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

Form 10-K

(Mark One)

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

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

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

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

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

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

        The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $102,127,050 as of March 24, 2002, 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 24, 2002 was 28,056,882.

DOCUMENTS INCORPORATED BY REFERENCE

(1)

Portions of the Registrant's Proxy Statement related to the 2001 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission subsequent to the date hereof—Part III.

NeoMagic Corporation

FORM 10-K

FOR THE FISCAL YEAR ENDED JANUARY 31, 2002

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

        When used in this discussion, the words "expects," "anticipates," "believes" and similar expressions are intended to identify forward-looking statements. Such statements reflect management's current intentions and expectations. However, actual events and results could vary significantly based on a variety of factors including, 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 represents a new endeavor and consequently carry greater risk 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.

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. The Company has only recently begun to generate minimal revenues from this new product effort.

        The Company believes that the dramatic growth of the Internet and consumer electronics 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 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 manufacture the wafers, perform testing and package the products. NeoMagic is focused on leveraging its core competencies in integrating logic, analog and memory, along with graphics, video, 3D and other multimedia technologies, drivers, middleware and operating system software, and power management in its continued development of solutions that facilitate the mobilization of multimedia applications.

        During the fourth quarter of fiscal 2002, NeoMagic acquired certain assets, customer contracts, and intellectual properties of LinkUp Systems Corporation ("LinkUp Systems"), a small privately held company that developed a family of System-on-Chip semiconductor products for similar market

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opportunities to those that the Company has been pursuing. All product and market related activities of the two companies have now been merged. References to the Company's products, and sales and marketing activities going forward from this time refer to the merged product, sales and marketing activities of NeoMagic and LinkUp Systems.

Financial Information about Segments

        The Company operates in one industry segment. Please refer to Part II, Item 6 entitled "Selective Consolidated Financial Data" and Item 8 entitled "Financial Statements and Supplementary Data" of this report.

Products

        The majority of the Company's historical net sales came 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 have been exhausted and there will be no significant revenue related to these products in the future.

        The Company's new product 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 microprocessor, graphics, audio, and video capabilities. Some portion of these products may also incorporate embedded DRAM, a technology in which NeoMagic has historically demonstrated expertise. 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. The Company generated limited revenues late in fiscal year 2002, and at the outset of fiscal year 2003 was beginning to ramp volume production of its new products for this market opportunity.

        The Company expects the majority of revenues for fiscal year 2003 to come from five products. Three of these products fall within the category of System-on-Chip, or SOCs, for Handheld Internet Appliances:

        Two of these products fall within the category of companion chips, which add IO (input/output) functions to processors made by other companies:

        The Company expects to introduce additional new SOC products within the MiMagic family during fiscal year 2003. These products are not expected to generate significant revenues during fiscal year 2003.

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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, 2002, the Company had approximately 98 employees engaged in research and development. Research and development expenses in fiscal 2002, 2001, and 2000 were $25.2 million, $27.5 million and $38.0 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 2003 due to development efforts on the Company's new product focus in the area of Handheld Internet Appliances.

Sales and Marketing

        NeoMagic's sales and marketing strategy is an integral part of the Company's effort to become a 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 trendsetters 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, although Manufacturer's sales representatives are used in some regions where significant customer opportunities may be perceived. The Company is continuing to evaluate and update its U. S. sales channels. In Japan, as well as Korea, the Company has relied, and intends to continue to rely, upon local sales representative firms. In Taiwan, the Company now maintains a small sales presence with one direct employee to bolster the activities of multiple sales representatives. In Europe, the Company maintains one sales executive as a direct consultant, to bolster the activities of multiple sales representatives in various national locations. The Company's sales and marketing organization was restructured with the rest of the Company in April 2000, and again as a result of the acquisition of the assets of LinkUp Systems.

        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. NeoMagic has strategic relationships with Infineon Technologies AG of Germany ("Infineon"), and three other foundries to produce its semiconductor wafers. These relationships enable the Company to concentrate its resources on product design, development, engineering, marketing, sales and distribution where NeoMagic believes it has greater competitive advantages, and to eliminate the high cost of owning and operating a semiconductor wafer fabrication

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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.

