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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

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Form 10-K/A

(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, 2001,
|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 333-20031           

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

DELAWAREState or other jurisdiction
of incorporation or organization

77-0344424[I.R.S. Employer Identification No.]3250 Jay Street
Santa Clara, CaliforniaAddress of principal executive offices

95054Zip 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

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /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/A or any amendment to this Form 10-K/A. /x/

The
aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $84,949,382 as of March 25, 2001, based upon the closing price on the Nasdaq
National Market reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes.

The
number of shares of the Registrant's Common Stock, $.001 par value, outstanding at March 25, 2001 was 25,891,308.

DOCUMENTS INCORPORATED BY REFERENCE

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Explanatory Note:

This
amendment to our annual report on Form 10-K for the year ended January 31, 2001 corrects the Report of the Independent Auditors by including the signature of the auditors.

This
amendment also provides specific quantification of the write-offs, reserves, and cancellation penalties charged to cost of sales in the Gross Margin section of Management's
Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and in the explanatory note 1 to the Selected Quarterly Data in Item 8.

This
amendment also eliminates the amortization of deferred compensation as a separate line item on the Statements of Operations by reallocating the respective portion of deferred
compensation amortization amounts to research and development and sales, general and administrative line items. Management's Discussion and Analysis of Financial Condition and Results of Operations in
Item 7 has been revised to include quantification of deferred compensation amounts included in research and development and sales, general and administrative line items, as a result of the
reclassification. We also updated the research and development spending stated in the Business section of Item 1. We have also made changes to Selected Consolidated Financial Data in
Item 6 and Selected Quarterly Data in Item 8, in order to reflect the reclassification of amortization of deferred compensation to the respective operating expense line items, as
described above.

We
have made no further changes to the previously filed Form 10-K other than those described above. All information in this Form 10-K/A is as of the date of the original
Annual Report on Form 10-K. No attempt has been made to update this report to reflect events occurring subsequent to the date of the original filing.

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NeoMagic Corporation
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2001
TABLE OF CONTENTS

|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I.   
|Item 1.    |  | Business                                                                              |  | 1   
|Item 2.    |  | Properties                                                                            |  | 7   
|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 and Related Stockholder Matters                 |  | 8   
|Item 6.    |  | Selected Consolidated Financial Data                                                  |  | 8   
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 24  
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  | 26  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  | 26  
|PART III. 
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  | 27  
|Item 11.   |  | Executive Compensation                                                                |  | 27  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 27  
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  | 27  
|PART IV.  
|Item 14.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 27  
|Signatures |  | 48                                                                                   

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PART I

Item 1.    BUSINESS

General

NeoMagic Corporation (the "Company" or "NeoMagic") was incorporated as a California corporation in May 1993. The Company was subsequently reincorporated as a
Delaware corporation in February 1997. The Company's initial public offering occurred in March 1997. The Company operates in one industry segment. NeoMagic designs, develops and markets
high-performance semiconductor solutions for sale to original equipment manufacturers ("OEMs") of Handheld Internet Appliances. Previously, the Company provided semiconductor solutions for the
Notebook PC Multimedia Accelerator marketplace. In April, 2000 the Company announced its intention to exit this market and is now focused on the market for Handheld Internet Appliances. To date, the
Company has no revenues from this new product effort. There can be no guarantee that the Company will be successful in the development, production and commercialization of this new product direction.

The
Company believes that the dramatic growth of the Internet provides for significant market opportunities. It is NeoMagic's strategy to participate in multiple market opportunities
driven by these trends towards multimedia, mobility, and the Internet. In February 1999, the Company completed the acquisition of Associative Computers, Ltd., ("ACL") located in Raanana, Israel from
Robomatix. The Company's plan includes leveraging its MagicWare embedded DRAM technology with the intellectual properties from this acquisition, other licensed technologies, and other developed
technologies, to deliver innovative solutions for the capture, and playback of multimedia content for a rich internet experience on handheld platforms.

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

Products

All of the Company's net sales to date have been from the sale of multimedia accelerators to notebook PC OEMs, or to third-party subsystem manufacturers who
design and manufacture notebooks on behalf of the OEMs. The multimedia accelerator products for Notebook PCs were part of the MagicGraph128 and MagicMedia256 product lines, which integrated DRAM with
analog circuitry on a single chip. In April 2000, the Company announced its intention to exit the multimedia accelerator notebook PC marketplace. It is the Company's expectation that all revenues
related to their legacy products for the notebook PC market are exhausted and there will be no significant revenue related to these products in fiscal year 2002.

The
Company's new product direction continues to utilize the same embedded DRAM technology as used in the Company's legacy products. This new direction is to produce Integrated
System-on-Chip semiconductor products for the Handheld Internet Appliance marketplace. In doing so, the Company expects to develop, produce and market products that have embedded DRAM, microprocessor,
graphics, audio, and video capabilities. To fully mobilize multimedia, the Company believes Handheld Internet Appliances will require a new approach for developing semiconductor solutions that deliver
higher performance while minimizing power consumption, system size, weight, complexity and cost. It is

1

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expected that the Company will see limited revenues late in fiscal year 2002 and volume production in fiscal year 2003 from these products.

Research and Development

The Company considers the timely development and introduction of new products to be essential to maintaining its competitive position and capitalizing on market
opportunities. Research and development efforts are now primarily focused on developing Integrated System-on-Chip semiconductor products for the Handheld Internet Appliance marketplace. At January 31,
2001, the Company had approximately 94 employees engaged in research and development. Research and development expenses in fiscal 2001, 2000, and 1999 were $27.5 million, $38.0 million and $31.7
million, respectively. The Company has made, and intends to continue to make, significant investments in research and development by developing new and enhanced products to serve its identified
markets. Research and development expenses are expected to increase in fiscal 2002 due to development efforts on the Company's new product focus in the area of Handheld Internet Appliances. The
development and successful introduction of new products presents a variety of risks, and there can be no assurance that
these or other product development efforts will be completed at the time the Company expects, or that new products will be accepted in the marketplace.

Sales and Marketing

NeoMagic's sales and marketing strategy is an integral part of the Company's effort to become the leading supplier of semiconductor solutions to the leading
manufacturers of Handheld Internet Appliances. To meet customer requirements and achieve design wins, the Company's sales and marketing personnel work closely with its customers, business partners and
key industry trend-setters to define product features, performance, price, and market timing of new products. The Company employs a sales 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, the Company employs a highly trained team of application engineers to assist customers
in designing, testing and qualifying system designs that incorporate NeoMagic products. The Company believes that the depth and quality of this design support is key to improving customers'
time-to-market deliveries and maintaining a high level of customer satisfaction, which encourages customers to utilize subsequent generations of NeoMagic's products.

In
the United States, the Company sells its products to key customers primarily through a direct sales and marketing organization. The Company is, however, evaluating its U. S. sales
channels. In Japan, DIA Semicon acts as the Company's sales representative. In Taiwan, Regulus acts as the Company's sales representative, and in Korea, Acetronics acts as the Company's sales
representative. The Company's sales and marketing organization was restructured with the rest of the Company in April 2000. There remains a risk that as the new products are ready, we will be unable
to attract adequate sales and marketing expertise in all necessary geographic locations necessary to sell our products.

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

Manufacturing

The Company's products require semiconductor wafers manufactured with state-of-the-art fabrication equipment and technology. The Company's products are designed
to be manufactured in

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accordance with the DRAM partners' design rules and manufacturing processes. Each DRAM partner has a design team dedicated to NeoMagic product development. The DRAM partners design the DRAM product
modules and NeoMagic designs the overall product, including the analog and logic
circuitry. The DRAM partners then aid the Company in design verification prior to production. The DRAM partners manufacture the wafers, perform memory testing and repair, and sell the Company finished
wafers, with pricing determined on a contractual basis.

NeoMagic
has a strategic relationship with Infineon Technologies AG of Germany ("Infineon"), to produce its semiconductor wafers. The Company also has two other strategic relationships
under evaluation. These relationships enable the Company to concentrate its resources on product design and development, where NeoMagic believes it has greater competitive advantages, and to eliminate
the high cost of owning and operating a semiconductor wafer fabrication facility. The Company depends on these suppliers to allocate to the Company a portion of their manufacturing capacity sufficient
to meet the Company's needs, to produce products of acceptable cost and quality and at acceptable manufacturing yields, and to deliver those products to the Company on a timely basis. A manufacturing
disruption experienced by any of the Company's manufacturing partners would have an adverse effect on the Company's business, financial condition and results of operations. Furthermore, in the event
that the transition to the next generation of manufacturing technologies at one of the Company's suppliers is unsuccessful, the Company's business, financial condition and results of operations would
be materially and adversely affected. Additionally, there can be no assurances that any of the Company's manufacturing partners will continue to devote resources to the production of the Company's
products or continue to advance the process design technologies on which the manufacturing of the Company's products are based.

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

Competition

In April 2000, the Company announced its intention to exit the Notebook PC Multimedia Accelerator marketplace and focus on the market for Handheld Internet
Appliances. The Company has now exited the Notebook PC Multimedia market and expects to introduce products for the Handheld Internet Appliance market in FY 2002. The market for semiconductor solutions
for Handheld Internet Appliances, in which the Company is now focused, is intensely competitive and is characterized by rapid technological change, evolving industry standards and declining average
selling prices. NeoMagic believes that the principal factors of competition in this market are performance, price, features, power consumption, size and software support. The ability of the Company to
compete successfully in this new rapidly evolving Handheld Appliance 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, the efficiency of production, ramp up of production of the Company's products for particular system manufacturers, end-user
acceptance of the system
manufacturers' products, market acceptance of competitors' products and general economic conditions. The Company's ability to compete in the future will also depend on its ability to identify and
ensure compliance with evolving industry standards and market trends. Unanticipated changes in market trends

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and industry standards could render the Company's products incompatible with products developed by major hardware manufacturers and software developers. As a result, the Company could be required to
invest significant time and resources to redesign its products or obtain license rights to technologies owned by third parties in order to ensure compliance with relevant industry standards and market
trends. There can be no assurance that the Company will be able to redesign its products or obtain the necessary third-party licenses within the appropriate window of market demand. If the Company's
products are not in compliance with prevailing market trends and industry standards for a significant period of time, the Company could miss crucial OEM design cycles, which could result in a material
adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's products are designed to afford the Handheld Internet Appliance manufacturer
significant advantages with respect to product performance, power consumption and size. To the extent that other future developments in components or subassemblies incorporate one or more of the
advantages offered by the Company's products, the market demand for the Company's products may be negatively impacted.

NeoMagic
competes with major domestic and international companies, some of which have substantially greater financial and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their products. The Company's principal competitors include National Semiconductor, Cirrus Logic, Intel's Strong Arm product line, and a
number of vertically integrated electronics firms who are developing their own solutions. NeoMagic may also face increased competition from new entrants into the Handheld Internet Appliance
Semiconductor market including companies currently at developmental stages. Certain of the Company's competitors may offer products with more functionality and or higher processor speeds at the
expense of battery life and power consumption than the Company's product offerings. The Company's product developments continue to utilize embedded DRAM technologies to produce System-On-Chip
technology. As such, the introduction of Multi-Chip module ("MCM") solutions offer an additional competitive solution. The MCM solution increases access memory both internally in the packaged module
and externally, with connections to discrete memory on the motherboard, for higher performance at the expense of battery life and power consumption. The successful commercial introduction by
competitors of products that integrate DRAM with analog and logic circuitry on a single chip, or the inability of the Company to produce products for their new market, could have a material adverse
effect on the Company's business, financial condition and operating results.

Some
of the Company's current and potential competitors operate their own manufacturing facilities. Since the Company does not operate its own manufacturing facility and must make
binding commitments to purchase products, it may not be able to reduce its costs and cycle time or adjust its production to meet changing demand as rapidly as companies that operate their own
facilities, which could have a material adverse effect on the Company's results of operations.

Intellectual Property

The Company relies in part on patents to protect its intellectual property. The Company has been issued 40 patents, each covering certain aspects of the design
and architecture of the Company's products. Additionally, the Company has numerous patent applications pending. There can be no assurance that the Company's pending patent applications, or any future
applications will be approved. Further, there can be no assurance that any issued patents will provide the Company with significant intellectual property protection, competitive advantages, or will
not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. In addition, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or design around any patents that may be issued to the Company.

The
Company also relies on a combination of mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements
to protect

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its intellectual property. Despite these efforts, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A failure by the
Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition and results of operations.

As
a general matter, the semiconductor industry is characterized by substantial litigation, regarding patent and other intellectual property rights. In December 1998, the Company filed a
lawsuit in the United States District Court for the District of Delaware against Trident Microsystems, Inc. The suit alleges that Trident's embedded DRAM graphics accelerators infringe certain patents
held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising from NeoMagic's filing of the
patent infringement action against Trident in December. The Court has ruled that there is no infringement by Trident. Management disagrees with this ruling and is evaluating our legal options.
Management also believes the Company has valid defenses against Trident's claims. There can be no assurance as to the results of the patent infringement suit and the counter-suit for antitrust filed
by Trident.

