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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



---



Form 10-K



(Mark One)



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------



For the fiscal year ended January 31, 2005,



OR



| ̈ | 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



NEOMAGIC CORPORATION

(Exact name of Registrant as specified in its charter)



|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                      |  | 77-0344424                          
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              | 
|3250 Jay Street Santa Clara, California                       |  | 95054                               
|(Address of principal executive offices)                      |  | (Zip Code)                          



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



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



Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value



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



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



Indicate by check mark whether
the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes  x    No ̈



The aggregate market value of
voting stock held by non-affiliates of the Registrant was approximately $47,153,835 as of July 30, 2004 based upon the closing price on the Nasdaq National Market reported for such date, the last business day of the Registrants most recently
completed second fiscal quarter. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes.



The number of shares of the Registrants Common Stock, $.001 par value, outstanding at April 22, 2005 was 33,238,669.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants Proxy Statement related to the 2005 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission after the date hereof, are incorporated by reference into Part III of this Annual Report on Form 10-K.



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NeoMagic Corporation

FORM 10-K



FOR THE
FISCAL YEAR ENDED JANUARY 31, 2005



TABLE OF CONTENTS



|          |  |                                                                                                              |  |     
|--------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|          |  |                                                                                                              |  | Page
|PART I.  
|Item 1.   |  | Business                                                                                                     |  | 1   
|Item 2.   |  | Properties                                                                                                   |  | 6   
|Item 3.   |  | Legal Proceedings                                                                                            |  | 7   
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 7   
|         
|PART II. 
|Item 5.   |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 8   
|Item 6.   |  | Selected Financial Data                                                                                      |  | 9   
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 10  
|Item 7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 27  
|Item 8.   |  | Financial Statements and Supplementary Data                                                                  |  | 29  
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                        |  | 56  
|Item 9A.  |  | Controls and Procedures                                                                                      |  | 56  
|Item 9B.  |  | Other Information                                                                                            |  | 57  
|         
|PART III.
|Item 10.  |  | Directors and Executive Officers of the Registrant                                                           |  | 57  
|Item 11.  |  | Executive Compensation                                                                                       |  | 57  
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 57  
|Item 13.  |  | Certain Relationships and Related Transactions                                                               |  | 57  
|Item 14.  |  | Principal Accountant Fees and Services                                                                       |  | 57  
|         
|PART IV. 
|Item 15.  |  | Exhibits and Financial Statement Schedules                                                                   |  | 58  
|          |  | Signatures                                                                                                   |  | 61  



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FORWARD-LOOKING STATEMENTS



When used in this discussion, the words expects, anticipates, believes and similar
expressions are intended to identify forward-looking statements. Such statements reflect managements current intentions and 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 devices developed and marketed by customers that use our products, our ability to execute product and technology development plans on schedule, and our
ability to access advanced manufacturing technologies in sufficient capacity without significant cash pre-payments or investment. Examples of forward-looking statements include statements about our expected revenues, our competitive advantage in our
markets, the potential market for our products, our expected production timelines, our customer base and our need for additional financing beyond the next 12 months. These statements are subject to significant risks and uncertainties, including
those set forth below under Factors that May Affect Results, that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any changes in our expectations with regard thereto or any changes in events, conditions or circumstances on which
any such statement is based.



PART I



|Item 1. | BUSINESS
|------- | --------



General



NeoMagic
Corporation designs, develops and markets high-performance semiconductor solutions, known as Applications Processors, for sale to manufacturers of mobile phones and handheld devices. Applications Processors are semiconductors, or Systems-on-Chips
(SOCs), used to enable multimedia applications and sophisticated operating systems on mobile phones and other handheld devices. Our Applications Processors are sold under the MiMagic brand name with a focus on enabling high performance
multimedia within a low power consumption environment. Our target customers include manufacturers of mobile phones and handheld devices. The largest projected market opportunity for Applications Processors is in the mobile phone market, where
Applications Processors that enable multimedia functionality work side-by-side with baseband processors that are used for communications functionality.



In the past, we provided semiconductor solutions, called multimedia accelerators, to top notebook computer manufacturers. In April 2000, we began to exit
the multimedia accelerator market. However, the majority of our historical net sales through the end of fiscal year 2002 continued to come from these multimedia accelerator products. We do not expect to have revenue related to these products in the
future. We are now focused solely on the Applications Processor market. We believe that our expertise and experience in providing multimedia accelerators for the laptop computer market, where multimedia processing with low power consumption is a
requirement, will give us an advantage in the Applications Processor market which also requires high performance processing with low power consumption.



International Data Corporation (IDC), an industry research firm for the technology market, states that 536 million mobile phones were shipped worldwide in
2003. IDC estimates that this number will grow to 745 million mobile phones by 2007. NeoMagic believes that next-generation mobile phones and other handheld devices will feature dramatically increased multimedia functionality including: camera
applications, highly compressed video using MPEG-4 and H.264 video standards, 3D graphics for gaming, and audio. Our strategy is to become a leading provider of Applications Processors by:



| | (1) | Leveraging our core competencies in integrating logic, analog, and memory to support all multimedia applications on mobile phones and handheld devices;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (2) | Offering Applications Processors that support a full range of operating systems, basebands and wireless protocols;
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (3) | Providing high-performance, power-efficient Applications Processors that use our proprietary Associative Processing Array architecture;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Continuing to focus on building relationships with the leading customers worldwide.
| | --- | -----------------------------------------------------------------------------------



We have established relationships with third-party manufacturing partners to produce semiconductor products for us. Pursuant
to these relationships, NeoMagic designs the overall product, including the logic and analog circuitry, and the manufacturing partners manufacture the wafers, assemble and test the products.



NeoMagic Corporation was incorporated in California in May 1993 and
subsequently reincorporated in Delaware in February 1997.



Products



Our main product line is the MiMagic Applications
Processor family. The MiMagic family of Applications Processors incorporates microprocessor, 3D graphics, audio and video capabilities. We introduced the first member of the MiMagic Applications Processor family in July of 2001. We have since phased
out production of the MiMagic 1 and MiMagic 2 Applications Processors. Currently, the MiMagic 3 Applications Processor and MiMagic 5 Applications Processor are in full production. The MiMagic 6 Applications Processor is currently being sampled to
customers and is expected to commence production shipments during the fourth quarter of calendar year 2005.



The following products fall within the category of Applications Processors for handheld devices:



|             |  |                                                               |  |                     
|------------ |  | ------------------------------------------------------------- |  | --------------------
|Product Name |  | Description                                                   |  | Status at April 2005
|MiMagic 3    |  | SOC with performance and power enhancements                   |  | Production          
|MiMagic 5    |  | SOC with dedicated video hardware                             |  | Production          
|MiMagic 6    |  | SOC with Associative Processing Array (APA) Multimedia Engine |  | Sampling            



The following products
fall within the category of companion chips, which add IO (input/output) functions to processors made by other companies. These companion chips are currently being phased out.



|             |  |                                        |  |                     
|------------ |  | -------------------------------------- |  | --------------------
|Product Name |  | Description                            |  | Status at April 2005
|NMC1110      |  | Companion chip for Intel StrongARM SOC |  | Production          
|NMC1121      |  | Enhanced SOC companion chip            |  | Production          



Research and Development



We believe the timely development and introduction of new
products are essential to maintaining our competitive position and our ability to capitalize on market opportunities. NeoMagics research and development efforts are focused on developing Integrated System-on-Chip semiconductor products for
mobile phones and other handheld devices. At the end of fiscal 2005, we had approximately 91 employees engaged in research and development activities. Research and development expenses were $18.2 million, $19.7 million, and $24.7 million, in fiscal
2005, 2004 and 2003, respectively. We have historically focused much of our personnel and



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resources on research and development. Our research and development activities are focused on bringing the MiMagic 6 to production as well as on developing
next generation products. We are also developing new technologies that will improve the quality of multimedia applications on low-power consumption mobile phones and other handheld devices. We plan to continue innovating and improving the
functionality of our MiMagic family of Applications Processors.



In November of 2003, we completed the first version of our MiMagic 6 Applications Processor, which includes a new technology architecture, called Associative Processor Array (APA). The APA multimedia engine uses a massively parallel
approach to processing information. Most competitive architectures use a sequential approach to process each bit of data separately. To increase performance, sequential architectures rely on increased clock rates. These faster clock rates result in
increased power consumption and reduced battery life. Because APA operates on data in parallel, it is able to process more information per clock cycle than sequential approaches. With its ability to handle large amounts of data simultaneously, the
APA platform is able to efficiently process multimedia data such as images, video and graphics, with low power consumption.



Sales and Marketing



We primarily sell our products to manufacturers of mobile phones and other handheld devices using our internal sales and marketing personnel, a global
network of distributors and sales representatives and our management team. In some cases, mobile phones and other handheld devices are designed and manufactured by third-party Original Design Manufacturers (ODMs) on behalf of the final brand name
Original Equipment Manufacturers (OEMs). We focus on developing long-term customer relationships with ODMs, brand name OEMs as well as mobile phone operators. We believe that this approach increases the likelihood of design wins, improves the
overall quality of support, and enables the timely release of customer products to market.



Our sales and marketing strategy is an integral part of our effort to become a leading supplier of Applications Processors to manufacturers of mobile phones and other handheld devices. To meet customer requirements
and achieve design wins, our sales and marketing personnel work closely with our customers, business partners and key industry trendsetters to define product features, performance, price, and market timing of new products. We employ a sales and
marketing organization with a high level of technical expertise and product and industry knowledge to support a lengthy and complex design win process. Additionally, we employ a highly trained team of application engineers to assist customers in
designing, testing and qualifying system designs that incorporate NeoMagic products as part of the pre-sale process. We believe that the depth and quality of this design support is key to improving customers time-to-market deliveries and
maintaining a high level of customer satisfaction, which in turn encourages customers to utilize subsequent generations of our products.



Third Party Manufacturing



We have relationships with several foundries to produce our semiconductor wafers. These relationships enable us to concentrate our resources on product
design, development, engineering, marketing and sales, where we believe we have greater competitive advantages, and to eliminate the high cost of owning and operating a semiconductor wafer fabrication facility. We depend on these suppliers to
allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable cost and quality at acceptable manufacturing yields, and to deliver those products to us on a timely basis. A manufacturing
disruption experienced by any of our manufacturing partners would have an adverse effect on our business, financial condition and results of operations. Furthermore, in the event that the transition to the next generation of manufacturing
technologies at one of our suppliers is unsuccessful, our business, financial condition and results of operations would be materially and adversely affected.



We use other third-party subcontractors to perform assembly, packaging and testing of our products. We work with these third-party subcontractors for
advanced packaging capabilities. We do not have long-term agreements with any of these subcontractors. As a result of our reliance on third-party subcontractors to



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assemble, test and provide advanced packaging for our products, we 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 our products. Due to the amount of time normally required to qualify these assembly and test subcontractors, shipments could be delayed significantly if we
are required to find alternative subcontractors.



Competition



The market for Applications Processors is intensely
competitive and is characterized by rapid technological change, evolving industry standards and declining average selling prices. We believe that the principal factors of competition in this market are video and 3D graphics performance, price,
features, power consumption, size and customer support. The market for Applications Processors is also heavily affected by the system level architectural decisions made by prospective customers, that affect the allocation of functionality between
the baseband processor and other chips in a mobile phone. Our ability to compete successfully in the Applications Processor 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, ramp of production of our products, customer demand and acceptance of more sophisticated multimedia functionality on mobile phones and other handheld devices, end-user acceptance of
our customers products, market acceptance of competitors products and general economic conditions. Our ability to compete will also depend on our ability to identify and ensure compliance with evolving industry standards and market
trends.



We compete with both domestic and international
companies, some of which have substantially greater financial and other resources than us with which to pursue engineering, manufacturing, marketing and distribution of their products. Our principal competitors include Texas Instruments, Renesas, ST
Microelectronics and Broadcom as well as a number of vertically integrated electronics firms that are developing their own solutions. We may also face increased competition from new entrants into the market including companies currently at
developmental stages. We believe we have significant intellectual properties and historically demonstrated expertise in SOC technology. However, our inability to introduce timely new products for our market, to support these products in customer
programs, or to manufacture these products could have a material adverse effect on our business, financial condition and operating results.



Intellectual Property



We rely in part on patents to protect our intellectual property. As of January 31, 2005, we had been issued 79 patents. However, on April 7, 2005, we
announced the sale of 58 patents to Faust Communications, LLC for net proceeds of $3.5 million. The patents sold related to our legacy products and not to products that we currently sell or plan to sell. We retain a worldwide, non-exclusive license
under the patents sold. The sale did not include several of our important patents covering embedded DRAM technology or any of the unique array processing technology used in our MiMagic family of Applications Processors. The remaining 21 issued
patents are scheduled to expire no later than January 2022. Additionally, we have several patent applications pending. There can be no assurance that our pending patent applications, or any future applications will be approved. Further, there can be
no assurance that any issued patents will provide us 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 our ability
to do business. In addition, there can be no assurance that others will not independently develop similar products, duplicate our products or design around any patents that may be issued to us.



We also rely on a combination of mask work protection, trademarks,
copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect our 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 our trade secrets or intellectual property, disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. A failure by
us to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations.



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As a general matter, the semiconductor industry has experienced substantial litigation regarding patent
and other intellectual property rights. In December 1998, we 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 alleged that Tridents
embedded DRAM graphics accelerators infringe certain patents held by the Company. In January 1999, Trident filed a counter claim against us alleging an attempted monopolization in violation of antitrust laws, arising from NeoMagics filing of
the patent infringement action against Trident. Since January 1999, no further action has occurred on this counter claim. The Court ruled that there was no infringement by Trident. As a result, we 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 on
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. In May 2003, the lower court ruled in favor of Trident. In
December 2003, we filed an appeal in the United States Court of Appeals, for the Federal Circuit. In August 2004 the Federal Circuit rejected the appeal and affirmed the lower courts decision of no infringement by the Trident products. While
we believe we have valid defenses against Tridents counter claim filed in 1999, there can be no assurance as to whether Trident will or will not proceed with the counter-suit.



Backlog



Sales of our products are primarily made pursuant to standard purchase orders that are cancelable without significant penalties. These purchase orders are
subject to price renegotiations and to changes in quantities of products and delivery schedules in order to reflect changes in customers requirements and manufacturing availability. Also, many of our customers are moving to just in
time relationships with their vendors, whereby orders for product deliveries are not provided to the supplier until just prior to the requested delivery. A large portion of our sales are made pursuant to short lead-time orders. In addition,
our actual shipments depend on the manufacturing capacity of our suppliers and the availability of products from such suppliers. As a result of the foregoing factors, we do not believe that backlog is a meaningful indicator of future sales.



Employees



As of January 31, 2005, we employed a total of 117 full-time employees,
including 91 in research and development, 4 in applications engineering, 8 in sales and marketing, 2 in manufacturing and 12 in finance, information technology and administration. We also employ, from time to time, a number of temporary and
part-time employees as well as consultants on a contract basis. Our employees are not represented by a collective bargaining organization, and we believe that we have good relations with our employees.



Management



Executive Officers



The executive officers of the Company as of January 31, 2005 are as follows:



|                       |  |     |  |                                                    
|---------------------- |  | --- |  | ---------------------------------------------------
|Name                   |  | Age |  | Position                                           
|Prakash C. Agarwal (1) |  | 51  |  | President, Chief Executive Officer and Director    
|Doug Young (2)         |  | 59  |  | Vice President, Worldwide Sales                    
|Scott Sullinger        |  | 35  |  | Vice President, Finance and Chief Financial Officer
|Mark Singer (3)        |  | 45  |  | Vice President, Corporate Marketing                

---

|(1) | Effective April 19, 2005, Prakash C. Agarwal was no longer President, Chief Executive Officer and Director of NeoMagic.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | Effective April 19, 2005, Doug Young was appointed as President, Chief Executive Officer and Director of NeoMagic.
|--- | ------------------------------------------------------------------------------------------------------------------

|(3) | Effective April 20, 2005, Mark Singer was no longer Vice President, Corporate Marketing.
|--- | ----------------------------------------------------------------------------------------



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Prakash C. Agarwal, is our co-founder, and he was President, Chief Executive Officer, and a Director of
NeoMagic from its inception in 1993 until April 19, 2005.



Doug
Young joined NeoMagic in February of 2004. Mr. Young was promoted to VP Worldwide Sales in January 2005 and on April 19, 2005, Mr. Young was appointed President, Chief Executive Officer and Director of NeoMagic. Before joining NeoMagic, Mr. Young
was Senior Vice President of Worldwide Sales at Planetweb, Inc., a provider of embedded multimedia application and browser software for consumer electronics devices. At Planetweb, Mr. Young worked with customers such as Samsung, Sharp, Philips and
other large OEMs. Mr. Young has managed sales in many different environments ranging between large systems enterprise sales to the Fortune 500 and ODM and OEM sales in the consumer electronics market. He has over 25 years experience
working for companies such as IBM, Storage Technology Corporation, Unilease Computer Corporation, Data General and Hitachi Data Systems. He has worked in hardware and software sales, and he was President and CEO of a computer and satellite leasing
company. Mr. Young has a Bachelors of Arts Degree from Princeton University and a Masters Degree in Business Administration from The Stern School of Business at New York University.



Scott Sullinger joined NeoMagic in March of 2004. Prior to joining NeoMagic, Mr. Sullinger was director of finance at ON
Semiconductor, a provider of power and data management semiconductors and standard semiconductor components. Before joining ON Semiconductor, Mr. Sullinger spent seven years in investment banking, most recently as vice president of technology
investment banking at Morgan Stanley, in Menlo Park, California. In his role as an investment banker, Mr. Sullinger advised a variety of semiconductor companies, including Atmel, LSI Logic and STMicroelectronics, on acquisition and financing
strategies. Mr. Sullinger previously worked as an auditor and as a senior consultant at the accounting firm of Price Waterhouse. He has a bachelors degree in economics from the University of California, Los Angeles, where he graduated cum
laude, and a Masters Degree in Business Administration from Columbia University. He is a Certified Public Accountant.



Mark Singer joined NeoMagic in March 1997 as a Senior Staff member managing Strategic Business Planning and Corporate Communications. In 1999, he was
promoted to Vice President, Corporate Marketing a position he held until April 20, 2005.



Available Information



We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC electronically. The public may read and copy any
materials we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.



You may obtain a free copy of our annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http://www.neomagic.com, by calling the Investor Relations Department at our corporate
offices at (408) 988-7020 or by sending an e-mail message to ir@neomagic.com.



|Item 2. | PROPERTIES
|------- | ----------



Our corporate headquarters, which is also our principal administrative, selling and marketing, customer service, applications engineering and product
development facility, is located in Santa Clara, California and consists of approximately 45,000 square feet under a lease which will expire on April 30, 2010. Prior to April 30, 2003, we had leases on two buildings with 45,000 square feet each.
However, we exited one of these buildings



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and chose not to renew the lease on this building. We also lease 7,500 square feet of office space in Israel and 13,000 square feet of office space in India
under operating leases that expire in September 2005 and December 2006, respectively. On February 1, 2005, we entered into a sublease agreement to sub-lease 10,000 square feet in our Santa Clara facility for a two year period starting on March 15,
2005. We believe our existing facilities are adequate for our current needs.



|Item 3. | LEGAL PROCEEDINGS
|------- | -----------------



As a general matter, the semiconductor industry has experienced substantial litigation regarding patent and other intellectual property rights. In
December 1998, we 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 alleged that Tridents embedded DRAM graphics accelerators infringe
certain patents held by the Company. In January 1999, Trident filed a counter claim against us alleging an attempted monopolization in violation of antitrust laws, arising from NeoMagics filing of the patent infringement action against
Trident. Since January 1999, no further action has occurred on this counter claim. The Court ruled that there was no infringement by Trident. As a result, we 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 on 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. In May 2003, the lower court ruled in favor of Trident. In December 2003, we filed an appeal in the
United States Court of Appeals, for the Federal Circuit. In August 2004 the Federal Circuit rejected the appeal and affirmed the lower courts decision of no infringement by the Trident products. While we believe we have valid defenses against
Tridents counter claim filed in 1999, there can be no assurance as to whether Trident will or will not proceed with the counter-suit.



|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



A special meeting of stockholders of NeoMagic Corporation, a Delaware corporation, was held on November 11, 2004 at 10:00 a.m., local time, at the offices
of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050.



At the special meeting, stockholders were asked to approve an amendment of NeoMagics existing certificate of incorporation to increase the authorized number of shares of common stock from 60,000,000 to
100,000,000. The number of votes cast for the matter was 28,262,856. The number of votes cast against the matter was 1,790,680. There were no votes withheld for the matter. The number of shares abstaining on the matter was 50,364. There were no
broker non-votes on the matter.