        The Company uses other third-party subcontractors to perform assembly, packaging and testing of the Company's products. The Company develops its own software and hardware for product testing. The Company also works with these third-party subcontractors for advanced packaging capabilities. 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, test and provide advanced packaging for 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.

Competition

        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 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 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.

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

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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 may continue to utilize embedded DRAM technologies to produce System-On-Chip technology for a portion of future product efforts. NeoMagic has significant intellectual properties and historically demonstrated expertise in this technology. However, the Company is now also exploring alternative technologies such as Multi-Chip module ("MCM") solutions and other packaging related approaches to combining multiple chips. 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.

Intellectual Property

        The Company relies in part on patents to protect its intellectual property. As of January 31, 2002, the Company has been issued 55 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 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 disagreed with this ruling and filed an appeal in the United States Court of Appeals for the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court's judgment of non-infringement on one patent and vacated the courts judgment of non-infringement of another patent, thereby remanding it to the lower court for further proceedings. 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.

Customers

        Two customers accounted for 37.6% and 15.7%, respectively, of net sales in fiscal 2002. Four customers accounted for 25.5%, 21.4%, 15.1%, and 13.6%, respectively, of net sales in fiscal 2001. Five

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customers accounted for 20.2%, 19.6%, 12.9%, 12.3% and 12.1% respectively, of net sales in fiscal 2000. 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 have a material adverse effect on the Company's operating results and the timing of the Company's new product introduction.

Financial Information about Geographical Area

        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 92.6%, 85.5% and 80.2% of net sales in fiscal 2002, 2001 and 2000, 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. Fiscal 2002 net sales to customers in Japan, Taiwan, Europe, and North America totaled 52.6%, 30.6%, 9.6%, and 7.6%, 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.

Backlog

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

Employees

        As of January 31, 2002, the Company employed a total of 144 full-time employees, including 98 in research and development, 13 in applications engineering, 7 in sales and marketing, 5 in manufacturing and 21 in finance and administration. The Company also employs, from time to time, a number of temporary and part-time employees as well as consultants on a contract basis. The Company's employees are not represented by a collective bargaining organization, and the Company believes that its relations with its employees are good.

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Management

Executive Officers

        The executive officers of the Company as of January 31, 2002 are as follows:

        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.

        Steve Lanza joined NeoMagic in June 2000 as Vice President of Finance and Chief Financial Officer and currently serves as Vice President of Operations and Finance, and Chief Financial Officer. Mr. Lanza has over two decades of experience in financial management of technology companies. Previously, Mr. Lanza served as Vice President of Finance and Administration, and Chief Financial Officer at PolyStor from 1999 to 2000. 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 from 1996 to 1999. He holds a BS degree in Business Administration from California Polytechnic University, a MBA from Golden Gate University, is a Certified Management Accountant, and has a Certificate in Engineering Management from the California Institute of Technology.

        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 nearly 20 years management experience in the semiconductor industry. Prior to joining NeoMagic, Mr. Singer was employed at Cirrus Logic, where he was a co-founder. 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 from 1998 to 2000, 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.

        Ravi Bhatnagar joined NeoMagic in December 2001 through the acquisition of LinkUp Systems Corporation. Mr. Bhatnagar has over 25 years of experience in general management, product management, and marketing in the semiconductor industry. Before joining NeoMagic, Mr. Bhatnagar

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served as co-founder, president and CEO of LinkUp Systems, where he guided the Company from its start in 1997 through the development and delivery of several ARM CPU-based System-on-Chip products for international companies in the PDA, smart cell phone and mobile communicator markets. Mr. Bhatnagar has also worked for Cirrus Logic as VP of the personal systems division, and Chips and Technologies as VP and general manager of the systems logic division. Mr. Bhatnagar holds a Bachelors degree in Electronics and Communications Engineering from Indian Institute of Technology, Kharagpur, India, and a Masters degree in Electrical Engineering and Computer Science from the University of California at Berkeley.