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

Backlog

As a result of the discontinuance of the notebook computer product line, the Company has no backlog. Sales of the Company's products had been primarily made
pursuant to standard purchase orders that were cancelable without significant penalties. These purchase orders were subject to price renegotiations and to changes in quantities of products and
delivery schedules in order to reflect changes in customers' requirements and manufacturing availability. Also, many of the Company's customers were moving to "just in time" relationships with their
vendors, whereby orders for product deliveries were not provided to the supplier until just prior to the requested delivery. A large portion of the Company's sales in the past were made pursuant to
short lead-time orders. In addition, the Company's actual shipments depend on the manufacturing capacity of the Company's suppliers and the availability of products from such suppliers. As a result of
the foregoing factors, the Company does not believe that backlog is a meaningful indicator of future sales.

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Employees

As of January 31, 2001, the Company employed a total of 138 full-time employees, including 94 in research and development, 6 in customer service and applications
engineering, 6 in sales and marketing, 5 in manufacturing and 27 in finance and administration. In March, 2001 the Company reduced its workforce in the U.S. by 18 and by 25 in Israel to be more
in-line with its plans for fiscal year 2002. The Company also employs, from time to time, a number of temporary and part-time employees as well as consultants on a contract basis. The Company's
employees are not represented by a collective bargaining organization, and the Company believes that its relations with its employees are good.

Management

Executive Officers

The
executive officers of the Company as of January 31, 2001 are as follows:

|Name               |  | Age |   | Position                                           
|------------------ |  | --- | - | ---------------------------------------------------
|Prakash C. Agarwal |  | 47  |   | President, Chief Executive Officer and Director    
|Kamran Elahian     |  | 46  | * | Chairman of the Board                              
|Stephen Lanza      |  | 41  |   | Vice President, Finance and Chief Financial Officer
|Mark Singer        |  | 41  |   | Vice President, Corporate Marketing                
|Sanjay Adkar       |  | 44  |   | Vice President, Corporate Engineering              

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Prakash
C. Agarwal, a co-founder of the Company, has been President, Chief Executive Officer, and a Director of the Company since its inception in 1993. Mr. Agarwal has over 20
years of engineering, marketing and general management experience in the semiconductor industry. Prior to joining the Company, he was employed as Vice President and General Manager of Cirrus Logic's
Portable Product Division. In addition to his duties as President of the Company, Mr. Agarwal is on the Board of Directors of Zeevo, Inc. Mr. Agarwal holds a BS and a MS degree in
Electrical Engineering from the University of Illinois.

Kamran
Elahian, a co-founder of the Company, has been Chairman of the Board since the Company's inception in 1993. Mr. Elahian has co-founded several Silicon Valley companies
since 1981, including CAE Systems, Inc., a computer-aided engineering software company, Cirrus Logic, a semiconductor manufacturer and Momenta Corporation, a pen-based computer company. In addition to
his duties as Chairman of the Company, Mr. Elahian is the Chairman of PlanetWeb, Inc., Centillium Communications, Inc., Actelis Networks, Cahoots, KangarooNet, and Co-Chairman and founder of
Schools Online, a not for profit company. Mr. Elahian holds a BS degree in Computer Science and Mathematics and a Masters of Engineering from the University of Utah.

Steve
Lanza joined Neomagic in June 2000 as Vice President of Finance and Chief Financial Officer. Mr. Lanza brings over two decades of experience in financial management of
technology companies. Mr. Lanza comes to NeoMagic from PolyStor Corporation, where he served as Vice President of Finance and Administration, and Chief Financial Officer. Before joining
PolyStor, Mr. Lanza spent several years at semiconductor equipment maker Watkins-Johnson Company, as Director of Finance for global business operations, Managing Director of Watkins-Johnson
Europe, and as Vice President and General Manager for global business operations. He holds a BS degree in Business Administration from California Polytechnic University, a MBA from Golden Gate
University, and is a Certified Management Accountant.

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

Sanjay
Adkar joined NeoMagic in June 2000 as Vice President of Corporate Engineering. Mr. Adkar has over a decade and a half of experience in design engineering and engineering
management, developing innovative integrated circuits. Before joining NeoMagic Mr. Adkar was Senior Director of the information application organization at National Semiconductor Corporation, where he
had general management responsibility for an organization of about 90 people developing chipsets and intellectual property for information appliances. Prior to that he worked for five years at LSI
Logic Corporation, most recently as Director of Design and methodology for the ASIC products organization. He holds a BS degree in Electrical Engineering from the Indian Institute of Technology,
Bombay, and a MS degree in Electrical Engineering from Virginia Tech.

Item 2.    PROPERTIES

The Company's corporate headquarters, which is also its principal administrative, selling and marketing, customer service, applications engineering and product
development facility, is located in Santa Clara,
California and consists of approximately 90,000 square feet under leases which expire on April 30, 2003. The Company leases offices in Raanana, Israel, and India under operating leases that expire at
various times through April 2003. The Company believes its existing facilities are adequate for its current needs, but that additional space for growth may be required in the future.

Item 3.    LEGAL PROCEEDINGS

In December 1998, the Company filed a lawsuit in the United States District Court for the District of Delaware against Trident Microsystems, Inc. The suit alleges
that Trident's embedded DRAM graphics accelerators infringe certain patents held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization
in violation of antitrust laws, arising from NeoMagic's filing of the patent infringement action against Trident in December. The Court has ruled that there is no infringement by Trident. Management
disagrees with this ruling and is evaluating our legal options. Management also believes the Company has valid defenses against Trident's claims. There can be no assurance as to the results of the
patent infringement suit and the counter-suit for antitrust filed by Trident.

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

None.

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PART II

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

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

|Quarterly Data
Fiscal 2001 |      | 1st |   | 2nd   |  | 3rd |       | 4th
|-------------------------- | ---- | --- | - | ----- |  | --- | ----- | ---
|Price range common stock:  |      |     |   |       |  |     |       |    
|                           | Low  |     | $ | 2.81  |  | $   | 2.81  |    
|                           | High |     | $ | 10.63 |  | $   | 3.88  |    
|Fiscal 2000                |      |     |   |       |  |     |       |    
|Price range common stock:  |      |     |   |       |  |     |       |    
|                           | Low  |     | $ | 9.84  |  | $   | 7.31  |    
|                           | High |     | $ | 14.19 |  | $   | 11.88 |    

The
Company had 185 stockholders of record as of March 25, 2001. The Company has not paid any dividends on its common stock. The Company currently intends to retain earnings for use in
its business and does not anticipate paying cash dividends to stockholders.

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

Five Year Summary

|                                                         |                                         | Year ended January 31,   |        
|-------------------------------------------------------- | --------------------------------------- | ------------------------ | -------
|
|Consolidated Statement of Operations Data:               |                                         |                          |        
|Net sales                                                |                                         | $                        | 75,806 
|Cost of sales                                            |                                         |                          | 61,328 
|                                                         |                                         |                          |        
|Gross margin                                             |                                         |                          | 14,478 
|Operating expenses:                                      |                                         |                          |        
|                                                         | Research and development                |                          |        
|                                                         | Sales, general and administrative       |                          |        
|                                                         | In-process research and development (3) |                          |        
|                                                         | Legal costs (1)                         |                          |        
|                                                         |                                         |                          |        
|                                                         |                                         | Total operating expenses |        
|Income (loss) from operations                            |                                         |                          | (26,114
|Income, net of expenses, from the sale of DVD assets (3) |                                         |                          | 6,494  
|                                                         | Interest and other income               |                          |        
|                                                         | Interest expense                        |                          |        
|                                                         |                                         |                          |        
|Income (loss) before income taxes                        |                                         |                          | (13,896
|Income tax provision (benefit)                           |                                         |                          | (5,481 
|                                                         |                                         |                          |        
|Net income (loss)                                        |                                         | $                        | (8,415 
|                                                         |                                         |                          |        
|Basic net income (loss) per share (2)                    |                                         | $                        | (.33   
|Diluted net income (loss) per share (2)                  |                                         | $                        | (.33   
|Weighted common shares outstanding (2)                   |                                         |                          | 25,737 
|Weighted common shares outstanding assuming dilution (2) |                                         |                          | 25,737 

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|                                 |  | 2001 |         | 2000 |   | 1999    |  | 1998 |         | 1997
|-------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ----
|Consolidated Balance Sheet Data: |  |      |         |      |   |         |  |      |         |     
|Cash and cash equivalents        |  | $    | 72,852  |      | $ | 33,097  |  | $    | 36,631  |     
|Short-term investments           |  |      | 34,917  |      |   | 63,429  |  |      | 56,097  |     
|Working capital                  |  |      | 104,766 |      |   | 101,948 |  |      | 92,839  |     
|Total assets                     |  |      | 123,765 |      |   | 149,136 |  |      | 144,374 |     
|Long-term obligations            |  |      |        |      |   |        |  |      |        |     
|Total stockholders' equity       |  |      | 115,470 |      |   | 120,215 |  |      | 103,395 |     
|Other Data                       |  |      |         |      |   |         |  |      |         |     
|Number of employees              |  |      | 138     |      |   | 278     |  |      | 234     |     
|Net book value/share (4)         |  | $    | 4.49    |      | $ | 4.83    |  | $    | 4.36    |     

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9

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

When used in this discussion, the words "expects," "anticipates," "believes" and similar expressions are intended to identify forward-looking statements. Such
statements reflect management's current intentions and expectations. However, actual events and results could vary significantly based on a variety of factors including, and not limited to: the
abilities of manufacturing subcontractors to make adequate and timely deliveries, access to advanced production process technologies from manufacturing subcontractors, recruiting and retaining
employees including those with engineering expertise in new disciplines. In particular, the Company's new product development efforts and customer engagements in System-on-Chip integration and MPEG-4
represent new endeavors and consequently carry greater risks of successful and timely execution. These factors along with those set forth below under "Factors that May Affect Results," are subject to
risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any changes in the Company's expectations with regard thereto
or any changes in events, conditions or circumstances on which any such statement is based.

Overview

The Company designed, developed and marketed high-performance semiconductor solutions for sale to original equipment manufacturers of mobile computing products
including notebook PCs, and over the last several years, began development of silicon solutions for digital cameras and DVD drives. In April 2000, the Company successfully concluded the sale of the
DVD product group to LSI Logic. The Company pioneered the first commercially available high-performance silicon technology that integrated DRAM, complex logic and analog circuits into a single chip.
The Company's proprietary MagicWare technology eliminates the need to drive signals off-chip to discrete memory, achieving a performance advantage while actually lowering the power
consumption and extending the battery life for smaller, lighter weight portable devices. The first commercial application for the Company's technology was in the design, development and marketing of
multimedia accelerators for sale to notebook computer manufacturers. The Company's MagicGraph128 and MagicMedia256 families of pin-compatible multimedia accelerators
incorporated 128-bit and 256-bit memory buses, respectively.

All
of the Company's net sales to date were derived from sales of its multimedia accelerator products. The Company may experience minimal sales of these products in fiscal 2002. The
Company expects to see limited revenues from its new product efforts in the Handheld Internet Appliance market place in
fiscal 2002. The Company generally recognizes revenue upon title passage for product sales directly to customers. The Company's policy is to defer recognition of revenue of shipments to distributors
until the distributors sell the product. Historically, a majority of the Company's sales have been to a limited number of customers. The Company expects that a substantial portion of sales of its new
products will also be to a limited number of customers. The customers contributing significant amounts of net sales have varied and will continue to vary depending on the timing and success of new
product introductions by the Company and its customers.

On
April 20, 2000 the Company announced a change in strategy ceasing further development efforts of its existing notebook multimedia product line, and focusing future development efforts
on technologies and products to enable multimedia communications. As a result, the Company undertook a significant resizing of its operations, and reduced its workforce by approximately 50% in the
first quarter of fiscal 2001 as compared to the end of the fourth quarter of fiscal 2000. Included in this total are employees of the Company's DVD product line, which was sold to LSI Logic
Corporation in a transaction announced on April 14, 2000. In March 2001, the Company reduced its workforce in the U.S. by 18 and in Israel by 25 to be more in-line with its plans for fiscal year 2002.

10

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

In
January 2001 the Company extended its wafer supply agreement with Infineon Technologies AG of Germany through fiscal 2004 to support the Company's new product efforts. Under the terms
of the agreement, production for NeoMagic will make use of Infineon's current 0.20 micron and new 0.17 micron embedded DRAM process technologies. The agreement also provides for access to additional
capacity and more advanced process technologies as they become available. NeoMagic has provided $15 million in guarantees towards its purchases over the term of the agreement.

Going
forward the Company expects minimal revenue from its discontinued notebook line in fiscal 2002 as it focuses on developing and producing Integrated System-on-Chip semiconductor
products for the Handheld Internet Appliance marketplace. During the first quarter of fiscal 2001 the Company restructured its operations to protect its financial strength. In the second quarter of
fiscal 2001, the Company set the basic parameters of its new direction, commenced significant engineering activities, and began customer discussions in the first of its new product areas. During the
third and fourth quarters of fiscal 2001 the Company continued to refine and evolve its products and refine its market focus, while adding key staff with new skills. While the Company expects a net
loss for the next fiscal year as a whole, it is managing its spending prudently and expects to end the fiscal year with more than $75 million in cash. The Company remains on its plan to drive the
first of its new product efforts for market entry with limited revenues anticipated from its System-on-Chip technology for the Handheld Internet Appliance marketplace beginning towards the end of
fiscal year 2002. Key to this timing will be the market rollout timing of our first customers.