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PART II



|Item 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ----------------------------------------------------------------------------------------------------------------



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



|                           |  |     |      |     |   |      |  |     |      |  |   |     
|-------------------------- |  | --- | ---- | --- | - | ---- |  | --- | ---- |  | - | ----
|Quarterly Data Fiscal
2005 |  | 1st |      | 2nd |   | 3rd  |  | 4th
|Price range common stock:  |  |     |      |     |   |      |  |     |      |  |   |     
|Low                        |  | $   | 3.56 |     | $ | 1.29 |  | $   | 0.72 |  | $ | 0.73
|High                       |  | $   | 5.40 |     | $ | 4.20 |  | $   | 1.47 |  | $ | 1.36
|                           |  |     |      |    
|Fiscal 2004                |  |     |      |     |   |      |  |     |      |  |   |     
|Price range common stock:  |  |     |      |     |   |      |  |     |      |  |   |     
|Low                        |  | $   | 0.96 |     | $ | 1.11 |  | $   | 1.82 |  | $ | 2.37
|High                       |  | $   | 1.28 |     | $ | 2.67 |  | $   | 3.09 |  | $ | 4.85



We had 229
stockholders of record as of April 22, 2005. We have not paid any dividends on our common stock. In addition, there are restrictions on dividend payments as long as the Series B Convertible Preferred Stock remains outstanding. We currently intend to
retain any future earnings for use in our business and do not anticipate paying cash dividends to stockholders.



Information as of January 31, 2005 regarding equity compensation plans approved and not approved by stockholders is summarized in the following:



|                                                       |  |                                                                      |  |                                                         |  |                                                                                                                                   |    
|------------------------------------------------------ |  | -------------------------------------------------------------------- |  | ------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- | ---
|Plan Category                                          |  | (A) Number of Shares to beIssued Upon Exercise ofOutstanding Options |  | (B)Weighted AverageExercise Price ofOutstanding Options |  | (C) Number of Shares RemainingAvailable for Future IssuanceUnder Equity CompensationPlans (Excluding SharesReflected in Column A) |    
|Equity compensation plans approved by shareholders     |  | 6,307,519                                                            |  | 2.60                                                    |  | 1,512,858                                                                                                                         | (1)
|Equity compensation plans not approved by shareholders |  | 5,981,931                                                            |  | 2.00                                                    |  | 1,034,001                                                                                                                         | (2)
|                                                       |  |                                                                      |  |                                                         |  |                                                                                                                                   |    
|Total                                                  |  | 12,289,450                                                           |  | 2.31                                                    |  | 2,546,859                                                                                                                         |    

---

|(1) | Includes 1,053,039 shares available for future issuance under our 2003 Stock Option Plan, as amended, generally used for grants to officers and directors. Also includes 459,819
shares available under our 1997 Employee Stock Purchase Plan.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Shares available under our 1998 Nonstatutory Stock Option Plan are used for grants to employees other than officers and directors except as provided within the plan. This plan was
not previously required to be approved by shareholders. Due to regulatory changes, going forward, all material changes to the plan require shareholder approval.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|Item 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



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



Five Year Summary



|                                                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                    |  | Fiscal Years ended January 31,                  |        
|                                                                                                    |  | 2005                                            |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                                                                    |  | (in thousands, except per share and Other Data) |        
|Consolidated Statement of Operations Data:                                                          |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net sales                                                                                           |  | $                                               | 2,466   |   |      | $ | 1,888   |      |  | $ | 2,189   |   |  | $    | 385     |   |  | $ | 75,806  |  
|Cost of sales                                                                                       |  |                                                 | 3,195   |   |      |   | 2,262   |      |  |   | 3,000   |   |  |      | 27      |   |  |   | 61,328  |  
|Impairment of certain acquired and licensed intangible assets                                       |  |                                                 | 89      |   |      |   |        |      |  |   | 491     |   |  |      |        |   |  |   |        |  
|                                                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross margin (loss)                                                                                 |  |                                                 | (818    | ) |      |   | (374    | )    |  |   | (1,302  | ) |  |      | 358     |   |  |   | 14,478  |  
|Operating expenses:                                                                                 |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Research and development                                                                            |  |                                                 | 18,208  |   |      |   | 19,694  |      |  |   | 24,715  |   |  |      | 25,201  |   |  |   | 27,524  |  
|Sales, general and administrative                                                                   |  |                                                 | 7,447   |   |      |   | 7,236   |      |  |   | 10,383  |   |  |      | 8,028   |   |  |   | 13,068  |  
|Special charge                                                                                      |  |                                                 |        |   |      |   |        |      |  |   | 3,600   |   |  |      |        |   |  |   |        |  
|Impairment of certain acquired and licensed intangible assets                                       |  |                                                 | 1,437   |   |      |   |        |      |  |   | 552     |   |  |      |        |   |  |   |        |  
|Acquired in-process research and development                                                        |  |                                                 |        |   |      |   |        |      |  |   |        |   |  |      | 700     |   |  |   |        |  
|                                                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total operating expenses                                                                            |  |                                                 | 27,092  |   |      |   | 26,930  |      |  |   | 39,250  |   |  |      | 33,929  |   |  |   | 40,592  |  
|Loss from operations                                                                                |  |                                                 | (27,910 | ) |      |   | (27,304 | )    |  |   | (40,552 | ) |  |      | (33,571 | ) |  |   | (26,114 | )
|Income, net of expenses, from the sale of DVD assets (2)                                            |  |                                                 |        |   |      |   |        |      |  |   | 1,580   |   |  |      |        |   |  |   | 6,494   |  
|Interest income and other                                                                           |  |                                                 | 415     |   |      |   | 854     |      |  |   | 1,816   |   |  |      | 3,488   |   |  |   | 5,987   |  
|Interest expense                                                                                    |  |                                                 | (534    | ) |      |   | (282    | )    |  |   | (75     | ) |  |      | (12     | ) |  |   | (263    | )
|                                                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loss before income taxes and cumulative effect of change in accounting principle                    |  |                                                 | (28,029 | ) |      |   | (26,732 | )    |  |   | (37,231 | ) |  |      | (30,095 | ) |  |   | (13,896 | )
|Income tax provision (benefit)                                                                      |  |                                                 | 196     |   |      |   | 43      |      |  |   | (6,294  | ) |  |      | (1,130  | ) |  |   | (5,481  | )
|                                                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss before cumulative effect of change in accounting principle                                 |  |                                                 | (28,225 | ) |      |   | (26,775 | )    |  |   | (30,937 | ) |  |      | (28,965 | ) |  |   | (8,415  | )
|Cumulative effect of change in accounting principle (1)                                             |  |                                                 |        |   |      |   |        |      |  |   | (4,175  | ) |  |      |        |   |  |   |        |  
|                                                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss                                                                                            |  | $                                               | (28,225 | ) |      | $ | (26,775 | )    |  | $ | (35,112 | ) |  | $    | (28,965 | ) |  | $ | (8,415  | )
|                                                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share before cumulative effect of change in accounting principle (1) |  | $                                               | (0.87   | ) |      | $ | (0.87   | )    |  | $ | (1.07   | ) |  | $    | (1.10   | ) |  | $ | (.33    | )
|Cumulative effect of change in accounting principle                                                 |  |                                                 |        |   |      |   |        |      |  |   | (0.15   | ) |  |      |        |   |  |   |        |  
|Basic and diluted net loss per share (1)                                                            |  | $                                               | (0.87   | ) |      | $ | (0.87   | )    |  | $ | (1.22   | ) |  | $    | (1.10   | ) |  | $ | (.33    | )
|Weighted common shares outstanding (1)                                                              |  |                                                 | 32,620  |   |      |   | 30,650  |      |  |   | 28,872  |   |  |      | 26,311  |   |  |   | 25,737  |  
|Weighted common shares outstanding assumingdilution (1)                                             |  |                                                 | 32,620  |   |      |   | 30,650  |      |  |   | 28,872  |   |  |      | 26,311  |   |  |   | 25,737  |  
|                                                                                                    |  |                                                 |         |   |     
|                                                                                                    |  | 2005                                            |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Consolidated Balance Sheet Data:                                                                    |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                                                                           |  | $                                               | 8,944   |   |      | $ | 12,342  |      |  | $ | 37,428  |   |  | $    | 38,996  |   |  | $ | 72,852  |  
|Short-term investments                                                                              |  |                                                 | 16,082  |   |      |   | 30,240  |      |  |   | 29,657  |   |  |      | 32,914  |   |  |   | 34,917  |  
|Working capital                                                                                     |  |                                                 | 18,427  |   |      |   | 35,807  |      |  |   | 59,608  |   |  |      | 68,318  |   |  |   | 104,766 |  
|Total assets                                                                                        |  |                                                 | 30,714  |   |      |   | 50,861  |      |  |   | 80,948  |   |  |      | 108,309 |   |  |   | 123,765 |  
|Long-term obligations                                                                               |  |                                                 | 4,975   |   |      |   | 799     |      |  |   | 2,521   |   |  |      |        |   |  |   |        |  
|Total stockholders equity                                                                          |  |                                                 | 17,960  |   |      |   | 41,827  |      |  |   | 67,887  |   |  |      | 98,206  |   |  |   | 115,470 |  
|Other Data                                                                                          |  |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Number of employees                                                                                 |  |                                                 | 117     |   |      |   | 175     |      |  |   | 155     |   |  |      | 144     |   |  |   | 138     |  
|Net book value/share (3)                                                                            |  | $                                               | 0.55    |   |      | $ | 1.36    |      |  | $ | 2.35    |   |  | $    | 3.73    |   |  | $ | 4.49    |  

---

|(1) | See Note 1 and Note 3 of Notes to Consolidated Financial Statements.
|--- | --------------------------------------------------------------------

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

|(3) | Denominator is equal to the weighted common shares outstanding.
|--- | ---------------------------------------------------------------



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##### Table of Contents

|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



When used in this discussion, the words expects, anticipates, believes and similar
expressions are intended to identify forward-looking statements. Such statements reflect managements current intentions and 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 devices developed and marketed by customers that use our products, our ability to execute product and technology development plans on schedule, and our
ability to access advanced manufacturing technologies in sufficient capacity without significant cash pre-payments or investment. Examples of forward-looking statements include statements about our expected revenues, our competitive advantage in our
markets, the potential market for our products, our expected production timelines, our customer base and our need for additional financing beyond the next 12 months. These statements are subject to significant risks and uncertainties, including
those set forth below under Factors that May Affect Results, that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any changes in our expectations with regard thereto or any changes in events, conditions or circumstances on which
any such statement is based.



NOTE: For a more complete
understanding of our financial condition and results of operations, and some of the risks that could affect future results, see Risks That Could Affect Future Results. This section should also be read in conjunction with the Consolidated
Financial Statements and related Notes.



Overview



NeoMagic designs, develops and markets high-performance, power-efficient
Applications Processors that enable multimedia features and applications in mobile phones and other handheld devices. In the past, we provided semiconductor solutions, called multimedia accelerators, to top notebook computer manufacturers. In April
2000, we began to exit the multimedia accelerator market. However, the majority of our historical net sales through the end of fiscal year 2002 continued to come from these multimedia accelerator products. We do not expect to have revenue related to
these products in the future. We are now focused solely on the Applications Processor market.



NeoMagic has established relationships with third-party manufacturing partners to produce semiconductor products for us. Pursuant to these relationships, we design the overall product, including the logic and analog
circuitry, and the manufacturing partners manufacture the wafers, perform testing and package the products. We are focused on leveraging our 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 our continued development of solutions that facilitate the mobilization of multimedia applications.



In November of 2003, we introduced a new technology architecture, called
Associative Processor Array (APA). The APA architecture uses a massively parallel approach to processing information, which means that APA operates on multimedia data in parallel, without increasing clock rates. Existing competitive solutions use a
sequential processing flow that operates on each individual data element in sequence, relying on ever-faster clock rates to improve performance. These faster clock rates burn power, thus reducing battery life. With its ability to handle large
amounts of data simultaneously and at lower clock rates, the APA platform is able to process multimedia data such as video, still pictures and audio with low power consumption. We anticipate that the MiMagic 6, the first of our chips to use APA,
will begin production shipments during the fourth quarter of calendar year 2005.



Our fiscal year ends on the last Sunday in January. For ease of presentation, the accompanying financial statements have been shown as ending on January 31 and calendar quarter ends for all annual and quarterly
financial statement captions. Fiscal year 2005 consisted of 53 weeks and ended on January 30, 2005. Fiscal years 2004 and 2003 consisted of 52 weeks each and ended on January 25 and January 26, respectively.



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Critical Accounting Policies and Estimates



NeoMagics discussion and analysis of its financial condition and results of operations are based upon its 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 us 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, we evaluate our estimates, including those related to intangible assets and long-lived assets, revenue
recognition, inventories and income taxes. We base our estimates on historical experience and on various other assumptions that we believe 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.



Intangible Assets and Long Lived Assets



In accordance with SFAS 144, Accounting for the Impairment or Disposal
of Long Lived Assets, we evaluate the carrying value of our long-lived assets, consisting primarily of identifiable intangible assets, and property, plant and equipment in the fourth quarter of each fiscal year, and whenever certain events or
changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a significant decline in our market value, significant reductions in projected future
cash flows or gross margins, or macroeconomic factors including a prolonged economic downturn. In assessing the recoverability of long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to
generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, we will be required to write down such assets based on the excess of the carrying amount over the fair value of the assets. Fair value is
generally determined by calculating the discounted future cash flows using a discount rate based upon the weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the
preparation of the estimated future cash flows, including gross profit margins, long-term forecasts of the amount and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates.
In addition, significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in liquidation. Changes
in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write-down or write-off long-lived assets.



During the fourth quarter of fiscal 2005 the Company determined that certain licensed intellectual property was impaired and
recorded an impairment charge of $1.5 million of which $0.1 million was charged to cost of sales for licensed intellectual property which related to products currently in production. The impairment was caused by a decline in the related sales
forecasts of products associated with the licensed intellectual property. The impairment charge recorded represents the amount by which the carrying amount of the licensed intellectual property exceeded its fair value, which was determined based on
the Companys estimated discounted future cash flows identifiable to the licensed intellectual property.



During the first quarter of fiscal 2003, we wrote-off licensed intangible properties with a net book value of $0.5 million relating to licensed
intellectual property that will no longer be used.



During the
third and fourth quarters of fiscal 2003, we also determined that certain intangible assets purchased as part of the LinkUp Systems Corporation (LinkUp) acquisition completed in December 2001 were impaired and recorded a total impairment
charge of $1.0 million.



We continue to periodically evaluate
our long-lived assets for impairment in accordance with SFAS 144 and acknowledge it is possible that such evaluation might result in future adjustments for impairment. Such an impairment might adversely affect our operating results.



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Revenue Recognition



We recognize revenue from non-distributor product sales when the products are shipped to customers, title has transferred, and no obligations remain.
Thus, we require the following: (i) execution of a written customer order, (ii) shipment of the product, (iii) fee is fixed or determinable, and (iv) collectibility of the proceeds is probable. Our shipment terms are FOB shipping point.



For products shipped to distributors, we defer recognition of revenue
until the distributors sell the products to their customers. On occasion, however, we will sell products with End of Life status to distributors under special arrangements without any price protection or return privileges for which we
recognize revenue upon transfer of title, typically at the time of shipping.



At the end of each accounting period, we make 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. Actual sales returns may vary significantly from historical experience and could have a material effect on our
operating results.



Inventory Valuation



Our 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 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
introduce product enhancements and new products, demand for our existing products in inventory may decrease, requiring additional inventory write-downs.



Deferred Taxes and Tax Accruals



We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Based on the uncertainty of
future pre-tax income, we have fully reserved our deferred tax assets. In the event we determine that we would be able to realize some or all of our deferred tax assets in the future, an adjustment to the deferred tax assets would increase income in
the period when such determination was made.



We have also
provided accruals for certain tax liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, or less than currently assessed, the resulting
reversal of such accruals would result in tax benefits being recorded in the period when the accruals are no longer deemed necessary. Conversely, if our estimate of tax liabilities is more than the amount ultimately assessed, further charges would
result.



Results of Operations



Net sales



Net sales were $2.5 million, $1.9 million and $2.2 million in fiscal 2005, 2004 and 2003, respectively. The increase in
sales in fiscal 2005 compared to fiscal 2004 is primarily due to increased shipments of approximately $0.7 million of our MiMagic 3 applications processor for the handheld devices market. The decrease in sales in fiscal 2004 compared to fiscal 2003
is primarily due to customer delays in bringing their MiMagic 3 related programs to commercial production. We expect that the percentage of our net sales represented by any one product or type of product may change significantly from period to
period when new products are introduced and existing products reach the end of their product life cycles.



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Sales to customers located outside the United States (including sales to the foreign operations of
customers with headquarters in the United States, and foreign manufacturers that sell to United States-based OEMs) accounted for 91%, 91% and 84% of net sales in fiscal 2005, 2004 and 2003, respectively. We expect that export sales will continue to
represent a significant portion of net sales. All sales transactions were denominated in United States dollars. The following is a summary of our net sales by major geographic area:



|                       |  |      |   |  |      |   |  |      |  
|---------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Year Ended January 31, |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Japan                  |  | 12   | % |  | 40   | % |  | 43   | %
|Taiwan                 |  | 47   | % |  | 34   | % |  | 39   | %
|Hong Kong              |  | 25   | % |  | 14   | % |  | 0    | %
|United States          |  | 9    | % |  | 9    | % |  | 16   | %
|Europe                 |  | 7    | % |  | 3    | % |  | 2    | %



The following
customers accounted for more than 10% of net sales:



|                                   |  |      |   |  |      |   |  |      |  
|---------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Year Ended January 31,             |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Edom Technology Co.**              |  | 33   | % |  | 25   | % |  | 20   | %
|Silicon Media, Inc.**              |  | 8    | % |  | 24   | % |  | 15   | %
|ESS Technology International, Inc. |  | 26   | % |  | 14   | % |  | *    | %
|Macnica, Inc.**                    |  | *    | % |  | 10   | % |  | 26   | %
|Silicon Alliance Int.**            |  | 13   | % |  | *    | % |  | 17   | %

---

|* | represents less than 10% of net sales
|- | -------------------------------------

|** | customer is a distributor
|-- | -------------------------



Gross Loss



Gross loss
was $0.8 million, $0.4 million and $1.3 million in fiscal 2005, 2004, and 2003, respectively. Cost of sales includes amortization of deferred compensation of $8 and $37 thousand in fiscal 2005 and 2004, respectively. There was no amortization of
deferred compensation in fiscal 2003. The increased negative margins in fiscal 2005 were largely due to the write-off of excess MiMagic 3 inventory of approximately $0.4 million. Fiscal 2004 excess inventory write-offs were approximately $0.2
million primarily related to our NMC1121 companion chip and our MiMagic 2 Applications Processor. In addition, fiscal 2005 gross loss included $0.1 million of amortization of licensed intellectual property as well as a $0.1 million impairment charge
for licensed intellectual property. The negative gross margin in fiscal 2004 is generally due to under absorption of manufacturing overhead resulting from relatively low production levels. Gross loss improved in fiscal 2004 compared to fiscal 2003,
due to the absence of developed technology write-offs totaling $0.5 million that occurred in fiscal 2003. The negative gross margin in fiscal 2003 is due to under absorption of manufacturing overhead resulting from low production levels and
amortization of $0.3 million and impairment charges of $0.5 million for acquired developed technology.



In the future, our gross margin percentages may be affected by increased competition and related decline in unit average selling prices (particularly with
respect to older generation products), changes in the mix of products sold, timing of volume shipments of new products, the availability and cost of products from our suppliers, inventory write-offs, and manufacturing yields (particularly on new
products).



Research and Development Expenses



Research and development expenses include compensation and associated costs
relating to research and development personnel, amortization of intangible assets and prototyping costs, which are comprised of photomask costs and pre-production wafer costs. Research and development expenses were $18.2 million, $19.7 million, and
$24.7 million in fiscal 2005, 2004 and 2003, respectively. These expenses include amortization of deferred compensation of $0.2 million, $0.4 million, and $0.9 million in fiscal 2005, 2004, and 2003,



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respectively. We have made, and intend to continue to make, significant investments in research and development to remain competitive by developing new and
enhanced products to serve our identified markets. The decrease in fiscal 2005 from fiscal 2004 of $1.5 million is primarily related to lower depreciation of $0.5 million due to certain fixed assets being fully depreciated throughout fiscal year
2005, lower outside consultant costs of $0.3 million and lower allocation costs of $0.5 million due to lower allocated IT department depreciation and other allocated costs. Research and development expenses decreased in fiscal 2004 primarily due to
lower labor costs of $1.1 million, lower amortization of acquired and licensed intangibles of $1.1 million, lower software license and maintenance costs of $0.8 million and lower outside consulting costs of $0.4 million. Labor costs decreased
largely due to one year Company wide salary reductions in fiscal 2004. Included in the research and development expenses for fiscal 2003 was a charge of $0.5 million to write off certain licensed intellectual property.



Sales, General and Administrative Expenses



Sales, general and administrative expenses were $7.4 million, $7.2 million,
and $10.4 million in fiscal 2005, 2004, and 2003, respectively. These expenses include amortization of deferred compensation of $0.1 million, $0.3 million, and $1.0 million in fiscal 2005, 2004, and 2003, respectively. Sales, general and
administrative expenses increased in fiscal 2005 due to increased labor costs of $0.4 million mainly due to reinstatement of salaries after a one-year reduction, and increased audit fees of $0.6 million offset by decreased cost of boards used to
demonstrate NeoMagic products of $0.5 million and lower allocation costs of $0.2 million. Audit expenses increased due to increased procedures required by section 404 of the Sarbanes-Oxley Act of 2002. Sales, general and administrative expenses
decreased in fiscal 2004 compared to fiscal 2003 primarily due to lower labor costs of $1.5 million and lower amortization of deferred compensation of $0.7 million. Labor costs decreased largely due to Company-wide salary reductions in fiscal 2004.