        Ernest Lin joined NeoMagic in December 2001 as a result of the acquisition of LinkUp Systems Corporation. Mr. Lin has over 20 year of engineering, sales, and general management experience in the semiconductor industry, with extensive experience in establishing and managing large and successful international sales teams and forging strong business relationships with key management at major equipment manufacturers and system design firms. Before joining NeoMagic, Mr. Lin was a co-founder and Executive Vice President of LinkUp Systems. Prior to co-founding LinkUp in 1997, Mr. Lin spent 12 years at Cirrus Logic, most recently as Vice President of Asia Pacific sales. Mr. Lin holds a Bachelor's degree in Electrical Engineering from National Taiwan University, a MBA degree from Santa Clara University, and a Master's degree in Computer Science from the University of Utah.

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. In March 2002 45,000 square feet was extended through April 30, 2010. The Company leases offices in Israel and India under operating leases that expire at various times through December 2006. 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. The Court has ruled that there is no infringement by Trident. Management disagreed with this ruling and filed an appeal in the United States Court of Appeals for the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court's judgment of non-infringement on one patent and vacated the courts judgment of non-infringement of another patent, thereby remanding it to the lower court for further proceedings. 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

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

        The Company had 183 stockholders of record as of March 24, 2002. 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.

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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
(in thousands, except per share and headcount data)

(1)

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

(2)

See Note 2 of Notes to Consolidated Financial Statements.

(3)

Denominator is equal to the weighted common shares outstanding.

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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 represents a new endeavor and consequently carry greater risk 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.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Goodwill and Other Purchased Intangible Assets

        NeoMagic has significant tangible and intangible assets on its balance sheet, including goodwill and other purchased intangibles related to acquisitions. The valuation and classification of these assets and the assignment of useful lives involve significant judgments and the use of estimates. The impairment testing of goodwill and other purchased intangibles under established accounting guidelines for impairment also requires significant use of judgment and assumptions as it pertains to the estimation of future cash flows for these assets. The Company's assets are tested and reviewed for indicators of impairment on an ongoing basis. Changes in business conditions could potentially require future adjustments to asset valuations.

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        If facts and circumstances indicate that the goodwill, other intangible assets or property and equipment may be impaired, an evaluation of continuing value would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with these assets would be compared to their carrying amount to determine if a write down to fair value or discounted cash flow value is required.

Estimation of Inventory Valuations

        The Company's inventory valuation policy stipulates that at the end of each reporting period we write-down or write-off our inventory for estimated obsolescence or unmarketable inventory. The amount of the write-down or write-off is equal to the difference between the cost of the inventory and the estimated market value of the inventory based upon reasonable assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs or write-offs may be required. Additionally, as we introduce product enhancements and new products, and improve our manufacturing processes, demand for our existing products in inventory may decrease. In the first quarter of fiscal 2001, consistent with this policy, we recorded a charge of $7.0 million for excess and obsolete write-downs related to restructuring the business. In the future, we may find that similar assessments may warrant another write-down or write-off of inventory.

Revenue Recognition

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

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

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

Deferred Taxes

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

Overview

        NeoMagic designs, develops and markets high-performance semiconductor solutions for sale to original equipment manufacturers ("OEMs") of Handheld Internet Appliances. Previously, the

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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. The Company has only recently begun to generate revenues from this new product effort. There can be no guarantee that the Company will be successful in the continued development, production and commercialization of this new product direction.

        The majority 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 2003. The Company expects to see an increase in revenues from its new product efforts in the Handheld Internet Appliance market place in fiscal 2003. 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.