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

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Results of Operations

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

Year ended January 31,2001

2000

1999Net sales

100.0
%
100.0
%
100.0
%Cost of sales

80.9

69.8

59.4Gross margin

19.1

30.2

40.6Operating expenses:Research and development

33.3

14.6

13.2Sales, general and administrative

17.2

7.1

8.6In-process research and development



2.1

Total operating expenses

53.5

23.8

21.8Income (loss) from operations

(34.4
)
6.4

18.8Income, net of expenses, from the sale of DVD assets

8.5



Interest and other income

7.9

1.5

1.6Interest expense

(.3
)
(.4
)
(.6
)Income (loss) before income taxes

(18.3
)
7.5

19.8Provision (benefit) for income taxes

(7.2
)
2.6

6.8Net income (loss)

(11.1
)%
4.9
%
13.0
%


Net sales

The Company's net sales to date have been generated from the sale of its multimedia accelerators. The Company's historical products were used in the personal
computer industry with sales primarily in Asia, Japan, and the United States. Net sales were $75.8 million, $259.7 million and $240.5 million in fiscal 2001, 2000; and 1999, respectively. The
substantial decrease in sales from fiscal 2000 to fiscal 2001 is
due to the Company ending its notebook multimedia product line and beginning to focus development efforts on developing Integrated System-on-Chip semiconductor products for the Handheld Internet
Appliance marketplace. The Company expects that the percentage of its net sales represented by any one product or type of product may change significantly from period to period when new products are
introduced and existing products reach the end of their product life cycles. The Company expects that net sales, for fiscal 2002 will be minimal due to the timing of its new products.

Sales
to customers located outside the United States (including sales to the foreign operations of customers with headquarters in the United States, and foreign system manufacturers that
sell to United States-based OEMs) accounted for 85.5%, 80.2% and 83.6% of net sales in fiscal 2001, 2000 and 1999, 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.

Four
customers accounted for 25.5%, 21.4%, 15.1%, and 13.6%, respectively, of net sales in fiscal 2001. Five customers accounted for 20.2%, 19.6%, 12.9%, 12.3% and 12.1% respectively, of
net sales in fiscal 2000. Three customers accounted for 19.8%, 17.1% and 10.5%, respectively, of net sales in fiscal 1999. The Company expects a significant portion of its future sales to remain
concentrated with a limited number of strategic customers. There can be no assurance that the Company will be able to retain its strategic customers. In addition, sales to any particular customer may
fluctuate significantly from quarter to quarter. The occurrence of any such events or the loss of a strategic customer could

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have a material adverse effect on the Company's operating results and the timing of the Company's new product introduction.

Gross Margin

Gross margin was $14.5 million, $78.4 million and $97.6 million in fiscal 2001, 2000, and 1999, respectively. Cost of sales includes amortization of deferred
compensation of $44,000, $7,000, and $31,000 for fiscal 2001, 2000, and 1999, respectively. The gross margin percentage decreased to 19.1% of net sales in fiscal 2001 from 30.2% of net sales in fiscal
2000 primarily due to excess and obsolete write-downs of $7.0 million, a lower of cost or market adjustment of $2.3 million, and cancellation penalties to our manufacturing partners of
$2.6 million related to restructuring the business in the first quarter of fiscal 2001. The gross margin percentage decreased to 30.2% of net sales in fiscal 2000 from 40.6% of net sales in fiscal
1999 due primarily to increases in wafer prices for the Company's MagicMedia256 product line. Also affecting fiscal 2000 gross margin was a decrease in the dollar/yen exchange rate throughout the year
and low production yields on new product ramp-ups.

In
the future, the Company's gross margin percentages may be affected by increased competition and related decreases in unit average selling prices (particularly with respect to older
generation products), changes in the mix of products sold, timing of volume shipments of new products, the availability and cost of products from the Company's suppliers, manufacturing yields
(particularly on new products),
and foreign currency exchange rate fluctuations. The Company has exited the Notebook PC Multimedia Accelerator marketplace and expects to introduce products for the Handheld Internet Appliance
marketplace late in fiscal 2002. Revenues from these new products are expected to be limited in fiscal 2002 and gross margins are expected to be lower than for the notebook products initially until
volume production is reached.

Research and Development Expenses

Research and development expenses include compensation and associated costs relating to development personnel, operating system software costs and prototyping
costs, which are comprised of photomask costs and pre-production wafer costs. Research and development expenses were $27.5 million, $38.0 million and $31.7 million in fiscal 2001, 2000, and 1999,
respectively. These expenses include amortization of deferred compensation of $2.0 million, $0.2 million, and $0.3 million in fiscal 2001, 2000, and 1999, respectively. The
Company has made, and intends to continue to make, significant investments in research and development to remain competitive by developing new and enhanced products to serve its identified markets.
Research and development expenses decreased in fiscal 2001 due to a reduction in the number of employees and an overall effort to reduce expenses. Research and development expenses are expected to
increase in absolute dollars in fiscal 2002 due to development efforts on the Company's new product effort in the area of Handheld Internet Appliances. Research and development expenses increased in
fiscal 2000 primarily as a result of increased employee related expenses on higher headcount, increased prototyping costs associated with new product development, and amortization of intangibles
associated with the acquisitions of ACL and the Optical Drive Development Group of Mitel Corporation.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $13.1 million, $18.5 million and $20.8 million in fiscal 2001, 2000, and 1999, respectively.
These expenses include amortization of deferred compensation of $0.6 million, $0.4 million, and $0.5 million in fiscal 2001, 2000, and 1999, respectively. Sales, general and
administrative expenses decreased in fiscal 2001 due primarily to lower outside commissions on lower sales, and the Company's ongoing cost reduction efforts offset in part by $0.8 million of employee
related severance expenses incurred in the first quarter of fiscal 2001 in connection with restructuring the business. Sales, general and administrative expenses decreased in fiscal 2000 compared

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to fiscal 1999, due primarily to lower outside commissions on lower sales and the Company's ongoing cost reduction efforts. Because of cost controls and the Company's projections for downward revenue
that will result in decreased commissions, sales, general and administrative expenses are expected to decrease in absolute dollars in fiscal 2002.

Acquired in-process research and development

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

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

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

Except
for the Company's plans to no longer pursue the development activities acquired from the Optical Drive Storage Group (DVD product group) due to the sale of this business to LSI,
there have been no significant changes in the assumptions used in the IPRD analyses relating to the timing of

14

---

expected future revenues or the amount of development expenses and efforts expected to be required to bring the in-process research and development technologies to completion and to achieve such
revenues. The Company successfully concluded the sale of the DVD group to LSI Logic in April, 2000. The gain from the sale of the DVD group of $6.5 million is included in Income, net of expenses, from
the sale of DVD assets on the Consolidated Condensed Statements of Operations.

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

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

Interest and Other Income

The Company earns interest on its cash and short-term investments. Interest and other income was $6.0 million, $3.8 million and $3.8 million in fiscal 2001, 2000,
and 1999, respectively. The increase in fiscal 2001 stemmed from higher interest income earned on higher cash and short-term investment balances.

Interest Expense

The Company pays interest and bank commissions on wafer purchases and interest on its leases. Interest expense was $0.3 million, $0.8 million, and $1.3 million in
fiscal 2001, 2000 and 1999, respectively. The decrease in interest expense from fiscal 2000 to fiscal 2001 reflects lower interest and bank commissions on reduced purchases and lower capital lease
balances. The decrease in interest
expense from fiscal 1999 to fiscal 2000 reflects lower interest and commission rates due to reduced purchases and lower capital lease balances than the prior year.

Income Taxes

The Company's effective tax (benefit) rate was (39%) in fiscal 2001, 35% in fiscal 2000 and 34% in fiscal 1999. In fiscal 2001, the Company incurred a loss and
the tax benefit rate resulted from carrying back the loss to tax years where a refund could be claimed. The increase in the effective tax rate from fiscal 1999 to fiscal 2000 was due to the
establishment of a valuation allowance related to acquisitions during the year, offset by research and development credits. The difference between the Company's fiscal 2001 effective tax rate and the
statutory rate is primarily due to the utilization of research and development tax credits.

Liquidity and Capital Resources

The Company's cash, cash equivalents and short-term investments were $107.8 million, $96.5 million, and $92.7 million as of the end of fiscal 2001, 2000 and 1999,
respectively. The increase in

15

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cash, cash equivalents and short-term investments in fiscal 2001 stems primarily from cash from investing activities and from cash provided by operating activities. Cash from investing activities
includes $10.1 million in proceeds from the sale of the DVD product group offset by purchases of property, plant and equipment of $2.3 million. The increase in cash, cash equivalents and short-term
investments in fiscal 2000 stems primarily from cash provided by operating activities, offset in part by the two acquisitions completed in February 1999 for $10.4 million and purchases of property,
plant and equipment of $7.4 million.

Cash
and cash equivalents provided from operating activities were $2.8 million, $19.6 million and $45.1 million in fiscal 2001, 2000, and 1999, respectively. The cash provided from
operating activities in fiscal 2001 stems primarily from decreases in accounts receivable and inventory, offset in part by the net loss of $8.4 million and decreases in accounts payable and income
taxes payable. The cash provided from operating activities in fiscal 2000 stems primarily from $12.7 million in net income and a decrease in inventory, offset in part by a decrease in accounts
payable. The cash provided from operating activities in fiscal 1999 stems primarily from $31.2 million in net income, an increase in accounts payable and a reduction in deferred taxes, offset in part
by increased accounts receivable, inventory and other assets.

Net
cash provided by investing activities in fiscal 2001 was $36.3 million while net cash used for investing activities in fiscal 2000 and 1999 was $25.2 million and $25.5 million,
respectively. Net cash provided by investing activities in fiscal 2001 was primarily due to net proceeds received on the sale of the DVD product group of $10.1 million and net maturities of short-term
investments of $28.5 million, partially offset by purchase of property, plant, and equipment. Net cash used for investing activities in
fiscal 2000 related primarily to cash paid of $10.4 million for two acquisitions, $7.3 million of net purchases of short-term investments and $7.4 million of investments in property, plant and
equipment. Net cash used for investing activities in fiscal 1999 related primarily to $20.1 million of net purchases of short-term investments and $5.4 million of investments in property, plant and
equipment. Continued operation of the Company's business may require higher levels of capital equipment purchases, technology investments, foundry investments and other payments to secure
manufacturing capacity.The timing and amount of future investments will depend primarily on the level of the Company's future revenues.

Net
cash provided by financing activities in fiscal 2001 and fiscal 2000 was $0.7 million and $2.0 million respectively, compared to net cash used for financing activities of $18.0
million in fiscal 1999. The net cash provided by financing activities in fiscal 2001 primarily represents net proceeds from the issuance of common stock partially offset by payments on capital lease
obligations. The net cash provided by financing activities in fiscal 2000 primarily represents net proceeds from the issuance of common stock. The net cash used for financing activities in fiscal 1999
related primarily to the pay-down of the working capital line of credit of $21.0 million, offset in part by proceeds from the issuance of common stock.

At
January 31, 2001, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of $107.8 million. The Company believes that it will not
generate cash over the upcoming twelve months, and believes the current cash, cash equivalents and short-term investments will satisfy the Company's projected working capital and capital expenditure
requirements through the next twelve months. Investments will continue in the Company's new product development efforts in the Handheld Internet Appliance marketplace. The Company's future capital
requirements will depend on many factors including the rate of net sales, the timing and extent of spending to support research and development programs, the timing of any new product introductions,
and market acceptance of the Company's products. The Company expects that it may need to raise additional equity or debt financing in the future. There can be no assurance that additional equity or
debt financing, if required, will be available on acceptable terms or at all.

16

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In
January 2001 the Company signed an extension of its wafer supply agreement with Infineon Technologies. In connection with that agreement, the Company has agreed to purchase fifty
thousand wafers before February 27, 2004. To secure this agreement, the Company opened an irrevocable letter of credit in the amount of $15 million in February 2001. The Company has secured the letter
of credit with a $15 million deposit at the issuing bank. Beginning in fiscal 2002, these funds will be shown on the Company's consolidated balance sheets as restricted cash until the letter of credit
expires in fiscal 2004. In connection with the work force reduction in March 2001, the Company expects to incur severance charges of approximately $600,000 in fiscal 2002.

Impact of Currency Exchange Rates

In
the past, the Company has purchased wafers under contracts denominated in yen. Significant appreciation in the value of the yen relative to the value of the U.S. dollar would make the
wafers relatively more expensive to the Company, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company generally enters into
foreign currency forward contracts to minimize short-term foreign currency fluctuation exposures related to these firm purchase commitments. The Company does not use derivative financial instruments
for speculative or trading purposes. The Company's accounting policies for these instruments are based on the Company's designation of such instruments as hedging transactions. The criteria the
Company uses for designating an instrument as a hedge include its effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions.

Notwithstanding
the measures the Company has adopted, due to the unpredictability and volatility of currency exchange rates and currency controls, there can be no assurance that the
Company will not experience currency losses in the future, nor can the Company predict the effect of exchange rate fluctuations upon future operating results. The Company did not experience
fluctuations during fiscal 2001 that negatively impacted the Company's gross margin and results of operations.