Special Charge



In January 2001, we extended our wafer supply agreement with Infineon
Technologies AG (Infineon) of Germany through fiscal 2004 to ensure future wafer supply for our new product efforts. NeoMagic provided $15.0 million in guarantees towards its wafer purchases over the term of the agreement. The amount of
guarantee was included as restricted cash on the Consolidated Balance Sheet, as of January 31, 2002. Due to uncertainties over Infineons continued product development with respect to embedded DRAM (eDRAM), we decided not to use
Infineons eDRAM technology for its future production needs. Based on negotiations between NeoMagic and Infineon on restructuring the wafer supply agreement with the intent to release NeoMagic from the related guarantee, we recorded $3.6
million in charges, composed of a $1.5 million cash payment and the issuance of $2.1 million in common stock, which reflects the value of the final settlement in fiscal 2003. The amount was recorded as a Special Charge in the Consolidated Statements
of Operations for fiscal 2003. As a result of the settlement, $15.0 million of restricted cash was released and reclassified to cash and cash equivalents on the Consolidated Balance Sheet in fiscal 2003.



Impairment of Certain Acquired and Licensed Intangible Assets



NeoMagic adopted SFAS 144 in the first quarter of fiscal 2003. In accordance
with SFAS 144, we assess the recoverability of our long-lived assets in the fourth quarter of each fiscal year, and whenever there are indicators of impairment, 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 fiscal 2005, we determined that certain licensed intellectual property was impaired and recorded an impairment charge
of $1.5 million of which $0.1 million was charged to cost of sales. The impairment was caused by a decline in the related sales forecasts of products associated with the licensed intellectual property.



During fiscal 2003, we 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



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$1.0 million, during the period. Of the total impairment charge, $491 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, we also recorded a $506 thousand impairment charge with respect to intangibles relating to customer relationships. Several key customers with whom we were engaged abandoned their related
product plans, which led to the impairment. We also recorded a $46 thousand impairment charge with respect to intangibles that were capitalized as internal use software. We no longer use the software. The impairment charge relating to customer
relationships and internal use software is included in the operating expenses section of the Consolidated Statements of Operations in fiscal 2003.



Income, Net of Expenses, from the Sale of DVD Assets



In April 2000, pursuant to an asset purchase agreement, we sold the principal assets of our DVD product group, primarily consisting of fixed assets and
intangible assets, to LSI Logic (Buyer). We received $11.7 million in a lump-sum cash payment and an additional $3.1 million was contingent on our performance of certain obligations related to the transfer of licenses with third parties
to the Buyer. We received a $1.5 million cash payment which was previously contingent on our performance of certain obligations related to the transfer of licenses with third parties to the Buyer in fiscal 2001. In fiscal 2003, we received the
remaining contingent payment of $1.6 million upon completing the transfer of licenses with third parties to the Buyer, and recorded the amount as a gain in the Consolidated Statement of Operations for the fiscal year ended January 31, 2003.



Cumulative Change in Accounting Principle



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 SFAS 142, we were required to complete the two-step
transitional goodwill impairment test. We completed step one of the transitional impairment test during the second quarter of fiscal 2003 and determined that there were indicators of impairment, as the carrying value of the reporting unit exceeded
the fair value derived from the market capitalization model. The second step of the transitional impairment test to determine the amount of impairment was completed in the third quarter of fiscal 2003 by comparing fair value to carrying value, with
any excess of carrying value over fair value being recorded as an impairment loss. Based on the results of the second transitional impairment test, we recorded a non-cash charge of $4.2 million, to reduce the carrying value of our goodwill, which is
reflected as a cumulative effect of an accounting change in the accompanying Consolidated Statements of Operations in fiscal 2003.



Interest Income and Other



We earn interest on our cash and short-term investments. Interest income and other was $0.4 million, $0.9 million and $1.8 million in fiscal 2005, 2004,
and 2003, respectively. The decrease in fiscal 2005 is primarily due to lower average cash and short-term investment balances. The decrease in fiscal 2004 is primarily due to lower interest income earned on lower average cash balances and from
interest rate reductions that occurred in fiscal 2003.



Interest Expense



Interest expense was $0.5 million, $0.3 million, and $0.1
million in fiscal 2005, 2004 and 2003, respectively. The increase in fiscal 2005 is due to accreted interest expense of $0.3 million recorded in fiscal 2005 related to our Mandatorily Redeemable Series B Convertible Preferred Stock issued in August
2004. In



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addition, we recorded $54 thousand of interest amortization for deferred financing costs related to our Mandatorily Redeemable Series B Preferred Stock
during fiscal 2005. The increase in fiscal 2004 compared to fiscal 2003 is due to new capital leases entered into in the latter part of fiscal 2003 being outstanding for the entire fiscal 2004.



Income Taxes



We recorded a tax provision of $196 thousand on a pre-tax loss of $28.0 million in fiscal year 2005 which consisted of
foreign income taxes and an increase of $179 thousand for accrued interest and penalties on tax liabilities. Our effective tax (benefit) rate was 0.7% in fiscal 2005, 0% in fiscal 2004, and (16.9%) in fiscal 2003. In fiscal year 2003, the tax
benefit rate differed from the statutory rate due to an increase in our valuation allowance. The benefit recorded was limited to current cash income tax refunds available. Realization of our deferred tax assets, which have a full valuation
allowance, depends on us generating sufficient taxable income in future years to obtain benefit from the reversal of temporary differences and from net operating loss and tax credit carryforwards. Due to the uncertainty of the timing and amount of
such realization, the management has concluded that a full valuation allowance is required as of January 31, 2005.



The American Jobs Creation Act of 2004 (the Jobs Act), enacted on October 22, 2004, provides for a temporary 85% dividends received deduction
on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States
pursuant to a domestic reinvestment plan established by our chief executive officer and approved by our board of directors. Certain other criteria in the Jobs Act must be satisfied as well.



We have not determined whether we will apply the above provision to
qualifying earnings repatriations in fiscal year 2006; however, as additional clarifying language on key elements of the provision becomes available, we will continue to analyze and assess whether such repatriation would be practical.



The earnings from foreign operations in India are currently tax exempt
pursuant to a tax holiday effective through 2008. The incentive provides for certain tax relief if certain conditions are met. We believe that we continued to be in compliance with these conditions at January 31, 2005.



Liquidity and Capital Resources



Our cash, cash equivalents and short-term investments were $25.0 million,
$42.6 million, and $67.1 million as of the end of fiscal 2005, 2004 and 2003, respectively. The decrease in cash, cash equivalents, and short-term investments in fiscal 2005 stems primarily from cash used for operating activities, which includes a
net loss of $28.2 million offset by net maturities of short-term investments and proceeds from issuance of mandatorily redeemable Series B convertible preferred stock. The decrease in cash, cash equivalents, and short-term investments in fiscal 2004
stems primarily from cash used for operating activities which includes a net loss of $26.8 million.



Cash and cash equivalents used in operating activities was $22.3 million, $23.9 million and $2.7 million in fiscal 2005, 2004 and 2003, respectively. The
cash used in operating activities in fiscal 2005 was primarily due to the $28.2 million net loss offset in part by non-cash depreciation and amortization of $4.0 million, an impairment charge for certain licensed intellectual property of $1.5
million and amortization of deferred compensation of $0.4 million. The cash used in operating activities in fiscal 2004 was primarily due to the $26.8 million net loss and decreases in accounts payable of $1.5 million and other accruals of $1.2
million, offset in part by non-cash depreciation and amortization of $4.2 million and amortization of deferred compensation $0.7 million. The cash used in operating activities in fiscal 2003 was primarily due to the $35.1 million net loss, an
increase in inventory of $0.5 million and a decrease in income tax payable of $0.3 million, offset in part by the reclass of $15.0 million from restricted cash to cash equivalents, an increase in accounts payable of $0.7 million, non-cash
depreciation and amortization of $4.9 million, deferred compensation amortization of $1.9 million, and the cumulative effect of a change in accounting principle of $4.2 million.



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Net cash provided by (used in) investing activities was $14.0 million, ($1.1 million) and $0.9 million in
fiscal 2005, 2004 and 2003, respectively. Net cash provided by investing activities in fiscal 2005 is primarily due to net maturities of short-term investments of $14.2 million. Net cash used in investing activities in fiscal 2004 was due to net
purchases of short-term investments of $0.6 million and purchases of property, plant, equipment and intangibles of $0.5 million. Net cash provided by investing activities in fiscal 2003 is primarily due to net maturities of short-term investments of
$3.2 million and from proceeds from the sale of DVD assets of $1.6 million partially offset by purchases of property, plant, equipment and intangibles of $3.9 million. Continued operation of our business may require higher levels of capital
equipment purchases, technology investments, foundry investments and other payments to secure manufacturing capacity. The timing and amount of future investments will depend primarily on the level of our future revenues.



Net cash provided by (used in) financing activities was $4.8 million, ($0.1
million) and $0.3 million in fiscal 2005, 2004 and 2003, respectively. In fiscal 2005 we issued preferred stock and warrants to purchase common stock for net proceeds of $4.9 million. The Preferred Stock can be converted into 4,347,826 shares of our
common stock at any time at the option of the investor. Alternatively, the Preferred Stock can be redeemed for $5 million in cash in August 2007 if the conversion option has not been exercised. The net proceeds were used to fund operating
activities. See Note 9, Mandatorily Redeemable Series B Convertible Preferred Stock, in the consolidated financial statements for additional information. The net cash provided by financing activities in fiscal 2005 is due to proceeds from the
issuance of Mandatorily Redeemable Series B Convertible Preferred Stock of $4.9 million and proceeds from the issuance of common stock of $1.7 million partially offset by payments on capital lease obligations of $1.8 million. The net cash used in
financing activities in fiscal 2004 is due to payments on capital lease obligations of $1.3 million partially offset by proceeds from the issuance of common stock of $1.2 million. The net cash provided by financing activities in fiscal 2003 is due
to net proceeds from the issuance of common stock of $0.8 million partially offset by payments on capital lease obligations of $0.5 million.



At January 31, 2005, our principal sources of liquidity included cash, cash equivalents and short-term investments of $25.0 million. We believe our
current cash, cash equivalents and short-term investments, including the net proceeds of $3.5 million received from our sale of certain patents after January 31, 2005 as described in Note 15 to our consolidated financial statements, will satisfy our
projected cash requirements through at least the next twelve months. However, we expect we will need to raise additional capital within the next 12 months to fund future operating activities beyond the next 12 months. If we experience a material
shortfall versus our plan for fiscal 2006, we expect to take all appropriate actions to ensure the continuing operation of our business and to mitigate any negative impact on our cash position. We believe we can take actions to achieve further
reductions in our operating expenses, if necessary. We also believe that we can take actions to generate cash by selling or licensing intellectual property, seeking funding from strategic partners, and seeking further equity or debt financing from
financial sources. There can be no assurance that additional financing will be available on acceptable terms or at all. Furthermore, as long as the Preferred Stock remains outstanding, provisions of the Preferred Stock limit our ability to issue any
security with greater or equal seniority to the Preferred Stock. Beyond fiscal 2006, the adequacy of our resources will depend largely on our ability to complete additional financing and our success in re-establishing profitable operations and
positive operating cash flows.



Our lease for our headquarters
in Santa Clara, California expires in April 2010. We lease offices in Israel and India under operating leases that expire in September 2005 for Israel and in December 2006 for India. On February 1, 2005, we entered into a sublease agreement to
sub-lease 10,000 square feet in our Santa Clara facility for a two year period starting on March 15, 2005 for $12,000 per month.



We lease software licenses under capital leases. Refer to Note 8, Obligations under Capital Leases, in the consolidated financial statements for
additional information.



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The future minimum payments relating to facility leases, software leases, non-cancelable purchase orders
and other contractual obligations are included in the contractual obligations table below.



Contractual Obligations



The following summarizes our contractual obligations at January 31, 2005, and the effect such obligations are expected to have on our liquidity and cash flow (in thousands).



|                                                            |  |      |       |      |   |       |  |      |       |      |   |             |  |       |       |  |   |     |  |   |       
|----------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----------- |  | ----- | ----- |  | - | --- |  | - | ------
|                                                            |  | 2006 |       | 2007 |   | 2008  |  | 2009 |       | 2010 |   | There After |  | Total
|CONTRACTUAL OBLIGATIONS                                     |  |      |       |      |   |       |  |      |       |      |   |             |  |       |       |  |   |     |  |   |       
|Operating leases *                                          |  | $    | 1,002 |      | $ | 933   |  | $    | 1,028 |      | $ | 1,073       |  | $     | 1,100 |  | $ | 277 |  | $ | 5,413 
|Capital leases **                                           |  |      | 1,686 |      |   | 1,648 |  |      | 643   |      |   |            |  |       |      |  |   |    |  |   | 3,977 
|Mandatorily redeemable Series B convertible preferred stock |  |      |      |      |   |      |  |      | 5,000 |      |   |            |  |       |      |  |   |    |  |   | 5,000 
|Non-cancelable purchase orders                              |  |      | 45    |      |   |      |  |      |      |      |   |            |  |       |      |  |   |    |  |   | 45    
|                                                            |  |      |       |      |   |       |  |      |       |      |   |             |  |       |       |  |   |     |  |   |       
|Total contractual cash obligations                          |  | $    | 2,733 |      | $ | 2,581 |  | $    | 6,671 |      | $ | 1,073       |  | $     | 1,100 |  | $ | 277 |  | $ | 14,435
|                                                            |  |      |       |      |   |       |  |      |       |      |   |             |  |       |       |  |   |     |  |   |       

---

|* | Includes sublease income for sub-leasing 10,000 square feet in our Santa Clara facility for a two-year period starting on March 15, 2005 for $12,000 per month.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Reflects March 2005 amendment to the payment schedule for one of our capital leases, which reduced fiscal 2006 payments by $150,000, increased fiscal 2007 payments by $100,000 and
increased fiscal 2008 payments by $50,000.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Off-Balance Sheet
Arrangements



As part of our ongoing business, we do not
participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of January 31, 2005, we are not involved in SPE transactions.



Recent Accounting Pronouncements



In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Issues objective is to provide guidance for identifying other-than-temporarily impaired
investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement
and recognition guidance in EITF 03-1 until further notice. The disclosure requirements of EITF 03-1 are effective with this annual report for fiscal 2005. Once the FASB reaches a final decision on the measurement and recognition provisions, the
Company will evaluate the impact of the adoption of the accounting provisions of EITF 03-1.



In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under
the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, as allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an
option pricing model for estimating fair value, which is amortized to expense over the service periods. The requirements of SFAS No. 123R are effective for the first fiscal year beginning after June 15, 2005. SFAS No. 123R allows for either
prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123. The Company is currently evaluating the impact of adoption of SFAS No. 123R.



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In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period
charges. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005.
The adoption of this pronouncement is not expected to have a material impact on our statements of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company is required to adopt SFAS 153, on a prospective basis, for nonmonetary exchanges beginning after June 15, 2005.
The adoption of SFAS No. 153 is not expected to have an impact on our consolidated result of operations.



Impact of Currency Exchange Rates



In fiscal 2005, all of our payments made to our suppliers and all of our payments received from our customers were denominated in U.S. dollars. We have in the past and may in the future enter into foreign currency
forward contracts to minimize short-term foreign currency fluctuation exposures related to firm purchase commitments. We do not use derivative financial instruments for speculative or trading purposes. Our accounting policies for these instruments
are based on our designation of such instruments as hedging transactions. The criteria we use 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 we have adopted,
due to the unpredictability and volatility of currency exchange rates and currency controls, there can be no assurance that we will not experience currency losses in the future, nor can we predict the effect of exchange rate fluctuations upon future
operating results.



Factors that May Affect Results



We Expect to Continue to Incur Significant Losses and Consume Cash in
Operations in the Fiscal Year Ending January 31, 2006



We have been incurring substantial losses and consuming cash in operations as we invest heavily in new product development in advance of achieving significant customer sales. This is expected to continue during the fiscal year ending
January 31, 2006. Our ability to achieve cash flow breakeven is likely to depend on the success of our MiMagic 5 and MiMagic 6 products. However, even if the MiMagic 5, MiMagic 6, and subsequent products achieve widespread customer acceptance, the
length of customer design-in cycles would preclude substantial product shipments in the fiscal year ending January 31, 2006. Accordingly, even if these new products are successful, we are likely to incur significant additional losses and consume
cash in operations during the fiscal year ending January 31, 2006.



We Are Likely To Need Additional Capital



Given the long cycle times required to achieve design wins, convert customer design wins into production orders, and for customers to achieve volume shipments of their products, we are likely to require additional
working capital to fund our business. We believe that our existing capital resources will be sufficient to meet our capital requirements through at least the next 12 months. However, we expect we will need to raise additional capital to fund future
operating activities beyond the next 12 months. Our 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



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activities, and timing and customer acceptance of new products. Our ability to raise capital and the terms of any financing will depend, in part, on our
ability to establish customer engagements and generate sales. As discussed below, revenue performance is difficult to forecast. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or
at all. Furthermore, as long as the preferred stock remains outstanding, provisions of the Preferred Stock limit our ability to issue any security with greater or equal seniority to the Preferred Stock.



Our Revenues Are Difficult To Predict



For a variety of reasons, revenues are difficult to predict and may vary
significantly from quarter to quarter. Our ability to achieve design wins depends on many factors, many outside our control, including changes in the customers strategic and financial plans, competitive factors and overall market conditions.
As our experience demonstrates, design wins themselves do not always lead to production orders because the customer may cancel or delay products for a variety of reasons. Such reasons may include the performance of a particular product that may
depend on components not supplied by NeoMagic, market conditions, reorganizations or other internal developments at the customer and changes in customer personnel or strategy. Even when a customer has begun volume production of a product containing
our chips, volumes are difficult to forecast because there may be no history to provide a guide, and because market conditions and other factors may cause changes in the customers plans. Because of the market uncertainties they face, many
customers place purchase orders on a short lead time basis, rather than providing reliable long-term purchase orders or purchase forecasts.



The difficulty in forecasting revenues increases the difficulty in forecasting our working capital requirements. It also increases the likelihood that we
may overproduce particular parts, resulting in inventory charges, or underproduce particular parts, affecting our ability to meet customer requirements. The difficulty in forecasting revenues also restricts our ability to provide forward-looking
revenue and earnings guidance to the financial markets and increases the chance that our performance does not match forecasts.



We Depend on Qualified Personnel



Our future success depends in part on the continued service of our key engineering, sales, marketing, manufacturing, finance and executive
personnel, and our ability to identify, hire and retain additional personnel. There is strong competition for qualified personnel in the semiconductor industry, and there can be no assurance that we will be able to continue to attract and retain
qualified personnel necessary for the development of our business. We have experienced the loss of personnel though headcount reductions and attrition. We have recently lost some of our executive management. For example, Prakash Agarwal, one of our
co-founders who was our President, Chief Executive Officer and a Director since our founding, resigned from all these positions on April 19, 2005. Our new President and Chief Executive Officer, Doug Young, has been with us only since February 2004.
We cannot assure you that the resignation of Mr. Agarwal and the appointment of Mr. Young will not have a material adverse effect on our business, financial condition and results of operations. All our executive officers are employees at will. We
have no employment contracts and do not maintain key person insurance on any of our personnel. If we are not able to maintain key personnel, if our headcount is not appropriate for our future direction, or if we fail to recruit key personnel
critical to our future direction in a timely manner, this may have a material adverse effect on our business, financial condition and results of operations. In addition, our future success will depend in part on our ability to identify and retain
qualified individuals to serve on our board of directors. We believe that maintaining a board of directors comprised of qualified members is critical given the current status of our business and operations. Moreover, Nasdaq Stock Market rules
require three outside board members to serve on our audit committee. Any inability on our part to identify and retain qualified board members could have a material adverse effect on our business or could lead to the delisting of our securities from
the Nasdaq Stock Market.



We have a Limited Customer Base



Three customers accounted for 33%, 26%, and
13%, respectively, of net sales in fiscal 2005. Four customers accounted for 25%, 24%, 14% and 10%, respectively, of net sales in fiscal 2004. Four customers accounted for



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26%, 20%, 17% and 15%, respectively, of net sales in fiscal 2003. We expect that a small number of customers will account for a substantial portion of our
net sales for the foreseeable future. Furthermore, the majority of our 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. As a result, our
business, financial condition and results of operations could be materially adversely affected by the decision of a single customer to cease using our products, or by a decline in the number of handheld devices sold by a single customer.



We May Lose Our Customer Base



Our products are designed to afford the mobile phone and handheld
device 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 our
products, the market demand for our products may be negatively impacted.



We Face Intense Competition in Our Markets



The market for Applications Processors is intensely competitive and is characterized by rapid technological change, evolving industry standards and
declining average selling prices. We believe that the principal factors of competition in this market are video and 3D graphics performance, price, features, power consumption, size and customer support. Our ability to compete successfully in the
Applications Processor 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, ramp of production of our
products, customer demand and acceptance of more sophisticated multimedia functionality on mobile phones and other handheld devices, end-user acceptance of our customers products, market acceptance of competitors products and general
economic conditions. Our ability to compete will also depend on our ability to identify and ensure compliance with evolving industry standards and market trends.



