UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended October 31, 2003 OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-22009

NEOMAGIC CORPORATION

(Exact name of Registrant as specified in its charter)

DELAWARE		77-0344424
[State or other jurisdiction of incorporation or organization]		[I.R.S. Employer Identification No.]

3250 Jay Street Santa Clara, California		95054
[Address of principal executive offices]		[Zip Code]

(408) 988-7020

Registrant’s telephone number, including area code

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

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

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at October 31, 2003 was 31,429,036

NEOMAGIC CORPORATION

FORM 10-Q

INDEX

PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Condensed Financial Statements:

	Consolidated Condensed Statements of Operations Three and Nine months ended October 31, 2003 and 2002

	Consolidated Condensed Balance Sheets October 31, 2003 and January 31, 2003

	Consolidated Condensed Statements of Cash Flows Nine months ended October 31, 2003 and 2002

	Notes to Unaudited Consolidated Condensed Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Item 4.	Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures

Part I. Financial Information

Item 1. Financial Statements

NEOMAGIC CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	October 31, 2003			October 31, 2002			October 31, 2003			October 31, 2002
Net sales	$	486		$	655		$	1,332		$	1,511

Cost of product sales (1)	623			780			1,630			2,085
Impairment of certain acquired intangible assets	—			367			—			367
Total	623			1,147			1,630			2,452

Gross loss	(137		)	(492		)	(298		)	(941		)

Operating expenses:
Research and development (2)	5,340			5,662			14,849			18,131
Sales, general and administrative (3)	1,835			2,127			5,379			7,836
Impairment of certain acquired intangible assets	—			506			—			506
Special Charges	—			—			—			3,600
Total operating expenses	7,175			8,295			20,228			30,073

Loss from operations	(7,312		)	(8,787		)	(20,526		)	(31,014		)

Other income (expense), net:
Income from the sale of DVD assets	—			—			—			1,580
Interest income	148			300			570			1,325
Other income (expense)	215			(23		)	172			232
Interest expense	(66		)	—			(226		)	—

Loss before income tax benefit and cumulative effect of change in accounting principle	(7,015		)	(8,510		)	(20,010		)	(27,877		)
Income tax expense (benefit)	33			—			39			(6,339		)
Loss before cumulative effect of change in accounting principle	(7,048		)	(8,510		)	(20,049		)	(21,538		)
Cumulative effect of change in accounting principle	—			(4,175		)	—			(4,175		)

Net loss	$	(7,048	)	$	(12,685	)	$	(20,049	)	$	(25,713	)

Basic and diluted net loss per share	$	(0.23	)	$	(0.44	)	$	(0.66	)	$	(0.90	)

Weighted average common shares outstanding for basic and diluted	30,759			29,157			30,498			28,453

(1) Includes $11 and $0 in amortization of deferred stock compensation for the three months ended October 31, 2003 and 2002, respectively, and $26 and $0 for the nine months ended October 31, 2003 and 2002, respectively

(2) Includes $128 and $101 in amortization of deferred stock compensation for the three months ended October 31, 2003 and 2002, respectively, and $285 and $863 for the nine months ended October 31, 2003 and 2002, respectively.

(3) Includes $104 and $143 in amortization of deferred stock compensation for the three months ended October 31, 2003 and 2002, respectively, and $191 and $906 for the nine months ended October 31, 2003 and 2002, respectively.

See accompanying notes to consolidated condensed financial statements.

NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)

	October 31, 2003			January 31, 2003 (1)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	9,641		$	37,428
Short-term investments	38,910			29,657
Accounts receivable, net	197			118
Inventory	284			535
Employee note receivable	—			1,200
Other current assets	932			1,210
Total current assets	49,964			70,148

Property, plant and equipment, net	4,170			5,840
Employee notes receivable	32			100
Intangibles, net	3,591			4,349
Other assets	382			511

Total assets	$	58,139		$	80,948

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,908		$	2,864
Compensation and related benefits	1,433			1,393
Income taxes payable	3,675			3,633
Current portion of capital lease obligations	1,475			1,363
Other accruals	319			1,287
Total current liabilities	8,810			10,540

Capital lease obligations	1,603			2,521

Commitments and contingencies

Stockholders’ equity:
Common stock	31			30
Additional paid-in-capital	89,373			89,237
Deferred compensation	(220		)	(4		)
Accumulated other comprehensive income (loss)	(24		)	9
Accumulated deficit	(41,434		)	(21,385		)
Total stockholders’ equity	47,726			67,887

Total liabilities and stockholders’ equity	$	58,139		$	80,948

(1) Derived from the January 31, 2003 audited consolidated financial statements included in the Annual Report on Form 10-K of NeoMagic Corporation for fiscal year 2003.

See accompanying notes to consolidated condensed financial statements.

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

(Unaudited)

	Nine Months Ended
	October 31, 2003			October 31, 2002
Operating activities:
Net loss	$	(20,049	)	$	(25,713	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization	2,850			2,206
Loss on disposal of property, plant and equipment	3			2
Loss on restructuring of wafer purchase agreement	—			3,600
Income from the sale of DVD assets	—			(1,580		)
Amortization of deferred compensation	502			1,771
Impairment of acquired intangible assets and goodwill	—			5,048
Changes in operating assets and liabilities:
Accounts receivable	35			(310		)
Inventory	251			(648		)
Income tax receivable	—			3,295
Other current assets	406			(187		)
Restricted cash	—			15,000
Other assets	69			(457		)
Accounts payable	(956		)	22
Compensation and related benefits	40			194
Income taxes payable	42			(412		)
Tax benefit from employee stock options	355			—
Other accruals	(1,082		)	(807		)
Net cash provided by (used in) operating activities	(17,534		)	1, 024

Investing activities:
Net proceeds from the sale of DVD assets	—			1,580
Purchases of property, plant, equipment and intangibles	(425		)	(702		)
Purchases of short-term investments	(52,357		)	(41,191		)
Maturities of short-term investments	43,071			44,713
Net cash provided by (used in) investing activities	(9,711		)	4,400

Financing activities:
Payments on capital lease obligations	(806		)	—
Net proceeds from issuance of common stock	264			492
Net cash provided by (used in) financing activities	(542		)	492

Net increase (decrease) in cash and cash equivalents	(27,787		)	5,916
Cash and cash equivalents at beginning of period	37,428			38,996
Cash and cash equivalents at end of period	$	9,641		$	44,912

Supplemental schedules of cash flow information:
Cash paid (received) during the period for:
Interest	$	152		$	—
Taxes	$	55		$	(9,568	)
Supplemental disclosure of non-cash financing activities:
Issuance of common stock in connection with restructuring of wafer purchasing agreement	$	—		$	2,100

See accompanying notes to consolidated condensed financial statements.

