Neomagic Corp - Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Neomagic Corp (MM)	NASDAQ:NMGC	NASDAQ	Common Stock

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended July 27, 2008

¨	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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at July 27, 2008 was 12,570,914.

Table of Contents

NEOMAGIC CORPORATION

FORM 10-Q

INDEX


		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Unaudited Condensed Consolidated Statements of Operations Three and Six months ended July 27, 2008 and July 29, 2007	3

	Condensed Consolidated Balance Sheets July 27, 2008 (unaudited) and January 27, 2008	4

	Unaudited Condensed Consolidated Statements of Cash Flows Six months ended July 27, 2008 and July 29, 2007	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20

Item 4T.	Controls and Procedures	20

PART II. OTHER INFORMATION

Item 1A.	Risk Factors	22

Item 6.	Exhibits	28

Signatures		30

Certifications

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements

NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended						Six Months Ended
	July 27, 2008			July 29, 2007			July 27, 2008			July 29, 2007
Net revenue	$	384		$	151		$	976		$	633
Cost of revenue		2,598			236			3,065			580

Gross profit (loss)		(2,214	)		(85	)		(2,089	)		53
Operating expenses:
Research and development		3,181			2,982			6,256			5,945
Sales, general and administrative		1,505			1,689			3,271			3,248
Restructuring expense		129			—			129			—
Gain on sale of patents		—			—			(9,500	)		—

Total operating expenses		4,815			4,671			156			9,193

Loss from operations		(7,029	)		(4,756	)		(2,245	)		(9,140	)
Other income (expense), net:
Interest income and other		30			212			101			405
Interest expense		(9	)		(17	)		(19	)		(41	)
Loss on marketable equity securities		(154	)		—			(154	)		—
Gain (loss) from change in fair value of warrant liability		9			(248	)		34			743

Loss before income taxes		(7,153	)		(4,809	)		(2,283	)		(8,033	)
Income tax expense (benefit)		15			(472	)		23			(451	)

Net loss	$	(7,168	)	$	(4,337	)	$	(2,306	)	$	(7,582	)

Basic and diluted net loss per share	$	(0.57	)	$	(0.35	)	$	(0.18	)	$	(0.62	)
Weighted average common shares outstanding for basic and diluted		12,520			12,339			12,488			12,313

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	July 27, 2008 (unaudited)			January 27, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	2,135		$	964
Short-term investments		—			500
Accounts receivable, net		190			529
Inventory		1,473			3,715
Other current assets		396			426

Total current assets		4,194			6,134
Property, plant and equipment, net		657			692
Long-term prepaid assets		34			74
Long-term investments		46			471
Other assets		241			242

Total assets	$	5,172		$	7,613

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,054		$	1,448
Compensation and related benefits		1,080			1,057
Income taxes payable		296			583
Current portion of capital lease obligations		327			316
Warrant liability		4			38
Other accruals		169			196

Total current liabilities		2,930			3,638
Capital lease obligations		172			339
Other long-term liabilities		58			89
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock		40			39
Additional paid-in-capital		123,112			122,071
Accumulated other comprehensive income		—			271
Accumulated deficit		(121,140	)		(118,834	)

Total stockholders’ equity		2,012			3,547

Total liabilities and stockholders’ equity	$	5,172		$	7,613

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended
	July 27, 2008			July 29, 2007
Operating activities:
Net loss	$	(2,306	)	$	(7,582	)
Adjustments to reconcile net loss to net cash for operating activities:
Depreciation		173			690
Stock-based compensation		972			921
Net write-downs of inventory		2,417			—
Gain on sale of patents		(9,500	)		—
Gain on sale of property, plant and equipment		(25	)		—
Loss on marketable equity securities		154			—
Change in fair value on revaluation of warrant liability		(34	)		(743	)
Reversal of provision for tax liability		—			(480	)
Changes in operating assets and liabilities:
Accounts receivable		339			(33	)
Inventory		(175	)		(1,719	)
Other current assets		30			(143	)
Long-term prepaid and other assets		41			29
Accounts payable		(394	)		283
Compensation and related benefits		23			34
Income taxes payable		(287	)		13
Other accruals		(58	)		151

Net cash used in operating activities		(8,630	)		(8,579	)
Investing activities:
Proceeds from sale of patents		9,500			—
Proceeds from sale of property, plant and equipment		25			—
Purchases of property, plant and equipment		(138	)		(106	)
Purchases of short-term investments		(2,991	)		(3,868	)
Maturities of short-term investments		3,491			910

Net cash provided by (used in) investing activities		9,887			(3,064	)
Financing activities:
Payments on capital lease obligations		(156	)		(715	)
Net proceeds from issuance of common stock		70			260

Net cash used in financing activities		(86	)		(455	)

Net increase (decrease) in cash and cash equivalents		1,171			(12,098	)
Cash and cash equivalents at beginning of period		964			16,468

Cash and cash equivalents at end of period	$	2,135		$	4,370

Supplemental schedules of cash flow information:
Cash paid during the period for:
Interest	$	21		$	40
Taxes	$	310		$	15
Supplemental disclosure of non-cash investing activities:
Change in fair value of marketable equity securities	$	(271	)	$	—
Reclassification of warrant liability to equity for amended warrants (Note 9)	$	—		$	2,986

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

NEOMAGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Basis of Presentation

The accompanying unaudited interim condensed consolidated 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 footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, 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 July 27, 2008, and the operating results and cash flows for the three and six months ended July 27, 2008 and July 29, 2007. 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 27, 2008, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

The Company believes that its current cash and cash equivalents will only satisfy its projected cash requirements through approximately September 30, 2008. The Company needs to raise additional capital to fund future operating activities as soon as possible. The adequacy of the Company’s resources will depend largely on its ability to complete additional financing and its success in achieving profitable operations and positive operating cash flows. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. If the Company continues to experience a material shortfall in revenues versus its plan, it expects to take all appropriate actions to maximize the value of the Company. The Company is in the process of taking actions to achieve further reductions in its operating expenses. The Company also believes that it can take actions to generate cash by selling or licensing intellectual property, seeking funding from strategic partners, and seeking further equity or debt financing from financial sources. The Company cannot assure that additional financing will be available on acceptable terms or at all.

The results of operations for the three and six months ended July 27, 2008 are not necessarily indicative of the results that may be expected for the year ending January 25, 2009.

The second fiscal quarters of 2009 and 2008 ended on July 27, 2008 and July 29, 2007, respectively. The Company’s quarters generally have 13 weeks. The second quarter of fiscal 2009 and fiscal 2008 each had 13 weeks. The Company’s fiscal years generally have 52 weeks. Fiscal 2009 will have 52 weeks and fiscal 2008 had 52 weeks.

2.	Stock-Based Compensation

During the quarter ended July 27, 2008, the Company had several stock-based employee compensation plans, including stock option plans and an employee stock purchase plan. Stock options may be issued to directors, officers, employees and consultants (“Service Providers”) under the Company’s 2003 Stock Option Plan, Amended 1998 Stock Option Plan, and 1993 Stock Option Plan. Stock options for employees or new non-employee members of the Board of Directors generally vest over a four-year period, have a term of ten years from the issuance date, and an exercise price equal to the closing price on the Nasdaq Capital Market of the common stock on the date of grant. Stock options issued to current non-employee members of the Board of Directors generally vest over a two-year period, have a term of ten years from the issuance date, and an exercise price equal to the closing price on the Nasdaq Capital Market of the common stock on the date of grant. Generally, unvested options are forfeited thirty to ninety days from the date a Service Provider ceases to be an employee or director (as the case may be), or in the case of death or disability for a period of up to twelve months. To cover the exercise of vested options, the Company issues new shares from its authorized but unissued share pool. At July 27, 2008, 1,862,688 shares of the Company’s common stock were reserved for issuance under the 2003 Stock Option Plan. There are 1,011,732 shares of the Company’s common stock reserved for issuance pursuant to outstanding options under the Amended 1998 Stock Option Plan, which expired in June 2008. No new grants may be made under this plan. There are 81,401 shares of the Company’s common stock reserved for issuance pursuant to outstanding options under the 1993 Stock Option Plan, which expired in 2003. No new grants may be made under this plan.

The 2006 Employee Stock Purchase Plan (“ESPP”) permits eligible employees to purchase common stock through payroll deductions of up to 10% of the employee’s compensation. The price of common stock to be purchased under ESPP is 85% of the lower of the fair market value of the common stock at the beginning of the offering period or at the end of the relevant purchase period. To cover the exercise of vested options the Company issues new shares from its authorized but unissued share pool. A total of 151,699 shares of the Company’s common stock were reserved at July 27, 2008, for future issuance under the 2006 Employee Stock Purchase Plan. Effective July 2008, the Board of Directors temporarily suspended the Company’s ESPP program.

Adoption of SFAS No. 123(R)

Effective January 30, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which requires the Company to measure the cost of employee services received in exchange for all equity awards granted under its stock option plans and employee stock purchase plans based on the fair market value of the award as of the grant date. SFAS 123R supersedes Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation and Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). The Company has adopted SFAS 123R using the modified prospective application method of adoption that requires the Company to record compensation cost related to unvested stock awards as of January 30, 2006 by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards with no change in historical reported earnings. Awards granted after January 30, 2006 are valued at fair value in accordance with provisions of SFAS 123R and recognized on a ratable basis over the service periods of each award. The Company began using estimated forfeiture rates in the first quarter of 2007 based on its historical experience.

Prior to fiscal year 2007, the Company accounted for stock-based compensation in accordance with APB 25 using the intrinsic value method, which did not require that compensation cost be recognized for the Company’s stock awards provided the exercise price was established at greater than or equal to 100% of the common stock fair market value on the date of grant. Prior to fiscal year 2007, the Company provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS No. 148), as if the fair value method defined by SFAS No. 123 had been applied to its stock-based compensation.

Stock Compensation Expense

The following table shows total stock-based compensation expense included in the accompanying Condensed Consolidated Financial Statements for the three and six months ended July 27, 2008 and July 29, 2007.


	Three Months Ended				Six Months Ended
	July 27, 2008		July 29, 2007		July 27, 2008		July 29, 2007
Cost of revenue	$	11	$	5	$	19	$	10
Research and development		277		250		550		486
Selling, general and administrative		192		213		403		425

Total	$	480	$	468	$	972	$	921

For the six months ended July 27, 2008 and July 29, 2007, the total compensation cost related to unvested stock-based awards granted to employees under the stock option plans but not yet recognized was approximately $4.2 million and $2.4 million, respectively, after estimated forfeitures. The cost will be recognized on a straight-line basis over an estimated weighted average period of approximately 2.79 years and 2.89 years for the six months ended July 27, 2008 and July 29, 2007, respectively, for stock options and will be adjusted if necessary in subsequent periods if actual forfeitures differ from those estimates.

In July 2008, the Board of Directors temporarily suspended the ESPP program and subsequently no unrecognized compensation expense related to the ESPP remains. For the six months ended July 29, 2007, the total compensation cost related to options to purchase common shares under the ESPP but not yet recognized was approximately $451 thousand. This cost would have been recognized on a straight-line basis over a weighted-average period of approximately 1.5 years.

Net cash proceeds from the sales of common stock under employee stock option and stock purchase plans were $70 thousand and $209 thousand for the three months ended July 27, 2008 and July 29, 2007, respectively, and $70 thousand and $260 thousand for the six months ended July 27, 2008 and July 29, 2007, respectively. No income tax benefit was realized from the sales of common stock under employee stock purchase and stock option plans during the three and six months ended July 27, 2008 and July 29, 2007. In accordance with SFAS 123(R), the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

Determining Fair Value

Valuation and amortization method – The Company estimates the fair value using a Black-Scholes option pricing formula and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected term – The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The expected term for the second quarter of fiscal 2009 is based upon historical review. The Company believes that this method meets the requirements for SFAS 123(R).