We compete with both domestic and international companies, some of which have substantially greater financial and other
resources than us with which to pursue engineering, manufacturing, marketing and distribution of their products. Our principal competitors include Texas Instruments, Renesas, ST Microelectronics and Broadcom as well as a number of vertically
integrated electronics firms that are developing their own solutions. We may also face increased competition from new entrants into the market including companies currently at developmental stages. We believe we have significant intellectual
properties and historically demonstrated expertise in SOC technology. However, our inability to introduce timely new products for our market, to support these products in customer programs, or to manufacture these products could have a material
adverse effect on our business, financial condition and operating results.



Some of our current and potential competitors operate their own manufacturing facilities. Since we do not operate our own manufacturing facility and may from time-to-time make binding commitments to purchase products
(binding purchase orders of $45,000 were outstanding as of January 31, 2005), we may not be able to reduce our costs and cycle time or adjust our production to meet changing demand as rapidly as companies that operate their own facilities, which
could have a material adverse effect on our results of operations.



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



Our ability to compete in the future will also depend on our ability to identify and ensure compliance with evolving industry standards and market
trends. Unanticipated changes in market trends and industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers. As a result, we could be required to invest significant
time and resources to redesign our 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 we will be able to redesign
our products or obtain the necessary third-party licenses within the appropriate window of market demand. If our products are not in



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compliance with prevailing market trends and industry standards for a significant period of time, we could miss crucial OEM (Original Equipment Manufacturer)
and ODM (Original Design Manufacturer) design cycles, which could result in a material adverse effect on our business, financial condition and results of operations.



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



NeoMagic is focused on providing high-performance semiconductor solutions
for sale to manufacturers of mobile phones and handheld devices. New product planning is focused on integrated System-On-Chip (SOC) semiconductor products for handheld devices that integrate multimedia technologies such as H.264 video compression,
3D graphics and audio technologies. Our future business, financial condition and results of operations will depend to a significant extent on our ability to develop new products that address these market opportunities. As a result, we believe that
significant expenditures for research and development will continue to be required in the future.



We 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 our products competitively and introduce new 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 manufacturing partners to effectively manufacture new products,
quality of new products, differentiation of new products from those of our competitors and market acceptance of our products and the products of our customers. There can be no assurance that the products we expect to introduce will incorporate the
features and functionality demanded by mobile phone and handheld device manufacturers and consumers, will be successfully developed, or will be introduced within the appropriate window of market demand. There can be no assurance that customers who
utilize our semiconductor products will achieve the levels of market success with their own products that they may project to us.



Because of the complexity of our products, we have experienced occasional delays in completing development and introduction of new products. In the event
that there are delays in 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, our 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, their manufacturing yields may be better, and their
production costs may be lower than those experienced by us.



We Depend on Third-Party Manufacturers to Produce Our Products



Our products require wafers manufactured with state-of-the-art fabrication equipment and techniques. We currently utilize several foundries for wafer fabrication. We expect that, for the foreseeable future, some of
our products will be manufactured by a single source. Since, in our experience, the lead time needed to establish a 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 our manufacturing partners, the failure of our manufacturing partners to
dedicate adequate resources to the production of our products, or the financial instability of our manufacturing partners would have a material adverse effect on our business, financial condition and results of operations. Furthermore, in the event
that the transition to the next generation of manufacturing technologies by our manufacturing partner is unsuccessful, our business, financial condition and results of operations would be materially and adversely affected.



There are many other risks associated with our 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 us; and potential



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misappropriation of our intellectual property. We are dependent on our manufacturing partners to produce wafers with acceptable quality and manufacturing
yields, to deliver those wafers on a timely basis to our third party assembly subcontractors and to allocate a portion of their manufacturing capacity sufficient to meet our needs. Although our products are designed using the process design rules of
the particular manufacturer, there can be no assurance that our 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 our manufacturing partners will continue to devote adequate resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products are based.



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



Our products are assembled and tested by
third-party subcontractors. We do 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 our reliance on third-party subcontractors to assemble and test our
products, we 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 our products. Due to the amount of time normally
required to qualify assembly and test subcontractors, product shipments could be delayed significantly if we were required to find alternative subcontractors. Any problems associated with the delivery, quality or cost of the assembly and test of our
products could have a material adverse effect on our business, financial condition and results of operations.



We May Encounter Inventory Excess or Shortage



We have wafer supply relationships with several foundries to support our product efforts. Normally, we place binding purchase orders two to three
months prior to wafer shipment. We had binding orders for wafers of $45,000 outstanding as of January 31, 2005. We order wafers for deliveries in advance and with the additional time to assemble and test wafers, we can have orders for finished goods
that will not be available for up to four months into the future. If we do not have sufficient demand for our products and cannot cancel our current and future commitments without material impact, we may experience excess inventory, which will
result in a write-off affecting gross margin and results of operations. If we cancel a purchase order, we must pay cancellation penalties based on the status of work in process or the proximity of the cancellation to the delivery date. We must place
purchase orders for wafers before we receive purchase orders from our own customers. This limits our ability to react to fluctuations in demand for our products, which can be unexpected and dramatic, and from time-to-time will cause us 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 customers, semiconductor companies from time-to-time take charges for excess
inventory.We did in fact incur such charges in fiscal 2005 of $0.4 million. Significant write-offs of excess inventory have had and could continue to have a material adverse effect on our financial condition and results of operations.
Conversely, failure to order sufficient wafers would cause us to miss revenue opportunities and, if significant, could impact sales by our customers, which could adversely affect our customer relationships and thereby materially adversely affect our
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. We often purchase wafers, not die, and pay an agreed upon price for wafers meeting certain acceptance criteria. Accordingly, we bear the risk of the yield of good die from wafers purchased meeting the acceptance criteria.



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Semiconductor manufacturing yields are a function of both product design, which is developed largely by
us, and process technology, which is typically proprietary to the manufacturer. Historically, we have 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 and communication between the manufacturer and us. This risk is compounded by the offshore location of our manufacturers, increasing the effort and time required
identifying, communicating and resolving manufacturing yield problems. As our relationships with new manufacturing partners develop, yields could be adversely affected due to difficulties associated with adapting our 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 our per unit product cost and could force us to allocate our available product supply among our
customers, potentially adversely impacting customer relationships as well as revenues and gross margins. There can be no assurance that our manufacturers will achieve or maintain acceptable manufacturing yields in the future.



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



We rely in part on patents to
protect our intellectual property. As of January 31, 2005, we had been issued 79 patents. However, on April 7, 2005, we announced the sale of 58 patents to Faust Communications, LLC for net proceeds of $3.5 million. The patents sold related to our
legacy products and not to products that we currently sell or plan to sell. We retain a worldwide, non-exclusive license under the patents sold. The sale did not include several of our important patents covering embedded DRAM technology or any of
the unique array processing technology used in our MiMagic family of Applications Processors. The remaining 21 issued patents are scheduled to expire no later than January 2022. Additionally, we have several patent applications pending. There can be
no assurance that our pending patent applications, or any future applications will be approved. Further, there can be no assurance that any issued patents will provide us 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 our ability to do business. In addition, there can be no assurance that others will not independently develop similar products, duplicate our
products or design around any patents that may be issued to us.



We also rely on a combination of mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect our 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 our trade secrets or intellectual property, disclose such intellectual property or trade secrets, or that
we can meaningfully protect our intellectual property. A failure by us to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations.



As a general matter, the semiconductor industry has experienced substantial
litigation regarding patent and other intellectual property rights. In December 1998, we 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
alleged that Tridents embedded DRAM graphics accelerators infringe certain patents held by the Company. In January 1999, Trident filed a counter claim against us alleging an attempted monopolization in violation of antitrust laws, arising from
NeoMagics filing of the patent infringement action against Trident. Since January 1999, no further action has occurred on this counter claim. The Court ruled that there was no infringement by Trident. As a result, we 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 on 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. In May 2003, the lower court ruled in
favor of Trident. In December 2003, we



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filed an appeal in the United States Court of Appeals, for the Federal Circuit. In August 2004 the Federal Circuit rejected the appeal and affirmed the lower
courts decision of no infringement by the Trident products. While we believe we have valid defenses against Tridents counter claim filed in 1999, there can be no assurance as to whether Trident will or will not proceed with the
counter-suit.



Any patent litigation, whether or not determined
in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel from productive tasks, which could have a material adverse effect on our 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 customers or end users of our 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 our business, financial condition and results of operations. In the event of any adverse ruling in any such matter, we 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 in our ability to market our products, or delays and costs associated with redesigning our products or payments of
license fees to third parties, or any failure by us to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on our business, financial condition and results of operations.



We Depend on International Sales and Suppliers



Export sales have been a critical part of our 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 manufacturers that sell to United States-based OEMs) accounted for 91%, 91% and 84% of our net
sales for fiscal 2005, 2004, and 2003, respectively. We expect that net sales derived from international sales will continue to represent a significant portion of our total net sales. Letters of credit issued by customers have supported a portion of
our international sales. To date, our international sales have been denominated in United States dollars. Increases in the value of the U.S. dollar relative to the local currency of our customers could make our 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 our wafers. In addition, many of the assembly and test services used by us are procured from
international sources. Wafers are priced in U.S. dollars under our purchase orders with our manufacturing suppliers.



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, we are 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 our products
may be developed, manufactured or sold, may not protect our intellectual property rights to the same extent as do the laws of the United States, thus increasing the possibility of piracy of our products and intellectual property. There can be no
assurance that one or more of these risks will not have a material adverse effect on our business, financial condition and results of operations.



A Lack of Effective Internal Control Over Financial Reporting Could Result in an Inability to Accurately Report Our Financial Results



Effective internal controls are necessary for us to
provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. In connection with



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our managements evaluation of our internal control over financial reporting as of January 31, 2005, management identified a control deficiency that
constituted a material weakness. As more fully described in Item 9A of this Annual Report on Form 10-K, as of January 31, 2005, our management concluded that we did not maintain effective controls over the process of evaluating impairment of
long-lived assets. This control deficiency resulted in a material adjustment recorded by us to the financial statements for the fourth quarter of fiscal 2005. As a result of the material weaknesses identified, our management concluded that our
internal control over financial reporting was not effective as of January 31, 2005. See Item 9A of this Annual Report on Form 10-K.



A failure to implement and maintain effective internal control over financial reporting, including a failure to implement corrective actions to address
the control deficiency identified above, could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in
the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.



Our Financial Results Could Be Affected by Changes in Accounting Principles



Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting
Standards Board (FASB), the American Institute of Certified Public Accountants, the Securities and Exchange Commission (SEC) and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or
interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, we currently are not required to record stock-based
compensation charges if an employees stock option exercise price is equal to or exceeds the deemed fair value of our common stock at the date of grant. However, several companies have recently elected to change their accounting policies and
begun to record the fair value of stock options as an expense. The FASB published a pronouncement in December 2004 that would require us to record expense for the fair value of stock options granted. The effective date of the proposed standard is
for fiscal years beginning after June 15, 2005 and will be applicable starting in our fiscal year 2007. Our future operating expenses may be adversely affected in connection with the issuance of stock options.



Our Stock Price May Be Volatile



The market price of our 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 our Common Stock could be subject to significant fluctuations in response to various factors, including quarter-to-quarter variations in our anticipated or actual operating results, announcements of new products, technological innovations or
setbacks by us or our competitors, general conditions in the semiconductor industry, unanticipated shifts in the markets for mobile phones and other handheld devices or changes in industry standards, losses of key customers, litigation commencement
or developments, the impact of our fundraising activities, including dilution to shareholders, changes in or the failure by us to meet estimates of our performance by securities analysts, market conditions for high technology stocks in general, and
other events or factors. In future quarters, our operating results may be below the expectations of public market analysts or investors.



Potential Nasdaq Stock Market Delisting



On February 28, 2005, we received a notice from the Nasdaq Stock Market that we were no longer in compliance with the requirements for continued inclusion
of our common stock on the Nasdaq National Market pursuant to the Nasdaqs Marketplace Rule 4450(a)(5) (the Rule) because our common stock had closed below $1.00 per share for 30 consecutive business days. We were given 180 calendar
days, or until August 29, 2005, to regain compliance with the Rule. To regain compliance with the Rule, the closing bid price of our common stock must be $1.00 per share or more for a minimum of 10 consecutive business days prior to August 29, 2005.
If we are unable to regain compliance with the Rule by August 29, 2005, we will receive a delisting notification from



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Nasdaq. Upon receipt of the delisting notification, we may appeal the delisting to a Listings Qualifications Panel of Nasdaq or we may apply to transfer our
securities to The Nasdaq SmallCap Market if, at such time, we satisfy the requirements for initial inclusion on such market as set forth in Marketplace Rule 4310(c), other than the minimum bid price requirement of $1.00 per share. If our application
to transfer to the Nasdaq SmallCap Market is approved, we will have until February 23, 2006 to demonstrate compliance with the continued listing requirements of the Nasdaq SmallCap 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. In addition, there are other continued listing requirements, such as a minimum stockholders equity requirement. If the Company fails to comply with
other listing requirements, it may receive future correspondence from the Nasdaq and may risk potential delisting. 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.



Terrorist Attacks, Terrorist Threats, Geopolitical Instability and Government Responses Thereto, May Negatively Impact All Aspects of
NeoMagics Operations, Revenues, Costs and Stock Price.



The terrorist attacks in September 2001 in the United States had a material adverse effect on the economy. Any similar future events may disrupt NeoMagics operations or those of our customers and suppliers. In addition, any similar
future events could have an adverse impact on the U.S. and world economy, in general, and consumer confidence and spending in particular, which could harm NeoMagics sales. Any similar future events could increase volatility in the U.S. and
world financial markets, which could harm NeoMagics stock price and may limit the capital resources available to us and our customers or suppliers. This could have a significant impact on NeoMagics operating results, revenues and costs
and may result in increased volatility in the market price of our common stock.



|Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Foreign Currency Fluctuations



In the past, we have purchased wafers in Japanese yen and have utilized foreign currency forward exchange contracts and options to minimize short-term
foreign currency fluctuation exposures related to these purchases. The Company does not use derivative financial instruments for speculative or trading purposes. We did not have any foreign currency forward contracts in fiscal 2005.



Interest Rate Risk and Investment Portfolio



The primary objective of our investment activities is to preserve principal
and liquidity while at the same time maximizing yields, without significantly increasing risk. To achieve this objective, we place our investments in instruments that meet high credit rating standards as specified in our investment policy. Our
investment policy also specifies limits on the type, concentration and maturity period of our investments. Our investment policy requires that we only invest in U.S. dollar denominated investments. In addition, a small portion of our cash balance is
held in Israel and India currencies. Foreign currency risk is immaterial due to the small amount of foreign currency holdings. We do not use derivative financial instruments in our investment portfolio. Our cash equivalents and short-term
investments are exposed to financial market risk due to fluctuations in interest rates, which may affect our interest income. Due to the short-term nature of our investment portfolio, operating results or cash flows are vulnerable to sudden changes
in market interest rates.



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The table below summarizes our investment portfolio. The table includes cash and cash equivalents,
short-term investments, and related average interest rates. Principal (notional) amounts as of January 31, 2005 and 2004 maturing in fiscal 2006 and fiscal 2005, respectively are as follows:



|                                                        |  |            |        |   |         |   |        |  
|------------------------------------------------------- |  | ---------- | ------ | - | ------- | - | ------ | -
|                                                        |  | Fair Value |       
|January 31,                                             |  | 2005       |        |   | 2004    |  
|(in thousands, except percentages)                      |  | Taxable    |        |   | Taxable |  
|Cash and cash equivalents                               |  | $          | 8,944  |   |         | $ | 12,342 |  
|Weighted average interest rate                          |  |            | 1.84   | % |         |   | 1.09   | %
|Short-term investments                                  |  |            | 16,082 |   |         |   | 30,240 |  
|Weighted average interest rate                          |  |            | 2.13   | % |         |   | 1.22   | %
|                                                        |  |            |        |   |         |   |        |  
|Total cash, cash equivalents and short-term investments |  | $          | 25,026 |   |         | $ | 42,582 |  
|                                                        |  |            |        |   |         |   |        |  



Interest earned on
non-taxable investments is subject to preferential tax treatment under the Internal Revenue Code. We did not have any non-taxable investments as of January 31, 2005 and January 31, 2004.



Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuations in interest rates,
which may affect our interest income. At January 31, 2005, our cash, cash equivalents and short-term investments earned interest at an average rate of 2.03%. Due to the short-term nature of our 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 January 31, 2005, with consistent cash balances, interest income would be adversely affected by approximately $13,000 per quarter.
We do not use our investment portfolio for trading or other speculative purposes.



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|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES



|                                                                                                 |  |               
|------------------------------------------------------------------------------------------------ |  | --------------
|                                                                                                 |  | Reference page
|Consolidated Statements of Operations for the three fiscal years endedJanuary 31, 2005           |  | 30            
|Consolidated Balance SheetsJanuary 31, 2005 and January 31, 2004                                 |  | 31            
|Consolidated Statements of Cash Flows for the three fiscal years endedJanuary 31, 2005           |  | 32            
|Consolidated Statements of Stockholders Equity for the three fiscalyears ended January 31, 2005 |  | 33            
|Notes to Consolidated Financial Statements                                                       |  | 34            
|Reports of Independent Registered Public Accounting Firm                                         |  | 53            
|Supplemental Data: Financial Information by Quarter                                              |  | 55            



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NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Fiscal Years Ended January 31,                                                                  |  | 2005                                  |         |   | 2004 |   |         | 2003 | 
|                                                                                                |  | (in thousands, except per share data) |        
|Net sales                                                                                       |  | $                                     | 2,466   |   |      | $ | 1,888   |      |  | $ | 2,189   |  
|                                                                                                |  |                                       |        
|Cost of sales (1)                                                                               |  |                                       | 3,195   |   |      |   | 2,262   |      |  |   | 3,000   |  
|Impairment of certain acquired and licensed intangible assets                                   |  |                                       | 89      |   |      |   |        |      |  |   | 491     |  
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Total cost of sales                                                                             |  |                                       | 3,284   |   |      |   | 2,262   |      |  |   | 3,491   |  
|Gross loss                                                                                      |  |                                       | (818    | ) |      |   | (374    | )    |  |   | (1,302  | )
|                                                                                                |  |                                       |        
|Operating expenses:                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |  
|Research and development (2)                                                                    |  |                                       | 18,208  |   |      |   | 19,694  |      |  |   | 24,715  |  
|Sales, general and administrative (3)                                                           |  |                                       | 7,447   |   |      |   | 7,236   |      |  |   | 10,383  |  
|Special charge                                                                                  |  |                                       |        |   |      |   |        |      |  |   | 3,600   |  
|Impairment of certain acquired and licensed intangible assets                                   |  |                                       | 1,437   |   |      |   |        |      |  |   | 552     |  
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                                        |  |                                       | 27,092  |   |      |   | 26,930  |      |  |   | 39,250  |  
|                                                                                                |  |                                       |        
|Loss from operations                                                                            |  |                                       | (27,910 | ) |      |   | (27,304 | )    |  |   | (40,552 | )
|Income, net of expenses, from the sale of DVD assets                                            |  |                                       |        |   |      |   |        |      |  |   | 1,580   |  
|Interest income and other                                                                       |  |                                       | 415     |   |      |   | 854     |      |  |   | 1,816   |  
|Interest expense                                                                                |  |                                       | (534    | ) |      |   | (282    | )    |  |   | (75     | )
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes and cumulative effect of change in accounting principle                |  |                                       | (28,029 | ) |      |   | (26,732 | )    |  |   | (37,231 | )
|                                                                                                |  |                                       |        
|Income tax provision (benefit)                                                                  |  |                                       | 196     |   |      |   | 43      |      |  |   | (6,294  | )
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net loss before cumulative effect of change in accounting principle                             |  |                                       | (28,225 | ) |      |   | (26,775 | )    |  |   | (30,937 | )
|Cumulative effect of change in accounting principle                                             |  |                                       |        |   |      |   |        |      |  |   | (4,175  | )
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                        |  | $                                     | (28,225 | ) |      | $ | (26,775 | )    |  | $ | (35,112 | )
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Basic and diluted net loss per share before cumulative effect of change in accounting principle |  | $                                     | (0.87   | ) |      | $ | (0.87   | )    |  | $ | (1.07   | )
|Cumulative effect of change in accounting principle                                             |  |                                       |        |   |      |   |        |      |  |   | (0.15   | )
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Basic and diluted net loss per share                                                            |  | $                                     | (0.87   | ) |      | $ | (0.87   | )    |  | $ | (1.22   | )
|                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |  
|Weighted common shares outstanding                                                              |  |                                       | 32,620  |   |      |   | 30,650  |      |  |   | 28,872  |  
|Weighted common shares outstanding assuming dilution                                            |  |                                       | 32,620  |   |      |   | 30,650  |      |  |   | 28,872  |  

---

|(1) | Includes $8 and $37 in amortization of deferred stock compensation in fiscal 2005 and 2004, respectively.
|--- | ---------------------------------------------------------------------------------------------------------

|(2) | Includes $240, $408, and $893 in amortization of deferred stock compensation in fiscal 2005, 2004, and 2003, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------

|(3) | Includes $126, $256, and $999 in amortization of deferred stock compensation in fiscal 2005, 2004, and 2003, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------



See accompanying notes.