NEOMAGIC CORPORATION

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation

The unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of NeoMagic Corporation and its wholly owned subsidiaries (collectively “NeoMagic” or the “Company”). Certain information and Note disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at October 31, 2003, the operating results for the three and nine months ended October 31, 2003 and 2002, and the cash flows for the nine months ended October 31, 2003 and 2002. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended January 31, 2003, included in the Company’s most recent Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three and nine months ended October 31, 2003 are not necessarily indicative of the results that may be expected for the year ending January 31, 2004.

The third fiscal quarters of 2003 and 2002 ended on October 26, 2003 and October 27, 2002, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month of October.

2. Recent Accounting Pronouncements

In November of 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company’s financial position or results of operations.

In January of 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. The Company believes the adoption of FIN No. 46 will not have a material effect on the Company’s financial position or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” which amends and clarifies accounting for derivative instruments and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 149). SFAS 149 provides guidance relating to decisions made (a) as part of the Derivatives Implementation Group process, (b) in connection with other FASB projects dealing with financial instruments and (c) regarding implementation issues raised in the application of the definition of a derivative and the characteristics of a derivative that contains financing components. SFAS 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Company’s financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150) which requires freestanding financial instruments such as mandatorily redeemable shares, forward purchase contracts and written put options to be reported as liabilities by their issuers as well as related new disclosure requirements. The provisions of SFAS 150 are effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s financial condition or results of operations.

3. Stock Compensation

During the first quarter of fiscal 2004, the Company adopted the provisions of the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS 148). SFAS 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure provisions of Statement 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.

At October 31, 2003, the Company had several stock-based employee compensation plans, including stock option plans and an employee stock purchase plan. The Company accounts for these plans under the intrinsic value method. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition method:

	Three Months Ended October 31,						Nine Months Ended October 31,
(in thousands, except per share amounts)	2003			2002			2003			2002
Net loss, as reported	$	(7,048	)	$	(12,685	)	$	(20,049	)	$	(25,713	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects	202			244			461			1,769
Less: Total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects	(870		)	(1,284		)	(2,381		)	(4,496		)
Pro forma net loss	$	(7,716	)	$	(13,725	)	$	(21,969	)	$	(28,440	)
Reported basic and diluted loss per share	$	(0.23	)	$	(0.44	)	$	(0.66	)	$	(0.90	)
Pro forma basic and diluted loss per share	$	(0.25	)	$	(0.47	)	$	(0.72	)	$	(1.00	)

In the three and nine months ended October 31, 2003 and 2002, respectively, 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:

	Option Plans								Stock Purchase Plan
	Three Month Ended October 31,				Nine Months Ended October 31,				Three Months Ended October 31,				Nine Months Ended October 31,
	2003		2002		2003		2002		2003		2002		2003		2002
Risk-free interest rates	2.7	%	2.95	%	1.99	%	3.64	%	1.1	%	2.2	%	1.3	%	2.2	%
Volatility	0.93		0.74		0.67		0.64		0.97		0.68		0.81		0.71
Expected life of option in years	4.28		5.0		2.80		4.30		0.51		0.49		0.50		0.49

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 employee stock 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 management’s opinion, the existing models do not necessarily provide a reliable single measure of its employee stock options.

4. Loss Per Share

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

Per share information calculated on this basis is as follows:

	Three Months Ended October 31,						Nine Months Ended October 31,
(in thousands, except per share amounts)	2003			2002			2003			2002
Numerator:
Loss from continuing operations	$	(7,048	)	$	(8,510	)	$	(20,049	)	$	(21,538	)
Cumulative effect of an accounting change	—			(4,175		)	—			(4,175		)

Net loss	$	(7,048	)	$	(12,685	)	$	(20,049	)	$	(25,713	)

Denominator:
Denominator for basic and diluted loss per share - weighted-average shares outstanding	30,759			29,157			30,498			28,453

Loss per share from continuing operations	$	(.23	)	$	(.29	)	$	(.66	)	$	(.75	)
Cumulative effect per share from an accounting change	—			(.15		)	—			(.15		)
Basic and diluted loss per share	$	(.23	)	$	(.44	)	$	(.66	)	$	(.90	)

For the three months ended October 31, 2003 and October 31, 2002 and for the nine months ended October 31, 2003 and October 31, 2002, respectively, basic earnings per share and diluted earnings per share are the same due to the net loss for those periods. During the three months ended October 31, 2003 and 2002, respectively, the Company excluded options to purchase 915,643 and 330,895 shares of common stock. During the nine months ended October 31, 2003 and 2002, respectively, the Company excluded options to purchase 652,964 and 828,935 shares of common stock.

5. Divestitures

Buyer. In addition, the Company incurred approximately $0.6 million in transaction costs, approximately $2.3 million in retention packages for the affected employees, and $0.3 million in additional costs during 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 in fiscal 2001. As a result, the Company recorded a pre-tax gain of approximately $6.5 million on the sale, which is recorded in income, net of expenses, from the sale of DVD assets on the consolidated condensed statements of operations for the year ended January 31, 2001. In the first quarter of fiscal 2003, the Company received the remaining contingent payment of $1.6 million upon completing the transfer of licenses with third parties to the Buyer, and recorded as the amount as a gain in the consolidated condensed statement of operations for the fiscal year ended January 31, 2003.

6. Inventories

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

Inventory consists of: (in thousands)	October 31, 2003		January 31, 2003

Raw materials	$	62	$	117
Work in process	63		102
Finished goods	159		316
Total	$	284	$	535

7. Accumulated Other Comprehensive Income (Loss)

Total accumulated other comprehensive income (loss) was $(24) thousand at October 31, 2003 and $9 thousand at January 31, 2003. Accumulated other comprehensive income (loss) consists entirely of unrealized gains (losses) on available for sale securities.