Factors that May Affect Results

Fluctuations in Quarterly Operating Results

The Company's quarterly and annual results of operations are affected by a variety of factors that could materially adversely affect net sales, gross margin and
operating results. These factors include, among others, the abilities of manufacturing subcontractors to make adequate and timely deliveries, access to advanced production process technologies from
manufacturing subcontractors, recruiting and retaining employees including those with engineering expertise in new disciplines. In particular, the Company's new product development efforts and
customer engagements in System-on-Chip integration and MPEG-4 streaming video represent new endeavors and consequently carry greater risks of successful and timely execution. Any one or more of these
factors could result in the Company failing to achieve its expectations as to future revenues and profits. The Company may be unable to adjust spending sufficiently in a timely manner to compensate
for any unexpected sales shortfall, which could materially adversely affect quarterly operating results. Accordingly, the Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. In future
quarters, the Company's operating results may be below the expectations of public
market analysts or investors. Since the Company's announcement of its expectation of declining revenues, gross margins and operating results, the market price of the Common Stock has been and is
expected to be for some time in the future, materially adversely affected.

17

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Customer Concentration

The Company's sales have been concentrated within a limited customer base in the notebook PC market. The Company exited the notebook PC market and is currently
developing products for the Handheld Internet Appliance market. The Company has engaged customers for the products under development, but currently has no commitments. The Company expects to have
commitments from only a limited number of customers by the end of fiscal 2002. The Company expects that a small number of customers will continue to account for a substantial portion of its net sales
for the foreseeable future. Furthermore, the majority of the Company's sales were 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, the Company's business, financial condition and results of operations could be materially adversely affected by the decision of a single customer to cease using the
Company's products, or by a decline in the number of Handheld Internet Appliances sold by a single customer.

Competition

In April 2000, the Company announced its intention to exit the Notebook PC Multimedia Accelerator market and focus on the market for Handheld Internet Appliances.
The Company has now exited the Notebook PC Multimedia market and expects to introduce products for the Handheld Internet Appliance market in the latter half of fiscal 2002. The market for
semiconductor solutions for Handheld Internet Appliances, in which the Company is now focused, is intensely competitive and is characterized by rapid technological change, evolving industry standards
and declining average selling prices. NeoMagic believes that the principal factors of competition in this market are performance, price, features, power consumption, size and software support. The
ability of the Company to compete successfully in this new rapidly evolving Handheld Internet Appliance market depends on a number of factors including: success in designing, subcontracting the
manufacture of new products that implement new technologies, product quality and reliability, price, the efficiency of production, ramp up of production of the Company's products for particular system
manufacturers, end-user acceptance of the system manufacturers' products, market acceptance of competitors' products, general economic conditions, and the acceptance of our customer's products in the
marketplace. The Company's ability to compete in the future will also depend on its ability to identify and ensure compliance with evolving industry standards and market trends. Unanticipated changes
in market trends and industry standards could render the Company's products incompatible with products developed by major hardware manufacturers and software developers. As a result, the Company could
be required to invest significant time and resources to redesign its products or obtain license rights to technologies owned by third parties in order to ensure compliance with relevant industry
standards and market trends. There can be no assurance that the Company could redesign its products or obtain the necessary third-party licenses within the appropriate window of market demand. If the
Company's products are not in
compliance with prevailing market trends and industry standards for a significant period of time, the Company could miss crucial OEM design cycles, which could result in a material adverse effect on
the Company's business, financial condition and results of operations. In addition, the Company's products are designed to afford the Handheld Internet Appliance manufacturer significant advantages
with respect to product performance, power consumption and size. To the extent that other future developments in components or subassemblies incorporate one or more of the advantages offered by the
Company's products, the market demand for the Company's products may be negatively impacted.

NeoMagic
competes with major domestic and international companies, some of which have substantially greater financial and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their products. The Company's principal competitors include National Semiconductor, Cirrus Logic, Intel's Strong Arm product line, and a
number of vertically integrated electronics firms who are developing their own solutions. NeoMagic may also face increased competition from new entrants into the Handheld Internet Appliance
Semiconductor market

18

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including companies currently at developmental stages. Certain of the Company's competitors may offer products with more functionality and or higher processor speeds at the expense of battery life
and power consumption than the Company's product offerings. The Company's product developments continue to utilize embedded DRAM technologies to produce System-On-Chip technology. As such, the
introduction of Multi Chip module ("MCM") solutions offer an additional competitive solution. The MCM solution increases access memory both internally in the packaged module and externally, with
connections to discrete memory on the motherboard, for higher performance at the expense of battery life and power consumption. The successful commercial introduction by competitors of products that
integrate DRAM with analog and logic circuitry on a single chip, or the inability of the Company to produce products for their new market, could have a material adverse effect on the Company's
business, financial condition and operating results.

Also,
some of the Company's current and potential competitors operate their own manufacturing facilities. Since the Company does not operate its own manufacturing facility and must make
binding commitments to purchase products, it may not be able to reduce its costs and cycle time or adjust its production to meet changing demand as rapidly as companies that operate their own
facilities, which could have a material adverse effect on the Company's results of operations.

Dependence on Manufacturing Relationships

The Company's products require wafers manufactured with state-of-the-art fabrication equipment and techniques. The Company has signed an extended wafer supply
agreement with Infineon Technologies AG of Germany to manufacture the Company's wafers. This new agreement extends the relationship which was first announced in April of 1999, expanding the production
capacity commitments between the two companies and providing the Company with access to more advanced process technologies. The Company expects that, for the foreseeable future, some of its products
will be manufactured by a single source. Since, in the Company's experience, the lead time needed to establish a strategic relationship with a new DRAM partner is at least 12 months, and the estimated
time for a foundry to switch to a new product line ranges from four to nine months, there may be no readily available alternative source
of supply for specific products. A manufacturing disruption experienced by the Company's manufacturing partner or the failure of the Company's manufacturing partner to dedicate adequate resources to
the production of the Company's products would have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, in the event that the transition to
the next generation of manufacturing technologies by the Company's manufacturing partner is unsuccessful, the Company's business, financial condition and results of operations would be materially and
adversely affected.

There
are many other risks associated with the Company's dependence upon third party manufacturers, including: reduced control over delivery schedules, quality, manufacturing yields and
cost; the potential lack of adequate capacity during periods of excess demand; limited warranties on wafers supplied to the Company; and potential misappropriation of NeoMagic's intellectual property.
The Company is dependent on its manufacturing partner to produce wafers with acceptable quality and manufacturing yields, deliver those wafers on a timely basis to the Company's third party assembly
subcontractors and to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs. Although the Company's products are designed using the process design
rules of the particular manufacturer, there can be no assurance that the Company's manufacturing partner will be able to achieve or maintain acceptable yields or deliver sufficient quantities of
wafers on a timely basis or at an acceptable cost. Additionally, there can be no assurance that the Company's manufacturing partner will continue to devote adequate resources to the production of the
Company's products or continue to advance the process design technologies on which the manufacturing of the Company's products are based.

19

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

Inventory Risk

The Company has extended its wafer supply agreement with Infineon Technologies AG of Germany through fiscal 2004 to support the Company's new product efforts. The
Company has provided $15 million in guarantees towards its purchases over the term of the agreement. Under its wafer supply agreement with Infineon, the Company is obligated to provide rolling
12-month forecasts of anticipated purchases and to place binding purchase orders three to four months prior to shipment. The Company
orders wafers for deliveries at least 3-5 months in advance and with the additional time to assemble and test wafers, the Company can have orders for finished goods that will not be available for up
to six months into the future. If the Company does not have sufficient demand for its products and cannot cancel its current and future commitments without material impact, the Company may experience
excess inventory, which will result in a write-off affecting gross margin and results of operations. If the Company cancels a purchase order, it must pay cancellation penalties based on the status of
work in process or the proximity of the cancellation to the delivery date. Forecasts of monthly purchases may not increase or decrease by more than a certain percentage from the previous month's
forecast without the manufacturer's consent. Thus, the Company must make forecasts and place purchase orders for wafers before it receives purchase orders from its own customers. This limits the
Company's ability to react to fluctuations in demand for its products, which can be unexpected and dramatic, and from time-to-time will cause the Company to have an excess or shortage of wafers for a
particular product. As a result of the long lead-time for manufacturing wafers and the increase in "just in time" ordering by manufacturers, semiconductor companies such as the Company from
time-to-time must take charges for excess inventory. The Company did in fact incur such charges in fiscal 2001 of $9.2 million. Significant write-offs of excess inventory have had and could continue
to have a material adverse effect on the Company's financial condition and results of operations. Conversely, failure to order sufficient wafers would cause the Company to miss revenue opportunities
and, if significant, could impact sales by the Company's customers, which could adversely affect the Company's customer relationships and thereby materially adversely affect the Company's business,
financial condition and results of operations. At January 31, 2001, the Company has no outstanding purchase orders. If orders from NeoMagic's customers do not meet the Company's expectations, the
Company may incur a charge associated with its $15 million guarantee with Infineon.

Manufacturing Yields

The fabrication of semiconductors is a complex and precise process. Because NeoMagic's products feature the integration of large DRAM memory with analog and logic
circuitry on a single chip, a manufacturer must obtain acceptable yields of both the memory and logic portions of such products, compounding the complexity of the manufacturing process. As a result,
the Company may face greater manufacturing challenges than its competitors. Minute levels of contaminants in the manufacturing environment, defects in masks used to print circuits on a wafer,
difficulties in the fabrication process or other factors can cause a substantial percentage of wafers to be rejected or a significant number of die

20

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on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. As a result, semiconductor companies often experience problems in
achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular wafer. The Company purchases wafers, not
die, and pays an agreed upon price for wafers meeting certain acceptance criteria. Accordingly, the Company bears the risk of the yield of good die from wafers purchased meeting the acceptance
criteria. The Company experienced such yield problems in fiscal 2000 which materially adversely affected the Company's net sales, gross margins and results of operations in fiscal 2000 and 2001.

Semiconductor
manufacturing yields are a function of both product design, which is developed largely by the Company, and process technology, which is typically proprietary to the
manufacturer. Historically, the Company has experienced lower yields on new products. Since low yields may result
from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process
sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems would require
cooperation by and communication between the Company and the manufacturer. This risk is compounded by the offshore location of the Company's manufacturers, increasing the effort and time required
identifying, communicating and resolving manufacturing yield problems. As the Company's relationships with new manufacturing partners develop, yields could be adversely affected due to difficulties
associated with adopting the Company's technology and product design to the proprietary process technology and design rules of each manufacturer. Any significant decrease in manufacturing yields could
result in an increase in the Company's per unit product cost and could force the Company to allocate its available product supply among its customers, potentially adversely impacting customer
relationships as well as revenues and gross margins. There can be no assurance that the Company's manufacturers will achieve or maintain acceptable manufacturing yields in the future.

Dependence on New Product Development, New Markets and Rapid Technological Change

During the first fiscal quarter of this year, the Company changed its primary market and business focus. The Company closed all new product development efforts in
multimedia ICs for notebook computers. The Company's other new product plans and development efforts were reconsidered as well.

The
Company is now focused on developing high-performance semiconductor solutions for sale to original equipment manufacturers of Handheld Internet Appliances. New product planning began
in fiscal 2001 primarily focused on Integrated System-on-Chip semiconductor products for Handheld Internet Appliances and MPEG-4 video compression technology. The Company's future business, financial
condition and results of operations will depend to a significant extent on its ability to develop new products that address these market opportunities. As a result, the Company believes that
significant expenditures for research and development will continue to be required in the future. Handheld Internet Appliances and MPEG-4 streaming video are relatively new technologies, and are
characterized by rapidly changing infrastructure, evolving industry standards and uncertain average selling prices. The Company must anticipate the features and functionality that consumers and
infrastructure providers will demand, incorporate those features and functionality into products that meet the exacting design requirements of equipment manufacturers, price its products competitively
and introduce the products to the market on a timely basis. The success of new product introductions is dependent on several factors, including proper new product definition, timely completion and
introduction of new product designs, the ability to create or acquire Intellectual Property, the ability of strategic manufacturing partners to effectively design and implement the manufacture of new
products, quality of new products, differentiation of new products from those of the Company's competitors and market acceptance of the Company's and its customers' products. There can be no assurance
that the

21

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products the Company expects to introduce will incorporate the features and functionality demanded by system manufacturers and consumers, will be successfully developed, or will be introduced within
the appropriate window of market demand.

The
Company intends to continue relying in part upon the integration of large DRAM with analog and logic circuitry on a single chip as a primary means of product differentiation. The
integration of large DRAM memory with analog and logic circuitry on a single chip is highly complex and is critical to the Company's success. Because of the complexity of its products, however, the
Company has experienced delays from time to time in completing development and introduction of new products. In addition, the Company is now embarked on the development of new products in markets in
which the Company has no history. In the event that there are delays in the completion of development of future products, including the products currently under development for introduction over the
next 12 to 18 months, the Company's potential future business, financial condition, and results of operations will be materially adversely affected. Although the development cycles for the memory and
logic portions of the Company's products have been relatively synchronized to date, there can be no assurance that this synchronization will continue in the future. In addition, there can be no
assurance that fundamental advances in either the memory or logic components of the Company's products will not significantly increase the complexity inherent in the design and manufacture of the
Company's products, rendering the Company's product technologically infeasible or uncompetitive. The time required for competitors to develop and introduce competing products may be shorter and
manufacturing yields may be better than those experienced by the Company.

The
Company is no longer pursuing new product development or new sales opportunities in its notebook multimedia product line, and anticipates minimal revenues from future sales of its
existing products in this market. The Company has exited the Notebook PC market and does not anticipate revenues from its Handheld Internet Appliance products until late in fiscal 2002. This situation
will have a material adverse effect on the Company's business, financial condition and results of operations in fiscal 2002.