Expected Volatility – The Company’s expected volatility for the quarter ended July 27, 2008 is computed based on the Company’s historical stock price volatility. The Company believes historical volatility to be the best estimate of future volatility and noted no unusual events that might indicate that historical volatility would not be representative of future volatility.

Risk-Free Interest Rate – The risk-free interest rate used in the Black-Scholes option valuation method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the option.

Expected Dividend – The dividend yield reflects that the Company has never paid any cash dividends and has no intention to pay dividends in the foreseeable future.

Estimated Forfeiture – The estimated forfeiture rate for the three and six months ended July 27, 2008 and July 29, 2007 was based upon an analysis of our historical forfeiture rates. The estimated average forfeiture rate for the three and six months ended July 27, 2008 was 23.75% and 33.86%, respectively. The estimated average forfeiture rate for the three and six months ended July 29, 2007 was 30.75% and 37.36%, respectively.

In the three and six months ended July 27, 2008 and July 29, 2007, respectively, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model and the ratable attribution approach using a dividend yield of 0% and the following weighted average assumptions:


	Option Plans								Stock Purchase Plan
	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	July 27, 2008		July 29, 2007		July 27, 2008		July 29, 2007		July 27, 2008		July 29, 2007		July 27, 2008		July 29, 2007
Risk-free interest rates	3.1	%	4.9	%	1.8	%	4.7	%	n/a	*	5.1	%	n/a	*	5.1	%
Volatility	1.05		0.99		0.94		1.00		n/a	*	0.98		n/a	*	0.98
Expected life of option in years	4.00		4.53		3.75		4.19		n/a	*	1.5		n/a	*	1.5

*	Effective July 2008, the Board of Directors temporarily suspended the ESPP program. As a result, no additional grants have been made for the ESPP program.

Stock Options and Awards Activities

The following is a summary of the Company’s stock option activity under the stock option plans as of July 27, 2008 and related information:


	Shares		Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 27, 2008	2,198,125		$	6.34
Granted	714,250		$	1.50
Exercised	—		$	—
Forfeitures and cancellations	(255,037	)	$	4.71

Outstanding at July 27, 2008	2,657,338		$	5.20	$	5.94	$	—

Vested and Expected to Vest at July 27, 2008	2,042,178		$	5.71	$	5.52	$	—

Exercisable at July 27, 2008	1,343,104		$	7.01	$	4.36	$	—

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.42 per share at July 25, 2008, the last market day of our fiscal quarter ended July 27, 2008, which would have been received by option holders had all option holders exercised their options that were in-the-money as of that date. There were no in-the-money options exercisable as of July 27, 2008. During the three and six months ended July 27, 2008, there were no options exercised. The aggregate intrinsic value of options exercised during the three and six months ended July 29, 2007 was $17 thousand and $79 thousand, respectively.

The exercise prices for options outstanding and exercisable as of July 27, 2008 and their weighted average remaining contractual lives were as follows:


	Outstanding		Exercisable
Range of Exercise Prices	Shares Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
(per share)	(in thousands)	(in years)	(per share)		(in thousands)	(per share)
$0.38 – 2.00	652	8.95	$	1.51	98	$	1.54
$2.01 – 4.02	609	6.98	$	2.71	330	$	2.40
$4.03 – 6.00	503	4.75	$	4.69	282	$	4.81
$6.01 – 9.92	526	3.73	$	6.58	266	$	6.59
$9.93 – 20.00	344	3.59	$	14.10	344	$	14.10
$20.01 and over	23	5.05	$	22.43	23	$	22.43

	2,657	5.94	$	5.20	1,343	$	7.01

3.	Loss Per Share

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


	Three Months Ended						Six Months Ended
(in thousands, except per share data)	July 27, 2008			July 29, 2007			July 27, 2008			July 29, 2007
Numerator:
Net loss	$	(7,168	)	$	(4,337	)	$	(2,306	)	$	(7,582	)

Denominator:
Denominator for basic net loss per share, weighted average shares		12,520			12,339			12,488			12,313
Effect of dilutive securities:
Stock options outstanding		—			—			—			—

Denominator for diluted net loss per share, weighted average shares		12,520			12,339			12,488			12,313
Basic net loss per share	$	(0.57	)	$	(0.35	)	$	(0.18	)	$	(0.62	)
Diluted net loss per share	$	(0.57	)	$	(0.35	)	$	(0.18	)	$	(0.62	)

For the three and six months ended July 27, 2008 and July 29, 2007, respectively, basic net loss per share equals diluted net loss per share since all options and warrants outstanding have an exercise price greater than the fair market value of our common stock as of those dates. During the three months ended July 27, 2008 and July 29, 2007, the Company excluded from the computation of basic and diluted loss per share options and warrants to purchase 5,281,719 and 4,140,590 shares of common stock, respectively, because the effect would be anti-dilutive. During the six months ended July 27, 2008 and July 29, 2007, the Company excluded from the computation of basic and diluted loss per share options and warrants to purchase 5,282,272 and 4,173,527 shares of common stock, respectively, because the effect would be anti-dilutive.

4.	Cash, Cash Equivalents and Short-term Investments

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

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

All cash equivalents and short-term investments are classified as available-for-sale and are recorded at fair market value. All available-for-sale securities have maturity dates of less than one year from the balance sheet dates. For all classifications of securities, cost approximates fair market value as of July 27, 2008 and January 27, 2008, and consists of the following (in thousands):


	July 27, 2008 (unaudited)						January 27, 2008
(in thousands)	Adjusted Cost		Gross Unrealized Loss		Estimated Fair Value		Adjusted Cost		Gross Unrealized Gain		Estimated Fair Value
Cash and cash equivalents:
Money market funds	$	1,277	$	—	$	1,277	$	533	$	—	$	533
Bank accounts		858		—		858		431		—		431

Total	$	2,135	$	—	$	2,135	$	964	$	—	$	964

Short-term investments:
U.S. Government agencies		—		—		—	$	500	$	—	$	500

Total	$	—	$	—	$	—	$	500	$	—	$	500

Long-term investments:
Equity securities	$	46	$	—	$	46	$	200	$	271	$	471

Total	$	46	$	—	$	46	$	200	$	271	$	471

Investment in Marketable Securities

In January 2006, the Company made a $200 thousand minority equity investment in Neonode, Inc. (“Neonode”), a then privately held mobile telephone company. In August 2007, effective upon the merger of Neonode with a subsidiary of SBE, Inc. (“SBE”), SBE changed its name to Neonode, Inc. and its common stock is now publicly traded on the Nasdaq Stock Exchange (“NEON”). Upon the merger of SBE and Neonode, the Company’s investment converted into approximately 127,000 shares of Neonode common stock. The investment is classified as an available for sale security and had a fair value on July 27, 2008 and January 27, 2008 of $46 thousand and $471 thousand, respectively. Management considers the impairment to be other than temporary and has recorded an impairment loss of $154 thousand in Other income (expense), net in the Statement of Operations. As of January 27, 2008, the fair value reflected a gross unrealized gain of $271 thousand.

Fair Value of Financial Instruments

On January 28, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”) which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for the Company beginning January 28, 2008, except for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application has been deferred for one year.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

FAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:


Level 1 -		Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 -		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

Level 3 -		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable (i.e., supported by little or no market activity).

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of July 27, 2008 and the basis for that measurement (in thousands):


			(Level 1)
	Balance as of July 27, 2008		Quoted Prices in Active Markets of Identical Assets
Money market funds	$	1,277	$	1,277
Equity securities		46		46

	$	1,323	$	1,323

The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. As of July 27, 2008, the Company did not have any assets with valuations obtained from readily-available pricing sources for comparable instruments (Level 2 assets) or those without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).

FASB’s Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (“SFAS 159”) also became effective the first quarter of fiscal 2009. This option was not chosen, so marketable securities continue to be accounted for as available-for-sale securities under SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities.”

5.	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. The following table sets forth Inventories (in thousands):


	July 27, 2008 (unaudited)		January 27, 2008
Raw materials	$	577	$	2,078
Work in process		—		—
Finished goods		896		1,637

Total	$	1,473	$	3,715

6.	Accumulated Other Comprehensive Loss

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

Net comprehensive loss includes the Company’s net loss, as well as accumulated other comprehensive loss on available-for-sale securities. Net comprehensive loss for the three and six months ended July 27, 2008 and July 29, 2007, respectively, is as follows (in thousands):


	Three Months Ended						Six Months Ended
	July 27, 2008			July 29, 2007			July 27, 2008			July 29, 2007
Net loss	$	(7,168	)	$	(4,337	)	$	(2,306	)	$	(7,582	)
Net change in unrealized gain / loss on available for sale securities		(44	)		1			(271	)		2

Net comprehensive loss	$	(7,212	)	$	(4,336	)	$	(2,577	)	$	(7,580	)

Total accumulated other comprehensive income was $0 thousand and $271 thousand at July 27, 2008 and January 27, 2008, respectively. Accumulated other comprehensive income consisted entirely of unrealized gains on available for sale securities.

7.	Restructure Expense

In July 2008, the Company implemented a corporate restructuring plan (“July Plan”) as approved by the Board of Directors in response to continuing economic uncertainties with the intent to improve its operating cost structure. As part of the July Plan, the Company reduced its workforce through a lay-off of approximately 15% of its employees. These restructuring activities have resulted in charges related to severance for terminated employees and other exit-related costs arising from contractual and other obligations. Related to the July Plan, the Company incurred total restructuring charges of $129 thousand, all of which resulted in cash expenditures. The Company substantially completed the restructuring activities by August 31, 2008. The restructuring charges are reported in the condensed consolidated statements of operations under operating expenses, “Restructuring expense”. Restructuring charges were as follows:


	Three Months Ended				Six Months Ended
	July 27, 2008		July 29, 2007		July 27, 2008		July 29, 2007
Employee severance and benefit arrangements	$	129	$	—	$	129	$	—

Total restructuring charges	$	129	$	—	$	129	$	—

The following table provides a summary of the activities for the three months ended July 27, 2008 related to the Company’s restructuring activities:


	Employee Severance and Benefits
Restructuring balance, April 27, 2008	$	—
Charged to costs and expenses		129
Non-cash items		—
Cash payments		(75	)

Restructuring balance, July 27, 2008	$	54

In September 2008, the Company implemented further restructuring activities, as approved by the Board of Directors. These restructuring activities included an additional 26% reduction in employees, resulting in an anticipated reduction in salaries and compensation-related expenses of approximately $595,000 on a quarterly basis. These employment reductions are anticipated to be completed by the end of October 2008.

The Company anticipates incurring costs of approximately $170,000 to $180,000 associated with these actions for one-time termination benefits and an additional amount of approximately $120,000 to $130,000 representing payments of accrued vacation benefits to terminated employees. These items result in total cash expenditures anticipated to be incurred in the Company’s fiscal third quarter ending October 26, 2008, ranging from approximately $290,000 to $310,000.

8.	Obligations Under Capital Leases

In January 2007, the Company entered into a new capital lease to replace an expiring lease for software licenses used in the design of its semiconductor products. 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):


	July 27, 2008 (unaudited)			January 27, 2008
Software under capital lease	$	655		$	655
Accumulated amortization		(346	)		(236	)

Net software under capital lease	$	309		$	419

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 July 27, 2008 (in thousands):


Fiscal 2009 (remaining six months)	$	176
Fiscal 2010		354

Total minimum lease payments		530
Less: amount representing interest		(31	)

Present value of net minimum lease payments		499
Less: current portion		(327	)

Long-term portion	$	172

9.	Warrant Liability

On December 6, 2006, NeoMagic closed the sale and issuance of (i) 2,500,000 shares of its Common Stock, $.001 par value (the “2006 Shares”), and (ii) warrants to purchase 1,250,000 shares of Common Stock at an exercise price of $5.20 per share (the “2006 Warrants”). The Company sold and issued the 2006 Shares and the 2006 Warrants for an aggregate offering price before deducting any expenses of $11,450,000. After deducting offering costs, net cash proceeds received by the Company were approximately $10.5 million. The issuance and sale of the 2006 Shares and the 2006 Warrants was registered under a shelf Registration Statement on Form S-3, which was declared effective on October 31, 2006 (the “Primary S-3”).