8. Intangible Assets

The following table provides a summary of the carrying amount of intangible assets that will continue to be amortized:

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

October 31, 2003	Cost		Accumulated Amortization			Net
Licensed intellectual property	$	3,275	$	(384	)	$	2,891
Core technology	1,800		(1,100		)	700
	$	5,075	$	(1,484	)	$	3,591

January 31, 2003	Cost		Accumulated Amortization			Net
Licensed intellectual property	$	3,244	$	(45	)	$	3,199
Core technology	1,800		(650		)	1,150
Patents	1,697		(1,697		)	—
	$	6,741	$	(2,392	)	$	4,349

Amortization expense for other intangible assets was $423 thousand and $450 thousand for the three months ended October 31, 2003 and 2002, respectively. Amortization expense for other intangible assets was $789 thousand and $1,452 thousand for the nine months ended October 31, 2003 and 2002, respectively. Licensed intellectual property and core technology are amortized over three years. Estimated annual amortization expense for other intangible assets is as follows as of October 31, 2003:

Fiscal years ending January 31, (in thousands)
2004	$	423
2005	1,642
2006	1,047
2007	479
Total	$	3,591

9. Obligations under Capital Leases

In fiscal 2003, the Company entered into capital leases to finance software licenses used in the design of semiconductors. Obligations under capital leases represent the present value of future payments under the lease agreements. Property, plant and equipment include the following amounts for leases that have been capitalized:

(in thousands)	October 31, 2003			January 31, 2003
Software under capital lease	$	4,073		$	4,073
Accumulated amortization	(1,399		)	(381		)
Net software under capital lease	$	2,674		$	3,692

Amounts capitalized under leases are being amortized over a three-year period.

Future minimum payments under the capital leases consist of the following, as of October 31, 2003:

Fiscal year ending January 31, (in thousands)
2004	$	658
2005	1,910
2006	829
Total minimum lease payments	3,397
Less: amount representing interest	(319		)
Present value of net minimum lease payments	3,078
Less: current portion	(1,475		)
Long-term portion	$	1,603

10. Contingencies

an attempted monopolization in violation of antitrust laws, arising from NeoMagic’s filing of the patent infringement action against Trident. The Court ruled that there was no infringement by Trident. The Company filed an appeal in the United States Court of Appeals, for the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court’s judgment of non-infringement on one patent and vacated the court’s judgment of non-infringement on another patent, thereby remanding it to the lower court for further proceedings. In November 2002, the lower court heard oral arguments on cross-motions for summary judgment on the matter. In May 2003, the lower court ruled in favor of Trident. In August 2003 the Company started the process to file an appeal in the United States Court of Appeals, for the Federal Circuit. Management believes the Company has valid defenses against Trident’s claims and no accrual has been recorded for the potential loss contingency relating to the Trident counter-suit. There can be no assurance as to the results of the patent infringement appeal and the counter-suit for antitrust filed by Trident.

11. Product Warranty

The Company generally sells products with a limited warranty of product quality and a limited indemnification of customers against intellectual property infringement claims related to the Company’s products. The Company accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical activity. The accrual and the related expense for known issues were not significant as of and for the nine months period ended October 31, 2003 and 2002. Due to product testing, the short time between product shipment and the detection and correction of product failures, and a low historical rate of payments on indemnification claims, the accrual based on historical activity and the related expense were not significant as of and for the nine month period ended October 31, 2003 and 2002.

Part I. Financial Information

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

When used in this discussion, the words “expects,” “anticipates,” “believes” and similar expressions are intended to identify forward-looking statements. Such statements reflect management’s current intentions and expectations. Examples of such forward-looking statements include statements regarding future revenues, expenses, losses and cash flows, capital requirements, the launch of new products and research and development activities. However, actual events and results could vary significantly based on a variety of factors including, but not limited to: customer acceptance of new NeoMagic products, the market acceptance of handheld system products developed and marketed by customers that use the Company’s products, the Company’s ability to execute product and technology development plans on schedule, and the Company’s ability to access advanced manufacturing technologies in sufficient capacity without significant cash pre-payments or investment. 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

NeoMagic designs, develops and sells high performance applications processors marketed under the MiMagic™ name. The MiMagic family is designed to enable sophisticated multimedia functionality within a low-power, high performance system-on-chip (SOC). The MiMagic Applications Processors are targeted at multimedia-enabled mobile phones and wireless personal digital assistants (PDAs). In the past, the Company provided semiconductor solutions for the notebook PC multimedia accelerator marketplace.

In calendar 2000, the Company exited this market and is now focused solely on developing, manufacturing and selling applications processors for the handheld systems market. The Company is now generating revenues from this product effort. Currently, customers are shipping products with the MiMagic 3 Applications Processor. By mid-year calendar 2004, the Company expects customers to ship new handheld systems that use the MiMagic 5 chips. The Company launched its newest product, the MiMagic 6, in June 2003. As of October 2003, the first samples of the MiMagic 6 chip were received and will be shipping into customer trials beginning in December of 2003. The Company believes that the MiMagic 6 provides some of the highest multimedia processing performance among low power applications processors available today.

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 has core competencies in integrating logic, analog and memory as well as developing graphics, video, 3D and other multimedia technologies. By combining these core competencies with third-party drivers, middleware, operating system software, and power management, NeoMagic develops solutions that facilitate the mobilization of multimedia applications.

NeoMagic introduced its first applications processor, the MiMagic 3 (NMS7210), in June 2002. This product is currently shipping to customers with consumer electronic end markets that include mobile phones, video recorders and MP3 players. The Company expects this product to continue shipping through calendar 2004.

NeoMagic introduced the MiMagic 5 Applications Processor (NMS9200) in November 2002, and began shipping product samples in February 2003. The Company expects to start revenue shipments in mid-year calendar 2004, depending upon customer production schedules.

The MiMagic 6 Application Processor (NMS9600) was launched in June of 2003. The MiMagic 6 is based on NeoMagic’s Associative Processor Array, or APA, which forms its multimedia engine. Existing applications processor solutions use a sequential processing flow that typically operates on each individual data element in sequence, relying on ever-faster processor clock cycles to gain performance. This requires large amounts of power and creates performance bottlenecks. Conversely, APA merges processing and memory. APA processes multiple bits of data in parallel, in a single clock cycle, thus boosting performance while using less power. Because of this, the MiMagic 6 is able to perform an order of magnitude more operations per clock cycle than a conventional applications processor at the same power. With that computational horsepower, the MiMagic 6 is able to provide value-add camera capabilities like zoom, low-light and bright-light adjustment and advanced 3-D gaming features, without adding transistors. With its ability to handle large amounts of data simultaneously and at lower clock rates, the APA platform is targeted at sophisticated multimedia data such as images, video and 3D graphics. The Company expects to begin shipping product samples to potential customers during the fourth quarter of fiscal 2004. As of November 2003, the Company is demonstrating this chip in silicon to 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. The third fiscal quarters of 2004 and 2003 ended on October 26, 2003 and October 27, 2002, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month of October.