Uncertainty Regarding Patents and Protection of Proprietary Rights

The Company relies in part on patents to protect its intellectual property. The Company has been issued 40 patents, each covering certain aspects of the design
and architecture of the Company's products. Additionally, the Company has numerous patent applications pending. There can be no assurance that the Company's pending patent applications, or any future
applications will be approved. Further, there can be no assurance that any issued patents will provide the Company with significant intellectual property protection, competitive advantages, or will
not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. In addition, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or design around any patents that may be issued to the Company.

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

As
a general matter, the semiconductor industry is characterized by substantial litigation, regarding patent and other intellectual property rights. In December 1998, the Company filed a
lawsuit in the United States District Court for the District of Delaware against Trident Microsystems, Inc. The suit

22

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alleges that Trident's embedded DRAM graphics accelerators infringe certain patents held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted
monopolization in violation of antitrust laws, arising from NeoMagic's filing of the patent infringement action against Trident. The Court has ruled that there is no infringement by Trident.
Management disagrees with this ruling and is evaluating our legal options. Management also believes the Company has valid defenses against Trident's claims. There can be no assurance as to the results
of the patent infringement suit and the counter-suit for antitrust filed by Trident.

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

Dependence on International Sales and Suppliers

Export sales have been a critical part of the Company's business. Sales to customers located outside the United States (including sales to the foreign operations
of customers with headquarters in the United States and foreign system manufacturers that sell to United States-based OEMs) accounted for 85.5%, 80.2% and 83.6% of the Company's net sales for fiscal
2001, 2000, and 1999, respectively. The Company expects that net sales derived from international sales will continue to represent a significant portion of its total net sales. Letters of credit
issued by customers support a portion of the Company's international sales. To date, the Company's international sales have been denominated in United States dollars. Increases in the value of the
U.S. dollar relative to the local currency of the Company's customers could make the Company's products relatively more expensive than competitors' products sold in the customer's local currency.

International
manufacturers have produced, and are expected to continue to produce for the foreseeable future, all of the Company's wafers. In addition, many of the assembly and test
services used by the Company are procured from international sources. Under the Company's wafer supply agreement with Infineon, the wafers are priced in U.S. dollars.

International
sales and manufacturing operations are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade
barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally including foreign government regulation, political and economic instability, and unexpected changes in diplomatic and trade
relationships. Moreover, the laws of certain foreign countries in which the Company's products may be developed, manufactured or sold, may not protect the Company's intellectual property rights to the
same extent as do the laws of the United States, thus increasing the possibility of piracy of the Company's products and intellectual property.

23

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There can be no assurance that one or more of these risks will not have a material adverse effect on the Company's business, financial condition and results of operations.

Need for Additional Capital

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

Dependence on Qualified Personnel

The Company's future success depends in part on the continued service of its key engineering, sales, marketing, manufacturing, finance and executive personnel,
and its ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary for the development of its business. The Company has experienced the loss of certain key personnel and also reduced
personnel in its restructuring. If the Company's headcount is not appropriate for its future direction and the Company fails to recruit key personnel critical to its future direction in a timely
manner, it may have a material adverse effect on the Company's business, financial condition and results of operations.

Volatility of Stock Price

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

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Fluctuations

In the past, the Company has purchased wafers in Japanese yen, and has utilized foreign currency forward contracts and options to minimize short-term foreign
currency fluctuation exposures related to these purchases. The Company does not use derivative financial instruments for speculative or trading

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purposes. The Company's accounting policy for these instruments is based on the Company's designation of such instruments as hedge transactions. As of January 31, 2001, and 2000 the Company's foreign
currency forward contracts were as follows:

|January 31,                        |  | 2001 |   | 2000 |  
|---------------------------------- |  | ---- | - | ---- | -
|
|Foreign Currency Forward Contracts |  | $    | 0 |      | $

Investment Portfolio

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

The
table below summarizes the Company's investment portfolio. The table includes cash, cash equivalents, and short-term investment and related average interest rates. Principal
(notional) amounts as of January 31, 2001, and 2000 maturing in fiscal 2002 and fiscal 2001, respectively are as follows:

|                                                        |                                | 2001 |         | 2000 |  
|------------------------------------------------------- | ------------------------------ | ---- | ------- | ---- | -
|
|
|
|Cash and cash equivalents                               |                                | $    | 72,852  |      | $
|                                                        | Weighted average interest rate |      |         | 5.82 | %
|Short-term investments                                  |                                |      | 28,801  |      |  
|                                                        | Weighted average interest rate |      |         | 6.57 | %
|                                                        |                                |      |         |      |  
|Total cash, cash equivalents and short-term investments |                                | $    | 101,653 |      | $
|                                                        |                                |      |         |      |  

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

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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Annual Financial Statements.See Part IV, Item 14 of this Form 10-K.

Selected Quarterly Data(unaudited, in thousands except per share data) Fiscal 2001

|                                                                 |                                                          | 1st                      |         | 2nd   |        | 3rd    |       | 4th   |       
|---------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------- | ----- | ------ | ------ | ----- | ----- | ------
|Net sales                                                        |                                                          | $                        | 38,877  |       | $      | 31,908 |       | $     | 3,912 
|Cost of sales (1)                                                |                                                          |                          | 40,987  |       |        | 19,458 |       |       | 761   
|                                                                 |                                                          |                          |         |       |        |        |       |       |       
|Gross margin (loss)                                              |                                                          |                          | (2,110  | )     |        | 12,450 |       |       | 3,151 
|Operating expenses:                                              |                                                          |                          |         |       |        |        |       |       |       
|                                                                 | Research and development                                 |                          |         | 7,783 |        |        | 5,493 |       |       
|                                                                 | Sales, general and administrative                        |                          |         | 4,873 |        |        | 3,757 |       |       
|                                                                 | In-process research and development (3)                  |                          |         |      |        |        |      |       |       
|                                                                 |                                                          |                          |         |       |        |        |       |       |       
|                                                                 |                                                          | Total operating expenses |         |       | 12,656 |        |       | 9,250 |       
|Income (loss) from operations                                    |                                                          |                          | (14,766 | )     |        | 3,200  |       |       | (5,647
|                                                                 | Income, net of expenses, from the sale of DVD assets (3) |                          |         | 5,244 |        |        | (250  | )     |       
|                                                                 | Interest and other income                                |                          |         | 949   |        |        | 1,556 |       |       
|                                                                 | Interest expense                                         |                          |         | (197  | )      |        | (65   | )     |       
|                                                                 |                                                          |                          |         |       |        |        |       |       |       
|Income (loss) before income taxes                                |                                                          |                          | (8,770  | )     |        | 4,441  |       |       | (2,357
|Income tax provision (benefit)                                   |                                                          |                          | (3,507  | )     |        | 1,780  |       |       | (935  
|                                                                 |                                                          |                          |         |       |        |        |       |       |       
|Net income (loss)                                                |                                                          | $                        | (5,263  | )     | $      | 2,661  |       | $     | (1,422
|                                                                 |                                                          |                          |         |       |        |        |       |       |       
|Basic net income (loss) per share (2)                            |                                                          | $                        | (.21    | )     | $      | .10    |       | $     | (.06  
|Diluted net income (loss) per share (2)                          |                                                          | $                        | (.21    | )     | $      | .10    |       | $     | (.06  
|Weighted common shares outstanding (2)                           |                                                          |                          | 25,566  |       |        | 25,736 |       |       | 25,800
|Weighted average common shares outstanding assuming dilution (2) |                                                          |                          | 25,566  |       |        | 25,779 |       |       | 25,800

Fiscal 2000

|                                                                 |                                         | 1st                      |        | 2nd   |        | 3rd    |        | 4th    |       
|---------------------------------------------------------------- | --------------------------------------- | ------------------------ | ------ | ----- | ------ | ------ | ------ | ------ | ------
|Net sales                                                        |                                         | $                        | 72,397 |       | $      | 60,320 |        | $      | 70,346
|Cost of sales                                                    |                                         |                          | 45,609 |       |        | 42,232 |        |        | 51,558
|                                                                 |                                         |                          |        |       |        |        |        |        |       
|Gross margin                                                     |                                         |                          | 26,788 |       |        | 18,088 |        |        | 18,788
|Operating expenses:                                              |                                         |                          |        |       |        |        |        |        |       
|                                                                 | Research and development                |                          |        | 9,772 |        |        | 10,905 |        |       
|                                                                 | Sales, general and administrative       |                          |        | 5,247 |        |        | 4,311  |        |       
|                                                                 | In-process research and development (3) |                          |        | 5,348 |        |        |       |        |       
|                                                                 |                                         |                          |        |       |        |        |        |        |       
|                                                                 |                                         | Total operating expenses |        |       | 20,367 |        |        | 15,216 |       
|Income (loss) from operations                                    |                                         |                          | 6,421  |       |        | 2,872  |        |        | 5,007 
|                                                                 | Interest and other income               |                          |        | 784   |        |        | 932    |        |       
|                                                                 | Interest expense                        |                          |        | (252  | )      |        | (218   | )      |       
|                                                                 |                                         |                          |        |       |        |        |        |        |       
|Income before income taxes                                       |                                         |                          | 6,953  |       |        | 3,586  |        |        | 5,734 
|Income tax provision                                             |                                         |                          | 3,692  |       |        | 1,076  |        |        | 1,614 
|                                                                 |                                         |                          |        |       |        |        |        |        |       
|Net income                                                       |                                         | $                        | 3,261  |       | $      | 2,510  |        | $      | 4,120 
|                                                                 |                                         |                          |        |       |        |        |        |        |       
|Basic net income per share (2)                                   |                                         | $                        | .13    |       | $      | .10    |        | $      | .16   
|Diluted net income per share (2)                                 |                                         | $                        | .13    |       | $      | .10    |        | $      | .16   
|Weighted common shares outstanding (2)                           |                                         |                          | 24,476 |       |        | 24,460 |        |        | 25,039
|Weighted average common shares outstanding
assuming dilution (2) |                                         |                          | 25,636 |       |        | 26,073 |        |        | 25,761

---

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

Not applicable.

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PART III

Certain information required by Part III is incorporated by reference from the Company's definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Company's 2001 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 2001 Proxy Statement and is
incorporated herein by reference. The required information concerning executive officers of the Company is contained in the section entitled "Management" in Part I of this Form 10-K.

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

Item 11.    EXECUTIVE COMPENSATION

The information required by this section relating to executive compensation and transactions is contained in the sections entitled "Election of Directors,"
"Director Compensation," and "Executive Compensation" in the 2001 Proxy Statement and is incorporated herein by reference.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this section is contained in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 2001 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 2001 Proxy Statement and is
incorporated herein by reference.

PART IV

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







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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

(Item 14 (a))

|                                                                                                  |  | Reference
page
|------------------------------------------------------------------------------------------------- |  | --------------
|Report of Ernst & Young LLP, Independent Auditors                                                 |  | 29            
|Consolidated Statements of Operations for the three fiscal years ended January 31, 2001           |  | 30            
|Consolidated Balance Sheets January 31, 2001 and January 31, 2000                                 |  | 31            
|Consolidated Statements of Cash Flows for the three fiscal years ended January 31, 2001           |  | 32            
|Consolidated Statements of Stockholders' Equity for the three fiscal years ended January 31, 2001 |  | 33            
|Notes to Consolidated Financial Statements                                                        |  | 34            
|Valuation and Qualifying Accounts for the three fiscal years ended January 31, 2001               |  | 49            

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

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
NeoMagic Corporation

We
have audited the accompanying consolidated balance sheets of NeoMagic Corporation as of January 31, 2001 and 2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended January 31, 2001. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In
our opinion, the consolidated financial statements and schedule referred to above present fairly, in all material respects, the consolidated financial position of NeoMagic Corporation
at January 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.

| |  | /s/ERNST & YOUNG LLP
| |  | --------------------

San Jose, California
February 12, 2001

29

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NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|Year Ended January 31,                               |                                                      | 2001 |                          | 2000   |   | 1999    |       
|---------------------------------------------------- | ---------------------------------------------------- | ---- | ------------------------ | ------ | - | ------- | ------
|
|Net sales                                            |                                                      | $    | 75,806                   |        | $ | 259,698 |       
|Cost of sales(1)                                     |                                                      |      | 61,328                   |        |   | 181,332 |       
|                                                     |                                                      |      |                          |        |   |         |       
|Gross margin                                         |                                                      |      | 14,478                   |        |   | 78,366  |       
|Operating expenses:                                  |                                                      |      |                          |        |   |         |       
|                                                     | Research and development(2)                          |      |                          | 27,524 |   |         | 37,956
|                                                     | Sales, general and administrative(3)                 |      |                          | 13,068 |   |         | 18,506
|                                                     | Acquired in-process research and development         |      |                          |       |   |         | 5,348 
|                                                     |                                                      |      |                          |        |   |         |       
|                                                     |                                                      |      | Total operating expenses |        |   | 40,592  |       
|Income (loss) from operations                        |                                                      |      | (26,114                  | )      |   | 16,556  |       
|                                                     | Income, net of expenses, from the sale of DVD assets |      |                          | 6,494  |   |         |      
|                                                     | Interest and other income                            |      |                          | 5,987  |   |         | 3,793 
|                                                     | Interest expense                                     |      |                          | (263   | ) |         | (838  
|                                                     |                                                      |      |                          |        |   |         |       
|Income (loss) before income taxes                    |                                                      |      | (13,896                  | )      |   | 19,511  |       
|Income tax provision (benefit)                       |                                                      |      | (5,481                   | )      |   | 6,806   |       
|                                                     |                                                      |      |                          |        |   |         |       
|Net income (loss)                                    |                                                      | $    | (8,415                   | )      | $ | 12,705  |       
|                                                     |                                                      |      |                          |        |   |         |       
|Basic net income (loss) per share                    |                                                      | $    | (.33                     | )      | $ | .51     |       
|Diluted net income (loss) per share                  |                                                      | $    | (.33                     | )      | $ | .49     |       
|Weighted common shares outstanding                   |                                                      |      | 25,737                   |        |   | 24,898  |       
|Weighted common shares outstanding assuming dilution |                                                      |      | 25,737                   |        |   | 25,834  |       

---

See
accompanying notes.