The 2006 Warrants provide that each holder of a 2006 Warrant may exercise its 2006 Warrant for shares of Common Stock at an exercise price of $5.20 per share, but no 2006 Warrant was exercisable for cash until one year after its initial issuance. The 2006 Warrants, however, became net exercisable on June 6, 2007. The 2006 Warrants provide for adjustments to the exercise price per share and number of shares for which the 2006 Warrants may be exercised in certain circumstances, including stock splits, stock dividends, certain distributions, reclassifications and, subject to a minimum price of $4.58 per share, dilutive issuances (i.e., price based anti-dilution adjustments).

The 2006 Warrants were initially classified as a liability in accordance with EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock” (“EITF 00-19”). Although the 2006 Warrants as originally issued provided that shares of common stock may be issued upon a cash exercise under a private placement exemption if the Primary S-3 is not effective, the staff of the SEC advised the Company that the Company would be obligated to physically settle the contract only by delivering registered shares. Under EITF 00-19, if the Company must settle the contract by delivering registered shares, it is assumed that the Company will be required to net-cash settle the contract. As a result, the 2006 Warrants were initially required to be classified as a liability. The fair value of the 2006 Warrants was estimated to be $5.7 million at the date of issue using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.53%; no dividend yield; an expected life of 5 years; and a volatility factor of 94.9%. The Company is required to revalue the cash exercisable 2006 Warrants at the end of each reporting period with the change in value reported in the statement of operations as a “gain or loss from the change in fair value on revaluation of warrant liability” in the period in which the change occurred. In fiscal 2008 and fiscal 2007, the Company recognized a gain on the change in fair value on revaluation of warrant liability of $0.8 million and $1.8 million, respectively. Since the warrants were initially classified as a liability, the proceeds allocated to equity were the gross proceeds of $11,450,000 less the fair value of the warrants of $5,688,000 and less the offering costs allocated to the warrants of $273,000. The total offering costs of $974,000 were allocated between the 2006 Warrants and the common stock based on their respective fair values. Offering costs of $273,000 were allocated to the 2006 Warrants and reported as interest expense in the statement of operations for fiscal 2007.

In July 2007, the Company offered holders of 2006 Warrants, the ability to amend their outstanding warrants. The amended 2006 Warrants are only exercisable on a net share settlement basis and are no longer cash exercisable. Since holders of amended 2006 warrants cannot make or execute a cash exercise, the Company will not be required to register the shares issued upon exercise of such amended warrants under any circumstances. Accordingly, as of July 27, 2007, the amended 2006 Warrants were no longer required to be classified as a liability under EITF 00-19 and were reclassified as equity. The Company completed its warrant exchange offer on July 27, 2007. At that time, 96% of all outstanding 2006 Warrants were amended, representing 1,200,000 shares of the 1,250,000 shares subject to warrants that had been available for amendment. One investor holding a warrant to purchase 50,000 shares chose not to participate. The 2006 Warrants were revalued on July 27, 2007, the date the warrant exchange offer was completed, and the Company recognized a loss on the change in fair value on revaluation of warrant liability of $248,000. The fair value of the 2006 Warrants was estimated to be $3.1 million. The $3.0 million value of the amended 2006 Warrants was reclassified to equity as of July 27, 2007 and the $0.1 million value of the 2006 Warrants that were not amended remains on the Company’s balance sheet as a liability of $4,000 as of July 27, 2008 and $38,000 as of January 27, 2008.

10.

Income Taxes

The Company maintained a full valuation allowance on its net deferred tax assets as of July 27, 2008. The valuation allowance was determined in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, or SFAS No. 109, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. The Company intends to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 effective January 29, 2007. In accordance with FIN 48, paragraph 19, the Company decided to classify interest and penalties as a component of tax expense. As a result of the implementation of FIN 48, the Company recognized a $101 thousand decrease in liability for unrecognized tax benefits, which was accounted for as an adjustment to the January 29, 2007 balance of retained earnings.

The Company has unrecognized tax benefits of approximately $2.3 million as of January 27, 2008, of which $571 thousand if recognized would result in a reduction of the Company’s effective tax rate. The Company recorded a decrease of its unrecognized tax benefits of approximately $296 thousand during the six months ended July 27, 2008.

Over the next twelve months, the Company’s existing tax positions may continue to generate an increase in unrecognized tax benefits subject to management’s periodic reviews of the Company’s uncertain tax positions. However, the Company does not expect the changes in unrecognized tax benefits of its tax positions, if any, will result in recognition of an uncertain tax liability.

The Company is subject to audit by the IRS for all years since fiscal 2003, and to audit by the California Franchise Tax Board for all years since fiscal 2001.

11.

Commitments and Contingencies

Commitments

In May 1996, the Company moved its principal headquarters to a new facility in Santa Clara, California, under a non-cancelable operating lease that expired in April 2003. In January 1998, the Company entered into a second non-cancelable operating lease for an adjacent building, which became its new corporate headquarters.

This lease had a co-terminus provision with the original lease that expired in April 2003. In March 2002, the Company extended the term for 45,000 square feet under this lease for another seven years with a termination date of April 2010. The Company leases offices in Israel and India under operating leases that expire in September 2008 and December 2008, respectively. Future minimum lease payments under operating leases are as follows (in thousands):


Fiscal 2009 (remaining six months) *	$	586
Fiscal 2010		893
Fiscal 2011		229
Thereafter		—

Total minimum lease payments	$	1,708

*	Net of sublease income for subleases in the Company’s Santa Clara facility through October 2008 and April 2010.

Design tool software licenses

We have commitments under time-based subscription licenses for design tool software of $285,000 for the remaining six months of fiscal 2009 and $285,000 in fiscal 2010.

12.

Product Warranty

The Company generally sells its products with a limited warranty and a limited indemnification of customers against intellectual property infringement claims. 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 claims based on historical activity. The accrual and the related expense for known claims was not significant as of and for the three and six month periods ended July 27, 2008 and July 29, 2007, 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.

13.

Recent Accounting Pronouncements

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This statement allows entities to elect to measure many financial instruments and certain other items that are similar to financial instruments at fair value that are not currently required to be measured at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. Upon initial adoption, this statement provides entities with a one-time chance to elect the fair value option for the eligible items. The effect of the first measurement to fair value should be reported as a cumulative-effect adjustment to the opening balance of retained earnings (cumulative deficit) in the year the statement is adopted. SFAS 159 was effective for NeoMagic beginning on January 28, 2008. The Company did not make any elections for fair value accounting and therefore, it did not record a cumulative-effect adjustment to its opening cumulative deficit balance.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), or SFAS No. 141(R), Business Combinations. Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development, or IPR&D is capitalized as an intangible asset and amortized over its estimated useful life. We are required to adopt the provisions of SFAS No. 141(R) beginning with our fiscal quarter ending April 26, 2009. The adoption of SFAS No. 141(R) is expected to change our accounting treatment for business combinations on a prospective basis beginning in the period it is adopted.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, or SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is in the process of evaluating this standard and therefore has not yet determined the impact that the adoption of SFAS 160 will have on its consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, or SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”. SFAS 161 requires enhanced disclosures about a company’s derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is in the process of evaluating the impact of adopting the provisions of SFAS 161.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FSP 157-2 defers by one year the effective date of FAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which for NeoMagic is effective beginning January 26, 2009. We are currently evaluating the impact of adopting the provisions of FSP 157-2.

On April 25, 2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Asset” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets”. The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), “Business Combinations”, and other U.S. generally accepted accounting principles. FSP 142-3 is effective for NeoMagic beginning January 26, 2009. Earlier adoption is prohibited. The adoption of FSP 142-3 is expected to change our accounting treatment for recognized intangible assets in conjunction with business combinations on a prospective basis beginning in the period it is adopted.

In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission of the Public Company Accounting Oversight Board’s amendments to AU section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect SFAS 162 to have a material impact on our consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants (“AICPA”) and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

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, the launch of new products by NeoMagic and its customers and research and development activities. However, actual events and results could vary significantly based on a variety of factors including those set forth below under Item 1A of Part II. 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

We deliver semiconductor chips and software that provide solutions to enable new multimedia applications for handheld devices. Our solutions offer low power consumption, small form-factor and high performance processing. As part of our complete system solution, we deliver a suite of middleware and sample applications for imaging, video and audio functionality, and we provide multiple operating system ports with customized drivers for our products. Our product portfolio includes semiconductor solutions known as Applications Processors as well as other System-On-Chips (SOCs). Our Applications Processors are sold under the “MiMagic” brand name with a focus on enabling high performance multimedia within a low power consumption environment. In mobile phones, our Applications Processors are designed to work side-by-side with baseband processors that are used for communications functionality. Our SOC products dedicated for the mobile digital TV market are marketed under the “NeoMobileTV” and MiMagic brand names. Target customers for both our MiMagic and our NeoMobileTV products include manufacturers of mobile phones and handheld devices. The largest projected market opportunity for our products is in the mobile phone market, where our products enable multimedia functionality.

We are not generating sufficient cash from the sale of our products to support our operations and have been incurring significant losses. We have been funding our operations primarily with the cash proceeds raised through the sale of certain patents in February 2008. We expect to incur additional losses and may have negative operating cash flows through the end of our fiscal year in January 2009 and beyond. During the six months ended July 27, 2008, we raised approximately $9.5 million through the sale of certain patents. Unless we are able to increase our revenues and decrease expenses substantially and secure an external funding source, we will not have sufficient cash to support our operations and may be forced to file for bankruptcy. We are currently evaluating different financing alternatives including but not limited to selling shares of our common stock or issuing notes that may be convertible into shares of our common stock, which could result in the issuance of additional shares. In addition, we have taken steps to restructure our operations and reduce our monthly operational cash expenditures. In September 2008, we implemented a second reduction in our work force of approximately 26%, which included two executive officers. An estimated approximately $170,000 to $180,000 will be paid as one-time termination benefits to affected employees, along with payments of accrued vacation benefits of approximately $120,000 to $130,000. The reduction in work force is anticipated to reduce our on-going compensation expenses by approximately $595,000 per quarter. We anticipate these actions will be completed by the end of October 2008 and will result in total cash expenditures in our fiscal third quarter ending October 26, 2008, to range from approximately $290,000 to $310,000. We continue to pursue customers for our MiMagic and NeoMobileTV products and we are developing our next generation of products and technology offerings.

At July 27, 2008, the Company had cash, cash equivalents and short-term investments of $2.1 million as compared to $1.5 million at January 27, 2008.

There is no assurance that we will be successful in reducing our operating expenses, generating sufficient cash flows from operations or obtaining sufficient funding from any source on acceptable terms, if at all. If we are unable to generate sufficient cash flows from our operations or secure additional funding, and obtain stockholder approvals, if necessary for funding options, we would have to curtail certain expenditures that we consider necessary for optimizing the probability of success of developing new products and executing on our business plan. If we are unable to obtain additional funding for operations, we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail various aspects of our operations or cease operations. In such event, investors may lose a portion or all of their investment. The report of our independent registered public accounting firm, in respect of our 2008 fiscal year, includes an explanatory going concern paragraph regarding substantial doubt as to our ability to continue as a going concern, which indicates an absence of obvious or reasonably assured sources of future funding that will be required by us to maintain ongoing operations.