Critical Accounting Policies

NeoMagic’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting

principles generally accepted in the United States. The preparation of these financial statements requires 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 goodwill, intangible assets, and long-lived assets, inventories, revenue recognition and income taxes. 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.

Goodwill, Intangible Assets and Long Lived Assets

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

In assessing the recoverability of intangible assets with indefinite lives, the Company must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets. Assumptions about future revenue and cash flows require significant judgment because of the current state of the economy, the fluctuation of actual revenue, and the timing of expenses.

As a result of the transitional impairment tests required under SFAS 142, the Company recorded a $4.2 million non-cash charge to reduce the carrying value of its goodwill to zero, which is shown as a cumulative effect of a change in accounting principle in the third quarter of fiscal 2003.

Long-lived assets and asset groups are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, or at least annually. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made.

Intangibles assets are carried and reported at acquisition cost, net of accumulated amortization subsequent to acquisition. The acquisition cost is amortized over estimated useful lives, which range from 2 to 3 years. Changes in circumstances such as the passage of new laws or changes in regulations, technological advances, changes to the Company’s business model, or changes in the capital strategy could result in the actual useful lives differing from initial estimates. In those cases where the Company determines that the useful life of a long-lived asset should be revised, the Company will depreciate the net book value in excess of the estimated residual value over its revised remaining useful life. Factors such as changes in the planned use of equipment, customer attrition, contractual amendments, or mandated regulatory requirements could result in shortened useful lives of intangible assets.

Intangible assets are reviewed for impairment whenever events or circumstances indicate impairment might exist, or at least annually, in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Projected undiscounted net cash flows expected to be derived from the use of those assets are compared to the respective net carrying amounts to determine whether impairment exists. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. The determination of the net carrying value of goodwill and intangible assets and the extent to which, in any, there is impairment are dependent on significant estimates and judgments on the Company’s part, including the useful life over which the intangible assets are to be amortized, and the estimates of the value of future cash flows, which are based upon further estimates of future revenue, expenses and operating margins.

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

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

Inventory Valuation

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, demand for our existing products in inventory may decrease.

Revenue Recognition

The Company recognizes revenue from product sales when the products are shipped to customers; other than distributors, 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 or determinable, and (iv) collectibility of the proceeds is probable. The Company’s shipment terms are FOB shipping point.

With respect to products shipped to distributors, the Company generally defers recognition of product revenue until the distributors sell their 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, based on shipping terms.

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 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 when such determination was made. The Company has also provided reserves 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 when the reserves are no longer deemed necessary.

Results of Operations

Net Sales

Net sales were $0.5 million and $1.3 million for the three months and nine months ended October 31, 2003, respectively, compared to $0.7 million and $1.5 million for the three months and nine months

ended October 31, 2002. Net sales decreased in the three and nine months ended October 31, 2003 due to customer delays in bringing their MiMagic 3 programs to commercial production.

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 91% and 90% of net sales in the three months ended October 31, 2003 and 2002, respectively. Export sales accounted for 88% and 89% of net sales in the nine months ended October 31, 2003 and 2002, respectively. All sales transactions were denominated in United States dollars.

Gross Margin (Loss)

Gross loss was $137 thousand and $492 thousand for the three months ended October 31, 2003 and 2002, respectively. Gross loss was $298 thousand and $941 thousand in the nine months ended October 31, 2003 and 2002, respectively. The negative gross margins in the three and nine month periods ended October 31, 2003 are generally due to under absorption of manufacturing overhead resulting from relatively low production levels. In addition, in the first quarter of fiscal 2004 the Company began reviewing the percentage of time spent by manufacturing employees between production and development. The Company allocated $50 thousand and $161 thousand of wage costs related to development efforts to research and development expenses in the three and nine months ended October 31, 2003, which had a favorable impact on gross margin. Cost of sales included amortization of developed technology of $112 thousand and $336 thousand for the three and nine months ended October 31, 2002. In addition, the Company wrote off $367 thousand of developed technology in the three months ended October 31, 2002 as part of and impairment charge. Developed technology was fully written off as of January 31, 2003 and, therefore, had no impact on cost of sales in fiscal 2004.

Research and Development Expenses

Research and development expenses include compensation and associated costs relating to development personnel, amortization of intangible assets and prototyping costs, which are comprised of photomask costs and pre-production wafer costs. Research and development expenses were $5.3 million and $5.7 million for the three months ended October 31, 2003 and 2002, respectively. Research and development expenses were $14.8 million and $18.1 million for the nine months ended October 31, 2003 and 2002, respectively. These expenses include amortization of deferred compensation of $0.1 million and $0.1 million for the three months ended October 31, 2003 and 2002, respectively, and $0.3 million and $0.9 million for the nine months ended October 31, 2003 and 2002, respectively. The decrease of $0.4 million for the three months ended October 31, 2003 is primarily related to lower software maintenance costs ($0.3 million) and lower labor costs ($0.1 million), lower consulting costs ($0.1 million) offset by increased mask costs ($0.2 million). The decrease of $3.3 million for the nine months ended October 31, 2003 is primarily related to lower labor costs ($0.7 million), lower amortization of deferred compensation ($0.6 million), lower amortization of acquired and licensed intangibles ($0.6 million) and lower software maintenance costs ($0.7 million). In addition, included in the expenses for the nine months ended October 31, 2002, were expenses of $0.5 million to write off certain licensed intellectual property. The Company has made, and intends to continue to make, significant investments in research and development as it focuses on developing products for the handheld systems market.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $1.8 million and $2.1 million for the three months ended October 31, 2003 and 2002, respectively. Sales, general and administrative expenses were $5.4 million and $7.8 million for the nine months ended October 31, 2003 and 2002, respectively. These expenses include amortization of deferred compensation of $0.1 million and $0.1 million for the three months ended October 31, 2003 and 2002, respectively, and $0.2 million and $0.9 million for the nine months ended October 31, 2003 and 2002, respectively. Sales, general, and administrative expenses decreased slightly for the three months ended October 31, 2003. Sales, general and administrative expenses decreased for the nine months ended October 31, 2003 primarily due to lower labor costs ($1.1million) and lower amortization of deferred compensation ($0.7 million).

