(FORTUNE Magazine) – SANTA CLARA, CA. Founded 1994 Revenues: N.A. Employees: 56 Private www.neomagic.com

Open up any PC, and you will find a lot more than just Intel inside. The microprocessor holds center stage, but so-called dedicated chips play a wide range of supporting roles. A startup looking to break in needs a technological edge, good timing, and lots of money. Tiny NeoMagic is 3 for 3.

NeoMagic (M is for "memory," a is for "and," gic is for "logic") was founded by six veterans of chipmaker Cirrus Logic with $20 million in venture funding. Their technological feat: They are the first to integrate several key graphics functions in a single design. That means graphics performance that has required at least three separate chips is now attained with one.

So far, so geek, right? Not according to some big PC makers who already use NeoMagic to endow their laptops with full-motion, full-color video. Dell and Sharp are shipping NeoMagic-equipped notebooks that blast competitors in side-by-side graphics comparisons. Acer, Hewlett-Packard, and NEC will soon offer laptops with NeoMagic's flagship chip.

The potential market is huge. According to Dataquest, a research firm in San Jose, some 24 million mobile PCs will be sold in the year 2000, up from 12.6 million this year. NeoMagic wants to put its chips into every portable computerized device that has a screen--from laptops to high-powered GameBoys and personal digital assistants like Apple's Newton.

That's a great opportunity for a chip designer nine months ahead of competitors. But NeoMagic faces big challenges. Its top priority is pushing down prices. NeoMagic's chips cost about 50% more than the less efficient components they replace. Cutting prices may help keep at bay high-volume chipmakers with well-established distribution chains. Says Prakash Agarwal, NeoMagic's CEO: "Our customers say, 'Give me these benefits at the same cost.' Our focus is not to charge an arm and a leg but to go after market share."

--Michael H. Martin