On July 23, 2008, our executive management approved and communicated to its employees a plan to terminate eleven full-time employees and five part-time employees, representing approximately 15% of the Company’s workforce, to reduce operating expenses and improve the Company’s cost structure. These actions were part of our strategy to create a more streamlined and effective business and cost structure. The terminations were completed August 31, 2008. For the second fiscal quarter ended July 27, 2008, we recorded restructuring costs of approximately $129 thousand associated with these actions for one-time termination benefits and contract terminations.

On July 8, 2008, we received a notice from the Nasdaq Stock Market that, due to recent vacancies on our board of directors and the audit committee of our board of directors, we were not in compliance with Nasdaq’s Marketplace Rules 4350(c) and (d), which require that the board of directors consist of a majority of independent directors, that our audit committee have at least three independent directors, and that our audit committee have at least one audit committee financial expert. The vacancies were created as a result of Steve Valenzuela’s resignation from our board of directors and audit committee on June 24, 2008 and Dr. Anil Gupta’s resignation from our board of directors on June 25, 2008.

In accordance with Marketplace Rules 4350(c)(1) and 4350(d)(4), Nasdaq has provided us a cure period to regain compliance until the earlier of our next annual shareholders’ meeting or June 24, 2009; or if the next annual shareholders’ meeting is held before December 22, 2008, then we must evidence compliance no later than December 22, 2008. If we do not regain compliance within this period, the Nasdaq Stock Market will provide written notification to us that our securities will be delisted. Upon receipt of the delisting notification, we may appeal the delisting to Nasdaq’s Listings Qualifications Panel.

On August 18, 2008, we announced that effective as of August 15, 2008, David Tomasello was appointed to our board of directors. Mr. Tomasello has been the managing partner of Attiva Capital, an independent investment firm, since October 2006, and, a director of Bluestone Financial, an independent investment firm, since February 2008. He has been a member of the board of directors of WorldGate Communications, Inc. (Nasdaq: WGAT), a leading provider of personal video phones and related technology, since May 2007. Mr. Tomasello has also been a member of the board of directors and the audit committee of Corimon S.A.C.A., a diversified manufacturer and distributor of packaging materials, chemicals and paint in Venezuela, since 2005. In addition, Mr. Tomasello has been a member of the board of directors of Fininvest S.A., a Venezuelan commercial and residential real estate developer, since 2003. He is a graduate of Boston University with a BS/BA degree in finance.

We are in the process of searching for another independent director to join our board of directors and to fill the vacancy on our audit committee.

On June 2, 2008, we received a letter from the Nasdaq Stock Market indicating that we were not in compliance with the Nasdaq Stock Market’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Minimum Bid Price Rule”). Nasdaq stated in its letter that in accordance with the Nasdaq Marketplace Rules, we would be provided 180 calendar days, or until December 1, 2008, to regain compliance with the Minimum Bid Price Rule. If, at any time before December 1, 2008, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that we have achieved compliance with the Minimum Bid Price Rule.

The letter also stated that if we do not regain compliance with the Minimum Bid Price Rule by December 1, 2008, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria as set forth in Marketplace Rule 4310(c), except for the bid price requirement. If we meet the initial listing criteria, the Nasdaq staff will notify us that we have been granted an additional 180 calendar day compliance period. If we are not eligible for an additional compliance period, the Nasdaq staff will provide written notification that our securities will be delisted. Upon receipt of this delisting notification, we may appeal the delisting to the Listing Qualifications Panel of Nasdaq.

Since April 2002, we have been working with The Consortium for Technology Licensing Ltd. to explore opportunities to license or sell our patents. During the first quarter of fiscal 2009, we completed the sale of selected, non-essential patents, which included our embedded DRAM patents, and a patent application to Faust Communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5 million after agency commissions. The patents sold relate to products we no longer sell and not to products that we currently sell or plan to sell. We have retained a worldwide, non-exclusive, royalty-free license to use the technology covered by these patents and patent application for all of our current and future products. The sales did not include our important patents covering the unique array processing technology used in our newer MiMagic and NeoMobileTV products. As a result of the patent sale, we reported net income of $4.9 million in the first quarter of fiscal 2009 compared to a net loss of $3.2 million in the first quarter of fiscal 2008.

During the first quarter of fiscal 2009, we announced the production release of our latest application processor, the MiMagic 8. The MiMagic 8 is designed for mobile TV enabled smart phones, personal media players, GPS navigation devices and other handheld products.

The Company’s fiscal year end is the last Sunday in January. The second fiscal quarters of 2009 and 2008 ended on July 27, 2008 and July 29, 2007, respectively. The Company’s quarters generally have 13 weeks. The second quarters of fiscal 2009 and fiscal 2008 had 13 weeks. The Company’s fiscal years generally have 52 weeks.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary materially from our estimates.

We believe that the following accounting policies are “critical” as defined by the SEC, in that they are both highly important to the portrayal of our financial condition and results, and require difficult management judgments and assumptions about matters that are inherently uncertain:

1.	revenue recognition;

2.	inventory valuation;

3.	deferred taxes and tax accruals; and

4.	fair value of equity instruments.

There have been no significant changes to these policies from the disclosures noted in our Annual Report on Form 10-K for the fiscal year ended January 27, 2008.

Results of Operations

Revenue

Net revenue was $384 thousand for the three months ended July 27, 2008, compared to $151 thousand for the three months ended July 29, 2007, and consisted entirely of net product revenue in both quarters. Net revenue was $976 thousand and $633 thousand for the six months ended July 27, 2008 and July 29, 2007, respectively. There was no licensing revenue during any of the periods reported. Net product revenue increased in the second fiscal quarter of 2009 relative to the second fiscal quarter of 2008 primarily due to an approximately $358 thousand increase in shipments of our MiMagic 3 applications processor, partially offset by an approximately $121 thousand decrease in shipments of our MiMagic 6+ applications processor. The increased shipments of our MiMagic 3 application processor were primarily due to shipments to Flextronics (formerly Solectron) for production in Singapore for use in an automated toll-collection system. The decrease in shipments of our MiMagic 6+ application processor was due to decreased shipments to Neonode for use in a mobile phone application. Net product revenue increased during the six months ended July 27, 2008 relative to the six months ended July 29, 2007 primarily due to an approximately $889 thousand increase in shipments of our MiMagic 3 applications processor, partially offset by an approximately $536 thousand decrease in shipments of our MiMagic 6+ applications processor. The increase in shipments of our MiMagic 3 applications processor during the first and second quarters of fiscal 2009 relative to the same period in fiscal 2008 was driven by increased demand from Flextronics, as previously noted. The decrease in shipments of our MiMagic 6+ applications processor during the first and second quarters of fiscal 2009 relative to the same period in fiscal 2008 was driven by a decrease in demand from Neonode as well as a decrease in demand from Seijin Electron for a mobile TV application. This MiMagic 6+ program of Sejin Electron is no longer active. Sejin has discontinued marketing efforts for this program due to limited demand for this type of stand-alone mobile TV product.

Product 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 100% and 85% of product revenue in the three months ended July 27, 2008 and July 29, 2007, respectively. During the six months ended July 27, 2008 and July 29, 2007, product sales to customers located outside the United States accounted for 99% and 94% of product revenue, respectively. In the first six months of fiscal 2009, 85% of our revenue resulted from the sales of our MiMagic 3 application processors to Flextronics for production in Singapore for use in an automated toll-collection system. In the first six months of fiscal 2008, 72% of our revenue resulted from sales of our MiMagic 6+ application processors to Sejin Electron and Neonode for a mobile television and mobile phone applications. We expect that export sales will continue to represent the majority of our product revenue.

Our customer base can shift significantly from period to period as some customer programs end and new programs do not always emerge to replace them. In addition, new customers are often added from period to period. All sales transactions were denominated in United States dollars. The following table summarizes the Company’s product revenue by major geographic area:


	Three Months Ended				Six Months Ended
	July 27, 2008		July 29, 2007		July 27, 2008		July 29, 2007
Singapore	77	%	2	%	85	%	0	%
Hong Kong	17	%	0	%	7	%	0	%
Korea	6	%	7	%	7	%	61	%
United States	0	%	15	%	1	%	6	%
Malaysia	0	%	0	%	0	%	5	%
Sweden	0	%	76	%	0	%	27	%
England	0	%	0	%	0	%	1	%

	100	%	100	%	100	%	100	%

The following customers accounted for more than 10% of product revenue:

Three Months Ended

Six Months Ended

July 27,
2008

July 29,
2007

July 27,
2008

July 29,
2007

Flextronics

Uni Precision

Neonode

Sejin Electron Inc.

*	represents less than 10% of net sales

Gross Profit (Loss)

Gross loss for the three months ended July 27, 2008 and July 29, 2007 was $2,214 thousand and $85 thousand, respectively. The increase in gross loss was primarily due to charges of $2,353 thousand for the write-down of MiMagic 6+ and MiMagic 8 inventories to anticipated market value where ending on-hand quantities exceeded the foreseeable customer requirements due to shifts in market demand. This charge was partially offset by the sale of higher margin products for approximately $161 thousand and lower manufacturing overhead and variances from standard cost of approximately $98 thousand. Gross loss for the six months ended July 27, 2008 was $2,089 thousand as compared to a gross profit of $53 thousand for the six months ended July 29, 2007. The reduction in gross profit to a gross loss in the first six months of fiscal 2009 as compared to the same period in fiscal 2008 was driven by a shift from reserve releases of $68 thousand in fiscal 2008 to charges for inventory write-downs of approximately $2.4 million in fiscal 2009.

Research and Development Expenses

Research and development expenses are primarily directed to development for the mobile television, wireless IP camera, and multimedia-enriched handsets markets. Research and development expenses include compensation and associated costs relating to development personnel, outside engineering consulting, amortization of intangible assets and prototyping costs, which are comprised of photomask costs and pre-production wafer costs. Research and development expenses were approximately $3.2 million and $3.0 million for the three months ended July 27, 2008 and July 29, 2007, respectively. Research and development expenses increased in the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 primarily due increased labor costs, consultants, and engineering software license costs of approximately $350 thousand, partially offset by an approximately $198 thousand decrease in depreciation expenses. For the six months ended July 27, 2008 and July 29, 2007, research and development expenses were $6.3 million and $5.9 million, respectively. The increase in research and development expenses during the first six months of fiscal 2009 compared to the first six months of fiscal 2008 was driven by increased labor costs, consultants, and engineering software maintenance costs of approximately $692 thousand, partially offset by an approximately $491 thousand decrease in depreciation expenses. Following the reduction in work force in September 2008, we anticipate reduced research and development expenses.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $1.5 million and $1.7 million for the three months ended July 27, 2008 and July 29, 2007, respectively. Sales, general and administrative expenses decreased due to lower recruiting costs, travel expenses, customer samples and costs incurred in 2007 for our annual shareholders’ meeting; no shareholder meeting has yet been held during 2008. For the six months ended July 27, 2008 and July 29, 2007, sales, general and administrative expenses were $3.3 million and $3.2 million, respectively. The increase in sales, general and administrative expenses was driven by slightly higher compensation costs, legal and audit fees, offset by lower facilities costs. Following the reduction in work force in September 2008, we anticipate reduced sales, general and administrative expenses.

Restructuring Expenses

In the second fiscal quarter of 2009, our executive management approved and communicated to its employees a plan to terminate eleven full-time employees and five part-time employees, representing approximately 15% of the Company’s workforce, to reduce operating expenses and improve the Company’s cost structure. These actions are part of the Company’s strategy to create a more streamlined and effective business and cost structure. In conjunction with these restructuring activities, we recorded expenses of approximately $129 thousand, comprised of approximately $105 of severance related costs and approximately $20 thousand of contract termination expenses.

A second reduction in work force was implemented in September 2008. See “Overview.”