30

---

NEOMAGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

|January 31,                          |                                                                                                                    | 2001                                                                                                |                                                                 | 2000   |       
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------ | ------
|
|ASSETS                               |                                                                                                                    |                                                                                                     |                                                                 |        |       
|Current assets:                      |                                                                                                                    |                                                                                                     |                                                                 |        |       
|                                     | Cash and cash equivalents                                                                                          |                                                                                                     | $                                                               | 72,852 |       
|                                     | Short-term investments                                                                                             |                                                                                                     |                                                                 | 34,917 |       
|                                     | Accounts receivable, less allowance for doubtful accounts of $147 at January 31, 2001 and $206 at January 31, 2000 |                                                                                                     |                                                                 | 333    |       
|                                     | Inventory                                                                                                          |                                                                                                     |                                                                 |       |       
|                                     | Other current assets                                                                                               |                                                                                                     |                                                                 | 4,959  |       
|                                     |                                                                                                                    |                                                                                                     |                                                                 |        |       
|                                     |                                                                                                                    |                                                                                                     | Total current assets                                            |        |       
|                                     | Property, plant and equipment, net                                                                                 |                                                                                                     |                                                                 | 5,770  |       
|                                     | Deferred tax assets                                                                                                |                                                                                                     |                                                                 | 791    |       
|                                     | Other assets                                                                                                       |                                                                                                     |                                                                 | 4,143  |       
|                                     |                                                                                                                    |                                                                                                     |                                                                 |        |       
|                                     |                                                                                                                    |                                                                                                     | Total assets                                                    |        | $     
|                                     |                                                                                                                    |                                                                                                     |                                                                 |        |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                    |                                                                                                     |                                                                 |        |       
|Current liabilities:                 |                                                                                                                    |                                                                                                     |                                                                 |        |       
|                                     | Accounts payable                                                                                                   |                                                                                                     | $                                                               | 3,675  |       
|                                     | Compensation and related benefits                                                                                  |                                                                                                     |                                                                 | 2,021  |       
|                                     | Income taxes                                                                                                       |                                                                                                     |                                                                 |       |       
|                                     | Deferred rent                                                                                                      |                                                                                                     |                                                                 | 475    |       
|                                     | Deferred gain on the sale of DVD assets                                                                            |                                                                                                     |                                                                 | 750    |       
|                                     | Advances from customers                                                                                            |                                                                                                     |                                                                 | 510    |       
|                                     | Other accruals                                                                                                     |                                                                                                     |                                                                 | 864    |       
|                                     | Obligations under capital leases                                                                                   |                                                                                                     |                                                                 |       |       
|                                     |                                                                                                                    |                                                                                                     |                                                                 |        |       
|                                     |                                                                                                                    |                                                                                                     | Total current liabilities                                       |        |       
|                                     | Commitments and contingencies                                                                                      |                                                                                                     |                                                                 |        |       
|                                     | Stockholders' equity:                                                                                              |                                                                                                     |                                                                 |        |       
|                                     |                                                                                                                    | Noncumulative convertible preferred stock, $.001 par value:                                         |                                                                 |        |       
|                                     |                                                                                                                    |                                                                                                     | Authorized shares2,000,000                                     |        |       
|                                     |                                                                                                                    |                                                                                                     | Issued and outstanding sharesnone at January 31, 2001 and 2000 |        |       
|                                     |                                                                                                                    | Common stock, $.001 par value: Authorized shares60,000,000                                         |                                                                 |        |       
|                                     |                                                                                                                    | Issued and outstanding shares25,891,308 at January 31, 2001
    and 25,535,569 at January 31, 2000 |                                                                 |        | 26    
|                                     |                                                                                                                    | Additional paid-in-capital                                                                          |                                                                 |        | 76,868
|                                     |                                                                                                                    | Notes receivable from stockholders                                                                  |                                                                 |        | (511  
|                                     |                                                                                                                    | Deferred compensation                                                                               |                                                                 |        | (3,585
|                                     |                                                                                                                    | Accumulated other comprehensive income (loss)                                                       |                                                                 |        | (20   
|                                     |                                                                                                                    | Retained earnings                                                                                   |                                                                 |        | 42,692
|                                     |                                                                                                                    |                                                                                                     |                                                                 |        |       
|                                     |                                                                                                                    |                                                                                                     | Total stockholders' equity                                      |        |       
|                                     |                                                                                                                    |                                                                                                     |                                                                 |        |       
|                                     |                                                                                                                    |                                                                                                     | Total liabilities and stockholders' equity                      |        | $     
|                                     |                                                                                                                    |                                                                                                     |                                                                 |        |       

See
accompanying notes.

31

---

NEOMAGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

|Year Ended January 31                                                                    |                                                                | 2001                                    |        | 2000    |         | 1999    |         
|---------------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------- | ------ | ------- | ------- | ------- | --------
|
|Operating activities                                                                     |                                                                |                                         |        |         |         |         |         
|Net income (loss)                                                                        |                                                                | $                                       | (8,415 | )       | $       | 12,705  |         
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                |                                         |        |         |         |         |         
|                                                                                         | Depreciation and amortization                                  |                                         |        | 4,900   |         |         | 5,368   
|                                                                                         | Loss on disposal of property, plant and equipment              |                                         |        | 846     |         |         |        
|                                                                                         | Amortization of deferred compensation                          |                                         |        | 2,583   |         |         | 567     
|                                                                                         | Write-off of in-process research and development               |                                         |        |        |         |         | 5,348   
|                                                                                         | Income, net of expenses, on the sale of DVD assets             |                                         |        | (6,494  | )       |         |        
|                                                                                         | Deferred taxes                                                 |                                         |        | 243     |         |         | 267     
|                                                                                         | Changes in operating assets and liabilities:                   |                                         |        |         |         |         |         
|                                                                                         |                                                                | Accounts receivable                     |        |         | 18,656  |         |         
|                                                                                         |                                                                | Inventory                               |        |         | 13,184  |         |         
|                                                                                         |                                                                | Other current assets                    |        |         | (2,039  | )       |         
|                                                                                         |                                                                | Other assets                            |        |         | 232     |         |         
|                                                                                         |                                                                | Accounts payable                        |        |         | (17,565 | )       |         
|                                                                                         |                                                                | Compensation and related benefits       |        |         | (965    | )       |         
|                                                                                         |                                                                | Income taxes payable                    |        |         | (2,207  | )       |         
|                                                                                         |                                                                | Tax benefit from employee stock options |        |         | 298     |         |         
|                                                                                         |                                                                | Other accruals                          |        |         | (485    | )       |         
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Net cash provided by operating activities                                                |                                                                |                                         | 2,772  |         |         | 19,647  |         
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Investing activities                                                                     |                                                                |                                         |        |         |         |         |         
|                                                                                         | Net proceeds from the sale of DVD assets                       |                                         |        | 10,091  |         |         |        
|                                                                                         | Purchases of property, plant and equipment                     |                                         |        | (2,255  | )       |         | (7,403  
|                                                                                         | Purchases of short-term investments                            |                                         |        | (63,666 | )       |         | (158,385
|                                                                                         | Maturities of short-term investments                           |                                         |        | 92,158  |         |         | 151,053 
|                                                                                         | Purchase of the Optical Drive Development Group                |                                         |        |        |         |         | (3,901  
|                                                                                         | Purchase of ACL                                                |                                         |        |        |         |         | (6,523  
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Net cash provided by (used for) investing activities                                     |                                                                |                                         | 36,328 |         |         | (25,159 | )       
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Financing activities                                                                     |                                                                |                                         |        |         |         |         |         
|                                                                                         | Payments on lease obligations                                  |                                         |        | (154    | )       |         | (548    
|                                                                                         | Payments on working capital line of credit                     |                                         |        |        |         |         |        
|                                                                                         | Net proceeds from issuance of common stock, net of repurchases |                                         |        | 795     |         |         | 2,497   
|                                                                                         | Repayment on notes receivable from stockholders                |                                         |        | 14      |         |         | 29      
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Net cash provided by (used for) financing activities                                     |                                                                |                                         | 655    |         |         | 1,978   |         
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Net increase (decrease) in cash and cash equivalents                                     |                                                                |                                         | 39,755 |         |         | (3,534  | )       
|Cash and cash equivalents at beginning of period                                         |                                                                |                                         | 33,097 |         |         | 36,631  |         
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Cash and cash equivalents at end of period                                               |                                                                | $                                       | 72,852 |         | $       | 33,097  |         
|                                                                                         |                                                                |                                         |        |         |         |         |         
|Supplemental schedules of cash flow information                                          |                                                                |                                         |        |         |         |         |         
|                                                                                         | Cash paid during the year for:                                 |                                         |        |         |         |         |         
|                                                                                         |                                                                | Interest                                |        | $       | 263     |         | $       
|                                                                                         |                                                                | Taxes                                   |        | $       |        |         | $       

See
accompanying notes.

32

---

NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                                                |  | Common Stock |   |   |    |  |   |        |   |   |      |   |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------------ | - | - | -- |  | - | ------ | - | - | ---- | - | - | ------ | -
|
|
|
|Balance at January 31, 1998                                                                     |  | 24,204,602   |   | $ | 24 |  | $ | 61,263 |   | $ | (559 | ) | $ | (2,801 | )
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|Issuance of common stock under stock option plan                                                |  | 598,030      |   |   | 1  |  |   | 2,330  |   |   |     |   |   |       |  
|Issuance of common stock under employee stock purchase plan                                     |  | 117,679      |   |   |   |  |   | 1,285  |   |   |     |   |   |       |  
|Repurchase of common stock at cost                                                              |  | (30,020      | ) |   |   |  |   | (23    | ) |   |     |   |   |       |  
|Payment on promissory notes                                                                     |  |             |   |   |   |  |   |       |   |   | 5    |   |   |       |  
|Reduction of unamortized deferred compensation on unvested options due to employee terminations |  |             |   |   |   |  |   | (230   | ) |   |     |   |   | 230    |  
|Amortization of deferred compensation relating to stock options                                 |  |             |   |   |   |  |   |       |   |   |     |   |   | 807    |  
|Tax benefit attributable to stock options                                                       |  |             |   |   |   |  |   | 2,661  |   |   |     |   |   |       |  
|Net income and Comprehensive income                                                             |  |             |   |   |   |  |   |       |   |   |     |   |   |       |  
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|Balance at January 31, 1999                                                                     |  | 24,890,291   |   | $ | 25 |  | $ | 67,286 |   | $ | (554 | ) | $ | (1,764 | )
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|Exercise of warrants                                                                            |  | 86,788       |   |   |   |  |   |       |   |   |     |   |   |       |  
|Issuance of warrant                                                                             |  |             |   |   |   |  |   | 313    |   |   |     |   |   |       |  
|Issuance of common stock under stock option plan                                                |  | 404,418      |   |   |   |  |   | 900    |   |   |     |   |   |       |  
|Issuance of common stock under employee stock purchase plan                                     |  | 189,279      |   |   |   |  |   | 1,296  |   |   |     |   |   |       |  
|Repurchase of common stock at cost                                                              |  | (35,207      | ) |   |   |  |   | (12    | ) |   |     |   |   |       |  
|Payment on promissory notes                                                                     |  |             |   |   |   |  |   |       |   |   | 29   |   |   |       |  
|Reduction of unamortized deferred compensation on unvested options due to employee terminations |  |             |   |   |   |  |   | (123   | ) |   |     |   |   | 123    |  
|Amortization of deferred compensation relating to stock options                                 |  |             |   |   |   |  |   |       |   |   |     |   |   | 567    |  
|Tax benefit attributable to stock options                                                       |  |             |   |   |   |  |   | 1,022  |   |   |     |   |   |       |  
|Net income and Comprehensive income                                                             |  |             |   |   |   |  |   |       |   |   |     |   |   |       |  
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|Balance at January 31, 2000                                                                     |  | 25,535,569   |   | $ | 25 |  | $ | 70,682 |   | $ | (525 | ) | $ | (1,074 | )
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|Issuance of common stock under stock option plan                                                |  | 209,572      |   |   | 1  |  |   | 339    |   |   |     |   |   |       |  
|Issuance of common stock under employee stock purchase plan                                     |  | 199,732      |   |   |   |  |   | 509    |   |   |     |   |   |       |  
|Repurchase of common stock at cost                                                              |  | (53,565      | ) |   |   |  |   | (54    | ) |   |     |   |   |       |  
|Payment on promissory notes                                                                     |  |             |   |   |   |  |   |       |   |   | 14   |   |   |       |  
|Reduction of unamortized deferred compensation on unvested options due to employee terminations |  |             |   |   |   |  |   | (1,687 | ) |   |     |   |   | 1,687  |  
|Addition to deferred compensation relating to stock plans                                       |  |             |   |   |   |  |   | 6,781  |   |   |     |   |   | (6,781 | )
|Amortization of deferred compensation relating to stock options                                 |  |             |   |   |   |  |   |       |   |   |     |   |   | 2,583  |  
|Tax benefit attributable to stock options                                                       |  |             |   |   |   |  |   | 298    |   |   |     |   |   |       |  
|Net loss                                                                                        |  |             |   |   |   |  |   |       |   |   |     |   |   |       |  
|Change in unrealized gain (loss) on investments                                                 |  |             |   |   |   |  |   |       |   |   |     |   |   |       |  
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|Total comprehensive loss                                                                        |  |             |   |   |   |  |   |       |   |   |     |   |   |       |  
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|Balance at January 31, 2001                                                                     |  | 25,891,308   |   | $ | 26 |  | $ | 76,868 |   | $ | (511 | ) | $ | (3,585 | )
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  
|                                                                                                |  |              |   |   |    |  |   |        |   |   |      |   |   |        |  

See accompanying notes.