Impairment of Certain Acquired Intangible Assets

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

Special Charges

In January 2001, the Company extended its wafer supply agreement with Infineon Technologies AG of Germany (“Infineon”) through fiscal 2004 to ensure future wafer supply for the Company’s new product efforts. The terms of the agreement provided that NeoMagic would make use of Infineon’s 0.20 micron and 0.17 micron embedded DRAM (eDRAM) process technologies. The agreement also provided for access to additional manufacturing capacity and to more advanced process technologies to be developed by Infineon. NeoMagic provided $15.0 million in guarantees towards its wafer purchases over the term of the agreement. The amount of guarantee was included as restricted cash on the Company’s Consolidated Balance Sheet, as of January 31, 2002. Due to uncertainties over Infineon’s continued eDRAM product development, the Company decided not to use Infineon’s eDRAM technology for its future production. Based on negotiations between NeoMagic and Infineon on restructuring the wafer supply agreement with the intent to release NeoMagic from the related guarantee, the Company recorded $3.6 million in charges, which reflects the value of the final settlement in fiscal 2003. The $3.6 million charge is composed of a $1.5 million cash payment and the issuance of $2.1 million in common stock. The Company booked $1.4 million of this charge in the first quarter of fiscal 2003 based on discussions with Infineon at that time and booked $2.2 million in the second quarter of fiscal 2003 to reflect the final settlement.

Income, Net of Expenses, from Sale of DVD Assets

In April 2000, pursuant to an asset purchase agreement, the Company sold the principal assets of its DVD product group, primarily consisting of fixed assets and intangible assets, to LSI Logic (“Buyer”). The Company received $11.7 million in a lump-sum cash payment and an additional $3.1 million was contingent on the Company’s performance of certain obligations related to the transfer of licenses with third parties to the Buyer. The Company 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 incurred approximately $0.6 million in transaction costs, approximately $2.3 million in retention packages for the affected employees, and $0.3 million in additional costs during 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 in fiscal 2001. As a result, the Company recorded a pre-tax gain of approximately $6.5 million on the sale, which is recorded in income, net of expenses, from the sale of DVD assets on the consolidated condensed statements of operations for the year ended January 31, 2001. In the first quarter of fiscal 2003, the Company received the remaining contingent payment of $1.6 million upon completing the transfer of licenses with third parties to the Buyer, and recorded the amount as a gain in the consolidated condensed statement of operations for the fiscal year ended January 31, 2003.

Interest Income

The Company currently earns interest on its cash equivalents and short-term investments and previously on its long-term investments and restricted cash. Interest and other income was $0.1 million and $0.3 million for the three months ended October 31, 2003 and 2002, respectively. Interest and other income was $0.6 million and $1.3 million for the nine months ended October 31, 2003 and 2002, respectively. The decrease for three months ended October 31, 2003 is primarily due to lower average cash and short-term investment balances. The decrease for the nine months ended October 31, 2003 in interest and other income is primarily due to significantly lower interest rates and to lower average cash and short-term investment balances.

Other Income (Expense)

Other income (expense) was $215 thousand and $(23) thousand for the three months ended October 31, 2003 and 2002, respectively. Other income was $172 thousand and $232 thousand for the nine months ended October 31, 2003 and 2002, respectively. The Company acquired shares of Margi Systems, Inc. preferred stock in January of 1998, for $300,000. The Company wrote off the investment fully during the fourth quarter of fiscal year 2001, based on the Company’s views of the financial prospects of Margi Systems at such time. Margi Systems was acquired by Harman International Industries, Inc. in September 2003. In connection with the acquisition, the Company received $255 thousand for its holdings of Margi Systems preferred stock. The proceeds from the previously written off investment is shown as other income in the consolidated condensed statement of operations for the three and nine months ended October 31, 2003. The Margi proceeds for the three and nine months ended October 31, 2003 are partially offset by foreign currency exchange losses. Other income for the nine months ended October 31, 2002 primarily represents $200 thousand received as final settlement with a distributor of the Company’s legacy products.

Interest Expense

Interest expense was $66 thousand and $0 for the three months ended October 31, 2003 and 2002, respectively. Interest expense was $226 thousand and $0 for the nine months ended October 31, 2003 and 2002, respectively. Interest expense for the three and nine months ended October 31, 2003 is due to new capital leases entered into in the latter half of fiscal 2003.

Income Taxes

In the three and nine months ended October 31, 2003, taxes consisted of foreign income taxes. The Company recorded a $6 million tax benefit for the three months ended April 30, 2002, primarily related to changes in the federal tax law. The Job Creation and Worker Assistance Act of 2002 was enacted on March 9, 2002 and contained provisions extending the net loss carry-back period from three to five years. This change permitted the Company to utilize net operating losses incurred in fiscal 2001 to recover taxes paid in prior periods. The $6 million benefit represents additional refunds that the Company claimed on the 2001 net operating loss carry-back due to the change in tax law.

Cumulative Effect of Change in Accounting Principle

The Company completed the transitional impairment testing of goodwill using the two-step process prescribed in SFAS 142 during the third quarter of fiscal 2003. As a result, the Company recorded a $4.2

million non-cash charge to reduce the carrying value of its goodwill to zero, which is shown as a cumulative effect of a change in accounting principle in the third quarter of fiscal 2003.

Liquidity and Capital Resources

The Company’s cash, cash equivalents and short-term investments decreased $18.5 million in the nine months ended October 31, 2003 to $48.6 million from $67.1 million at January 31, 2003.

Cash and cash equivalents used in operating activities for the nine months ended October 31, 2003 was $17.5 million, compared to $1.0 million of net cash provided by operating activities for the nine months ended October 31, 2002. The cash used in operating activities stems primarily from a net loss of $20.0 million, as well as decreases in accounts payable ($1.0 million) and in other accruals ($1.1 million), partially offset by non-cash depreciation and amortization ($2.9 million), deferred compensation amortization charges ($0.5 million), tax benefit from employee stock options ($0.4 million) and decreases in inventory ($0.3 million) and other current assets ($0.4 million).

Net cash used in investing activities for the nine months ended October 31, 2003, was $9.7 million, compared to $4.4 million of net cash provided by investing activities for the nine months ended October 31, 2002. Net cash used in investing activities related primarily to net purchases of short-term investments of $9.3 million and purchases of fixed assets and intangibles of $0.4 million.