        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 of fiscal 2001. During the second quarter of fiscal 2001 the Company incurred additional costs of $0.3 million. During the third quarter of fiscal 2001 the Company received a $1.5 million cash payment which was previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. 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 the first quarter of fiscal 2003 the Company received a $1.6 million cash payment previously contingent on the transfer of licenses with third parties to the buyer. The Company had recorded $0.8 million as a receivable shown in other current assets and deferred revenue, in fiscal 2001. The Company recorded the additional $0.8 million as a receivable shown in other current assets and deferred revenue as of January 31, 2002 on the Consolidated Balance Sheet. The gain will be recorded in the first quarter of 2003, during the period in which the claim was settled and the cash was received.

        In January 2001 the Company extended its wafer supply agreement with Infineon Technologies AG of Germany through fiscal 2004 to ensure future wafer supply for the Company's new product efforts. Under the terms of the agreement, production for NeoMagic will make use of Infineon's 0.20 micron

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and 0.17 micron embedded DRAM (eDRAM) process technologies. The agreement also provides for access to additional capacity and to more advanced process technologies to be developed by Infineon. There is no assurance that Infineon and its partners will be able to continue developing advanced eDRAM process technologies that will be adequate for the Company's needs. Due to uncertainties over Infineon's continued eDRAM product development, the Company is not using Infineon's eDRAM technology in products being introduced in 2002. NeoMagic has provided $15 million in guarantees towards its wafer purchases over the term of the agreement. Infineon and the Company are discussing potential amendments to the terms of the wafer purchase guarantee, but no decisions have been reached. If orders from NeoMagic's customers do not meet the Company's expectations, the Company may incur a charge associated with its wafer purchase guarantee.

        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 Company accrued severance charges of $0.7 million associated with the reduction in workforce during the first quarter of fiscal 2002 and made cash payments of $0.4 million in connection with this restructuring activity. During the second quarter of fiscal 2002 the Company completed the restructuring activity by making additional cash payments of $0.4 million of which $0.3 million was charged against the accrual and $0.1 million was expensed.

        On December 18, 2001 the Company completed its acquisition of certain assets, customer contracts, and intellectual properties of LinkUp Systems Corporation ("LinkUp") of Santa Clara, California, in exchange for 1,600,000 shares of NeoMagic Common Stock. The average closing stock price from the period of December 14 through December 20 was approximately $3.13. This transaction did not have a material effect on the Company's cash or cash equivalents for the fiscal year. NeoMagic has hired most of the 28 employees of LinkUp. The transaction was accounted for under the purchase method. LinkUp was a small privately held firm that had developed a family of System-on-Chip semiconductor products using RISC CPU cores licensed from ARM Ltd. for similar market opportunities to those that the Company has been pursuing. All product and market related activities of the two companies have now been merged. NeoMagic intends to support current LinkUp products and customers and, through this acquisition, to accelerate the development of new SOC solutions with low-power, high performance multimedia communication capabilities.

        During the fourth quarter of fiscal 2002, the Company announced design wins in three of its target market segments, including communication devices such as cellular phones, entertainment devices such as handheld games and media players, and productivity devices such as PDAs and webpads. The Company now has a product line which includes three ARM7 based SOC's, as well as two peripherals to StrongARM or other processors.

        Going forward the Company expects to ship more than a quarter million dollars of its new products in the first quarter of fiscal 2003, and expects to see growth in each successive quarter for the rest of the year. 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 $55 million in cash and equivalents, short-term investments, and restricted cash.

        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.

Results of Operations

Net sales

        The Company's net sales to date have primarily 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 $0.4 million, $75.8 million and $259.7 million in fiscal 2002, 2001 and 2000, respectively. The substantial decrease in sales from fiscal

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2001 to fiscal 2002 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 sales in fiscal year 2002 were primarily comprised of residual orders for the Company's legacy multimedia accelerator products. 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 2003 will increase from fiscal 2002 due to its product introductions in the Handheld Internet Appliance marketplace.

        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 92.6%, 85.5% and 80.2% of net sales in fiscal 2002, 2001 and 2000, 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.