33

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NEOMAGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

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

Basis of Presentation

The Company's fiscal year generally consists of a fifty-two week period ending on the Sunday closest to the January month end. Fiscal year 1999 ended on January
31, 1999 and was a fifty-three week fiscal year. Fiscal year 2000 ended on January 30, 2000. Fiscal 2001 ended on January 28, 2001. For convenience, the accompanying consolidated financial statements
have been presented as ending on the last day of the January calendar month.

Principals of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, NeoMagic Japan (KK), NeoMagic International, NeoMagic
International (Hong Kong) Ltd., NeoMagic Israel Ltd., NeoMagic U.K. Ltd., and NeoMagic Semiconductor India Private Ltd. All significant intercompany balances and transactions have been eliminated.

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. Actual results could differ from those estimates.

Foreign Currency Transactions

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

Derivative Financial Instruments

In the past, the Company utilized derivative financial instruments to hedge wafer inventory purchases, which were priced in yen. The Company utilized foreign
currency forward contracts to minimize foreign currency fluctuation exposures related to these purchase commitments. The Company does not use derivative financial instruments for speculative or
trading purposes. The Company's accounting policy for these instruments is based on the Company's designation of such instruments as a hedge transaction. The criteria the Company uses for designating
an instrument as a hedge include its effectiveness in risk reduction and matching of derivative instruments to underlying transactions. Gains and losses on currency forward contracts that are
designated as hedges, for which a firm commitment

34

---

has been attained, are deferred and recognized in income in the same period that the underlying transactions are settled. Gains and losses on any instrument not meeting the above criteria would be
recognized in income in the current period. If an underlying hedged transaction is terminated earlier than initially anticipated, the offsetting gain or loss on the related derivative instrument would
be recognized in income in the same period.

Cash and Cash Equivalents

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

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

All
cash equivalents and short-term investments are classified as available-for-sale and are recorded at fair market value. For all classifications of securities, cost approximates fair
market value as of January 31, 2001 and 2000, and consists of the following (in thousands):

January 31,

2001

2000Cash and cash equivalents:Money market funds

$
5,217

$
6,465Commercial paper


63,057


22,041U.S. Government Agencies


2,993


Municipal bonds





1,062Certificates of deposit


1,004


3,002Bank accounts


581


527Total

$
72,852

$
33,097Short-term investments:Market auction preferrednon-taxable

$


$
26,174Medium term notes


4,066


1,002Commercial paper


17,682


12,505Corporate notes


2,038


1,010Certificates of deposit





1,037U.S. Government agencies


9,097


21,701Municipal bonds


2,034


Total

$
34,917

$
63,429


35

---

Gross
realized and unrealized gains and losses on available-for-sale securities in fiscal 2001, 2000 and 1999 were immaterial.

Inventory

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

Property, Plant and Equipment

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

Goodwill and Other Acquired Intangibles

The Company has goodwill and other acquired intangibles from the acquisition of ACL and from other licensed technologies of $3.0 million and $5.8 million at
January 31, 2001 and January 31, 2000, respectively. These assets are recorded in other assets, net of amortization. Intangible assets, including goodwill, are being amortized on a straight-line basis
over their estimated useful lives between two and four years. Total accumulated amortization recorded was $2.5 million and $1.4 million at January 31, 2001 and January 31, 2000, respectively. Reviews
are regularly performed by the Company to determine whether the carrying value of these assets is impaired. The carrying amount is compared to the estimated undiscounted cash flows of these assets.
Should the review indicate that these intangibles are not recoverable, their carrying amount would be reduced by the estimated shortfall of those cash flows.

Revenue Recognition

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

Concentration of Credit Risk

The Company's historical sales have been to PC notebook OEMs as well as to third-party system manufacturers who design and manufacture PC notebooks on behalf of
the brand name OEMs. The Company expects to sell its future products to Handheld Internet Appliance OEMs as well as to third-party system manufacturers who design and manufacture Handheld Internet
Appliances on behalf of the brand name OEMs. The Company performs continuing credit evaluations of its customers and, generally, does not require collateral. Letters of credit may be required from its
customers in certain circumstances.

Earnings per Share

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

36

---

Comprehensive Income (Loss)

The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130") during the quarter ended April 30, 1998.
SFAS 130 requires unrealized gains or losses on the Company's available for-sale securities and foreign currency translation adjustments to be included in comprehensive income (loss) and reported
separately in stockholders' equity.

Segment Information

The Company has one operating segment by which the chief operating decision maker evaluates performance and allocates resources. All of the Company's net sales to
date have been derived from the sale of multimedia accelerators. The Company expects to continue to have one operating segment through at least fiscal 2002.

Recent Accounting Pronouncements

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

2. SUMMARIZED BALANCE SHEET DETAILS

January 31,

2001

2000(in thousands)Inventory:Raw materials

$


$
3,035Work in process





3,085Finished goods





7,064Total

$


$
13,184Property, plant and equipment:Computer equipment and software

$
10,574

$
18,224Furniture and fixtures


2,102


2,217Machinery and equipment


998


1,836Total


13,674


22,277Less accumulated depreciation and amortization


(7,904
)

(11,907
)Property, plant and equipment, net

$
5,770

$
10,370


37

---

3. ACQUISITIONS/DIVESTITURES

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

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

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

In
fiscal year 2000 the Company decided not to pursue the further development of technologies acquired from Mitel for the DVD market. In April 2000, pursuant to an asset purchase
agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets primarily consisted of fixed assets and intangible assets. In exchange for the assets sold
to the Buyer, the Company received $11.7 million in a lump-sum cash payment. An additional $2.3 million was contingent on the Company's performance of certain obligations related to the transfer of
licenses with third parties to the Buyer. The Company wrote-off approximately $3.6 million in capitalized intellectual property, fixed assets and prepaid expenses related to the DVD product group
which was transferred to the Buyer. In addition, the Company accrued approximately $0.6 million in transaction costs and approximately $2.3 million in retention packages for the affected employees
during the first quarter. During the second quarter the Company incurred additional costs of $0.3 million. During the third quarter the Company received a $1.5 million cash payment which was
previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. As a result, the Company has recorded a total pre-tax
gain of approximately $6.5 million on the sale, which is recorded in Income, net of expenses, from the sale of DVD assets on the Consolidated Condensed Statements of Operations for the fiscal year
ended January 31, 2001.

38

---



4. EARNINGS (LOSS) PER SHARE

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

Per
share information calculated on this basis is as follows:

Year Ended January 31,

2001

2000

1999(in thousands except per share data)Numerator:Net income (loss)

$
(8,415
)
$
12,705

$
31,202Denominator:Denominator for basic earnings (loss) per Shareweighted-average shares


25,737


24,898


23,710Effect of dilutive securities:Employee stock options





936


2,354Warrants








89Convertible preferred stock








Dilutive potential common shares





936


2,443Denominator for diluted earnings (loss) per Shareadjusted weighted-average Shares and assumed conversions


25,737


25,834


26,153Basic earnings (loss) per share

$
(.33
)
$
.51

$
1.32Diluted earnings (loss) per share

$
(.33
)
$
.49

$
1.19


The
basic and diluted net income (loss) per share presented in the statements of operations have been computed as described above. For the fiscal year ended January 31, 2001, basic
earnings per share equals diluted earnings per share due to the net loss for the year.

5. DERIVATIVE FINANCIAL INSTRUMENTS

All of the Company's sales and the majority of its purchases have been denominated in U.S. dollars. However, in the past the Company's wafer purchases have been
denominated in Japanese yen. The Company entered into foreign exchange forward contracts to hedge this foreign currency exposure. There were no outstanding foreign currency forward contracts at
January 31, 2001. The notional amount of outstanding foreign currency forward contracts at January 31, 2000 totaled $18.0 million. The Company does not enter into speculative foreign exchange
contracts to profit on exchange rate fluctuations.

6. OBLIGATIONS UNDER CAPITAL LEASES

The Company had entered into various capital leases, including transactions to finance purchases of property, plant and equipment, software and masks. Obligations
under capital leases represent the present value of future payments under the equipment lease agreements. As of January 31, 2001 the

39

---

Company had no equipment under capital leases. As of January 31, 2000 the Company had equipment under capital leases of $46,000 with associative accumulated depreciation of $28,000. Under the terms
of the lease agreements, warrants to purchase the Company's common stock were granted as described in Note 8.

7. INCOME TAXES

Income before taxes and the provision (benefit) for income taxes in fiscal 2001, 2000 and 1999 consists of the following:

Year Ended January 31,

2001

2000

1999(in thousands)Income (loss) before taxesU.S.

$
(30,250
)
$
11,079

$
33,849Foreign


16,354


8,432


13,748Total income (loss) before taxes

$
(13,896
)
$
19,511

$
47,597Provision (benefit) for taxesCurrent:Federal

$
(5,757
)
$
6,006

$
10,168State


76





331$
(5,681
)
$
6,006

$
10,499Deferred:Federal

$
200

$
310

$
5,640State





490


256200


800


5,896Total provision (benefit) for income taxes

$
(5,481
)
$
6,806

$
16,395


The
tax benefit associated with dispositions from employee stock plans reduced taxes currently payable for fiscal 2001 and 2000 by $0.3 million and $1.0 million, respectively.

40

---

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

Year Ended January 31,

2001

2000

1999(in thousands except percentages)Pretax income (loss)

$
(13,896
)
$
19,511

$
47,597Federal statutory rate


35
%

35
%

35
%Expected tax (benefit)


(4,864
)

6,829


16,659State taxes (net of federal benefit)


130


130


381Utilization of research and development tax credits


(1,000
)

(1,521
)

(1,239
)Change in valuation allowance


(700
)

1,761


Non-deductible amortization of deferred compensation


792


198


282Other


161


(591
)

312Provision for income taxes

$
(5,481
)
$
6,806

$
16,395


The
valuation allowance of $1.1 million for the year ended January 31, 2001, is attributable to deferred tax assets from the acquisition costs of ACL which will not be deductible for
several years. These acquisition costs include book versus tax temporary differences related to the acquired intangible assets of ACL. Sufficient uncertainty exists regarding the realizability of
certain of these assets, and accordingly, a valuation allowance has been provided. The valuation allowance decreased by $0.7 million in fiscal 2001 due to the disposal of the principal assets
of the DVD product group for which deferred tax assets had originally been provided with a corresponding valuation allowance.

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

Year Ended January 31,

2001

2000(in thousands)Deferred tax assets:Acquisition costs


1,443


2,255Reserves and accruals


888


1,244Other


406


138Total deferred tax assets


2,737


3,637Valuation allowance


(1,061
)

(1,761
)Net deferred tax assets

$
1,676

$
1,876


A
portion of the net deferred tax assets have been included in other current assets.

8. STOCKHOLDERS' EQUITY

Warrants

The Company granted warrants in connection with the acquisition of Associative Computing Ltd. in February 1999. The warrants are for the purchase of 100,000
shares of NeoMagic common stock at

41

---

an exercise price of $20 per share and are fully transferable. The warrants are exercisable, in whole or in part, for five years after February 1999, and the shares which will be issued upon the
exercise of the
warrants shall be freely tradable as of the date of exercise, except that commencing February 1999 warrants to purchase 50,000 shares are subject to a six month lock-up period, and 50,000 shares are
subject to a one year lock-up period. As of January 31, 2001, none of these warrants were exercised.

Stock Plan

In accordance with the 1993 Stock Plan (the "Plan") the Board of Directors may grant incentive stock options, nonstatutory stock options and stock purchase rights
to employees, consultants and directors. The Company reserved 7,775,000 shares of common stock for issuance under the Plan. In June 1998, an additional 875,000 shares were approved by the Shareholders
of the Company at the Annual Shareholders meeting, and in June 1999 an additional 875,000 shares were approved by the Shareholders of the Company at the Annual Shareholder meeting, bringing the total
reserved under the Plan to 9,525,000 shares. Unless terminated sooner, the Plan will terminate automatically in December 2003. The Board of Directors determines vesting provisions for stock purchase
rights and options granted under the Plan. Stock options expire no later than ten years from the date of grant. In the event of voluntary or involuntary termination of employment with the Company for
any reason, with or without cause, all unvested options are forfeited and all vested options must be exercised within a thirty-day period or they are forfeited. Certain of the options and stock
purchase rights are exercisable immediately upon grant. However, common shares issued on exercise of options prior to vesting are subject to repurchase by the Company. As of January 31, 2001, 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 out in the option
agreement.

