local 
currencies of the Company's products in foreign markets and make the 
Company's products relatively more expensive than competitors' products that 
are denominated in local currencies. All of the Company's wafers are, and for 
the foreseeable future, will be produced by foreign manufacturers.  In 
addition, the majority of the assembly and test services used by the Company 
are procured from international sources. Under the Company's wafer supply 
agreements with Mitsubishi Electric and Toshiba, products are priced in 
Japanese yen.  As a result, the Company's cost of goods sold are subject to 
fluctuations in the yen-dollar exchange rates.  The Company has in the past 
hedged its exposure to fluctuations in such foreign currency exchange rate by 
purchasing foreign exchange contracts and will continue to do so in the 
future.  However, there can be no assurance that such hedging will be 
adequate.  Significant wafer or assembly and test service price increases, 
fluctuations in currency exchange rates or the Company's hedging against 
currency exchange rate 


                                  Page 19 of 23

<PAGE>

fluctuations could have a material adverse effect on the Company's business, 
financial condition and results of operations. 

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

IMPACT OF CURRENCY EXCHANGE RATES

     Because the Company currently purchases wafers under purchase contracts 
denominated in yen, significant appreciation in the value of yen relative to 
the value of the U.S. dollar would make the wafers relatively more expensive 
to the Company, which could have a material adverse effect on the Company's 
business, financial condition and results of operations.  The Company from 
time to time enters into foreign currency forward contracts and foreign 
currency options to minimize foreign currency fluctuation exposures related 
to these firm purchase commitments.  The Company does not use derivative 
financial instruments for speculative or trading purposes.  The Company's 
accounting policies for these instruments are based on the Company's 
designation of such instruments as hedging transactions.  The criteria the 
Company uses for designating an instrument as a hedge include its 
effectiveness in risk reduction and one-to-one matching of derivative 
instruments to underlying transactions.  Notwithstanding the measures the 
Company has adopted, due to the unpredictability and volatility of currency 
exchange rates and currency controls, there can be no assurance that the 
Company will not experience currency losses in the future, nor can the 
Company predict the effect of exchange rate fluctuations upon future 
operating results.

NEED FOR ADDITIONAL CAPITAL

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

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


                                  Page 20 of 23

<PAGE>

DEPENDENCE ON QUALIFIED PERSONNEL

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

VOLATILITY OF STOCK PRICE

     The market price of the shares of Common Stock, like that of the common 
stock of many other semiconductor companies, has been and is likely to be 
highly volatile, and the market has from time to time experienced significant 
price and volume fluctuations that are unrelated to the operating performance 
of particular companies.  The market price of the Common Stock could be 
subject to significant fluctuations in response to 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, conditions in the semiconductor and PC 
industries, unanticipated shifts in the notebook PC market or industry 
standards, loss of customers, changes in DRAM pricing, the commencement of, 
developments in or outcome of litigation, 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. 
     

                                  Page 21 of 23

<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings
          None.

ITEM 2.   Changes in Securities and Use of Proceeds
          The Company completed its initial public offering pursuant to a
          Registration Statement on Form S-1 in March 1997 and issued 3,575,000
          shares (including direct sales of 125,000 shares and an additional
          450,000 shares sold pursuant to the underwriters exercise of its 
          over-allotment option) of its Common Stock at a price of $12.00 per 
          share. The offering has been terminated and all the shares were sold.
          The Company received approximately $37.8 million of cash from the 
          public offering, net of underwriting discounts, commissions, and other
          offering costs.  All of the proceeds from such offering have been
          used.

ITEM 3.   Defaults Upon Senior Securities
          None.

ITEM 4.   Submission of Matters to a Vote of Security Holders
          
          The Annual Meeting of Stockholder of NeoMagic Corporation was held on
          June 4, 1998 in Santa Clara, California.  21,433,797 shares of common
          stock or 87.82% of the total outstanding shares were present or
          represented by proxies at the meeting.  The matters voted upon at the
          meeting and the results of those votes were as follows:
          
          1.   Election of directors, Kamran Elahian, Prakash C. Agarwal, Brian
               P. Dougherty, Irwin Federman, James Lally and Klaus Wiemer.  Mr.
               Elahian received 19,983,229 affirmative votes and 1,450,568 votes
               were withheld.  Mr. Agarwal received 21,375,963 affirmative votes
               and 57,834 votes were withheld.  Mr. Dougherty received
               17,544,374 affirmative votes and 3,889,423 votes were withheld. 
               Mr. Federman received 16,183,938 affirmative votes and 5,249,859
               votes were withheld.  Mr. Lally received 16,183,938 affirmative
               votes and 5,249,859 votes were withheld.  Mr. Wiemer received
               21,381,963 affirmative votes and 51,834 votes were withheld.

          2.   Approval to increase the number of shares of Common Stock
               available for grant under the Company's Amended 1993 Stock Plan 
               by 875,000 shares.  The proposal received 12,946,838 affirmative
               votes, 8,436,961 negative votes and 49,998 abstentions.

          3.   Appointment of Ernst & Young LLP as the Company's independent
               auditors for the fiscal year ended January 31, 1999.  The
               proposal received 21,403,093 affirmative votes, 12,066 negative
               votes and 18,638 abstentions.  

ITEM 5.   Other Information
          Not applicable.

ITEM 6.   Exhibits and Reports on Form 8-K
          (a)  Exhibits
          
<TABLE>
<CAPTION>
          EXHIBIT 
          NUMBER         DESCRIPTION
          -------        -----------
          <S>            <C>
          27.1           Financial Data Schedule
</TABLE>

          (b)  Reports on Form 8-K

          The Company did not file any reports on Form 8-K during the six months
          ended July 31, 1998.
               

                                  Page 22 of 23

<PAGE>

                                     SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
                                          
                                          
                                          
                                NEOMAGIC CORPORATION
                                    (Registrant)
                                          
                                          
                                          
                                                                 
                                  Merle McClendon
                              -----------------------
                                  MERLE MCCLENDON
                              Vice President, Finance
                            and Chief Financial Officer
                    (Principal Financial and Accounting Officer)
                                          
                                 September 1, 1998
                                          
 












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