        Two customers accounted for 37.6% and 15.7%, respectively, of net sales in fiscal 2002. 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. 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 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 $0.4 million, $14.5 million and $78.4 million in fiscal 2002, 2001, and 2000, respectively. Cost of Sales includes amortization of deferred compensation of $0, $44,000, and $7,000 for fiscal 2002, 2001, and 2000, respectively. The Company had minimal sales of its fully reserved legacy notebook products in fiscal 2002. 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.

        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, and manufacturing yields (particularly on new products). The Company has exited the Notebook PC Multimedia Accelerator marketplace and has begun to introduce products for the Handheld Internet Appliance marketplace. Revenues from these new products are expected to be limited in fiscal 2003 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 $25.2 million, $27.5 million and $38.0 million in fiscal 2002, 2001 and 2000, respectively. These expenses include amortization of deferred compensation of $2.1 million, $2.0 million, and $0.2 million in fiscal

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2002, 2001, and 2000, 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 2002 primarily relates to lower labor costs due to lower average headcount offset somewhat by higher photomask costs associated with the Company's new product development effort in the Handheld Internet Appliance market. 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 2003 due to development efforts on the Company's new product effort in the area of Handheld Internet Appliances.

Sales, General and Administrative Expenses

        Sales, general and administrative expenses were $8.0 million, $13.1 million and $18.5 million in fiscal 2002, 2001, and 2000, respectively. These expenses include amortization of deferred compensation of $0.7 million, $0.6 million, and $0.4 million in fiscal 2002, 2001, and 2000, respectively. Sales, general and administrative expenses decreased in fiscal 2001 from fiscal 2000 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 are expected to increase in absolute dollars in fiscal 2003 as sales of the Company's new products increase.

Acquired In-Process Research and Development

        The Company incurred approximately $0.7 million of charges for acquired in-process research and development ("IPRD") in connection with its December 2001 acquisition of LinkUp. As of the date of acquisition, IPRD has no alternative future use and did not otherwise qualify for capitalization. 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. LinkUp's development efforts were in the L9200 silicon product that will use the next generation ARM technology. LinkUp's development efforts were estimated to be approximately 35% complete at the date of the acquisition. The estimated cost to complete the development effort of the L9200 product is expected to be approximately $500,000. The project is expected to be completed at the end of fiscal 2003. Revenue from a commercially viable product from this development effort was not anticipated until fiscal 2004.

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 of fiscal 2001. During the second quarter of fiscal 2001 the Company incurred additional costs of $0.3 million. During the third quarter of fiscal 2001 the Company received a $1.5 million cash payment which was previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. As a result, the Company recorded a pre-tax gain of approximately $6.5 million on the sale, which is recorded in Income, net of expenses, from the sale of DVD assets on the Consolidated

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Condensed Statements of Operations. In the first quarter of fiscal 2003 the Company received a $1.6 million cash payment previously contingent on the transfer of licenses with third parties to the buyer. The Company had recorded $0.8 million as a receivable shown in other current assets and deferred revenue, in fiscal 2001. The Company recorded the additional $0.8 million as a receivable shown in other current assets and deferred revenue as of January 31, 2002 on the Consolidated Balance Sheet. The gain will be recorded in the first quarter of 2003, during the period in which the claim was settled and the cash was received.

Interest and Other Income

        The Company earns interest on its cash and short-term investments. Interest and other income was $3.5 million, $6.0 million and $3.8 million in fiscal 2002, 2001, and 2000, respectively. The decrease in fiscal 2002 is primarily due to lower interest income earned on lower average cash balances and from significant interest rate reductions that occurred in fiscal 2002. The increase in fiscal 2001 stemmed from higher interest income earned on higher cash and short-term investment balances.

Interest Expense

        In the past the Company paid interest and bank commissions on wafer purchases and interest on its capital leases. Interest expense was $12 thousand, $0.3 million, and $0.8 million in fiscal 2002, 2001 and 2000, respectively. The decrease in interest expense from fiscal 2001 to fiscal 2002 is due to the significant reduction of capital lease balances. The decrease in interest expense from fiscal 2000 to fiscal 2001 ref