Net cash used in financing activities was $0.5 million for the nine months ended October 31, 2003, compared to $0.5 million of net cash provided by financing activities for the nine months ended October 31, 2002. The net cash used in financing activities represents payments on capital lease obligations offset somewhat by proceeds from the issuance of common stock.

At October 31, 2003, the Company’s principal sources of liquidity included cash, cash equivalents and short-term investments of $48.6 million. The Company believes that it will not generate cash from operations during the next twelve months. The Company believes the current cash, cash equivalents and short-term investments will satisfy the Company’s projected working capital and capital expenditure requirements through the next twelve months. After this period, capital requirements will depend on many factors, including general economic conditions, the rate of net sales growth, the timing and extent of spending to support research and development programs, the timing of any new product introductions and enhancements to existing products, and market acceptance of the Company’s products. To the extent that existing cash, cash equivalents and short-term investment balances and any cash from operations are insufficient to fund the Company’s future activities, the Company may need to raise additional equity or debt financing in the future. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or at all.

In May 1996, the Company moved its principal headquarters to a new facility in Santa Clara, California, under a non-cancelable operating lease that expired in April 2003. In January 1998, the Company entered into a second non-cancelable operating lease for the building adjacent to its principal headquarters. This lease had a co-terminus provision with the original lease, which expired in April 2003. In March 2002, the Company extended the term for 45,000 square feet under this lease for another seven years with a termination date of April 2010. The Company leases offices in India and Israel under operating leases that expire at various times through December 2006. The future minimum payments relating to the facility leases are included in the contractual obligations table presented below.

The Company has entered into capital leases relating to software licenses. Refer to note 9 of the consolidated condensed financial statements for additional information. The future minimum payments relating to the software leases are included in the contractual obligations table presented below.

The following summarizes the Company’s contractual obligations at October 31, 2003, and the expected effect of such obligations on our liquidity and cash flow (in thousands) in the future.

	2004			2005		2006		2007		2008		Thereafter		Total
CONTRACTUAL OBLIGATIONS
Operating leases	$		289	$	1,137	$	1,090	$	1,117	$	1,046	$	2,450	$	7,129
Capital leases	658			1,910		829		—		—		—		3,397
Non-cancelable purchase orders	22			33		—		—		—		—		55

Total contractual cash obligations	$	969		$	3,080	$	1,919	$	1,117	$	1,046	$	2,450	$	10,581

As described in note 11 to the consolidated condensed financial statements, the warranty liabilities are not material as of October 31, 2003.

Factors that May Affect Future Results

We Expect to Continue to Incur Significant Losses in Fiscal 2004

The Company has been incurring substantial losses as it invests heavily in new product development in advance of achieving significant customer sales. This is expected to continue in fiscal year 2004. The Company’s ability to achieve cash flow breakeven is likely to depend on customer acceptance and revenue generation from its MiMagic 5 and its MiMagic 6, which has recently been announced. However, given the length of customer design-in cycles, the Company will incur significant additional losses in fiscal 2004.

Our Annual and Quarterly Performance May Fluctuate

The Company’s quarterly and annual results of operations are affected by a variety of factors that could materially adversely affect net sales, gross margin and operating results. These factors include, among others, the ability of the Company to increase its customer base and its sales, the abilities of manufacturing subcontractors to make adequate and timely deliveries, access to advanced production process technologies from manufacturing subcontractors, and recruiting and retaining employees including those with engineering expertise in new disciplines. In particular, the Company’s new product development efforts and customer engagements in System-on-Chip integration and supporting multimedia technologies such as MPEG-4 streaming video represent new endeavors and consequently carry greater risks of successful and timely execution. Any one or more of these factors could result in the Company failing to achieve its expectations as to future revenues and profits. Furthermore, the majority of the Company’s sales were historically made, and are expected to continue to be made, on the basis of purchase orders rather than pursuant to long-term purchase agreements, which increases the difficulty of forecasting sales. The Company may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly operating results. Accordingly, the Company believes that period-to-period comparisons of its operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. In future quarters, the Company’s operating results may be below the expectations of public market analysts or investors.

Our Financial Results could be Affected by Changes in Accounting Rules

In August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 requires us to perform impairment analysis on our long-lived assets, other than goodwill, to be held and used, whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss will be recognized if the carrying amount of a long-lived asset exceeds its fair value. SFAS 144 retains the fundamental provisions of SFAS 121 related to (i) the recognition and measurement of the impairment of long-lived assets to be held and used, and (ii) the measurement of long-lived assets to be disposed of by sale. As SFAS 144 excludes goodwill, certain long-lived assets may be subject to impairment charges sooner than they would have been recorded under SFAS

121, which SFAS 144 replaces. During the third and fourth quarter of fiscal 2003, we recorded impairment charges of $873 thousand and $170 thousand, respectively, related to our long-lived assets as a result of our SFAS 144 analysis. If economic conditions in our industry continue to deteriorate and adversely affect our business, we could be required to record additional impairment charges related to our long-lived assets, which could have a material adverse effect on our results of operations and financial condition.

Our financial results could be affected by potential changes in the accounting rules governing the recognition of stock-based compensation expense. We measure compensation expense for our employee stock plans under the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” In addition, we provide pro forma disclosures of our operating results in our Notes to Consolidated Financial Statements as if the fair value method of accounting had been applied in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” Had we accounted for our compensation expense under the fair value method of accounting prescribed by SFAS 123, the charge would have been significant, totaling $5.6 million, $6.7 million and $6.3 million during fiscal 2003, 2002 and 2001, respectively. Currently, the U.S. Congress, the Securities and Exchange Commission and the Financial Accounting Standards Board are considering changes to accounting rules concerning the recognition of stock option compensation expense. If one or more of these proposals are implemented, we and other companies may be required to measure compensation expense using the fair value method, which would adversely affect our results of operations by reducing our income or increasing our losses by an amount equal to such stock option charges.

We have a Limited Customer Base

Two customers accounted for 39% and 35% of net sales for the three months ended October 31, 2003. For the same period in the prior year, those customers accounted for 10% and 15%, respectively, of net sales. In addition, two customers that both accounted for less than 10% of net sales for the three months ended October 31, 2003, accounted for 46% and 14% of net sales for the same period last year. Four customers accounted for 33%, 29%, 12% and 11% of net sales for the nine months ended October 31, 2003. For the same period in the prior year, those customers accounted for 20%, 21%, 20% and 20%, respectively, of net sales. The Company expects that a small number of customers will account for a substantial portion of its net sales for the foreseeable future. Furthermore, the majority of the Company’s sales was historically made, and is 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 systems sold by a single customer.