Gain on Sale of Patents

There were no patent sales in the second quarter of fiscal 2009. In the first quarter of fiscal 2009, we completed the sale of 18 non-essential patents, which included our embedded DRAM patents, and a patent application to Faust Communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5 million after agency commissions. We have retained a worldwide, non-exclusive, royalty-free license to use the technology covered by these patents and patent application for all of our current and future products. The patents sold in the first quarter of fiscal 2009 do not relate to products NeoMagic currently sells or plans to sell. There were no patent sales in the first or second quarters of fiscal 2008.

Stock Compensation

Stock compensation expense was $480 thousand and $468 thousand for the three months ended July 27, 2008 and July 29, 2007, respectively. For the first six months of fiscal 2009 and fiscal 2008, stock compensation expense was $972 thousand and $921 thousand, respectively. Stock compensation expense recorded in cost of revenues, research and development expenses and selling, general and administrative expenses for the three and six months ended July 27, 2008 and July 29, 2007, is the amortization of the fair value of share-based payments made to employees and members of our board of directors in the form of stock options and purchases under the employee stock purchase plan as we adopted the provision of SFAS No. 123 (R) on the first day of fiscal 2007 (See Note 2). The fair value of stock options granted and rights granted to purchase our common stock under the employee stock purchase plan is recognized as expense over the employee requisite service period.

Interest Income and Other

The Company earns interest on its cash and short-term investments. Interest and other income was $30 thousand and $212 thousand for the three months ended July 27, 2008 and July 29, 2007, respectively. For the first six months of fiscal 2009 and fiscal 2008, interest and other income was $101 thousand and $405 thousand, respectively. The decrease is primarily due to lower average cash and short-term investment balances and decreased interest rates.

Loss on Marketable Equity Securities

In January 2006, the Company made a $200 thousand minority equity investment in Neonode, Inc. (“Neonode”), a then privately held mobile telephone company. In August 2007, effective upon the merger of Neonode with a subsidiary of SBE, Inc. (“SBE”), SBE changed its name to Neonode, Inc. and its common stock is now publicly traded on the Nasdaq Stock Exchange (“NEON”). Upon the merger of SBE and Neonode, the Company’s investment converted into approximately 127,000 shares of Neonode common stock. The investment is classified as an available for sale security and had a fair value on July 27, 2008 and January 27, 2008 of $46 thousand and $471 thousand, respectively. We have evaluated the fair value of the Neonode securities as of July 27, 2008, and consider the decline since the January 27, 2008 to be other than temporary, and accordingly, we have recorded an impairment loss of $154 thousand in Other income (expense), net in the Statement of Operations. As of January 27, 2008, the fair value reflected a gross unrealized gain of $271 thousand.

Interest Expense

Interest expense was $9 thousand and $17 thousand for the three months ended July 27, 2008 and July 29, 2007, respectively. For the first six months of fiscal 2009 and fiscal 2008, interest expense was $19 thousand and $41 thousand, respectively. Interest expense recorded in the first and second quarters of fiscal 2009 and fiscal 2008 represents interest on our capital lease obligations (See Note 8). The decreased interest expense is due to declining principal balances.

Gain from Change in Fair Value of Warrant Liability

The Company recorded a gain of $9 thousand as compared to a loss of $248 thousand in the second quarters of fiscal 2009 and 2008, respectively, for the change in fair value on revaluation of its warrant liability associated with its warrants issued on December 6, 2006 (the “2006 Warrants”). For the first six months of fiscal 2009 and fiscal 2008, the Company recorded a gain $34 thousand and $743 thousand, respectively. The Company is required to revalue certain of the 2006 Warrants at the end of each reporting period and reflect in the statement of operations a gain or loss for the change in fair value of the warrant liability in the period in which the change occurred. We calculate the fair value of the warrants outstanding using the Black-Scholes model (see Note 8). Following the warrant exchange in the second quarter of fiscal 2008, the number of 2006 Warrants subject to quarterly re-evaluation has decreased from warrants to purchase 1,250,000 shares to a warrant to purchase 50,000 shares, which significantly decreased the magnitude of the revaluation for the first quarter of fiscal 2009. A gain results principally from a decline in the Company’s share price during the period and a loss results principally from an increase in the Company’s share price.

Income Taxes

Income tax expense was $15 thousand for the three months ended July 27, 2008 and the Company recorded an income tax benefit of $472 thousand for the three months ended July 29, 2007. For the first six months of fiscal 2009, income tax expense was $23 thousand and the Company recorded an income tax benefit of $451 thousand for the similar period of fiscal 2008. We recorded tax provisions of $15 thousand and $23 thousand, notwithstanding incurring losses before income taxes of $7.1 million and $2.3 million, in the three and six months ended July 27, 2008, respectively, primarily due to foreign income taxes. We did not record a provision for domestic income taxes in the first or second quarters of fiscal 2009, as we anticipate an operating loss for the fiscal year. We recorded a tax benefit of $472 thousand on a loss before income taxes of $4.8 million in the three months ended July 29, 2007 that consisted primarily of foreign income taxes and a reduction in income tax payable of $481 thousand for the settlement of an income tax assessment by the State of Texas. We recorded a tax benefit of $451 thousand on a loss before income taxes of $8.0 million in the six months ended July 29, 2007 that consisted of foreign income taxes, an increase of $15 thousand for accrued interest on income taxes payable and a reduction in income tax payable of $481 thousand for the settlement of an income tax assessment by the State of Texas.

Liquidity and Capital Resources

At July 27, 2008, the Company had cash, cash equivalents and short-term investments of $2.1 million as compared to $1.5 million at January 27, 2008.

We believe our current cash, cash equivalents and short-term investments will only satisfy our projected cash requirements through approximately September 30, 2008. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern. The audit report of our independent registered public accounting firm with respect to our fiscal year ended January 27, 2008, was modified by adding an explanatory paragraph for a “going concern”. We need to raise additional capital to fund future operating activities as soon as possible. If we continue to experience a material shortfall in revenues versus our plan, we expect to take appropriate actions to maximize the value of the Company. We are in the process of taking actions to achieve further reductions in our operating expenses, including a second reduction in work force implemented in September 2008. We also believe that we can take actions to generate cash by selling or licensing intellectual property, seeking funding from strategic partners, and seeking further equity or debt financing from financial sources. We cannot assure you that additional financing will be available on acceptable terms or at all.

Cash and cash equivalents used in operating activities was $8.6 million for the six months ended July 27, 2008 and for the six months ended July 29, 2007. The net cash used in operating activities for the six months ended July 27, 2008 was primarily due to net losses of $2.3 million reduced by the non-operating gain on the sale of patents of $9.5 million, which were partially offset by non-cash charges for inventory write-downs of $2.4 million, stock-based compensation expenses of $1.0 million and depreciation expenses of $0.2million. Requirements for working capital assets and liabilities drove cash usage in operations of approximately $0.5 million, comprised of a decrease in accounts payable of $0.4 million, a decrease in income taxes payable of $0.3 million and an increase in inventory of $0.2 million, partially offset by a decrease in accounts receivable of $0.3 million. The cash used in operating activities for the six months ended July 29, 2007 was primarily due to the net loss of $7.6 million, the change in fair value on revaluation of warrant liability of $0.7 million, and the reversal of the provision for a tax liability of $0.5 million, partially offset by non-cash stock-based compensation of $0.9 million and depreciation of $0.7 million. Requirements for working capital assets and liabilities drove cash usage in operations of approximately $1.4 million, comprised of an increase in inventory of $1.7 million, partially offset by an increase in accounts payable of $0.3 million.

Net cash provided by investing activities for the six months ended July 27, 2008 was $9.9 million, compared to $3.1 million of net cash used in investing activities for the six months ended July 29, 2007. The net cash provided by investing activities for the six months ended July 27, 2008 was primarily due to the net proceeds from the sale of patents of $9.5 million and the maturities of short-term investments of $3.5 million, partially offset by purchases of short-term investments of $3.0 million. The net cash used in investing activities for the six months ended July 29, 2007 was primarily due to net purchases of short-term investments of $3.0 million.

Net cash used in financing activities was $ 0.1 million for the six months ended July 27, 2008, compared to $ 0.5 million of net cash used in financing activities for the six months ended July 29, 2007. The net cash used in financing activities for the six months ended July 27, 2008 and July 29, 2007 was principally due to payments on capital lease obligations of $0.2 million and $0.7 million, respectively. These payments were partially offset by net proceeds from the issuance of common stock of $0.1 million and $0.3 million, for the six months ended July 27, 2008 and July 29, 2007, respectively.

Our lease for our headquarters in Santa Clara, California expires in April 2010. We lease offices in Israel and India under operating leases that expire in September 2008 and in December 2008, respectively. In December 2006, we amended a sublease agreement to extend the term for the sublease of 10,000 square feet of our Santa Clara facility to a third party through October 2008. In July 2008, we subleased an additional 11,000 square feet of our Santa Clara facility to a different third party through April 2010.

We lease software licenses under capital leases (see Note 8).

Contractual Obligations

The following summarizes the Company’s contractual obligations at July 27, 2008, and the effect such obligations are expected to have on our liquidity and cash flow (in thousands):


	Fiscal Year
	2009		2010		2011		Thereafter		Total
CONTRACTUAL OBLIGATIONS
Operating leases	$	586	$	893	$	229	$	—	$	1,708
Capital leases		176		354		—		—		530
Design tool software licenses		285		285		—		—		570
Non-cancelable purchase orders		28		—		—		—		28

Total contractual cash obligations	$	1,075	$	1,532	$	229	$	—	$	2,836

Off-Balance Sheet Arrangements

As of July 27, 2008, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

Recent Accounting Pronouncements

Please refer to Note 13 of Notes to our condensed consolidated financial statements included in Item 1 of Part I for a discussion of the expected impact of recently issued accounting standards.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Item 4T.

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 were 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

During the second quarter of fiscal 2009, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the risk of exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate the risk of misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.

Part II. Other Information

Item 1A .

Risk Factors

The factors discussed below are cautionary statements that identify important risk factors that could cause actual results to differ materially from those anticipated in the forward-looking statements in this Quarterly Report on Form 10-Q. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock could decline and investors might lose all or part of their investment in our common stock.

We Need Additional Capital

We need to raise additional capital to fund future operating activities as soon as possible. In addition to our serious need for cash in the very near term, we will continue to require additional working capital to fund our business, given the long cycle times required to achieve design wins, convert customer design wins into production orders, and for customers to achieve volume shipments of their products. At July 27, 2008, cash, cash equivalents and short-term investments were $2.1 million. We believe that our existing capital resources will only be sufficient to meet our capital requirements through approximately September 30, 2008. Our future capital requirements will depend on many factors, including the rate of net revenue growth, timing and extent of spending to support research and development programs in new and existing areas of technology, effectiveness of sales and marketing support activities, the effects of our expense reduction program, and timing and customer acceptance of new products. Our ability to raise capital and the terms of any financing will depend, in part, on our ability to establish customer engagements and generate sales. The uncertainty related to the timing and extent of achievement of these factors raises substantial doubt about the Company’s ability to continue as a going concern. We cannot assure you that additional equity or debt financing will be available on acceptable terms or at all. It is anticipated that a financing will substantially dilute the interests of existing shareholders. Failure to obtain sufficient funding in the very near term could result in the need to file for bankruptcy.

We Expect to Continue to Incur Significant Losses and Consume Cash in Operations

We have been incurring substantial operating losses and consuming cash in operations as we invest heavily in new product development in advance of achieving significant product sales. This is expected to continue throughout fiscal 2009. Our ability to achieve cash flow breakeven is likely to depend on the success of our MiMagic 6+, MiMagic 8 and NeoMobileTV products. Even if these new products are successful, we are likely to continue to incur significant additional losses and consume cash in operations during the current fiscal year ending January 25, 2009.