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NEOMAGIC CORPORATION

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                            |  |                                   |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------- | -
|As of January 31,                                                                                                                                           |  | 2005                              |         |   | 2004 |  
|                                                                                                                                                            |  | (in thousands, except share data) |        
|ASSETS                                                                                                                                                      |  |                                   |         |   |      |   |         |  
|Current assets:                                                                                                                                             |  |                                   |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                   |  | $                                 | 8,944   |   |      | $ | 12,342  |  
|Short-term investments                                                                                                                                      |  |                                   | 16,082  |   |      |   | 30,240  |  
|Accounts receivable, less allowance for doubtful accounts of$0 at January 31, 2005 and 2004                                                                 |  |                                   | 12      |   |      |   | 384     |  
|Inventory                                                                                                                                                   |  |                                   | 376     |   |      |   | 102     |  
|Prepaid and other current assets                                                                                                                            |  |                                   | 792     |   |      |   | 974     |  
|                                                                                                                                                            |  |                                   |         |   |      |   |         |  
|Total current assets                                                                                                                                        |  |                                   | 26,206  |   |      |   | 44,042  |  
|Property, plant and equipment, net                                                                                                                          |  |                                   | 3,835   |   |      |   | 3,302   |  
|Employee notes receivable                                                                                                                                   |  |                                   |        |   |      |   | 10      |  
|Intangibles, net                                                                                                                                            |  |                                   |        |   |      |   | 3,168   |  
|Long term prepaid assets                                                                                                                                    |  |                                   | 458     |   |      |   | 128     |  
|Other assets                                                                                                                                                |  |                                   | 215     |   |      |   | 211     |  
|                                                                                                                                                            |  |                                   |         |   |      |   |         |  
|Total assets                                                                                                                                                |  | $                                 | 30,714  |   |      | $ | 50,861  |  
|                                                                                                                                                            |  |                                   |         |   |      |   |         |  
|                                                                                                                                                            |  |                                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |                                   |         |   |      |   |         |  
|Current liabilities:                                                                                                                                        |  |                                   |         |   |      |   |         |  
|Accounts payable                                                                                                                                            |  | $                                 | 1,084   |   |      | $ | 1,344   |  
|Compensation and related benefits                                                                                                                           |  |                                   | 1,017   |   |      |   | 1,257   |  
|Income taxes payable                                                                                                                                        |  |                                   | 3,851   |   |      |   | 3,675   |  
|Current portion of capital lease obligations                                                                                                                |  |                                   | 1,602   |   |      |   | 1,756   |  
|Other accruals                                                                                                                                              |  |                                   | 225     |   |      |   | 203     |  
|                                                                                                                                                            |  |                                   |         |   |      |   |         |  
|Total current liabilities                                                                                                                                   |  |                                   | 7,779   |   |      |   | 8,235   |  
|Capital lease obligations                                                                                                                                   |  |                                   | 2,004   |   |      |   | 799     |  
|Mandatorily redeemable Series B convertible preferred stock                                                                                                 |  |                                   | 2,971   |   |      |   |        |  
|Authorized and issued shares5,000                                                                                                                          |  |                                   |         |   |      |   |         |  
|Commitments and contingencies                                                                                                                               |  |                                   |         |   |      |   |         |  
|Stockholders equity:                                                                                                                                       |  |                                   |         |   |      |   |         |  
|Non-cumulative convertible preferred stock, $.001 par value:                                                                                                |  |                                   |         |   |      |   |         |  
|Authorized shares2,000,000                                                                                                                                 |  |                                   |         |   |      |   |         |  
|Issued and outstanding sharesnone at January 31, 2005 and 2004                                                                                             |  |                                   |        |   |      |   |        |  
|Common stock, $.001 par value:Authorized shares100,000,000 Issued and outstanding shares33,231,710 at January 31, 2005 and 31,866,200 at January 31, 2004 |  |                                   | 33      |   |      |   | 32      |  
|Additional paid-in-capital                                                                                                                                  |  |                                   | 95,606  |   |      |   | 90,496  |  
|Deferred stock compensation                                                                                                                                 |  |                                   | (1,280  | ) |      |   | (535    | )
|Accumulated other comprehensive loss                                                                                                                        |  |                                   | (14     | ) |      |   | (6      | )
|Accumulated deficit                                                                                                                                         |  |                                   | (76,385 | ) |      |   | (48,160 | )
|                                                                                                                                                            |  |                                   |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                  |  |                                   | 17,960  |   |      |   | 41,827  |  
|                                                                                                                                                            |  |                                   |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                  |  | $                                 | 30,714  |   |      | $ | 50,861  |  
|                                                                                                                                                            |  |                                   |         |   |      |   |         |  



See accompanying notes.



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NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Years Ended January 31,                                                                                                                        |  | 2005           |         |   | 2004 |   |         | 2003 | 
|                                                                                                                                               |  | (in thousands) |        
|Operating activities                                                                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                                                                       |  | $              | (28,225 | ) |      | $ | (26,775 | )    |  | $ | (35,112 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                                                    |  |                |         |   |      |   |         |      |  |   |         |  
|Cumulative effect of a change in accounting principle                                                                                          |  |                |        |   |      |   |        |      |  |   | 4,175   |  
|Depreciation                                                                                                                                   |  |                | 2,059   |   |      |   | 3,023   |      |  |   | 3,122   |  
|Amortization and accretion                                                                                                                     |  |                | 1,969   |   |      |   | 1,212   |      |  |   | 1,806   |  
|Gain (loss) on disposal of property, plant and equipment                                                                                       |  |                | (1      | ) |      |   | (11     | )    |  |   | 167     |  
|Amortization of deferred compensation                                                                                                          |  |                | 374     |   |      |   | 701     |      |  |   | 1,892   |  
|Non-cash special charge                                                                                                                        |  |                |        |   |      |   |        |      |  |   | 2,100   |  
|Income, net of expenses, on the sale of DVD assets                                                                                             |  |                |        |   |      |   |        |      |  |   | (1,580  | )
|Impairment of certain acquired and licensed intangible assets                                                                                  |  |                | 1,526   |   |      |   |        |      |  |   | 1,043   |  
|Changes in operating assets and liabilities:                                                                                                   |  |                |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                                                                            |  |                | 372     |   |      |   | (152    | )    |  |   | 7       |  
|Inventory                                                                                                                                      |  |                | (274    | ) |      |   | 433     |      |  |   | (457    | )
|Prepaid and other current assets                                                                                                               |  |                | 213     |   |      |   | 364     |      |  |   | 762     |  
|Restricted cash                                                                                                                                |  |                |        |   |      |   |        |      |  |   | 15,000  |  
|Income tax receivable                                                                                                                          |  |                |        |   |      |   |        |      |  |   | 3,295   |  
|Long term prepaid and other assets                                                                                                             |  |                | (22     | ) |      |   | 134     |      |  |   | 383     |  
|Accounts payable                                                                                                                               |  |                | (260    | ) |      |   | (1,520  | )    |  |   | 717     |  
|Compensation and related benefits                                                                                                              |  |                | (240    | ) |      |   | (136    | )    |  |   | 140     |  
|Income taxes payable                                                                                                                           |  |                | 176     |   |      |   | 42      |      |  |   | (301    | )
|Other accruals                                                                                                                                 |  |                | 22      |   |      |   | (1,198  | )    |  |   | 98      |  
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|Net cash used in operating activities                                                                                                          |  |                | (22,267 | ) |      |   | (23,883 | )    |  |   | (2,743  | )
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|Investing activities                                                                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Net proceeds from the sale of DVD assets                                                                                                       |  |                |        |   |      |   |        |      |  |   | 1,580   |  
|Proceeds from sale of property, plant and equipment                                                                                            |  |                | 6       |   |      |   | 14      |      |  |   |        |  
|Purchases of property, plant, equipment and intangibles                                                                                        |  |                | (116    | ) |      |   | (519    | )    |  |   | (3,940  | )
|Purchases of short-term investments                                                                                                            |  |                | (30,809 | ) |      |   | (56,798 | )    |  |   | (48,403 | )
|Maturities of short-term investments                                                                                                           |  |                | 44,959  |   |      |   | 56,200  |      |  |   | 51,650  |  
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                                                                            |  |                | 14,040  |   |      |   | (1,103  | )    |  |   | 887     |  
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|Financing activities                                                                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Payments on capital lease obligations                                                                                                          |  |                | (1,807  | ) |      |   | (1,329  | )    |  |   | (523    | )
|Net proceeds from issuance of common stock, net of repurchases                                                                                 |  |                | 1,701   |   |      |   | 1,229   |      |  |   | 811     |  
|Net proceeds from issuance of mandatorily redeemable Series B convertible preferred stock and Series A and B warrants to purchase common
stock |  |                | 4,935   |   |      |   |        |      |  |   |        |  
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                                                                            |  |                | 4,829   |   |      |   | (100    | )    |  |   | 288     |  
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|Net decrease in cash and cash equivalents                                                                                                      |  |                | (3,398  | ) |      |   | (25,086 | )    |  |   | (1,568  | )
|Cash and cash equivalents at beginning of period                                                                                               |  |                | 12,342  |   |      |   | 37,428  |      |  |   | 38,996  |  
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of period                                                                                                     |  | $              | 8,944   |   |      | $ | 12,342  |      |  | $ | 37,428  |  
|                                                                                                                                               |  |                |         |   |      |   |         |      |  |   |         |  



See accompanying notes.



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NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | - | --------------------------- | ------ | -- | --------------------------- | - | ------ | -------------------------------------------- |  | - | --------------------------------------- | - |  | -------------------------- | --- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                                    |  | Common Stock                      |   | Additional Paid-In- Capital |        |    | Deferred Stock Compensation |   |        | AccumulatedOther Comprehensive Income (Loss) |  |   | Retained Earnings (Accumulated Deficit) |   |  | Total Stockholders Equity |    
|                                                                                                                                                    |  | Shares                            |   |                             | Amount |    |                             |   |        |                                             
|                                                                                                                                                    |  | (in thousands, except share data) |  
|Balance at January 31, 2002                                                                                                                         |  | 28,008,924                        |   |                             | $      | 28 |                             | $ | 86,436 |                                              |  | $ | (2,004                                  | ) |  | $                          | 19  |   |  | $ | 13,727  |   |  | $ | 98,206  |  
|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock under stock option plan                                                                                                    |  | 216,572                           |   |                             |        |   |                             |   | 265    |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 265     |  
|Issuance of common stock under Employee stock purchase plan                                                                                         |  | 381,459                           |   |                             |        |   |                             |   | 546    |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 546     |  
|Reduction of unamortized deferred compensation on unvested options due to employee terminations                                                     |  |                                  |   |                             |        |   |                             |   | (108   | )                                            |  |   | 108                                     |   |  |                            |    |   |  |   |        |   |  |   |        |  
|Amortization of deferred stock compensation                                                                                                         |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   | 1,892                                   |   |  |                            |    |   |  |   |        |   |  |   | 1,892   |  
|Issuance of common stock for settlement of the wafer purchase agreement                                                                             |  | 1,667,000                         |   |                             |        | 2  |                             |   | 2,098  |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 2,100   |  
|Components of comprehensive loss:                                                                                                                   |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Net loss                                                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            |    |   |  |   | (35,112 | ) |  |   | (35,112 | )
|Change in unrealized gain on investments                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            | (10 | ) |  |   |        |   |  |   | (10     | )
|Total comprehensive loss                                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | (35,122 | )
|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Balance at January 31, 2003                                                                                                                         |  | 30,273,955                        |   |                             |        | 30 |                             |   | 89,237 |                                              |  |   | (4                                      | ) |  |                            | 9   |   |  |   | (21,385 | ) |  |   | 67,887  |  
|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock under stock option plan                                                                                                    |  | 473,366                           |   |                             |        | 1  |                             |   | 658    |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 659     |  
|Issuance of common stock under Employee stock purchase plan                                                                                         |  | 578,698                           |   |                             |        | 1  |                             |   | 569    |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 570     |  
|Issuance of common stock under stock award plan                                                                                                     |  | 540,181                           |   |                             |        |   |                             |   | 621    |                                              |  |   | (621                                    | ) |  |                            |    |   |  |   |        |   |  |   |        |  
|Addition to deferred compensation for stock options                                                                                                 |  |                                  |   |                             |        |   |                             |   | 572    |                                              |  |   | (572                                    | ) |  |                            |    |   |  |   |        |   |  |   |        |  
|Reduction of unamortized deferred compensation on unvested options due to employee terminations                                                     |  |                                  |   |                             |        |   |                             |   | (31    | )                                            |  |   | 31                                      |   |  |                            |    |   |  |   |        |   |  |   |        |  
|Amortization of deferred stock compensation                                                                                                         |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   | 631                                     |   |  |                            |    |   |  |   |        |   |  |   | 631     |  
|Stock compensation for non-employee stock options                                                                                                   |  |                                  |   |                             |        |   |                             |   | 70     |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 70      |  
|Repayment of note receivable from stockholder                                                                                                       |  |                                  |   |                             |        |   |                             |   | (1,200 | )                                            |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | (1,200  | )
|Components of comprehensive loss:                                                                                                                   |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Net loss                                                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            |    |   |  |   | (26,775 | ) |  |   | (26,775 | )
|Change in unrealized gain on investments                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            | (15 | ) |  |   |        |   |  |   | (15     | )
|Total comprehensive loss                                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | (26,790 | )
|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Balance at January 31, 2004                                                                                                                         |  | 31,866,200                        |   |                             |        | 32 |                             |   | 90,496 |                                              |  |   | (535                                    | ) |  |                            | (6  | ) |  |   | (48,160 | ) |  |   | 41,827  |  
|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock under stock option plan                                                                                                    |  | 583,417                           |   |                             |        |   |                             |   | 988    |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 988     |  
|Issuance of common stock under Employee stock purchase plan                                                                                         |  | 736,307                           |   |                             |        | 1  |                             |   | 712    |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 713     |  
|Issuance of common stock under stock award plan                                                                                                     |  | 52,773                            |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   |        |  
|Addition to deferred compensation for stock options                                                                                                 |  |                                  |   |                             |        |   |                             |   | 1,493  |                                              |  |   | (1,493                                  | ) |  |                            |    |   |  |   |        |   |  |   |        |  
|Reduction of unamortized deferred compensation on unvested options due to employee terminations                                                     |  | (6,987                            | ) |                             |        |   |                             |   | (434   | )                                            |  |   | 434                                     |   |  |                            |    |   |  |   |        |   |  |   |        |  
|Amortization of deferred stock compensation                                                                                                         |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   | 314                                     |   |  |                            |    |   |  |   |        |   |  |   | 314     |  
|Stock compensation for non-employee stock options                                                                                                   |  |                                  |   |                             |        |   |                             |   | 60     |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 60      |  
|Series A and B warrants to purchase common stock issued in connection with sale of mandatorily redeemable preferred stock, net of transaction
costs |  |                                  |   |                             |        |   |                             |   | 2,291  |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | 2,291   |  
|Components of comprehensive loss:                                                                                                                   |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Net loss                                                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            |    |   |  |   | (28,225 | ) |  |   | (28,225 | )
|Change in unrealized gain on investments                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            | (8  | ) |  |   |        |   |  |   | (8      | )
|Total comprehensive loss                                                                                                                            |  |                                  |   |                             |        |   |                             |   |       |                                              |  |   |                                        |   |  |                            |    |   |  |   |        |   |  |   | (28,233 | )
|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  
|Balance at January 31, 2005                                                                                                                         |  | 33,231,710                        |   |                             | $      | 33 |                             | $ | 95,606 |                                              |  | $ | (1,280                                  | ) |  | $                          | (14 | ) |  | $ | (76,385 | ) |  | $ | 17,960  |  
|                                                                                                                                                    |  |                                   |   |                             |        |    |                             |   |        |                                              |  |   |                                         |   |  |                            |     |   |  |   |         |   |  |   |         |  



See accompanying notes.



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NEOMAGIC CORPORATION



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES



Description of Business



NeoMagic Corporation designs, develops and markets
high-performance semiconductor solutions, known as Applications Processors, for sale to manufacturers of mobile phones and handheld devices. NeoMagic Corporation was incorporated in California in May 1993. The Company was subsequently reincorporated
in Delaware in February 1997.



The Company incurred net losses
and negative cash flows from operations during each of the past several fiscal years and had working capital of $18.4 million at January 31, 2005, down from $35.8 million at January 31, 2004. At January 31, 2005, the Companys principal sources
of liquidity included cash, cash equivalents and short-term investments of $25.0 million. While a forecast of future events is inherently uncertain, the Company believes its current cash, cash equivalents and short-term investments including the net
proceeds of $3.5 million received from patent sales subsequent to January 31, 2005 as described in Note 15 to the consolidated financial statements, will satisfy its projected cash requirements through at least the next twelve months. If the Company
experiences a material shortfall versus its plan for fiscal 2006, it expects to take all appropriate actions to ensure the continuing operation of its business and to mitigate any negative impact on its cash position. The Company believes it can
take actions to achieve further reductions in its operating expenses, if necessary. The Company also believes that it can take actions to generate cash by selling or licensing intellectual property, seeking funding from strategic partners, and
seeking further equity or debt financing from financial sources. There can be no assurance that additional financing will be available on acceptable terms or at all. Furthermore, as long as the Preferred Stock remains outstanding, provisions of the
Preferred Stock limit the Companys ability to issue any security with greater or equal seniority to the Preferred Stock. Beyond fiscal 2006, the adequacy of the Companys resources will depend largely on its ability to complete additional
financing and its success in re-establishing profitable operations and positive operating cash flows.



Basis of Presentation



The Companys fiscal year ends on the last Sunday in January. For ease of presentation, the accompanying financial statements have been shown as ending on January 31 and calendar quarter ends for all annual and quarterly financial
statement captions. Fiscal year 2005 consisted of 53 weeks and ended on January 30, 2005. Fiscal years 2004 and 2003 consisted of 52 weeks each and ended on January 25 and January 26, respectively.



The consolidated financial statements include the accounts of NeoMagic and
its wholly owned subsidiaries. NeoMagic is not involved with any variable interest entities, as defined by the Financial Accounting Standards Board (FASB) Interpretation No. 46. Intercompany accounts and transactions have been eliminated. Accounts
denominated in non-United States currencies have been remeasured using the United States dollar as the functional currency.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the financial statements and accompanying notes. Significant estimates include those relating to determination of net realizable value of inventories, realizability of deferred tax assets, as well as the
assessment of impairment of goodwill, intangibles and other long-lived assets. Actual results could differ from those estimates.



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cumulative Effect of a Change in Accounting Principle



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 SFAS 142, the Company was required to complete the two-step
transitional goodwill impairment test. The Company completed step one of the transitional impairment test during the second quarter of fiscal 2003 and determined that there were indicators of impairment, as the carrying value of the reporting unit
exceeded the fair value derived from the market capitalization model. The second step of the transitional impairment test to determine the amount of impairment was completed in the third quarter of fiscal 2003 by comparing fair value to carrying
value, with any excess of carrying value over fair value being recorded as an impairment loss. Based on the results of the second transitional impairment test, the Company recorded a non-cash charge of $4.2 million, to reduce the carrying value of
its goodwill, which is reflected as a cumulative effect of an accounting change in the accompanying consolidated statements of operations in fiscal 2003.



Revenue Recognition



The Company recognizes revenue from non-distributor product sales when the products are shipped to the customer, title has transferred, and no obligations
remain. In addition, the Company requires the following criteria to be met prior to recognizing revenue: (i) execution of a written customer order, (ii) shipment of the product, (iii) fee is fixed or determinable, and (iv) collectibility of the
proceeds is probable. The Companys shipment terms are FOB shipping point.



With respect to products shipped to distributors, the Company defers recognition of product revenue until the distributors sell its products to their customers. On occasion, however, the Company may 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 our historical experiences.



Cash, Cash Equivalents and Short-term
Investments



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



Investments in marketable equity securities and debt securities are
classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost with corresponding premiums or discounts amortized to interest income
over the life of the investment. Securities not classified as held-to-maturity are classified as available-for-sale and are reported at fair market value. Unrealized gains or losses on available-for-sale securities are included, net of tax, in
stockholders equity until their disposition. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income and other. The cost of securities sold is based on
the specific identification method.