We May Lose Our Customer Base

The Company’s products are designed to afford the handheld systems manufacturer significant advantages with respect to product performance, power consumption and size. To the extent that other future developments in components or subassemblies incorporate one or more of the advantages offered by the Company’s products, the market demand for the Company’s products may be negatively impacted.

We Face Intense Competition in Our Markets

The market for applications processors 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 imaging performance, price, features, power consumption, size and software support. The ability of the Company to compete successfully in the applications processor market depends on a number of factors including, success in designing and subcontracting the manufacture of new products that implement new technologies, product quality and

reliability, price, ramp of production of the Company’s products for particular system manufacturers, customer demand and acceptance of more sophisticated multimedia functionality on handheld systems, 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/ODM design cycles, which could result in a material adverse effect on the Company’s business, financial condition and results of operations.

NeoMagic competes with both domestic and international companies, most 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, ST Microelectronic’s Nomadik line, certain of Samsung’s S3C chips, Nvidia’s Katana line and Texas Instruments’ OMAP product line, as well as a number of vertically integrated electronics firms who are developing their own solutions. NeoMagic may also face increased competition from new entrants into the handheld systems semiconductor market including companies currently at developmental stages.

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

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

The Company’s ability to compete in the future will also depend on its ability to identify and ensure compliance with evolving industry standards and market trends. Unanticipated changes in market trends and industry standards could render the Company’s products incompatible with products developed by major hardware manufacturers and software developers. As a result, the Company could be required to invest significant time and resources to redesign its products or obtain license rights to technologies owned by third parties in order to ensure compliance with relevant industry standards and market trends. There can be no assurance that the Company will be able to redesign its products or obtain the necessary third-party licenses within the appropriate window of market demand. If the Company’s products are not in compliance with prevailing market trends and industry standards for a significant period of time, the Company could miss crucial OEM/ODM design cycles, which could result in a material adverse effect on the Company’s business, financial condition and results of operations.

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

The Company is focused on providing high-performance semiconductor solutions for sale to original equipment manufacturers of handheld systems. New product planning is primarily focused on Integrated System-on-Chip semiconductor products for handheld systems, and multimedia technologies for integration into such products, such as MPEG-4 video compression, image processing, graphics, and audio technologies. The Company’s future business, financial condition and results of operations will depend to a

significant extent on its ability to develop new products that address these market opportunities. As a result, the Company believes that significant expenditures for research and development will continue to be required in the future.

The Company must anticipate the features and functionality that consumers and infrastructure providers will demand, incorporate those features and functionality into products that meet the exacting design requirements of equipment manufacturers, price its products competitively and introduce the products to the market on a timely basis. The success of new product introductions is dependent on several factors, including proper new product definition, timely completion and introduction of new product designs, the ability to create or acquire intellectual property, the ability of strategic manufacturing partners to effectively design and implement the manufacture of new products, quality of new products, differentiation of new products from those of the Company’s competitors and market acceptance of the Company’s and its customers’ products. There can be no assurance that the products the Company expects to introduce will incorporate the features and functionality demanded by system manufacturers and consumers, will be successfully developed, or will be introduced within the appropriate window of market demand, nor can there be assurance that customers who utilize the Company’s semiconductor products will achieve the levels of market success with their own system products that they may project to the Company.

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

We Depend on Third-Party Manufacturers to Produce Our Products

The Company’s products require wafers manufactured with state-of-the-art fabrication equipment and techniques. The Company currently utilizes several foundries for wafer fabrication. The Company expects that, for the foreseeable future, some of its products will be manufactured by a single source. Since, in the Company’s experience, the lead time needed to establish a strategic relationship with a new wafer fabrication partner is at least 12 months, and the estimated time for a foundry to switch to a new product line ranges from four to nine months, there may be no readily available alternative source of supply for specific products. A manufacturing disruption experienced by the Company’s manufacturing partners, the failure of the Company’s manufacturing partners to dedicate adequate resources to the production of the Company’s products, or the financial instability of the Company’s manufacturing partners would have a material adverse effect on the Company’s business, financial condition and results of operations. Furthermore, in the event that the transition to the next generation of manufacturing technologies by the Company’s manufacturing partner is unsuccessful, the Company’s business, financial condition and results of operations would be materially and adversely affected.

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

continue to devote adequate resources to the production of the Company’s products or continue to advance the process design technologies on which the manufacturing of the Company’s products are based.

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

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

We May Encounter Inventory Excess or Shortage

The Company has wafer supply relationships with several foundries to support the Company’s product efforts. Normally, the Company places binding purchase orders two to three months prior to wafer shipment. The Company orders wafers for deliveries in advance and with the additional time to assemble and test wafers, the Company can have orders for finished goods that will not be available for up to four 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. The Company must 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.

Our Manufacturing Yields May Fluctuate

The fabrication of semiconductors is an extremely complex process, which typically includes hundreds of process steps. Minute levels of contaminants in the manufacturing environment, defects in masks used to print circuits on a wafer, utilization of equipment with variations and numerous other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. As a result, semiconductor companies often experience problems in achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular wafer. The Company often purchases wafers, not die, and pays an agreed upon price for wafers meeting certain acceptance criteria. Accordingly, the Company bears the risk of the yield of good die from wafers purchased meeting the acceptance criteria. The Company experienced such yield problems in fiscal 2000, which materially adversely affected the Company’s net sales, gross margins and results of operations in fiscal 2000 and 2001.

Semiconductor manufacturing yields are a function of both product design, which is developed largely by the Company, and process technology, which is typically proprietary to the manufacturer.

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

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

The Company relies in part on patents to protect its intellectual property. As of October 31, 2003, the Company has been issued 69 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 seeking damages and an injunction against Trident Microsystems, Inc. The suit alleges that Trident’s embedded DRAM graphics accelerators infringe certain patents held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising from NeoMagic’s filing of the patent infringement action against Trident. The Court ruled that there was no infringement by Trident. The Company filed an appeal in the United States Court of Appeals, for the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower court’s judgment of non-infringement on one patent and vacated the court’s judgment of non-infringement on another patent, thereby remanding it to the lower court for further proceedings. In November 2002, the lower court heard oral arguments on cross-motions for summary judgment on the matter. In May 2003, the lower court ruled in favor of Trident. In August 2003 the Company started the process to file an appeal in the United States Court of Appeals, for the Federal Circuit. Management believes the Company has valid defenses against Trident’s claims. There can be no assurance as to the results of the patent infringement appeal and the counter-suit for antitrust filed by Trident.