We Have a Limited Customer Base

In each of the last three fiscal years, three customers have accounted for over two-thirds of our product revenue. In the first six months of fiscal 2009, one customer accounted for 85% of product revenue. In fiscal 2008, the top three customers accounted for 50%, 20%, and 14%, respectively, of product revenue. In addition, one licensee accounted for 100% of our licensing revenue in fiscal 2006. There has been no licensing revenue in fiscal 2009 to date, nor in 2008 and 2007. We expect that a small number of customers will continue to account for a substantial portion of our product revenue for the foreseeable future. Furthermore, the majority of our sales were made, and are expected to continue to be made, on the basis of purchase orders rather than pursuant to long-term purchase agreements. As a result, our business, financial condition and results of operations could be materially adversely affected by the decision of a single customer to cease using our products, or by a decline in the number of handheld devices sold by a single customer.

We May Lose Our Customer Base

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

Potential Nasdaq Stock Market Delisting

We are currently out of compliance with several Nasdaq requirements, as detailed below. Accordingly, it is likely that our stock will be delisted upon expiration of the applicable grace periods.

On June 30, 2008, we notified the Nasdaq Capital Market that we were not in compliance with Nasdaq’s Marketplace Rules 4350(c) and (d), which require that the board of directors consist of a majority of independent directors, that our audit committee have at least three independent directors, and that our audit committee have an audit committee financial expert. Therefore, our securities are subject to potential delisting.

On July 8, 2008, we received a notice from the Nasdaq Stock Market that, due to recent vacancies on our board of directors and the audit committee of our board of directors, we were not in compliance with Nasdaq’s Marketplace Rules 4350(c) and (d), which require that the board of directors consist of a majority of independent directors and that our audit committee have at least three independent directors. The vacancies were created as a result of Steve Valenzuela’s resignation from our board of directors and audit committee on June 24, 2008 and Dr. Anil Gupta’s resignation from our board of directors on June 25, 2008.

On August 18, 2008, we announced that effective as of August 15, 2008, David Tomasello was appointed to our board of directors. Mr. Tomasello has been the managing partner of Attiva Capital, an independent investment firm, since October 2006; and, a director of Bluestone Financial, an independent investment firm, since February 2008. He has been a member of the board of directors of WorldGate Communications, Inc., (Nasdaq: WGAT), a leading provider of personal video phones and related technology, since May 2007. Mr. Tomasello has also been a member of the board of directors and the audit committee of Corimon S.A.C.A., a diversified manufacturer and distributor of packaging materials, chemicals and paint in Venezuela, since 2005. In addition, Mr. Tomasello has been a member of the board of directors of Fininvest S.A., a Venezuelan commercial and residential real estate developer, since 2003. He is a graduate of Boston University with a BS/BA degree in finance.

We are in the process of searching for another independent director to join our board of directors and to fill the vacancy on our audit committee.

The letter also stated that if we do not regain compliance with the Minimum Bid Price Rule by December 1, 2008, the Nasdaq staff will determine whether the we meet the Nasdaq Capital Market initial listing criteria as set forth in Marketplace Rule 4310(c), except for the bid price requirement. If we meet the initial listing criteria, the Nasdaq staff will notify us that we have been granted an additional 180 calendar day compliance period. If we are not eligible for an additional compliance period, the Nasdaq staff will provide written notification that our securities will be delisted. Upon receipt of this delisting notification, we may appeal the delisting to a Listing Qualifications Panel of Nasdaq.

On December 12, 2007, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market, Inc. indicating that we did not comply with the minimum $10,000,000 stockholders’ equity requirement for continued listing on the Nasdaq Global Market set forth in Marketplace Rule 4450(a)(3), and therefore that our common stock was subject to potential delisting from The Nasdaq Global Market. On January 14, 2008, we received a letter from Nasdaq informing us that the Nasdaq Listing Qualifications Panel had granted our request to transfer the listing of our common stock from The Nasdaq Global Market to The Nasdaq Capital Market, effective at the opening of business on January 16, 2008. Our continued listing on The Nasdaq Capital Market is subject to our ability to meet the requirements of The Nasdaq Capital Market, including either (i) maintaining an aggregate market value of NeoMagic’s common stock of at least $35 million, (ii) maintaining stockholders’ equity of at least $2.5 million, or (iii) receiving net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. At July 27, 2008, our market value was approximately $5.3 million, our stockholders’ equity was approximately $2.0 million and we had net losses in each of the last three fiscal years.

On September 18, 2007, we received a Nasdaq Staff Determination notice from the Nasdaq Stock Market stating we were not in compliance with Nasdaq’s Marketplace Rule 4310(c)(14) because we had not yet filed our Quarterly Report on Form 10-Q for the quarter ended July 29, 2007. Therefore, our securities were subject to potential delisting. On November 1, 2007, we participated in a hearing before a Nasdaq Listing Qualifications Panel (the “Panel”) to review the staff determination. The hearing stayed the delisting until the Panel rendered a decision. We filed our Quarterly Report on Form 10-Q for the quarter ended July 29, 2007 on November 9, 2007 and, on November 15, 2007, we received a notice that the Nasdaq Listing Qualifications Panel determined that NeoMagic had regained compliance with the continued listing standards of The Nasdaq Stock Market.

On February 28, 2005, we received a notice from the Nasdaq Stock Market that we were no longer in compliance with the requirements for continued inclusion of our common stock on the Nasdaq Global Market pursuant to the Nasdaq’s Marketplace Rule 4450(a)(5) (the “Rule”) because our common stock had closed below $1.00 per share for 30 consecutive business days. We were given 180 calendar days, or until August 29, 2005, to regain compliance with the Rule. To regain compliance with the Rule, the closing bid price of our common stock had to be $1.00 per share or more for a minimum of 10 consecutive business days before August 29, 2005. We effected a five-for-one reverse stock split on August 12, 2005 that brought the closing bid price of our common stock above $1.00. On April 16, 2008, the closing bid price of our common stock dropped below $1.00 for the first time since the reverse stock split occurred. During the period from April 16, 2008 to May 28, 2008, our stock closed below $1.00 on 30 out of 30 trading days.

If we fail to regain compliance with the continued listing requirements of the Nasdaq Capital Market, including the requirement to make timely filing of SEC reports, the minimum bid price per share requirement and the minimum stockholders’ equity requirement, we may be delisted from trading on such market, and thereafter trading in our common stock, if any, would be conducted through 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 Capital Market. You may not be able to sell your shares of our stock quickly, at the market price or at all, if trading in our stock is not active.

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

Effective internal controls are necessary for us to provide reliable financial reports. If we do not provide reliable financial reports or prevent fraud, we will be subject to potential liability and may have to incur expenses to defend the Company against governmental proceedings or private litigation and/or to pay fines or damages. Such proceedings would also require significant management time and would distract management from focusing on the business. Failing to provide reliable financial reports would also cause loss of reputation in the investor community and would likely result in a decrease in our stock price.

In connection with management’s evaluation of our internal control over financial reporting as of July 29, 2007, management identified control deficiencies that constituted a material weakness. Our management concluded that we did not maintain effective controls over our revenue recognition processes. These control deficiencies resulted in our recording of a material adjustment to the financial statements for the second quarter of fiscal 2008 before their issuance. As a result of the material weakness, our management concluded that our internal control over financial reporting was not effective as of July 29, 2007 and October 28, 2007. The material weakness was remediated as of January 27, 2008 and management concluded that its internal control over financial reporting was effective as of January 27, 2008 and July 27, 2008.

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

Our Revenues Are Difficult To Predict

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

The difficulty in forecasting revenues increases the difficulty in anticipating our inventory requirements. This difficulty increases the likelihood that we may overproduce particular parts, resulting in inventory write-downs, or under-produce particular parts, affecting our ability to meet customer requirements. The difficulty in forecasting revenues also restricts our ability to provide forward-looking revenue and earnings guidance to the financial markets and increases the chance that our revenue performance does not match investor expectations.

We May Encounter Inventory Excess or Shortage

To have product inventory to meet potential customer purchase orders, we place purchase orders for semiconductor wafers from our manufacturer in advance of having firm purchase orders from our customers. We had binding orders for wafers totaling approximately $28 thousand outstanding as of July 27, 2008. If we do not have sufficient demand for our products and cannot cancel our current and future commitments without material impact, we may experience excess inventory, which will result in an inventory write-down affecting gross margin and results of operations. If we cancel a purchase order, we must pay cancellation penalties based on the status of work in process or the proximity of the cancellation to the delivery date. We must place purchase orders for wafers before we receive purchase orders from our own customers. This limits our ability to react to fluctuations in demand for our products, which can be unexpected and dramatic, and from time to time will cause us to have an excess or shortage of wafers for a particular product. As a result of the long lead-time for manufacturing wafers and the increase in “just-in-time” ordering by customers, semiconductor companies from time-to-time take charges for excess inventory. We have in fact incurred such charges in fiscal 2009 of $2.4 million, in fiscal 2008 of $0.4 million, in fiscal 2007 of $12 thousand and in fiscal 2006 of $0.2 million. Significant write-downs for excess inventory have had and could continue to have a material adverse effect on our financial condition and results of operations. Conversely, failure to order sufficient wafers would cause us to miss revenue opportunities and, if significant, could impact sales by our customers, which could adversely affect our customer relationships and thereby materially adversely affect our business, financial condition and results of operations.

We Face Intense Competition in Our Markets

The market for Applications Processors is intensely competitive and is characterized by rapid technological change, evolving industry standards and declining average selling prices. We believe that the principal factors of competition in this market are audio/video performance, price, features, power consumption, product size and customer support as well as company stability. Our ability to compete successfully in the Applications Processor market depends on a number of factors, including success in designing and subcontracting the manufacture of new products that implement new technologies, product quality and reliability, price, ramp of production of our products, customer demand and acceptance of more sophisticated multimedia functionality on mobile phones and other handheld devices, end-user acceptance of our customers’ products, market acceptance of competitors’ products and general economic conditions. Our ability to compete will also depend on our ability to identify and ensure compliance with evolving industry standards and market trends. Our small size and perceived instability are negative factors in competing for business.

We compete with both domestic and foreign companies, some of which have substantially greater financial and other resources than us with which to pursue engineering, manufacturing, marketing and distribution of their products. Our main competitors include Texas Instruments, Renesas, Marvell, Freescale, ST Microelectronics, Broadcom, Mediatek, Mtekvision, Core Logic, Telechips and C&S Technologies. We may also face increased competition from new entrants into the market, including companies currently in the development stage. We believe we have significant intellectual properties and have historically demonstrated expertise in SOC technology. However, if we cannot timely introduce new products for our markets, support these products in customer programs, or manufacture these products, such inabilities could have a material adverse effect on our business, financial condition and operating results.

Some of our current and potential competitors operate their own manufacturing facilities. Since we do not operate our own manufacturing facility and may from time-to-time make binding commitments to purchase products, we may not be able to reduce our costs and cycle time or adjust our production to meet changing demand as rapidly as companies that operate their own facilities, which could have a material adverse effect on our results of operations. In addition, if production levels increase the value of binding purchase orders may increase significantly.

Uncertainty Regarding Future Licensing Revenue and Gain on Sale of Patents

In the third quarter of fiscal 2006, we collected gross licensing revenue of $8.5 million ($5.6 million net of commissions and expenses) from the nonexclusive licensing of all of our patents to Sony Corporation of Tokyo, Japan. In February 2008, we sold 18 patents and one patent application to Faust Communications, LLC for net proceeds of $9.5 million. In June 2006, we sold 4 patents to Samsung Electronics Co. Ltd. for net proceeds of $1.0 million. In April 2005, we sold 58 patents to Faust Communications, LLC for net proceeds of $3.5 million. The patents sold related to products we no longer sell and not to products that we currently sell or plan to sell. We retained a worldwide, non-exclusive license under the patents sold. The sales did not include our important patents covering the unique array processing technology used in our newer MiMagic and NeoMobileTV products. We cannot assure you that we will be able to generate any future licensing revenue or gains on sales of patents from our remaining 15 patents as of July 27, 2008, or from any future patents that we will own or have the right to license. The licensing agreement with Sony may be the only licensing agreement that we ever complete and the patent sales noted above may be the only patent sales we complete. Furthermore, if we should in the future complete an agreement to license or sell our patents, we cannot assure you that the proceeds we receive from such transaction will be as significant as the proceeds we received from Sony and Faust.