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



All cash equivalents and short-term investments are classified as available-for-sale and are recorded
at fair market value. All available-for-sale securities have maturity dates of less than one year from the balance sheet dates. For all classifications of securities, cost approximates fair market value as of January 31, 2005 and 2004, and consists
of the following (in thousands):



|                           |  |               |        |                            |   |     |           |  |   |       
|-------------------------- |  | ------------- | ------ | -------------------------- | - | --- | --------- |  | - | ------
|                           |  | AmortizedCost |        | GrossUnrealizedGain (Loss) |   |     | FairValue
|January 31, 2005           |  |               |        |                            |   |     |           |  |   |       
|Cash and cash equivalents: |  |               |        |                            |   |     |           |  |   |       
|Money market funds         |  | $             | 5,194  |                            | $ |    |           |  | $ | 5,194 
|Commercial paper           |  |               | 2,697  |                            |   | (1  | )         |  |   | 2,696 
|Bank accounts              |  |               | 1,054  |                            |   |    |           |  |   | 1,054 
|                           |  |               |        |                            |   |     |           |  |   |       
|Total                      |  | $             | 8,945  |                            | $ | (1  | )         |  | $ | 8,944 
|                           |  |               |        |                            |   |     |           |  |   |       
|Short-term investments:    |  |               |        |                            |   |     |           |  |   |       
|Corporate bonds            |  | $             | 2,080  |                            | $ | (4  | )         |  | $ | 2,076 
|Corporate notes            |  |               | 523    |                            |   | (1  | )         |  |   | 522   
|Auction rate securities    |  |               | 9,990  |                            |   |    |           |  |   | 9,990 
|U.S. Government agencies   |  |               | 3,502  |                            |   | (8  | )         |  |   | 3,494 
|                           |  |               |        |                            |   |     |           |  |   |       
|Total                      |  | $             | 16,095 |                            | $ | (13 | )         |  | $ | 16,082
|                           |  |               |        |                            |   |     |           |  |   |       



|                                    |  |               |        |                            |   |    |           |  |   |       
|----------------------------------- |  | ------------- | ------ | -------------------------- | - | -- | --------- |  | - | ------
|                                    |  | AmortizedCost |        | GrossUnrealizedGain (Loss) |   |    | FairValue
|January 31, 2004                    |  |               |        |                            |   |    |           |  |   |       
|Cash and cash equivalents:          |  |               |        |                            |   |    |           |  |   |       
|Money market funds                  |  | $             | 5,265  |                            | $ |   |           |  | $ | 5,265 
|Commercial paper                    |  |               | 5,995  |                            |   | (1 | )         |  |   | 5,994 
|Bank accounts                       |  |               | 1,083  |                            |   |   |           |  |   | 1,083 
|                                    |  |               |        |                            |   |    |           |  |   |       
|Total                               |  | $             | 12,343 |                            | $ | (1 | )         |  | $ | 12,342
|                                    |  |               |        |                            |   |    |           |  |   |       
|Short-term investments:             |  |               |        |                            |   |    |           |  |   |       
|Commercial paper                    |  | $             | 1,499  |                            | $ | (2 | )         |  | $ | 1,497 
|Corporate notes                     |  |               | 4,964  |                            |   | (9 | )         |  |   | 4,955 
|Auction rate securities             |  |               | 10,680 |                            |   |   |           |  |   | 10,680
|Market auction preferred securities |  |               | 2,429  |                            |   |   |           |  |   | 2,429 
|U.S. Government agencies            |  |               | 10,673 |                            |   | 6  |           |  |   | 10,679
|                                    |  |               |        |                            |   |    |           |  |   |       
|Total                               |  | $             | 30,245 |                            | $ | (5 | )         |  | $ | 30,240
|                                    |  |               |        |                            |   |    |           |  |   |       



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Inventory



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: |  | January 31, 2005 |     | January 31, 2004
|                       |  | (in thousands)  
|Raw materials          |  | $                | 115 |                  | $ | 7  
|Work in process        |  |                  | 52  |                  |   |   
|Finished goods         |  |                  | 209 |                  |   | 95 
|                       |  |                  |     |                  |   |    
|Total                  |  | $                | 376 |                  |   | 102
|                       |  |                  |     |                  |   |    



Long Lived Assets



The Company evaluates the carrying value of its long-lived assets,
consisting primarily of identifiable intangible assets, and property, plant and equipment in the fourth quarter of each fiscal year, and whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be
recoverable. Such events or circumstances include, but are not limited to, a significant decline in the Companys market value, significant reductions in projected future cash flows or gross margins, or macroeconomic factors including a
prolonged economic downturn. In assessing the recoverability of long-lived assets, the Company compares the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows
is less than the carrying amount of the assets, the Company will be required to write down such assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted
future cash flows using a discount rate based upon the Companys weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future
cash flows, including gross profit margins, long-term forecasts of the amount and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significant estimates
and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in liquidation. Changes in these estimates could have a
material adverse effect on the assessment of our long-lived assets, thereby requiring us to write down the assets.



Property, Plant and Equipment



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



Property, plant and equipment consist of the following (in thousands):



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2005 |         |   | 2004 |  
|January 31,                                    |  |      |         |   |      |   |         |  
|Property, plant and equipment:                 |  |      |         |   |      |   |         |  
|Computer equipment and software                |  | $    | 11,084  |   |      | $ | 10,896  |  
|Furniture and fixtures                         |  |      | 1,719   |   |      |   | 1,756   |  
|Machinery and equipment                        |  |      | 1,400   |   |      |   | 1,364   |  
|                                               |  |      |         |   |      |   |         |  
|Total                                          |  |      | 14,203  |   |      |   | 14,016  |  
|Less accumulated depreciation and amortization |  |      | (10,368 | ) |      |   | (10,714 | )
|                                               |  |      |         |   |      |   |         |  
|Property, plant and equipment, net             |  | $    | 3,835   |   |      | $ | 3,302   |  
|                                               |  |      |         |   |      |   |         |  



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Intangible Assets



The Companys intangible assets included licensed intellectual property and acquisition related core technology. Licensed intellectual property and
acquisition related core technology were amortized on a straight-line basis over their estimated useful lives of three years. The balance of intangible assets was zero at January 31, 2005 due to impairment charges in the fourth quarter of fiscal
2005. During the fourth quarter of fiscal 2005 the Company determined that all its remaining intangible assets were fully impaired, see Note 7 of the Notes to the Consolidated Financial Statements.



Warranty



The Company generally sells products with a limited warranty of product quality and a limited indemnification of customers
against intellectual property infringement claims related to the Companys products. The Company accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated, and accrues for estimated but
unidentified issues based on historical activity. The accrual and the related expense for known issues were not significant as of and for the years ended January 31, 2005 and 2004. Due to product testing, the short time between product shipment and
the detection and correction of product failures, and a low historical rate of payments on indemnification claims, the accrual based on historical activity and the related expense were not significant for fiscal 2005, 2004, and 2003.



Concentration of Credit Risk



The Company sells its products to manufacturers of mobile phones and other
handheld devices. The Company performs continuing credit evaluations of its customers and, generally, does not require collateral. Letters of credit may be required from its customers in certain circumstances.



Net Loss per Share



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



Comprehensive Loss



Unrealized gains or losses on the Companys available-for-sale securities are included in comprehensive loss and
reported separately in stockholders equity.



Net
comprehensive loss includes the Companys net loss, as well as accumulated other comprehensive loss on available for sale securities. Net comprehensive loss for the three years ended January 31, 2005, 2004 and 2003, respectively, is as follows
(in thousands):



|                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Years ended January 31,                                        |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Net loss                                                       |  | $    | (28,225 | ) |      | $ | (26,775 | )    |  | $ | (35,112 | )
|Net change in unrealized loss on available for sale securities |  |      | (8      | ) |      |   | (15     | )    |  |   | (10     | )
|                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Net comprehensive loss                                         |  | $    | (28,233 | ) |      | $ | (26,790 | )    |  | $ | (35,122 | )
|                                                               |  |      |         |   |      |   |         |      |  |   |         |  



Total accumulated
other comprehensive loss was $14,000 and $6,000 at January 31, 2005 and 2004, respectively. Accumulated other comprehensive loss consists entirely of unrealized losses on available for sale securities.



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Research and Development Costs



Research and development costs are charged to expense when incurred.



Shipping and Handling Costs



The Companys shipping terms are FOB shipping point and our
customers are responsible for all shipping and handling costs.



Advertising
Costs



The Company expenses advertising costs as incurred.
Advertising expenses were immaterial in fiscal 2005, 2004 and 2003, respectively.



Stock Compensation



At January 31,
2005, the Company had several stock-based employee compensation plans, including stock option plans and an employee stock purchase plan. See Note 5 of the Notes to the Consolidated Financial Statements for description of the plans operated by the
Company. The Company accounts for these plans under the intrinsic value method. The following table illustrates the pro forma effect on net loss and loss per share if the Company had applied the fair value recognition method (in thousands, except
per share data):



|                                                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Year Ended January 31,                                                                                                         |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Net loss, as reported                                                                                                          |  | $    | (28,225 | ) |      | $ | (26,775 | )    |  | $ | (35,112 | )
|Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects                       |  |      | 374     |   |      |   | 701     |      |  |   | 1,892   |  
|Less: Total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects |  |      | (3,959  | ) |      |   | (3,606  | )    |  |   | (5,649  | )
|                                                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Pro forma net loss                                                                                                             |  |      | (31,810 | ) |      |   | (29,680 | )    |  |   | (38,869 | )
|                                                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Reported basic and diluted loss per share                                                                                      |  | $    | (0.87   | ) |      | $ | (0.87   | )    |  | $ | (1.22   | )
|                                                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Pro forma basic and diluted loss per share                                                                                     |  | $    | (0.98   | ) |      | $ | (0.97   | )    |  | $ | (1.35   | )
|                                                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  



The fair value for
these options was estimated at the date of grant using a Black-Scholes option-pricing model.



In fiscal 2005, 2004 and 2003, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model using a dividend yield of 0% and the following additional
weighted-average assumptions:



|                                 |  |                       |   |  |                             |   |  |      |   |  |      |   |  |      |   |  |      |  
|-------------------------------- |  | --------------------- | - |  | --------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                 |  | Employee Option Plans |   |  | Employee StockPurchase Plan |  
|Year Ended January 31,           |  | 2005                  |   |  | 2004                        |   |  | 2003 |   |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Risk-free interest rates         |  | 3.2                   | % |  | 2.7                         | % |  | 3.6  | % |  | 2.1  | % |  | 1.3  | % |  | 2.2  | %
|Volatility                       |  | .91                   |   |  | .79                         |   |  | .64  |   |  | .80  |   |  | .70  |   |  | .75  |  
|Expected life of option in years |  | 3.34                  |   |  | 4.13                        |   |  | 4.31 |   |  | 1.66 |   |  | .76  |   |  | .49  |  



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##### Table of Contents

NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Derivative Financial Instruments



The Company did not utilize any derivative financial instruments in fiscal 2005. The Company has utilized foreign currency
forward contracts to minimize foreign currency fluctuation exposures related to foreign currency denominated purchase commitments in the past. The Company does not use derivative financial instruments for speculative or trading purposes. The
Companys accounting policy for these instruments is based on the Companys designation of such instruments as a hedge transaction. The criteria the Company uses for designating an instrument as a hedge include its effectiveness in risk
reduction and matching of derivative instruments to underlying transactions. Gains and losses on currency forward contracts that are designated as hedges, are deferred and recognized in income (loss) in the same period that the underlying
transactions are settled. Gains and losses on any instrument not meeting the above criteria would be recognized in income (loss) in the current period. If an underlying hedged transaction is terminated earlier than initially anticipated, the
offsetting gain or loss on the related derivative instrument would be recognized in income (loss) in the same period.



Financial Instruments



The Companys financial instruments consist principally of cash and cash equivalents, short-term investments, accounts receivable, employee
receivables, capital leases and accounts payable. The Company believes all of the financial instruments recorded values approximate current values because of the short-term nature of these instruments.



Segment Information



The Company has one operating segment by which management evaluates performance and allocates resources.



Recent Accounting Pronouncements



In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Issues objective is to provide guidance for identifying other-than-temporarily impaired
investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement
and recognition guidance in EITF 03-1 until further notice. The disclosure requirements of EITF 03-1 are effective with this annual report for fiscal 2005. The Company did not have any investments that were deemed temporarily impaired in fiscal
2005. Once the FASB reaches a final decision on the measurement and recognition provisions, the Company will evaluate the impact of the adoption of the accounting provisions of EITF 03-1.



In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires employee stock
options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, as
allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. The requirements of SFAS No. 123R are effective for
the first fiscal year beginning after June 15, 2005. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123. The Company is currently
evaluating the impact of adoption of SFAS No. 123R.



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as
current period charges. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after
June 15, 2005. The adoption of this pronouncement is not expected to have a material impact on our statements of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company is required to adopt SFAS 153, on a prospective basis, for nonmonetary exchanges beginning after June 15, 2005.
The adoption of SFAS No. 153 is not expected to have an impact on our consolidated results of operations.



2. ACQUISITIONS AND DIVESTITURES



In fiscal year 2000, the Company decided not to pursue the further development of technologies for the DVD market. In April 2000, pursuant to an asset purchase agreement, the Company sold the principal assets of the
DVD product group, primarily consisting of fixed assets and intangible assets to LSI Logic (Buyer). The Company received $11.7 million in a lump-sum cash payment and an additional $3.1 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 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 in fiscal 2001. In fiscal 2003, the Company received the remaining contingent payment of $1.6 million upon completing the transfer of licenses with third parties to the Buyer, and recorded
the amount as a gain in the Consolidated Statements of Operations for the fiscal year ended January 31, 2003.



3. LOSS PER SHARE



Per
share information is as follows:



|                                                                         |  |                                       |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Year Ended January 31,                                                   |  | 2005                                  |         |   | 2004 |   |         | 2003 | 
|                                                                         |  | (in thousands, except per share data) |        
|Numerator:                                                               |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                 |  | $                                     | (28,225 | ) |      | $ | (26,775 | )    |  | $ | (35,112 | )
|                                                                         |  |                                       |         |   |      |   |         |      |  |   |         |  
|Denominator:                                                             |  |                                       |         |   |      |   |         |      |  |   |         |  
|Denominator for basic and diluted loss per shareweighted-average shares |  |                                       | 32,620  |   |      |   | 30,650  |      |  |   | 28,872  |  
|Basic and diluted loss per share                                         |  | $                                     | (0.87   | ) |      | $ | (0.87   | )    |  | $ | (1.22   | )



For fiscal years 2005,
2004 and 2003 basic loss per share equals diluted loss per share due to the net loss for the year. During fiscal 2005, 2004, and 2003 the Company excluded options to purchase 8,369,389, 7,972,089 and 7,289,975 shares of common stock, respectively,
from the diluted loss per share computation because the effect was anti-dilutive for these fiscal years.



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4. INCOME TAXES



Loss before taxes and the provision (benefit) for income taxes in fiscal 2005, 2004 and 2003 consists of the following:



|                                           |  |                |         |   |      |   |         |      |  |   |         |  
|------------------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Year Ended January 31,                     |  | 2005           |         |   | 2004 |   |         | 2003 | 
|                                           |  | (in thousands) |        
|Income (loss) before taxes                 |  |                |         |   |      |   |         |      |  |   |         |  
|U. S.                                      |  | $              | (26,953 | ) |      | $ | (27,047 | )    |  | $ | (29,688 | )
|Foreign                                    |  |                | (1,076  | ) |      |   | 315     |      |  |   | (7,543  | )
|                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Total loss before taxes                    |  | $              | (28,029 | ) |      | $ | (26,732 | )    |  | $ | (37,231 | )
|                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Provision (benefit) for taxes              |  |                |         |   |      |   |         |      |  |   |         |  
|Current:                                   |  |                |         |   |      |   |         |      |  |   |         |  
|U. S.                                      |  | $              | 27      |   |      | $ |        |      |  | $ | (6,339  | )
|Foreign                                    |  |                | 169     |   |      |   | 43      |      |  |   | 45      |  
|                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Total provision (benefit) for income taxes |  | $              | 196     |   |      | $ | 43      |      |  | $ | (6,294  | )
|                                           |  |                |         |   |      |   |         |      |  |   |         |  



The Companys
income tax provision (benefit) differs from the federal statutory rate of 35% due to the following:



|                                                     |  |                                   |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Year Ended January 31,                               |  | 2005                              |         |   | 2004 |   |         | 2003 | 
|                                                     |  | (in thousands except percentages) |        
|Pretax loss                                          |  | $                                 | (28,029 | ) |      | $ | (26,732 | )    |  | $ | (37,231 | )
|Federal statutory rate                               |  |                                   | 35      | % |      |   | 35      | %    |  |   | 35      | %
|Expected benefit                                     |  |                                   | (9,810  | ) |      |   | (9,356  | )    |  |   | (13,031 | )
|Foreign taxes                                        |  |                                   | 169     |   |      |   | 43      |      |  |   | 45      |  
|Net operating loss not currently benefited           |  |                                   | 9,607   |   |      |   | 9,406   |      |  |   | 6,127   |  
|Non-deductible amortization of deferred compensation |  |                                   | 91      |   |      |   | (59     | )    |  |   | 557     |  
|Other                                                |  |                                   | 139     |   |      |   | 9       |      |  |   | 8       |  
|                                                     |  |                                   |         |   |      |   |         |      |  |   |         |  
|Provision (Benefit) for income taxes                 |  | $                                 | 196     |   |      | $ | 43      |      |  | $ | (6,294  | )
|                                                     |  |                                   |         |   |      |   |         |      |  |   |         |  



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



|                                     |  |                |         |   |      |   |         |  
|------------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | -
|Year Ended January 31,               |  | 2005           |         |   | 2004 |  
|                                     |  | (in thousands) |        
|Deferred tax assets:                 |  |                |         |   |      |   |         |  
|Net operating loss carryforward      |  | $              | 31,574  |   |      | $ | 14,823  |  
|Research and development credit      |  |                | 4,684   |   |      |   | 3,844   |  
|Acquisition costs                    |  |                | 1,950   |   |      |   | 1,617   |  
|Reserves and accruals                |  |                | 529     |   |      |   | 1,071   |  
|Capitalized research and development |  |                | 3,351   |   |      |   | 3,085   |  
|Other                                |  |                | 1,295   |   |      |   | 77      |  
|                                     |  |                |         |   |      |   |         |  
|Total deferred tax assets            |  |                | 43,383  |   |      |   | 24,517  |  
|Valuation allowance                  |  | $              | (43,383 | ) |      | $ | (24,517 | )
|                                     |  |                |         |   |      |   |         |  
|Net deferred tax assets              |  |                |        |   |      |   |        |  
|                                     |  |                |         |   |      |   |         |  



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Realization of the deferred tax assets is dependent on the Company generating
sufficient taxable income in future years to obtain benefit from the reversal of temporary differences and from net operating loss and tax credit carryforwards. At January 31, 2005, the Company has provided a valuation allowance of $43.4 million
equal to its total deferred tax assets due to uncertainties surrounding their realization. The valuation allowance increased by $18.9 million, $10.5 million, and $2.5 million in fiscal 2005, 2004 and 2003, respectively. At January 31, 2005,
approximately $2.4 million of the valuation allowance referenced above relates to the tax benefit of stock option deductions that will be credited to additional paid in capital, when realized.



As of January 31, 2005, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $79.5 million. The federal net operating loss will expire in fiscal years beginning in 2023. The Company also had research and development credit carryforwards for federal income tax purposes of
approximately $2.8 million, which expire in fiscal years beginning in 2019. In addition, the Company had net operating losses and research and development tax credits for state income tax purposes of approximately $65.5 million and $2.9 million,
respectively. The state net operating loss will expire in the years beginning in 2013, and state research and development tax credits will not expire. Utilization of the Companys federal net operating loss and research credit carryforwards may
be subject to an annual limitation due to the change of ownership provisions of the Tax Reform Act of 1986. The annual limitation may result in the expiration of net operating loss and research credit carryforwards before utilization.



Income taxes payable balances on the Consolidated Balance
Sheets are represented by accruals recorded by the Company for income tax liabilities. Income tax liabilities are recorded in accordance with the FAS 5 criteria of being estimable and probable.



The American Jobs Creation Act of 2004 (the Jobs Act), enacted on
October 22, 2004, provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify
for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a companys chief executive officer and approved by the companys board of directors. Certain other criteria in
the Jobs Act must be satisfied as well.



The Company has not
determined whether it will apply the above provision to qualifying earnings repatriations in fiscal year 2006; however, as additional clarifying language on key elements of the provision becomes available, the Company will continue to analyze and
assess whether such repatriation would be practical.



The
earnings from foreign operations in India are currently tax exempt pursuant to a tax holiday effective through 2008. The incentive provides for certain tax relief if certain conditions are met. We believe that we continued to be in compliance with
these conditions at January 31, 2005.



5. STOCKHOLDERS EQUITY



Warrants



The Company granted warrants in connection with the securities purchase
agreement entered into with Satellite Strategic Finance Associates, LLC in August 2004. The warrants are for the purchase of 1,000,000 shares of NeoMagic common stock at an exercise price of $1.60 per share, exercisable until 90 days after the date
that the registration statement was filed by the Company covering the securities is declared effective by the Securities and Exchange Commission, and (ii) a warrant to purchase 1,608,696 shares of common stock at $1.64 per share, exercisable until
August 20, 2009. The Securities and Exchange Commission declared the Companys



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



filing effective September 24, 2004 and the warrants for the purchase of 1,000,000 shares expired on December 26, 2004. As of January 31, 2005, none of the
1,608,696 warrants had been exercised. See Note 9 Mandatorily Redeemable Series B Preferred Stock, for additional information.