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

42

---

A
summary of the Company's stock option activity, and related information for the three years ended January 31, 2001 follows:

Number of
Shares
Outstanding
(Options)

Weighted Average
Exercise PriceBalance at January 31, 1998

3,663,025

$
7.80Granted

3,751,700


13.43Exercised

(598,030
)

3.94Canceled

(2,485,350
)

14.61Balance at January 31, 1999

4,331,345

$
9.30Granted

3,895,475


8.28Exercised

(404,418
)

2.24Canceled

(1,378,002
)

9.34Balance at January 31, 2000

6,444,400

$
9.10Granted

5,546,700


2.61Exercised

(209,572
)

1.62Canceled

(4,669,782
)

8.92Balance at January 31, 2001

7,111,746

$
4.37


At
January 31, 2001, options to purchase 928,400 shares of common stock were vested at prices ranging from $0.28 to $22.44 and 3,258,501 shares of common stock were available for future
grants under the Plan.

The
following table summarizes information about stock options outstanding at January 31, 2001:

|                |  | Options outstanding and exercisable
|--------------- |  | -----------------------------------
|
|$0.28 - $1.00   |  | 1,818,267                          
|$1.39 - $7.44   |  | 3,088,037                          
|$7.50 - $7.53   |  | 1,203,917                          
|$7.75 - $11.13  |  | 658,525                            
|$11.50 - $22.44 |  | 343,000                            
|                |  |                                    
|                |  | 7,111,746                          
|                |  |                                    

Employee Stock Purchase Plan

A total of 800,000 shares of common stock has been reserved for issuance under the 1997 Purchase Plan including 300,000 shares which were approved at the Annual
Meeting of Stockholders in September 2000. 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,

43

---

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 2001, 2000 and 1999, 199,732, 189,279 and 117,679 shares, respectively of common stock at an average price of $2.55, $6.85 and $10.92 per share, respectively, were issued under
the 1997 Purchase Plan. Shares available for purchase under the Purchase Plan were 257,323 at January 31, 2001.

Stock-Based Compensation

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

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

In
fiscal 2001, 2000 and 1999, 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 Stock
Purchase PlanEmployee Option PlansYear Ended January 31,2001

2000

1999

2001

2000

1999Risk-free interest rates

6.0
%
5.9
%
4.8
%
5.8
%
5.7
%
5.4
%Volatility

.71

.70

.65

.92

.87

.70Expected life of option in years

5.0

5.0

5.0

.69

.94

1.01


Had
compensation costs been determined based upon the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS 123, the Company's
fiscal 2001 net loss and loss per share would have increased by approximately $6.3 million, or $0.24 per share. The Company's fiscal 2000 net income and earnings per share would have decreased by
approximately $7.5 million, or $0.30 per share and $0.29 per share for basic and diluted earnings per share, respectively. The Company's fiscal 1999 net income and earnings per share would have
decreased

44

---

by approximately $8.9 million, or $0.38 per share and $0.34 per share for basic and diluted earnings per share, respectively. For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option's vesting period and stock purchased under the 1997 Purchase Plan is amortized over the six month purchase period. The effects on pro forma disclosure of applying
SFAS 123 are not likely to be representative of the effects on pro forma disclosure of future years.

The
weighted average fair value of options granted during fiscal 2001 with exercise prices less than the market price at the date of grant is $3.30 per share. There were no options
granted during fiscal 2000 or fiscal 1999 with an exercise price less than the market price at the date of grant. The weighted average fair value of options granted during fiscal 2001, 2000, 1999 with
exercise prices equal to the market price at the date of grant is $3.71, $8.28, and $13.40 per share, respectively.

Deferred Stock Compensation

In connection with the grant of certain stock options to employees in fiscal 2001, the Company recorded deferred stock compensation of $6,386,000 for the
difference between the fair value of common stock at the date of grant and the option exercise price. The fiscal 2001 amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the related options. In fiscal 2001 the Company also recorded deferred stock compensation of $395,000 in connection with its employee stock purchase plan. In fiscal
2001, 2000 and 1999, $1,687,000, $123,000 and $230,000, respectively were recorded as reductions to deferred stock compensation to reflect the unamortized portion of deferred stock compensation
related to the cancellation of options upon employee terminations.

9. SAVINGS PLAN

The Company maintains a savings plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees may contribute up to 20% of their pre-tax
salaries per year, but not more than the statutory limits. In April 1998, the Company initiated a matching program whereby the Company contributes $0.20 for every dollar the employee contributes to
the plan up to the first 6% of earnings. In April 1999, the Company contribution was increased to $0.30 for every dollar the employee contributes to the plan up to the first 6% of earnings. The
Company made matching contributions to employees of $141,000, $254,000 and $128,000 in fiscal 2001, 2000 and 1999, respectively.

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 expires in
April 2003. In January 1998, the Company entered into a second non-cancelable operating lease for the building adjacent to its principal headquarters. This lease has a co-terminous provision with the
original lease expiring in April 2003. The Company leases offices in India, Israel and New Jersey under operating leases that expire at

45

---

various times through April 2003. Future minimum lease payments under operating leases as of January 31, 2001 are as follows:

Fiscal year ending January 31:(in thousands)2002

$
2,1442003


2,6242004


8512005


02006


0Total minimum lease payments

$
5,619


Rent
expense under operating leases was $2,298,000, $2,421,000, and $2,004,000 in fiscal 2001, 2000, and 1999, respectively.

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

In
November 1999, the Company signed an additional sublease agreement. The sublease was terminated in October 2000. Rent income related to this sublease agreement was $163,000 and
$36,000 in fiscal 2001 and fiscal 2000, respectively.

In
November 2000, the Company signed an additional sublease agreement. Rent income related to this sublease agreement was $725,000 in fiscal 2001. As of January 31, 2001, future minimum
rents to be received under sublease total $911,000 and $153,000 in fiscal 2002 and fiscal 2003, respectively.

At
January 31, 2001, the Company had no outstanding purchase orders with its manufacturing partners for the delivery of wafers. In January 2001 the Company signed an extension of its
wafer supply agreement with Infineon Technologies. In connection with that agreement, the Company has agreed to purchase fifty thousand wafers before February 27, 2004. To secure this agreement, the
Company opened an irrevocable standby letter of credit (LOC) in the amount of $15 million in February 2001. The Company has secured the LOC with a $15 million deposit at the issuing bank. Beginning in
fiscal 2002, these funds will be shown on the Company's consolidated balance sheets as restricted cash until the letter of credit expires in fiscal 2004. Infineon is entitled to withdraw any remaining
balance prior to February 27, 2004 with thirty day written notice that the LOC will not be renewed beyond its expiration date. Infineon shall be entitled to draw on the outstanding sum of the LOC on
February 27, 2004. If there is no remaining sum because the amount has been reduced to zero by both parties mutual consent, then Infineon shall not be entitled to claim any payment under the LOC.

Contingencies

As a general matter, the semiconductor industry is characterized by substantial litigation, regarding patent and other intellectual property rights. In December
1998, the Company filed a lawsuit in the United States District Court for the District of Delaware against Trident Microsystems, Inc. The suit alleges that Trident's embedded DRAM graphics
accelerators infringe certain patents held by the

46

---

Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising from NeoMagic's filing of the patent
infringement action against Trident in December. The Court has ruled that there is no infringement by Trident. Management disagrees with this ruling and is evaluating our legal options. Management
also believes the Company has valid defenses against Trident's claims. There can be no assurance as to the results of the patent infringement suit and the counter-suit for antitrust filed by Trident.

11. SIGNIFICANT CUSTOMERS AND EXPORT SALES

In fiscal 2001 four customers accounted for 25.5%, 21.4%, 15.1% and 13.6%. In fiscal 2000 five customers accounted for 20.2%, 19.6%, 12.9%, 12.3% and 12.1%,
respectively, of net sales. In fiscal 1999 three customers accounted for 19.8%, 17.1% and 10.5%, respectively, of net sales. Fiscal 2001 net sales to customers in Taiwan, Japan, and North America
totaled 41.5%, 34.5% and 24.0%, respectively, of net sales. Net sales to customers in Taiwan, Japan, North America and Europe totaled 52.2%, 26.9%, 19.8% and 1.1%, respectively, of net sales in fiscal
2000 and 50.9%, 29.0%, 16.9% and 3.2%, respectively, of net sales in fiscal 1999.

12. SUBSEQUENT EVENTS

In March 2001, the Company reduced its workforce in the U.S. by 18 and in Israel by 25 to be more in-line with its plans for fiscal year 2002. The expected
severance charge to be taken in the first quarter of fiscal 2002 is estimated to be approximately $600,000.

47

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized, on March 4, 2002.

| |  | NEOMAGIC CORPORATION
| |  | --------------------
| |  | By:                 

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/PRAKASH AGARWALPrakash Agarwal       |  | President, Chief Executive Officer
and Director (Principal
Executive Officer)                 |  | March 4, 2002
|/s/STEPHEN T. LANZAStephen T. Lanza     |  | Vice President, Operations and Finance,
Chief Financial Officer
(Principal Financial Officer) |  | March 4, 2002
|/s/BRIAN P. DOUGHERTYBrian P. Dougherty |  | Director                                                                                      |  | March 4, 2002
|/s/JIM LALLYJim Lally                   |  | Director                                                                                      |  | March 4, 2002
|/s/KLAUS WIEMERKlaus Wiemer             |  | Director                                                                                      |  | March 4, 2002
|/s/ANIL GUPTAAnil Gupta                 |  | Director                                                                                      |  | March 4, 2002

48

---

NEOMAGIC CORPORATION

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JANUARY 31, 2001, 2000, AND 1999

(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, 1999      |  | $                            | 132 |                                        | $ | 93         |  |                       
|Year ended January 31, 2000      |  | $                            | 225 |                                        |   |           |  | $                     
|Year ended January 31, 2001      |  | $                            | 206 |                                        |   |           |  | $                     

49

---

INDEX TO EXHIBITS

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

|Exhibit
Number |  |     |  | Description                                                                                                                                                                                                                         
|-------------- |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | (1) |  | Certificate of Incorporation of Registrant.                                                                                                                                                                                         
|3.2            |  | (1) |  | Form of Amended and Restated Certificate of Incorporation of Registrant to be filed upon the closing of the Offering made under the Registration Statement.                                                                         
|3.3            |  | (1) |  | Bylaws of Registrant.                                                                                                                                                                                                               
|10.1           |  | (1) |  | Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers.                                                                                                                     
|10.1           |  | (2) |  | Lease Agreement, dated as of October 9, 1997, between Registrant and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.                                                                        
|10.2           |  | (1) |  | Amended and Restated 1993 Stock Plan and related agreements.                                                                                                                                                                        
|10.2           |  | (2) |  | Amendment 1, dated as of October 15, 1997, between Registrant and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.                                                                           
|10.3           |  | (2) |  | Amendment to Agreement dated as of November 20, 1995, between Registrant and Mitsubishi International Corporation, as amended.                                                                                                      
|10.4           |  | (1) |  | Wafer Supply Agreement, dated as of January 21, 1997, between NeoMagic International Corporation, actually-owned subsidiary of Registrant, and Mitsubishi Electric Corporation.                                                     
|10.5           |  | (1) |  | Form of promissory note.                                                                                                                                                                                                            
|10.6           |  | (1) |  | Lease Agreement, dated as of February 5, 1996, between Registrant and A&P Family Investments, as landlord.                                                                                                                          
|10.8           |  | (1) |  | Master Lease Agreement, as amended, dated as of November 24, 1993, between Registrant and Comdisco, Inc., and certain exhibits thereto.                                                                                             
|10.9           |  | (1) |  | Master Lease Agreement, dated as of July 19, 1995, between Registrant and Venture Lending & Leasing, Inc., and certain exhibits thereto.                                                                                            
|10.10          |  | (1) |  | Agreement, dated as of November 20, 1995, between Registrant and Mitsubishi International Corporation as amended.                                                                                                                   
|10.11          |  | (1) |  | General Security Agreement, dated November 15, 1995, between Registrant and Mitsubishi International Corporation.                                                                                                                   
|10.13          |  | (1) |  | 1997 Employee Stock Purchase Plan, with exhibit.                                                                                                                                                                                    
|10.14          |  | (3) |  | Amendment to Agreement dated as of November 20, 1995, between Registrant and Mitsubishi International Corporation, as amended.                                                                                                      
|10.15          |  | (4) |  | 1998 Nonstatutory Stock Option Plan.                                                                                                                                                                                                
|10.16          |  | (4) |  | Wafer Supply Agreement, dated as of March 15, 1999, between NeoMagic International Corporation, actually-owned subsidiary of Registrant, and Siemens Aktiengesellschaft Semiconductor Group, now operating as Infineon
Technologies.
|10.17          |  | (5) |  | General Amendment to the Wafer Supply Agreement with Product Sourcing Agreement, dated January 9, 2001, between NeoMagic International Corporation, actually-owned subsidiary of Registrant, and Infineon
Technologies AG.          
|21.0           |  | (5) |  | NeoMagic Subsidiaries.                                                                                                                                                                                                              
|23.0           |  |     |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                 

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50

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The Company did not file any reports on Form 8-K during the fiscal year ended January 31, 2001.

51

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