We Depend on Qualified Personnel

Our future success depends in part on the continued service of our key engineering, sales, marketing, manufacturing, finance and executive personnel, and our ability to identify, hire and retain additional personnel to serve potential customers in our targeted markets. There is strong competition for qualified personnel in the semiconductor industry, and we cannot assure you that we will be able to continue to attract and retain qualified personnel necessary for the development of our business. We have experienced the loss of personnel both through headcount reductions and attrition. In the past two years we have lost some of our executive management, including Jeffery Blanc (Vice President, Worldwide Sales) and Scott Sullinger (CFO). Steve Berry joined NeoMagic on August 6, 2007 as CFO and Pierre-Yves Couteau joined NeoMagic on January 7, 2008 as Vice President of Marketing.

All our executive officers are employees “at will”. We have employment contracts with Douglas R. Young, our chief executive officer, Steve Berry, our chief financial officer, Syed Zaidi, our chief operating officer, Deepraj Puar, our vice president of operations, and Pierre-Yves Couteau, our vice president of marketing, which allow us to terminate their employment at any time but require us to make severance payments depending upon the circumstances surrounding termination of employment. We do not maintain key person insurance on any of our personnel. If we are not able to retain key personnel, if our headcount is not appropriate for our future direction, or if we fail to recruit key personnel critical to our future direction in a timely manner, this may have a material adverse effect on our business, financial condition and results of operations.

In addition, our future success will depend in part on our ability to identify and retain qualified individuals to serve on our board of directors. We believe that maintaining a board of directors comprised of qualified members is critical given the current status of our business and operations. Moreover, SEC and Nasdaq Capital Market rules require that three independent board members serve on our audit committee. Any inability on our part to identify and retain qualified board members could have a material adverse effect on our business or could lead to the delisting of our securities from the Nasdaq Capital Market.

On June 24, 2008, Steve Valenzuela, an independent member of our board of directors and a member of our audit committee and our audit committee financial expert, notified us that he was resigning as a director effective June 24, 2008. On June 25, 2008, Dr. Anil Gupta, an independent member of our board of directors, notified us that he was resigning as a director effective June 25, 2008.

On August 18, 2008, we announced that effective as of August 15, 2008, David Tomasello was appointed to our board of directors. Mr. Tomasello has been the managing partner of Attiva Capital, an independent investment firm, since October 2006; and, a director of Bluestone Financial, an independent investment firm, since February 2008. He has been a member of the board of directors of WorldGate Communications, Inc., (Nasdaq: WGAT), a leading provider of personal video phones and related technology, since May 2007. Mr. Tomasello has also been a member of the board of directors and the audit committee of Corimon S.A.C.A., a diversified manufacturer and distributor of packaging materials, chemicals and paint in Venezuela, since 2005. In addition, Mr. Tomasello has been a member of the board of directors of Fininvest S.A., a Venezuelan commercial and residential real estate developer, since 2003. He is a graduate of Boston University with a BS/BA degree in finance.

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

Our ability to compete in the future will also depend on our ability to identify and ensure compliance with evolving industry standards and market trends. Unanticipated changes in market trends and industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers. As a result, we could be required to invest significant time and resources to redesign our products or obtain license rights to technologies owned by third parties to comply with relevant industry standards and market trends. We cannot assure you that we will be able to redesign our products or obtain the necessary third-party licenses within the appropriate window of market demand. If our products are not in compliance with prevailing market trends and industry standards for a significant period of time, we could miss crucial OEM and ODM design cycles, which could result in a material adverse effect on our business, financial condition and results of operations.

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

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

We must anticipate the features and functionality that consumers and infrastructure providers will demand, incorporate those features and functionality into products that meet the exacting design requirements of equipment manufacturers, price our products competitively and introduce new products to the market on a timely basis. The success of new product introductions is dependent on several factors, including proper new product definition, timely completion and introduction of new product designs, the ability to create or acquire intellectual property, the ability of manufacturing partners to effectively manufacture new products, quality of new products, differentiation of new products from those of our competitors and market acceptance of our products and the products of our customers. We cannot assure you that the products we expect to introduce will incorporate the features and functionality demanded by mobile phone and handheld device manufacturers and consumers, will be successfully developed, or will be introduced within the appropriate window of market demand. We cannot assure you that customers who use our semiconductor products will achieve the levels of market success with their own products that they may project to us.

We regularly incur costs to license or acquire technology from third parties. There is no guarantee of realizing the anticipated value of such expenditures due to changes in other available technologies or market demand. To the extent that we rely on licenses from third parties, there can be no assurance that we will continue to obtain all of the licenses we desire on the terms we consider reasonable or at all.

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

We Depend on Third-Party Manufacturers to Produce Our Products

Our products require wafers manufactured with state-of-the-art fabrication equipment and techniques. We currently use one third-party foundry for wafer fabrication. We expect that, for the foreseeable future, all of our products will be manufactured at Taiwan Semiconductor Manufacturing Corporation on a purchase-order-by-purchase-order basis. Since, in our experience, the lead time needed to establish a relationship with a new wafer fabrication partner is at least 12 months, and the estimated time for a foundry to switch to a new product line ranges from four to nine months, we may have no readily available alternative source of supply for specific products. In addition to time constraints, switching foundries would require a diversion of engineering manpower and financial resources to redesign our products so that the new foundry could manufacture them. We cannot assure you that we can redesign our products to be manufactured by a new foundry in a timely manner, nor can we assure you that we will not infringe on the intellectual property of our current wafer manufacturer when we redesign our products for a new foundry. A manufacturing disruption experienced by our manufacturing partner, the failure of our manufacturing partner to dedicate adequate resources to the production of our products, or the financial instability of our manufacturing partner would have a material adverse effect on our business, financial condition and results of operations. Furthermore, if the transition to the next generation of manufacturing technologies by our manufacturing partner is unsuccessful, our business, financial condition and results of operations would be materially and adversely affected.

We have many other risks due to our dependence on a third-party manufacturer, including: reduced control over delivery schedules, quality, manufacturing yields and cost; the potential lack of adequate capacity during periods of excess demand; limited warranties on wafers supplied to us; and potential misappropriation of our intellectual property. We are dependent on our manufacturing partner to produce wafers with acceptable quality and manufacturing yields, to deliver those wafers on a timely basis to our third party assembly subcontractors and to allocate a portion of their manufacturing capacity sufficient to meet our needs. Although our products are designed using the process design rules of the particular manufacturer, we cannot assure you that our manufacturing partner will be able to achieve or maintain acceptable yields or deliver sufficient quantities of wafers on a timely basis or at an acceptable cost. Additionally, we cannot assure you that our manufacturing partner will continue to devote adequate resources to produce our products or continue to advance the process design technologies on which the manufacturing of our products are based.

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

Our products are assembled and tested by third-party subcontractors. We expect that, for the foreseeable future, the vast majority of our products will be packaged and assembled at Amkor Technology on a purchase-order-by-purchase-order basis. We do not have long-term agreements with any of these subcontractors. Such assembly and testing is conducted on a purchase order basis. Because we rely on third-party subcontractors to assemble and test our products, we cannot directly control product delivery schedules, which could lead to product shortages or quality assurance problems that could increase the costs of manufacturing or assembly of our products. Due to the amount of time normally required to qualify assembly and test subcontractors, product shipments could be delayed significantly if we were required to find alternative subcontractors. Any problems associated with the delivery, quality or cost of the assembly and test of our products could have a material adverse effect on our business, financial condition and results of operations.

Our Manufacturing Yields May Fluctuate

Fabricating 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, variation in equipment used and numerous other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. As a result, semiconductor companies often experience problems in achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular wafer. We typically purchase wafers, not die, and pay an agreed upon price for wafers meeting certain acceptance criteria. Accordingly, we bear the risk of the yield of good die from wafers purchased meeting the acceptance criteria.

Semiconductor manufacturing yields are a function of both product design, which is developed largely by us, and process technology, which is typically proprietary to the manufacturer. Historically, we have experienced lower yields on new products. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems would require cooperation and communication between the manufacturer and us. This risk is compounded by the offshore location of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. As our relationships with new manufacturing partners develop, yields could be adversely affected due to difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of each manufacturer. Any significant decrease in manufacturing yields could result in an increase in our per unit product cost and could force us to allocate our available product supply among our customers, potentially adversely impacting customer relationships as well as revenues and gross margins. We cannot assure you that our manufacturers will achieve or maintain acceptable manufacturing yields in the future.

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

We rely in part on patents to protect our intellectual property. As of July 27, 2008, we had been issued and held 15 patents. These issued patents are scheduled to expire between 2014 and 2025. In February 2008 we sold 18 patents and one patent application to Faust Communications, LLC for net proceeds of $9.5 million. In June 2006, we sold 4 patents to Samsung Electronics Co. Ltd. for net proceeds of $1.0 million. In April 2005, we sold 58 patents to Faust Communications, LLC for net proceeds of $3.5 million. The patents sold related to products we no longer sell and not to products that we currently sell or plan to sell. We retained a worldwide, non-exclusive license under the patents sold. The sales did not include our important patents covering the unique array processing technology used in our newer MiMagic and NeoMobileTV products. Additionally, we have several patent applications pending. We cannot assure you that our pending patent applications, or any future applications, will be approved. Further, we cannot assure you that any issued patents will provide us with significant intellectual property protection, competitive advantages, or will not be challenged by third parties, or that the patents of others will not have an adverse effect on our ability to do business. In addition, we cannot assure you that others will not independently develop similar products, duplicate our products or design around any patents that may be issued to us.

We also rely on a combination of mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property. Despite these efforts, we cannot assure you that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. Our failure to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations.

As a general matter, the semiconductor industry has experienced substantial litigation regarding patent and other intellectual property rights. In December 1998, the Company filed a lawsuit in the United States District Court for the District of Delaware seeking damages and an injunction against Trident Microsystems, Inc. The suit alleged that Trident’s embedded DRAM graphics accelerators infringed certain patents held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising from NeoMagic’s filing of the patent infringement action against Trident. In September 2005, the Court ruled that there was no infringement by Trident.

Any patent litigation, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel from productive tasks, which could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that current or future infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect our business, financial condition and results of operations. If any adverse ruling in any such matter occurs, we could be required to pay substantial damages, which could include treble damages, to cease the manufacturing, use and sale of infringing products, to discontinue the use of certain processes, or to obtain a license under the intellectual property rights of the third party claiming infringement. We cannot assure you, however, that a license would be available on reasonable terms or at all. Any limitations in our ability to market our products, or delays and costs associated with redesigning our products or payments of license fees to third parties, or any failure by us to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on our business, financial condition and results of operations.

We Depend on Foreign Sales and Suppliers

Export sales have been a critical part of our business. Sales to customers located outside the United States (including sales to the foreign operations of customers with headquarters in the United States and foreign manufacturers that sell to United States-based OEMs) accounted for 96%, 77% and 60% of our product revenue for fiscal 2008, 2007 and 2006, respectively, and 99% and 94% of our product revenue for the six months ended July 27, 2008 and July 29, 2007, respectively. We expect that product revenue derived from foreign sales will continue to represent a significant portion of our total product revenue. Letters of credit issued by customers have supported a portion of our foreign sales. To date, our foreign sales have been denominated in United States dollars. Increases in the value of the U.S. dollar relative to the local currency of our customers could make our products relatively more expensive than competitors’ products sold in the customer’s local currency.