Stock Plan



In accordance with the 2003 Stock Plan (the Plan), the Board of Directors may grant Nonstatutory stock options and stock purchase rights to
employees, consultants and directors. Incentive Stock Options may be granted only to Employees. The Company has reserved a total of 3,072,746 shares under the Plan. The Plan terminates in 2013. The Board of Directors determines vesting provisions
for stock purchase rights and options granted under the Plan. Stock options expire no later than ten years from the date of grant. Generally stock options vest over four years when granted to new employees. In the event of voluntary or involuntary
termination of employment with the Company for any reason, with or without cause, all unvested options are forfeited and all vested options must be exercised within a ninety-day period, or as set forth in the option agreement, or they are forfeited.
Certain of the options and stock purchase rights are exercisable immediately upon grant. However, common shares issued on exercise of options prior to vesting are subject to repurchase by the Company. As of January 31, 2005, no shares of common
stock were subject to this repurchase provision. Other options granted under the Plan are exercisable during their term in accordance with the vesting schedules set forth in the option agreement. The 2003 Plan is subject to an automatic increase for
unexercised forfeited shares issued in the 1993 Plan. As of January 31, 2005 the maximum number of options outstanding and unexercised in the 1993 Plan was 4,287,812.



Under the 1998 Nonstatutory Stock Option Plan, the Board of Directors may grant nonstatutory stock options to employees,
consultants, and officers initial employment grants. The Company has reserved a total of 7,015,932 shares under the Plan. Unless terminated sooner, the Plan will terminate automatically in June 2008.



Under the 1993 Stock Plan (the Plan), the Board of Directors may
grant incentive stock options, nonstatutory stock options and stock purchase rights to employees, consultants and directors. The Company has reserved a total of 4,287,812 shares under the Plan. The Plan terminated in September 2003. The Board of
Directors determines vesting provisions for stock purchase rights and options granted under the Plan. Stock options expire no later than ten years from the date of grant. Generally stock options vest over four years when granted to new employees. In
the event of voluntary or involuntary termination of employment with the Company for any reason, with or without cause, all unvested options are forfeited and all vested options must be exercised within a ninety-day period, or as set forth in the
option agreement, or they are forfeited. Certain of the options and stock purchase rights are exercisable immediately upon grant. However, common shares issued on exercise of options prior to vesting are subject to repurchase by the Company. As of
January 31, 2005, no shares of common stock were subject to this repurchase provision. Other options granted under the Plan are exercisable during their term in accordance with the vesting schedules set forth in the option agreement. Unexercised
forfeited shares are transferable to the 2003 Plan as provided within the 2003 Plan.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A summary of the Companys stock option activity under the three plans, and related information
for the three years ended January 31, 2005 follows:



|                            |  |                                     |   |  |                              |     
|--------------------------- |  | ----------------------------------- | - |  | ---------------------------- | ----
|                            |  | Number ofSharesOutstanding(Options) |   |  | WeightedAverageExercisePrice
|Balance at January 31, 2002 |  | 7,937,789                           |   |  | $                            | 3.64
|Granted                     |  | 2,569,280                           |   |  |                              | 3.05
|Exercised                   |  | (216,572                            | ) |  |                              | 1.22
|Canceled                    |  | (989,880                            | ) |  |                              | 3.72
|                            |  |                                     |   |  |                              |     
|Balance at January 31, 2003 |  | 9,300,617                           |   |  | $                            | 3.52
|                            |  |                                     |   |  |                              |     
|Granted                     |  | 4,880,452                           |   |  |                              | 2.39
|Exercised                   |  | (473,366                            | ) |  |                              | 1.39
|Canceled                    |  | (2,177,461                          | ) |  |                              | 6.05
|                            |  |                                     |   |  |                              |     
|Balance at January 31, 2004 |  | 11,530,242                          |   |  | $                            | 2.66
|                            |  |                                     |   |  |                              |     
|Granted                     |  | 3,761,263                           |   |  |                              | 1.31
|Exercised                   |  | (583,417                            | ) |  |                              | 1.69
|Canceled                    |  | (2,418,638                          | ) |  |                              | 2.55
|                            |  |                                     |   |  |                              |     
|Balance at January 31, 2005 |  | 12,289,450                          |   |  | $                            | 2.31
|                            |  |                                     |   |  |                              |     



At January 31, 2005,
options to purchase 5,904,910 shares of common stock were vested at prices ranging from $0.27 to $21.31 and 2,091,040 shares of common stock were available for future grants under the plans.



The following table summarizes information about stock options outstanding at
January 31, 2005:



|                                    |  |                   |  |                                         |  |                              |       |                   |           |                              |   |      
|----------------------------------- |  | ----------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ----------------- | --------- | ---------------------------- | - | -----
|Options Outstanding and Exercisable
|                                    |  |                   |  |                                         | 
|Range of Exercise Prices            |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | NumberExercisable |           | WeightedAverageExercisePrice
|$0.27$1.00                         |  | 2,692,943         |  | 8.27                                    |  | $                            | 0.58  |                   | 680,977   |                              | $ | 1.00 
|$1.02$2.30                         |  | 2,233,912         |  | 9.00                                    |  |                              | 1.58  |                   | 401,829   |                              |   | 1.75 
|$2.55$2.79                         |  | 2,594,479         |  | 8.66                                    |  |                              | 2.68  |                   | 1,313,698 |                              |   | 2.79 
|$2.84$3.20                         |  | 2,633,132         |  | 6.67                                    |  |                              | 3.11  |                   | 2,296,370 |                              |   | 3.10 
|$3.22$4.30                         |  | 1,790,584         |  | 6.17                                    |  |                              | 3.33  |                   | 1,581,818 |                              |   | 3.28 
|$4.40$13.00                        |  | 341,900           |  | 7.05                                    |  |                              | 6.25  |                   | 113,300   |                              |   | 9.86 
|$21.31$21.31                       |  | 2,500             |  | 3.88                                    |  |                              | 21.31 |                   | 2,500     |                              |   | 21.31
|                                    |  |                   |  |                                         |  |                              |       |                   |           |                              |   |      
|                                    |  | 12,289,450        |  | 7.80                                    |  | $                            | 2.31  |                   | 6,390,492 |                              | $ | 2.90 



Preferred Stock



In fiscal 2000, the Board of Directors approved an amendment to the
Certificate of Incorporation to allow the issuance of up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of those shares without any further vote or action
by the stockholders.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Employee Stock Purchase Plan



A total of 2,900,000 shares of common stock has been reserved for issuance under the 1997 Employee Stock Purchase Plan
(Purchase Plan). The 1997 Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code and has consecutive and overlapping twenty-four month offering periods that begin every six months. Each twenty-four month
offering period includes four six-month purchase periods, during which payroll deductions are accumulated and at the end of which, shares of common stock are purchased with a participants accumulated payroll deductions. The 1997 Purchase Plan
permits eligible employees to purchase common stock through payroll deductions of up to 10% of the employees compensation. The price of common stock to be purchased under the 1997 Purchase Plan is 85% of the lower of the fair market value of
the common stock at the beginning of the offering period or at the end of the relevant purchase period.



In fiscal 2005, 2004, and 2003, 736,307, 578,698, and 381,459 shares, respectively, of common stock at an average price of $0.96, $0.98, and $1.43 per
share, respectively, were issued under the 1997 Purchase Plan. Shares available for purchase under the Purchase Plan were 459,819 at January 31, 2005.



Stock-Based Compensation



The Company has elected to follow the intrinsic value method in accounting for its employee stock awards. Under the intrinsic value method, when the
exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, no compensation is recognized.



Had compensation costs been determined based upon the fair value at the grant date for awards under these plans, the
Companys fiscal 2005 net loss and loss per share would have increased by approximately $3.6 million, or $0.11 per share. The Companys fiscal 2004 net loss and loss per share would have increased by approximately $2.9 million, or $0.10
per share. The Companys fiscal 2003 net loss and loss per share would have increased by approximately $3.8 million, or $0.13 per share. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the
options vesting period and stock purchased under the 1997 Purchase Plan is amortized over the six-month purchase period.



The weighted average fair value of options granted during fiscal 2005 and fiscal 2004 with exercise prices less than the market price at the date of grant
is $0.76 and $1.01 per share, respectively. There were no options granted during fiscal 2003 with an exercise price less than the market price at the date of grant. The weighted average fair value of options granted during fiscal 2005, 2004 and 2003
with exercise prices equal to the market price at the date of grant is $1.93, $2.54, and $3.05 per share, respectively.



Deferred Stock Compensation



In connection with the grant of certain stock options to employees in fiscal 2005 and fiscal 2004, the Company recorded deferred stock compensation of
$1,493,000 and $572,000, respectively, for the difference between the fair value of common stock at the date of grant and the option exercise price. These amounts are presented as a credit to additional paid-in capital with an offsetting debit to
deferred stock compensation included in stockholders equity and are amortized over the vesting period of the related options. In connection with the grant of certain stock awards to employees in fiscal 2004, the Company recorded deferred stock
compensation of $621,000 for the difference of the par value of common stock and the fair market value on the Board of Director approval date. The majority shares for the stock awards were issued to restricted accounts on September 18, 2003 and
released on March 1, 2004 while the residual 52,773 shares were issued on March 1, 2004. This amount was presented as a credit to additional paid-in capital with an offsetting debit to deferred stock compensation included in stockholders
equity and was amortized over the vesting period of the related award. In fiscal 2005, 2004, and 2003, $434,000, $31,000, and $108,000, respectively was recorded as reductions to deferred stock compensation to reflect the unamortized portion of
deferred stock compensation related to the cancellation of unvested options upon employee terminations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6. SAVINGS PLAN



The Company maintains a savings plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees may contribute up to 60% beginning
January 1, 2003 of their pre-tax salaries per year, but not more than the statutory limits. Prior to January 1, 2003, the Company contributed $0.30 for every dollar the employee contributed to the plan up to the first 6% of earnings. As of January
1, 2003, the Company changed to a discretionary matching program. The Company stopped the employer match as of January 1, 2003. The Company made matching contributions to employees of $0, $0, and $131,000 in fiscal 2005, 2004, and 2003,
respectively.



7. INTANGIBLE ASSETS



The following table provides a summary of the carrying amount of
intangible assets as of January 31, 2005 and 2004, respectively:



|                               |  |                |       |                         |   |        |     |  |   |      
|------------------------------ |  | -------------- | ----- | ----------------------- | - | ------ | --- |  | - | -----
|January 31, 2005               |  | Cost           |       | AccumulatedAmortization |   |        | Net
|                               |  | (in thousands)
|Core technology                |  | $              | 1,800 |                         | $ | (1,800 | )   |  | $ | 0    
|                               |  |                |       |                         |   |        |     |  |   |      
|                               |  |                |      
|January 31, 2004               |  | Cost           |       | AccumulatedAmortization |   |        | Net
|                               |  | (in thousands)
|Licensed intellectual property |  | $              | 3,275 |                         | $ | (657   | )   |  | $ | 2,618
|Core technology                |  |                | 1,800 |                         |   | (1,250 | )   |  |   | 550  
|                               |  |                |       |                         |   |        |     |  |   |      
|                               |  | $              | 5,075 |                         | $ | (1,907 | )   |  | $ | 3,168
|                               |  |                |       |                         |   |        |     |  |   |      



Amortization expense
for other intangible assets was $1,642, $1,212 and $1,806 thousand in fiscal 2005, 2004 and 2003, respectively.



During the fourth quarter of fiscal 2005 the company determined that certain licensed intellectual property was impaired and recorded an impairment charge
of $1.5 million of which $0.1 million was charged to cost of sales for licensed intellectual property which related to products currently in production. The impairment was caused by a decline in the related sales forecasts of products associated
with the licensed intellectual property. The impairment charge recorded represents the amount by which the carrying amount of the licensed intellectual property exceeded its fair value, which was determined based on the Companys estimated
discounted future cash flows identifiable to the licensed intellectual property.



During the first quarter of fiscal 2003 the Company wrote-off licensed intangible properties with a net book value of $531 thousand relating to licensed intellectual property that will no longer be used.



During 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 $1.0 million during the period. Of the total impairment charge, $0.5 million 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 $0.5 million impairment charge with respect to intangibles relating to customer relationships. Several key
customers with whom the Company was engaged had abandoned their related product plans, which led to the impairment. The Company also recorded a $46,000 impairment



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



charge with respect to intangibles that were capitalized as internal use software. The Company no longer uses the software. The impairment charge relating to
customer relationships and internal use software is included in the operating expenses section of the Consolidated Statements of Operations in fiscal 2003.



8. OBLIGATIONS UNDER CAPITAL LEASES



In fiscal 2003, the Company entered into capital leases for software licenses used in the design of semiconductors. In March 2004 and October 2004, the
Company entered into new capital lease agreements adding additional software and extending the terms of two of the Companys existing leases. Obligations under capital leases represent the present value of future payments under the lease
agreements. Property, plant and equipment include the following amounts for leases that have been capitalized:



|                                                        |  |                |       |   |      |   |        |  
|------------------------------------------------------- |  | -------------- | ----- | - | ---- | - | ------ | -
|January 31,                                             |  | 2005           |       |   | 2004 |  
|                                                        |  | (in thousands) |      
|Gross property, plant and equipment under capital lease |  | $              | 4,243 |   |      | $ | 4,073  |  
|Accumulated depreciation                                |  |                | (821  | ) |      |   | (1,738 | )
|                                                        |  |                |       |   |      |   |        |  
|Net property, plant and equipment under capital lease   |  | $              | 3,422 |   |      | $ | 2,335  |  
|                                                        |  |                |       |   |      |   |        |  



Amounts capitalized
under leases are being amortized over a three-year period and included as part of depreciation expense.



Future minimum payments under the capital leases consist of the following as of January 31, 2005:



|                                            |  |   |        |  
|------------------------------------------- |  | - | ------ | -
|(in thousands)                              |  |   |       
|2006                                        |  | $ | 1,836  |  
|2007                                        |  |   | 1,548  |  
|2008                                        |  |   | 593    |  
|                                            |  |   |        |  
|Total minimum lease payments                |  |   | 3,977  |  
|Less: amount representing interest          |  |   | (371   | )
|                                            |  |   |        |  
|Present value of net minimum lease payments |  |   | 3,606  |  
|Less: current portion                       |  |   | (1,602 | )
|                                            |  |   |        |  
|Long-term portion                           |  | $ | 2,004  |  
|                                            |  |   |        |  



In March 2005, the
Company amended the payment schedule for one of its capital leases, which reduced fiscal 2006 payments by $150,000, increased fiscal 2007 payments by $100,000 and increased fiscal 2008 payments by $50,000. The above table does not reflect this
amendment.



9. MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK



On August 20, 2004, the Company issued 5,000 shares of
Mandatorily Redeemable Series B Convertible Preferred Stock (the Series B Preferred Stock), Series A Warrants for the purchase of 1,608,696 shares of common stock at $1.64 per share, and Series B Warrants for the purchase of 1,000,000
shares of common stock at $1.60 per share for an aggregate cash purchase price of $5,000,000. After deducting certain transaction costs of $65,000, net cash proceeds received by the Company were $4,935,000. These net proceeds were used to fund the
Companys operating activities. In addition, the Company incurred out-of-pocket expenses of approximately $392 thousand related to the financing. The Series B Preferred Stock is convertible at the option of the investor into 4,347,826 shares of
the Companys Common Stock at a conversion price of $1.15 per share, and is subject to certain anti-dilution provisions. The Series B Preferred Stock is redeemable by the Company for a mandatory



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



payment of $5 million three years from the issue date of August 20, 2004 if the conversion option has not been exercised. The Series B Preferred Stock has
liquidation preferences over the Companys Common Stock and has no voting rights. Furthermore, as long as the preferred stock remains outstanding, provisions of the Preferred Stock limit our ability to issue any security with greater or equal
seniority to the Preferred Stock. In addition, there are restrictions on dividend payments as long as the Series B Convertible Preferred Stock remains outstanding. The Series A Warrants to purchase common stock are exercisable for five years from
the date of issuance. The Series B Warrants to purchase common stock were exercisable until 90 days after the date that the registration statement relating to the common shares underlying the securities issued in this transaction was declared
effective by the Securities and Exchange Commission. On September 24, 2004, this registration statement was declared effective. The Series B Warrants expired unexercised on December 26, 2004.



In accordance with SFAS 150, the Company classified the estimated fair value
of the Mandatorily Redeemable Series B Convertible Preferred Stock as a liability. The Company estimated the fair values of the Series B Preferred Stock and the Series A and B Warrants and allocated the net proceeds of $4,935,000 based on relative
fair values in accordance with EITF 00-27 and calculated the intrinsic value of the conversion option embedded within the convertible preferred stock using the effective conversion price of $1.15 per common share. The intrinsic value of the
beneficial conversion option calculated was $1,203,000 and the fair value allocated to the Series A and Series B warrants was $1,153,000. The fair value allocated to the warrants and the intrinsic value of the beneficial conversion option were
recorded as credits to additional paid in capital in stockholders equity on the consolidated balance sheets with an offsetting amount of $2,356,000 treated as a reduction in the $5 million liability recorded for the Mandatorily Redeemable
Series B Convertible Preferred Stock. The net-recorded liability of $2,644,000 for the Mandatorily Redeemable Series B Convertible Preferred Stock is accreting to the redemption value of $5 million through charges to interest expense over the three
year period until mandatory redemption. The Company accreted interest expense of $327,000 during fiscal 2005.



The Companys out-of-pocket expenses of approximately $392,000 related to the financing were recorded as deferred financing costs on the consolidated
balance sheets with $131,000 recorded in current assets. The Company recorded amortization of the deferred financing costs to interest expense of $54,000 during fiscal 2005.



10. COMMITMENTS AND CONTINGENCIES



Commitments



In May 1996, the Company moved its principal headquarters to a new facility in Santa Clara, California, under a non-cancelable operating lease that
expired in April 2003. In January 1998, the Company entered into a second non-cancelable operating lease for an adjacent building which became its new corporate headquarters. This lease had a co-terminus provision with the original lease that
expired in April 2003. In March 2002, the Company extended the term for 45,000 square feet under this lease for another 7 years with a termination date of April 2010. The Company leases offices in Israel and India under operating leases that expire
September 2005 and December 2006, respectively. Future minimum lease payments under operating leases are as follows:

|                               |  |   |      
|------------------------------ |  | - | -----
|Fiscal year ending January 31: |  |  
|(in thousands)                 |  |  
|2006*                          |  | $ | 1,002
|2007*                          |  |   | 933  
|2008*                          |  |   | 1,028
|2009                           |  |   | 1,073
|2010                           |  |   | 1,100
|Thereafter                     |  |   | 277  
|                               |  |   |      
|Total minimum lease payments   |  | $ | 5,413
|                               |  |   |      



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NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



---

|* | Includes sublease income for sub-leasing 10,000 square feet in the Companys Santa Clara facility for a two-year period starting on March 15, 2005 for $12,000 per month.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Rent expense under operating leases was $1,196,
$1,201 and $1,849 thousand in fiscal 2005, 2004 and 2003, respectively.



In November 2000, the Company signed a sublease agreement. Rent income related to this sublease agreement was $0, $0 and $260 thousand in fiscal 2005, 2004 and 2003, respectively.



In June 2001, the Company signed an additional sublease agreement. Rent
income related to this sublease agreement was $0, $0 and $199 thousand in fiscal 2005, 2004 and fiscal 2003, respectively.



Contingencies



As a general matter, the semiconductor industry has experienced 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 alleged 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. Since January 1999, no further action has occurred on this counter claim. 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 on 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. In May 2003, the lower court ruled in favor of Trident. In December 2003 the Company filed an
appeal in the United States Court of Appeals, for the Federal Circuit. In August 2004 the Federal Circuit rejected the appeal and affirmed the lower courts decision of no infringement by the Trident products. While the Company believes it has
valid defenses against Tridents counter claim filed in 1999, there can be no assurance as to whether Trident will or will not proceed with the counter-suit.



11. 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 manufacturers that sell to United States-based OEMs) accounted for 91%, 91% and 84% of net sales in fiscal 2005, 2004 and 2003, respectively. The Company expects that export sales will continue to represent a significant portion of net
sales, although there can be no assurance that export sales as a percentage of net sales will remain at current levels. All sales transactions were denominated in United States dollars. The following is a summary of the Companys net sales by
major geographic area:



|              |  |                        |   |  |      |   |  |      |  
|------------- |  | ---------------------- | - |  | ---- | - |  | ---- | -
|              |  | Year Ended January 31, |  
|              |  | 2005                   |   |  | 2004 |   |  | 2003 |  
|Japan         |  | 12                     | % |  | 40   | % |  | 43   | %
|Taiwan        |  | 47                     | % |  | 34   | % |  | 39   | %
|Hong Kong     |  | 25                     | % |  | 14   | % |  | 0    | %
|United States |  | 9                      | % |  | 9    | % |  | 16   | %
|Europe        |  | 7                      | % |  | 3    | % |  | 2    | %



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following customers accounted for more than 10% of net sales:



|                                   |  |                        |   |  |      |   |  |      |  
|---------------------------------- |  | ---------------------- | - |  | ---- | - |  | ---- | -
|                                   |  | Year Ended January 31, |  
|                                   |  | 2005                   |   |  | 2004 |   |  | 2003 |  
|Edom Technology Co.**              |  | 33                     | % |  | 25   | % |  | 20   | %
|Silicon Media, Inc.**              |  | 8                      | % |  | 24   | % |  | 15   | %
|ESS Technology International, Inc. |  | 26                     | % |  | 14   | % |  | *    | %
|Macnica, Inc.**                    |  | *                      | % |  | 10   | % |  | 26   | %
|Silicon Alliance Int.**            |  | 13                     | % |  | *    | % |  | 17   | %

---

|* | represents less than 10% of net sales
|- | -------------------------------------

|** | customer is a distributor
|-- | -------------------------



12. RELATED PARTY TRANSACTIONS



The Company had non-current notes receivable from officers and employees of $10 thousand as of January 31, 2004.