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

We Depend on International Sales and Suppliers

Export sales have been a critical part of the Company’s business. Sales to customers located outside the United States (including sales to the foreign operations of customers with headquarters in the United States and foreign system manufacturers that sell to United States-based OEMs) accounted for 91% and 90% of net sales in the three months ended October 31, 2003 and 2002, respectively. Export sales accounted for 88% and 89% of net sales in the nine months ended October 31, 2003 and 2002, 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 have supported 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. Wafers are priced in U.S. dollars under the Company’s purchase orders with its manufacturing suppliers.

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

We May Need Additional Capital

The Company requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and for capital expenditures. The Company believes that its existing capital resources will be sufficient to meet the Company’s capital requirements through the next 12 months, although the Company could be required, or could elect, to seek to raise additional capital in the future. The Company’s future capital requirements will depend on many factors, including the rate of net sales growth, timing and extent of spending to support research and development programs in new and existing

areas of technology, expansion of sales and marketing support activities, and timing and customer acceptance of new products. The Company may raise additional equity or debt financing in the future. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or at all.

We are Dependent on Qualified Personnel

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

Our Stock Price May Be Volatile

The market price of the Company’s Common Stock, like that of other semiconductor companies, has been and is likely to continue to be, highly volatile. The market has from time-to-time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The market price of the Company’s Common Stock could be subject to significant fluctuations in response to various factors, including quarter-to-quarter variations in the Company’s anticipated or actual operating results, announcements of new products, technological innovations or setbacks by the Company or its competitors, general conditions in the semiconductor industry, unanticipated shifts in the handheld systems market or industry standards, loss of key customers, 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.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company’s cash equivalents, short-term investments, and long-term investments are exposed to financial market risk due to fluctuations in interest rates, which may affect our interest income. As of October 31, 2003, the Company’s cash equivalents and short-term investments earned interest at an average rate of 1.2%. Due to the short-term nature of the Company’s investment portfolio, operating results or cash flows are vulnerable to sudden changes in market interest rates. Assuming a decline of 10% in the market interest rates at October 31, 2003, with consistent cash balances,

interest income would be adversely affected by approximately $14,000 per quarter. The Company does not use its investment portfolio for trading or other speculative purposes.

Foreign Currency Exchange Risk

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

Item 4. Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Changes in Internal Controls Over Financial Reporting

During the third quarter of fiscal 2004, the Company took steps to strengthen its controls over stock administration by adding a stock administration specialist.

Other than as noted above, there were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

None.

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

None

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The exhibits listed in the accompanying Exhibit Index on page 31 are filed or incorporated by reference as part of this Report on Form 10-Q.

(b) Reports on Form 8-K

On August 14, 2003, the Company filed a report on Form 8-K reporting the financial results for the quarter ending July 31, 2003.

SIGNATURES

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

	NEOMAGIC CORPORATION
	(Registrant)


		/s/ Stephen T. Lanza
	STEPHEN T. LANZA
	Acting Chief Financial Officer

		/s/ M.J. Silva
	M.J. SILVA
	Principal Accounting Officer

	December 10, 2003

EXHIBIT INDEX

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

Number	Description

3.1	(1)	Amended and Restated Certificate of Incorporation.
3.2	(1)	Bylaws.
3.3	(9)	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock.
4.1	(10)	Preferred Stock Rights Agreement dated December 19, 2002, between the Company and EquiServe Trust Company, N.A.
10.1	(1)	Form of Indemnification Agreement entered into by the Company with each of its directors and executive officers.
10.2	(2)	Lease Agreement, dated as of October 9, 1997, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.
10.3	(1)	Amended and Restated 1993 Stock Plan and related agreements.
10.4	(2)	Amendment No. 1, dated as of October 15, 1997, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.
10.5	(1)	Lease Agreement, dated as of February 5, 1996, between the Company and A&P Family Investments, as landlord.
10.6	(1)	1997 Employee Stock Purchase Plan, with exhibit.
10.7	(4)	1998 Nonstatutory Stock Option Plan.
10.8	(4)	Wafer Supply Agreement, dated as of March 15, 1999, between NeoMagic International Corporation and Siemens Aktiengesellschaft Semiconductor Group, now Infineon Technologies AG.
10.9	(5)	General Amendment to the Wafer Supply Agreement with Product Sourcing Agreement, dated January 9, 2001, between NeoMagic International Corporation and Infineon Technologies AG.
10.10	(6)	Employment Offer Letter dated May 10, 2000, between the Company and Sanjay Adkar.
10.11	(6)	Employee Loan Agreement dated May 10, 2000, between the Company and Sanjay Adkar.
10.12	(6)	Security Agreement dated September 1, 2001, between the Company and Stephen Lanza.
10.13	(6)	Promissory Note dated September 1, 2001, between the Company and Stephen Lanza.
10.14	(7)	Full and Final Release dated September 9, 2002, from the Wafer Supply Agreement and the Product Sourcing Agreement between NeoMagic International Corporation and Infineon Technologies AG.
10.15	(8)	Amendment No. 1, dated as of February 26, 2002, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.
10.16	(8)	Amendment No. 2, dated as of April 7, 2000, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.
10.17	(8)	Amendment No. 3, dated as of February 26, 2002, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.
10.18	(11)	Amendment No. 4, dated as of January 31, 2003, between the Company and A&P Family Investments, as landlord for the leased premises located at 3260 Jay Street.
31.1		Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated December 10, 2003.
31.2		Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated December 10, 2003.
32.1		Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as

				adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2				Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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

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

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

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

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

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

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

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

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

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

Overview

Critical Accounting Policies

Revenue Recognition

Deferred Taxes

Research and Development Expenses

Sales, General and Administrative Expenses

Interest Expense

We Expect to Continue to Incur Significant Losses in Fiscal 2004

Our Financial Results could be Affected by Changes in Accounting Rules

Interest Rate Risk

Foreign Currency Exchange Risk

SIGNATURES

Description