Foreign manufacturers have produced, and are expected to continue to produce for the foreseeable future, all of our wafers. In addition, many of the assembly and test services we use are procured from foreign sources. Wafers are priced in U.S. dollars under our purchase orders with our manufacturing suppliers.

Foreign sales and manufacturing operations are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences and export license requirements. In addition, we are subject to the risks inherent in conducting business internationally including foreign government regulation, political and economic instability, and unexpected changes in diplomatic and trade relationships. Moreover, the laws of certain foreign countries in which our products may be developed, manufactured or sold, may not protect our intellectual property rights to the same extent as do the laws of the United States, thus increasing the possibility of piracy of our products and intellectual property. We cannot assure you that one or more of these risks will not have a material adverse effect on our business, financial condition and results of operations.

Our Financial Results Could Be Affected by Changes in Accounting Principles

Generally accepted accounting principles in the United States are subject to issuance and interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, in December 2004, FASB issued SFAS 123(R), “Share-Based Payment,” which replaces SFAS 123 and supersedes APB 25. As required, we adopted SFAS 123(R) in our first quarter of fiscal 2007. SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in the financial statements. The pro forma disclosure previously permitted under SFAS 123 is no longer an acceptable alternative to recognition of expense in the financial statements. The adoption of SFAS 123(R) increased the amount of loss that we reported for fiscal 2008 and fiscal 2007.

Our Stock Price May Be Volatile

The market price of our Common Stock, like that of other semiconductor companies, has been and is likely to continue to be, highly volatile. For example, during fiscal 2008, the highest closing sales price per share was $4.52 and the lowest was $1.68. During fiscal 2007, the highest closing sales price was $7.95 per share and the lowest was $2.46 per share. During fiscal 2006, the highest closing sales price was $10.23 per share and the lowest was $1.80 per share. The market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The market price of our Common Stock could be subject to significant fluctuations in response to various factors, including sales of our common stock, quarter-to-quarter variations in our anticipated or actual operating results, announcements of new products, technological innovations or setbacks by us or our competitors, general conditions in the semiconductor industry, unanticipated shifts in the markets for mobile phones and other handheld devices or changes in industry standards, losses of key customers, litigation commencement or developments, the impact of our financing activities, including dilution to shareholders, changes in or the failure by us to meet estimates of our performance by securities analysts, market conditions for high technology stocks in general, and other events or factors. In future quarters, our operating results may be below the expectations of public market analysts or investors.

Item 6.

Exhibits

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


Number		Description

3.1(8)		Amended and Restated Certificate of Incorporation.

3.2(14)		Bylaws, as amended through April 6, 2007.

4.1(4)		Preferred Stock Rights Agreement dated December 19, 2002, between the Company and EquiServe Trust Company, N.A.

4.2(6)		Amendment to Rights Agreement, dated as of August 20, 2004, between the Company and EquiServe Trust Company, N.A.

4.3(15)		Amendment No. 3 to Rights Agreement, dated as of April 6, 2007, between the Company and EquiServe Trust Company, N.A.

4.4(5)		Series A Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.

4.5(5)		Series B Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.

4.6(5)		Registration Rights Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.

4.7(3)		Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock.

4.8(5)		Amended and Restated Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock dated August 20, 2004.

4.9(9)		Registration Rights Agreement dated December 13, 2005 by and between the Company and named Private Investors.

4.10(9)		Warrant to Registration Rights Agreement dated December 13, 2005.

4.11(13)		Form of Warrant originally issued December 6, 2006.

4.12(16)		Form of Amendment to Warrant, dated July 27, 2007.

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(1)		Lease Agreement, dated as of February 5, 1996, between the Company and A&P Family Investments, as landlord.

10.5(1)		1997 Employee Stock Purchase Plan, with exhibit.

10.6(10)		1998 Nonstatutory Stock Option Plan amended December 22, 2005.

10.7(19)		2003 Stock Option Plan, as amended July 12, 2007.

10.8(3)		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.

10.9(6)		Securities Purchase Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.

10.10(6)		Amended and Restated Patent Licensing Agreement dated March 28, 2005 by and between the Company and The Consortium for Technology Licensing, Ltd.

10.11(6)		Patent Purchase Agreement dated April 6, 2005 by and between the Company and Faust Communications, LLC.

10.12(7)		Settlement Agreement and Release dated May 31, 2005 between the Company and Prakash Agarwal.

10.13(8)		Patent License Agreement dated September 1, 2005 between the Company and Sony Corporation.

10.14(9)		Securities Purchase Agreement dated December 13, 2005 by and between the Company and named Private Investors.

10.15(10)		Form of Retention Bonus Agreement, dated as of January 13, 2006.

10.16(11)		Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Douglas R. Young.

10.17(11)		Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Scott Sullinger.

10.18(19)		2006 Employee Stock Purchase Plan, as amended July 12, 2007.

10.19(12)		Form of Bonus Agreement.

10.20(12)		Patent Sale Agreement dated June 22, 2006 by and between NeoMagic Corporation and Samsung Electronics Co. Ltd.

10.21(13)		Form of Subscription Agreement, dated as of November 30, 2006, between the Company and the investor signatories thereto.

10.22(19)		Employment Agreement dated June 7, 2007 between NeoMagic Corporation and Steven P. Berry.

10.23(17)		Description of oral consulting agreement with Steven P. Berry.

10.24(18)		Description of oral bonus agreement.

10.25(20)		Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Syed Zaidi.

10.26(20)		Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Deepraj Puar.

10.27(20)		Patent Purchase Agreement with an effective date of January 17, 2008 by and between the Company, NeoMagic Israel Ltd. and Faust Communications Holdings, LLC.

10.28		Employment Agreement dated June 11, 2008 between NeoMagic Corporation and Pierre-Yves Couteau

10.29		Sublease Agreement dated July 21, 2008 between NeoMagic Corporation and Sea Micro, Inc.


Number		Description

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.

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.

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 an exhibit to the Company’s registration statement on Form S-1, registration no. 333-20031.

(2)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the period ended October 26, 1997.

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

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

(5)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed August 20, 2004.

(6)	Incorporated by reference to an exhibit to the Company’s Form 8-A/A filed August 23, 2004.

(7)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended July 31, 2005.

(8)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended October 30, 2005.

(9)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed December 16, 2005.

(10)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed January 19, 2006.

(11)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed May 4, 2006.

(12)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended July 30, 2006.

(13)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed December 1, 2006.

(14)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 12, 2007.

(15)	Incorporated by reference to an exhibit to the Company’s Form 8-A/A filed April 12, 2007.

(16)	Incorporated by reference to an exhibit to the Company’s Schedule TO-I filed June 28, 2007.

(17)	Incorporated by reference to the Company’s Form 8-K filed June 13, 2007.

(18)	Incorporated by reference to the Company’s Form 8-K filed June 15, 2007.

(19)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended July 29, 2007.

(20)	Incorporated by reference to the Company’s Form 10-K for the year ended January 27, 2008

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/ Steven P. Berry

STEVEN P. BERRY

Vice President, Finance and Chief Financial Officer

(Authorized Officer and Principal Financial Officer)

September 15, 2008

INDEX TO EXHIBITS


Number		Description

3.1(8)		Amended and Restated Certificate of Incorporation.

3.2(14)		Bylaws, as amended through April 6, 2007.

4.1(4)		Preferred Stock Rights Agreement dated December 19, 2002, between the Company and EquiServe Trust Company, N.A.

4.2(6)		Amendment to Rights Agreement, dated as of August 20, 2004, between the Company and EquiServe Trust Company, N.A.

4.3(15)		Amendment No. 3 to Rights Agreement, dated as of April 6, 2007, between the Company and EquiServe Trust Company, N.A.

4.4(5)		Series A Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.

4.5(5)		Series B Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.

4.6(5)		Registration Rights Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.

4.7(3)		Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock.

4.8(5)		Amended and Restated Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock dated August 20, 2004.

4.9(9)		Registration Rights Agreement dated December 13, 2005 by and between the Company and named Private Investors.

4.10(9)		Warrant to Registration Rights Agreement dated December 13, 2005.

4.11(13)		Form of Warrant originally issued December 6, 2006.

4.12(16)		Form of Amendment to Warrant, dated July 27, 2007.

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(1)		Lease Agreement, dated as of February 5, 1996, between the Company and A&P Family Investments, as landlord.

10.5(1)		1997 Employee Stock Purchase Plan, with exhibit.

10.6(10)		1998 Nonstatutory Stock Option Plan amended December 22, 2005.

10.7(19)		2003 Stock Option Plan, as amended July 12, 2007.

10.8(3)		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.

10.9(6)		Securities Purchase Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.

10.10(6)		Amended and Restated Patent Licensing Agreement dated March 28, 2005 by and between the Company and The Consortium for Technology Licensing, Ltd.

10.11(6)		Patent Purchase Agreement dated April 6, 2005 by and between the Company and Faust Communications, LLC.

10.12(7)		Settlement Agreement and Release dated May 31, 2005 between the Company and Prakash Agarwal.

10.13(8)		Patent License Agreement dated September 1, 2005 between the Company and Sony Corporation.

10.14(9)		Securities Purchase Agreement dated December 13, 2005 by and between the Company and named Private Investors.

10.15(10)		Form of Retention Bonus Agreement, dated as of January 13, 2006.

10.16(11)		Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Douglas R. Young.

10.17(11)		Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Scott Sullinger.

10.18(19)		2006 Employee Stock Purchase Plan, as amended July 12, 2007.

10.19(12)		Form of Bonus Agreement.

10.20(12)		Patent Sale Agreement dated June 22, 2006 by and between NeoMagic Corporation and Samsung Electronics Co. Ltd.

10.21(13)		Form of Subscription Agreement, dated as of November 30, 2006, between the Company and the investor signatories thereto.

10.22(19)		Employment Agreement dated June 7, 2007 between NeoMagic Corporation and Steven P. Berry.

10.23(17)		Description of oral consulting agreement with Steven P. Berry.

10.24(18)		Description of oral bonus agreement.

10.25(20)		Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Syed Zaidi.

10.26(20)		Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Deepraj Puar.


Number		Description

10.27(20)		Patent Purchase Agreement with an effective date of January 17, 2008 by and between the Company, NeoMagic Israel Ltd. and Faust Communications Holdings, LLC.

10.28		Employment Agreement dated June 11, 2008 between NeoMagic Corporation and Pierre-Yves Couteau

10.29		Sublease Agreement dated July 21, 2008 between NeoMagic Corporation and Sea Micro, Inc.

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.

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.

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 an exhibit to the Company’s registration statement on Form S-1, registration no. 333-20031.

(2)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the period ended October 26, 1997.

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

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

(5)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed August 20, 2004.

(6)	Incorporated by reference to an exhibit to the Company’s Form 8-A/A filed August 23, 2004.

(7)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended July 31, 2005.

(8)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended October 30, 2005.

(9)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed December 16, 2005.

(10)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed January 19, 2006.

(11)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed May 4, 2006.

(12)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended July 30, 2006.

(13)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed December 1, 2006.

(14)	Incorporated by reference to an exhibit to the Company’s Form 8-K filed April 12, 2007.

(15)	Incorporated by reference to an exhibit to the Company’s Form 8-A/A filed April 12, 2007.

(16)	Incorporated by reference to an exhibit to the Company’s Schedule TO-I filed June 28, 2007.

(17)	Incorporated by reference to the Company’s Form 8-K filed June 13, 2007.

(18)	Incorporated by reference to the Company’s Form 8-K filed June 15, 2007.

(19)	Incorporated by reference to an exhibit to the Company’s Form 10-Q for the quarter ended July 29, 2007.

(20)	Incorporated by reference to the Company’s Form 10-K for the year ended January 27, 2008.

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