During fiscal 2002, the Board of Directors authorized the Company to release an officer from the collateral provisions associated with a note receivable.
This note had initially been collateralized in 1996 in connection with the exercise of unvested NeoMagic common stock options. At the time of the authorized release of the collateral restrictions, the underlying shares had matured, i.e. vested. The
release of the collateral provisions resulted in the reclassification of the related note from stockholders notes receivable to an employee note receivable. The Board also authorized the Company to forgive the newly reclassified employee note
receivable principal of $400 thousand and accrued interest of $117,600 between May 2001 and April 2002, based on continued employment. The loan forgiveness was recorded as compensation expense over the forgiveness period. The Company recorded
compensation expense of $50,000 during fiscal 2003.



In
September 2001, the Company provided a loan to an officer, in the aggregate principal amount of $100 thousand at an annual interest rate of 4.82% pursuant to a promissory note secured by a pledge of an aggregate of 240,000 shares of common stock. As
of January 31, 2004, an aggregate amount of $10 thousand, which includes interest payable, remained outstanding on the promissory note. In the first quarter of fiscal year 2005, the promissory note and accrued interest were paid in full.



Paul Richman served as a member of the NeoMagic Board of Directors from
April 2002 through December 2004. During this time, Mr. Richman also served as CEO of The Consortium for Technology Licensing, Ltd. (The Consortium). In April 2002, The Consortium began performing services for NeoMagic as its exclusive
patent licensing agent. In conjunction with these services, Mr. Richman was reimbursed for the expense he incurred and paid approximately $9 thousand, $4 thousand and $16 thousand in this regard during fiscal years 2005, 2004 and 2003, respectively.
Mr. Richman no longer serves as a Board member of the Company; however, NeoMagic continues to work with The Consortium as the Companys exclusive patent licensing agent and completed a patent sale with The Consortium in April 2005 which is
described in Note 15 to the Consolidated Financial Statements.



13. SPECIAL
CHARGE



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. NeoMagic provided $15.0 million in guarantees towards its wafer purchases
over the term of the agreement. The amount of guarantee was collaterized by restricted cash. Due to uncertainties over Infineons continued eDRAM product development, the Company decided not to use Infineons eDRAM technology for its
future production. Based on negotiations between NeoMagic and Infineon on restructuring the wafer supply agreement with the intent to release NeoMagic from the related guarantee, the Company recorded $3.6 million in charges, which



51



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##### Table of Contents

NEOMAGIC CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



reflects the value of the final settlement in fiscal 2003. The $3.6 million charge is composed of a $1.5 million cash payment and the issuance of $2.1
million in common stock. These amounts are shown on the Consolidated Statements of Operations as a special charge for fiscal 2003. As a result of the settlement, $15.0 million of restricted cash was released and reclassified to cash and cash
equivalents on the Consolidated Balance Sheet for fiscal 2003.



14. CASH
FLOW STATEMENT



|                                                |  |                         |     |      |   |      |  |   |        |  
|----------------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | ------ | -
|                                                |  | Years Ended January 31, |    
|                                                |  | 2005                    |     | 2004 |   | 2003 | 
|                                                |  | (in thousands)          |    
|Supplemental schedules of cash flow information |  |                         |     |      |   |      |  |   |        |  
|Cash paid (received) during the year for:       |  |                         |     |      |   |      |  |   |        |  
|Interest                                        |  | $                       | 146 |      | $ | 267  |  | $ | 75     |  
|Taxes paid (refunded)                           |  | $                       | 21  |      | $ | 57   |  | $ | (9,215 | )



During fiscal 2005,
the Company entered into new capital lease agreements in the amount of $4.8 million. These new capital leases replaced two of the Companys capital leases entered into in fiscal 2003 by adding additional software and extending the terms of the
leases.



The Company issued common stock in fiscal 2003 of $2.1
million in connection with settlement of its wafer supply agreement with Infineon.



During fiscal 2003, the Company entered into capital leases for software licenses in the amount of $4.4 million, which is a non-cash financing and investing activity.



15. SUBSEQUENT EVENTS



On April 6, 2005 NeoMagic completed the sale of selected patents to Faust Communications, LLC, a private company, for net
proceeds of approximately $3.5 million. The gross proceeds in the transaction were approximately $4.6 million. Expenses are expected to include legal payments of approximately $20 thousand and a commission payment to the Consortium for Technology
Licensing Ltd of approximately $1.0 million. The patents sold relate to NeoMagics legacy products and not to products that NeoMagic currently sells or plans to sell. NeoMagic retains a worldwide, non-exclusive license under the patents sold.
The sale does not include several of NeoMagics important patents covering embedded DRAM technology or any of the unique array processing technology used in NeoMagics MiMagic family of Applications Processors. During the patent sale
negotiations, NeoMagic was represented by The Consortium for Technology Licensing, Ltd., of Nissequogue, New York, a company whose CEO served on the board of NeoMagic until December 2004 as described in Note 12 to the Consolidated Financial
Statements. On March 28, 2005 NeoMagic entered into an amended and restated Patent Licensing Agreement with the Consortium for Technology Licensing, Ltd. governing the relationship between the two parties.



On February 1, 2005, the Company entered into a sublease agreement to
sub-lease 10,000 square feet in its Santa Clara facility for a two year period starting on March 15, 2005 for $12,000 per month.



In March 2005, the Company amended the payment schedule for one of its capital leases, which reduced fiscal 2006 payments by $150,000, increased fiscal
2007 payments by $100,000 and increased fiscal 2008 payments by $50,000.



52



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders of

NeoMagic Corporation



We have audited the accompanying consolidated balance sheets of NeoMagic Corporation as of January 31, 2005 and 2004, and
the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended January 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NeoMagic Corporation at January 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended January 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of NeoMagic
Corporations internal control over financial reporting as of January 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated April 22, 2005 expressed an unqualified opinion on managements assessment of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting.



As noted in Note 1 to the consolidated financial statements, effective
February 1, 2002, NeoMagic Corporation changed its method of accounting for goodwill and other acquired intangible assts in accordance with guidance provided in the Statement of Financial Accounting Standards Number 142, Goodwill and Other
Intangible Assets.



/s/ Ernst &
Young LLP



San Jose, California

April 22, 2005



53



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders of

NeoMagic Corporation



We have audited managements assessment, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting,
that NeoMagic Corporation did not maintain effective internal control over financial reporting as of January 31, 2005, because of the effect of the material weakness related to NeoMagic Corporations process of evaluating long-lived assets for
impairment, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). NeoMagic Corporations management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of the companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in
managements assessment:



NeoMagic Corporation has a
material weakness as of January 31, 2005 related to its process of evaluating long-lived assets for impairment, including insufficient controls over the review and documentation of key assumptions used in preparing forecasted cash flows used to
support NeoMagic Corporations impairment analyses. This material weakness resulted in an audit adjustment that was recorded by NeoMagic Corporation to recognize the impairment of intangible assets in the financial statements for the fourth
quarter of fiscal 2005. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 financial statements, and this report does not affect our report dated April 22, 2005 on those
financial statements.



In our opinion, managements
assessment that NeoMagic Corporation did not maintain effective internal control over financial reporting as of January 31, 2005, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, because of the
effect of the material weakness described above on the achievement of the objectives of the control criteria, NeoMagic Corporation has not maintained effective internal control over financial reporting as of January 31, 2005, based on the COSO
control criteria.



/s/ Ernst & Young LLP



San Jose, California

April 22, 2005



54



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##### Table of Contents

NeoMagic Corporation



Selected Quarterly
Data



|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|---------------------------------------------------------------- |  | ----------------------------------------------- | ------ | - | --- | - | ------ | --- |  | - | ------ | - |  | - | ------ | -
|Fiscal 2005                                                      |  | 1st                                             |        |   | 2nd |   |        | 3rd |  |   | 4th    |  
|                                                                 |  | (unaudited, in thousands except per share data) |       
|Net sales                                                        |  | $                                               | 651    |   |     | $ | 1,041  |     |  | $ | 552    |   |  | $ | 222    |  
|Cost of sales                                                    |  |                                                 | 715    |   |     |   | 1,044  |     |  |   | 663    |   |  |   | 773    |  
|Impairment of certain licensed intangible assets                 |  |                                                 |       |   |     |   |       |     |  |   |       |   |  |   | 89     |  
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Gross loss                                                       |  |                                                 | (64    | ) |     |   | (3     | )   |  |   | (111   | ) |  |   | (640   | )
|Operating expenses:                                              |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Research and development                                         |  |                                                 | 4,868  |   |     |   | 4,819  |     |  |   | 4,189  |   |  |   | 4,332  |  
|Sales, general and administrative                                |  |                                                 | 2,140  |   |     |   | 1,880  |     |  |   | 1,643  |   |  |   | 1,784  |  
|Impairment of certain licensed intangible assets                 |  |                                                 |       |   |     |   |       |     |  |   |       |   |  |   | 1,437  |  
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Total operating expenses                                         |  |                                                 | 7,008  |   |     |   | 6,699  |     |  |   | 5,832  |   |  |   | 7,553  |  
|Loss from operations                                             |  |                                                 | (7,072 | ) |     |   | (6,702 | )   |  |   | (5,943 | ) |  |   | (8,193 | )
|Interest income and other                                        |  |                                                 | 103    |   |     |   | 92     |     |  |   | 123    |   |  |   | 97     |  
|Interest expense                                                 |  |                                                 | (24    | ) |     |   | (53    | )   |  |   | (173   | ) |  |   | (284   | )
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Loss before income taxes                                         |  |                                                 | (6,993 | ) |     |   | (6,663 | )   |  |   | (5,993 | ) |  |   | (8,380 | )
|Income tax expense                                               |  |                                                 | 7      |   |     |   | 7      |     |  |   | 5      |   |  |   | 177    |  
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Net loss                                                         |  | $                                               | (7,000 | ) |     | $ | (6,670 | )   |  | $ | (5,998 | ) |  | $ | (8,557 | )
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Basic net loss per share (1)                                     |  | $                                               | (.22   | ) |     | $ | (.20   | )   |  | $ | (.18   | ) |  | $ | (.26   | )
|Diluted net loss per share (1)                                   |  | $                                               | (.22   | ) |     | $ | (.20   | )   |  | $ | (.18   | ) |  | $ | (.26   | )
|Weighted common shares outstanding (1)                           |  |                                                 | 32,077 |   |     |   | 32,549 |     |  |   | 32,829 |   |  |   | 33,065 |  
|Weighted average common shares outstanding assuming dilution (1) |  |                                                 | 32,077 |   |     |   | 32,549 |     |  |   | 32,829 |   |  |   | 33,065 |  
|                                                                 |  |                                                 |        |  
|Fiscal 2004                                                      |  | 1st                                             |        |   | 2nd |   |        | 3rd |  |   | 4th    |  
|Net sales                                                        |  | $                                               | 624    |   |     | $ | 222    |     |  | $ | 486    |   |  | $ | 556    |  
|Cost of sales                                                    |  |                                                 | 588    |   |     |   | 419    |     |  |   | 623    |   |  |   | 632    |  
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Gross profit (loss)                                              |  |                                                 | 36     |   |     |   | (197   | )   |  |   | (137   | ) |  |   | (76    | )
|Operating expenses:                                              |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Research and development                                         |  |                                                 | 5,019  |   |     |   | 4,490  |     |  |   | 5,340  |   |  |   | 4,845  |  
|Sales, general and administrative                                |  |                                                 | 1,777  |   |     |   | 1,767  |     |  |   | 1,835  |   |  |   | 1,857  |  
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Total operating expenses                                         |  |                                                 | 6,796  |   |     |   | 6,257  |     |  |   | 7,175  |   |  |   | 6,702  |  
|Loss from operations                                             |  |                                                 | (6,760 | ) |     |   | (6,454 | )   |  |   | (7,312 | ) |  |   | (6,778 | )
|Interest income and other                                        |  |                                                 | 211    |   |     |   | 168    |     |  |   | 363    |   |  |   | 112    |  
|Interest expense                                                 |  |                                                 | (87    | ) |     |   | (73    | )   |  |   | (66    | ) |  |   | (56    | )
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Loss before income taxes                                         |  |                                                 | (6,636 | ) |     |   | (6,359 | )   |  |   | (7,015 | ) |  |   | (6,722 | )
|Income tax expense                                               |  |                                                 |       |   |     |   | 6      |     |  |   | 33     |   |  |   | 4      |  
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Net loss                                                         |  | $                                               | (6,636 | ) |     | $ | (6,365 | )   |  | $ | (7,048 | ) |  | $ | (6,726 | )
|                                                                 |  |                                                 |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Basic net loss per share (1)                                     |  | $                                               | (.22   | ) |     | $ | (.21   | )   |  | $ | (.23   | ) |  | $ | (.21   | )
|Diluted net loss per share (1)                                   |  | $                                               | (.22   | ) |     | $ | (.21   | )   |  | $ | (.23   | ) |  | $ | (.21   | )
|Weighted common shares outstanding (1)                           |  |                                                 | 30,277 |   |     |   | 30,457 |     |  |   | 30,759 |   |  |   | 31,659 |  
|Weighted average common shares outstanding assuming dilution (1) |  |                                                 | 30,277 |   |     |   | 30,457 |     |  |   | 30,759 |   |  |   | 31,659 |  

---

|(1) | See Note 1 and 3 of Notes to Consolidated Financial Statements.
|--- | ---------------------------------------------------------------



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##### Table of Contents

|Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
|------- | -------------------------------------------------------------------------------------



Not applicable.



|Item 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



(a) Evaluation of Disclosure Controls and Procedures



As of the end of the period covered by this Annual Report on Form 10-K, under the supervision of our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Annual Report on Form 10-K because of the material weakness discussed below.



(b) Managements Report on Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). NeoMagics internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles (GAAP).



Under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2005. This evaluation was based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In the course of this evaluation, we discovered a control deficiency that constitutes a material weakness, as described below.



A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of January 31, 2005, we identified a material weakness related to
our process of evaluating long-lived assets for impairment, including insufficient controls over the review and documentation of key assumptions used in preparing forecasted cash flows used to support our impairment analyses. This material weakness
resulted in an audit adjustment that was recorded by the Company to recognize the impairment of intangible assets in the financial statements for the fourth quarter of fiscal 2005.



Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on
managements assessment of the Companys internal control over financial reporting, which is included herein.



(c) Status of Remediation of Material Weakness Related to the Evaluation of Long-Lived Assets for Impairment



To remediate the material weakness identified above, the Company will
increase the level of documentation with respect to the assumptions used in the underlying forecast supporting the impairment analysis and increase the level of review performed with respect to the reasonableness of certain key assumptions used in
the underlying forecast supporting the impairment analysis.



(d) Changes in
Internal Controls Over Financial Reporting



During the
fourth quarter of fiscal 2005, there were no changes in the Companys internal controls over financial reporting that occurred during the period covered by this report that had materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.



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##### Table of Contents

(e) Inherent Limitations on Effectiveness of Controls



The companys management, including the CEO and CFO, does not expect
that our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems
objectives will be met. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions.



|Item 9B. | OTHER INFORMATION
|-------- | -----------------



None.



PART III



Certain information
required by Part III is incorporated by reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Companys 2005 Annual Meeting of
Stockholders (the Proxy Statement).



|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



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



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



We have adopted a Code of Ethics for all
directors, officers and employees to govern their professional and ethical conduct. The Code of Ethics is posted on company website at http://www.neomagic.com.



|Item 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



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



|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



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



|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



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



|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



The information required by this section is contained in the section entitled Principal Accountant Fees and Services in the Proxy Statement
and is incorporated herein by reference.



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##### Table of Contents

PART IV



|Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



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



| | 1. | Financial Statements.
| | -- | ---------------------



See Index to Consolidated Financial Statements in part II, Item 8.



| | 2. | Financial Statement Schedule.
| | -- | -----------------------------



See Schedule IIValuation and Qualifying Accounts on Page 62 of this Form 10-K.



| | 3. | Exhibits
| | -- | --------



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



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##### Table of Contents

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.                                                                                                                                                                                    
|         | 
|4.1(10)  |  | Preferred Stock Rights Agreement dated December 19, 2002, between the Company and EquiServe Trust Company, N.A.                                                                            
|         | 
|4.2(13)  |  | Amendment to Rights Agreement, dated as of August 20, 2004, between the Company and EquiServe Trust Company, N.A.                                                                          
|         | 
|4.3(12)  |  | Series A Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.                                                                                                    
|         | 
|4.4(12)  |  | Series B Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.                                                                                                    
|         | 
|4.5(12)  |  | Registration Rights Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.                                                            
|         | 
|4.6(9)   |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock.                                                                                
|         | 
|4.7(12)  |  | Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock dated August 20, 2004                                                                      
|         | 
|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(8) |  | 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.                            



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##### Table of Contents

|          |  |                                                                                                                                                                                                       
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number    |  | Description                                                                                                                                                                                           
|10.16(8)  |  | 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(8)  |  | 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.                                       
|          | 
|10.18(11) |  | Amendment No. 4, dated as of January 31, 2003, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.                                        
|          | 
|10.19(12) |  | Securities Purchase Agreement dated August 19, 2004 by and between the company and Satellite Strategic Finance Associates, LLC.                                                                       
|          | 
|21.1      |  | NeoMagic Subsidiaries.                                                                                                                                                                                
|          | 
|23.1      |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                   
|          | 
|31.1      |  | Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated December
10, 2003.
|          | 
|31.2      |  | Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated December
10, 2003.
|          | 
|32.1      |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                
|          | 
|32.2      |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                

---

|(1) | Incorporated by reference to the Companys registration statement on Form S-1, registration no. 333-20031.
|--- | ----------------------------------------------------------------------------------------------------------

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

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

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

|(5) | Incorporated by reference to the Companys Form 10-K for the year ended January 31, 2001.
|--- | -----------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Companys Form 10-K for the year ended January 31, 2002.
|--- | -----------------------------------------------------------------------------------------

|(7) | Incorporated by reference to the Companys Form 10-Q for the quarter ended July 31, 2002.
|--- | -----------------------------------------------------------------------------------------

|(8) | Incorporated by reference to the Companys Form 10-Q for the quarter ended October 31, 2002.
|--- | --------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to the Companys Form 8-A filed December 23, 2002.
|--- | ----------------------------------------------------------------------------

|(10) | Incorporated by reference to the Companys Form 8-K filed December 23, 2002.
|---- | ----------------------------------------------------------------------------

|(11) | Incorporated by reference to the Companys Form 10-K for the year ended January 31, 2003.
|---- | -----------------------------------------------------------------------------------------

|(12) | Incorporated by reference to the Companys Form 8-K filed August 20, 2004.
|---- | --------------------------------------------------------------------------

|(13) | Incorporated by reference to the Companys Form 8-A/A filed August 23, 2004.
|---- | ----------------------------------------------------------------------------



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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, on April 28, 2005.



NEOMAGIC CORPORATIONBy:

/s/    SCOTT
SULLINGERSCOTT SULLINGER Vice President Finance and Chief FinancialOfficer (Principal Financial Officer)




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



|                                         |  |                                                                                  |  |               
|---------------------------------------- |  | -------------------------------------------------------------------------------- |  | --------------
|Name                                     |  | Title                                                                            |  | Date          
|                                         |  |                                                                                 
|/s/ DOUG YOUNGDoug Young                 |  | President, Chief Executive Officer and Director (Principal Executive Officer)    |  | April 28, 2005
|                                         |  |                                                                                 
|/s/ SCOTT SULLINGERScott Sullinger       |  | Vice President Finance and Chief Financial Officer (Principal Financial Officer) |  | April 28, 2005
|                                         |  |                                                                                 
|/s/ BRIAN P. DOUGHERTYBrian P. Dougherty |  | Director                                                                         |  | April 28, 2005
|                                         |  |                                                                                 
|/s/ ANIL GUPTAAnil Gupta                 |  | Director                                                                         |  | April 28, 2005
|                                         |  |                                                                                 
|/s/ CARL STORKCarl Stork                 |  | Director                                                                         |  | April 28, 2005



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##### Table of Contents

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

(In thousands)



|                                 |  |                              |    |                                        |   |            |  |                        |    |  |   |   
|-------------------------------- |  | ---------------------------- | -- | -------------------------------------- | - | ---------- |  | ---------------------- | -- |  | - | --
|                                 |  | Balance at Beginning of Year |    | Additions Charged to Costs and Expense |   | Deductions |  | Balance at End of Year
|Allowance for doubtful accounts: |  |                              |    |                                        |   |            |  |                        |    |  |   |   
|Year ended January 31, 2003      |  | $                            |   |                                        | $ | 58         |  | $                      |   |  | $ | 58
|Year ended January 31, 2004      |  | $                            | 58 |                                        | $ |           |  | $                      | 58 |  | $ |  
|Year ended January 31, 2005      |  | $                            |   |                                        | $ |           |  | $                      |   |  | $ |  



62