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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 October 28, 2007

OR



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

For the transition period from  to

Commission
file number 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, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large
Accelerated Filer ̈Accelerated Filer ̈Non-Accelerated Filer  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 December 3, 2007 was 12,386,068.



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NEOMAGIC CORPORATION

FORM 10-Q

INDEX



|                                                     |  |                                                                                                                             |  |     
|---------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                     |  |                                                                                                                             |  | PAGE
|PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION |  |                                                                                                                            
|                                                     |  |                                                                                                                            
|Item 1.                                              |  | Financial Statements:                                                                                                       |  |     
|                                                     |  |                                                                                                                            
|                                                     |  | Unaudited Condensed Consolidated Statements of Operations Three and Nine months ended October 28, 2007 and October 29, 2006 |  | 3   
|                                                     |  |                                                                                                                            
|                                                     |  | Condensed Consolidated Balance Sheets October 28, 2007 (unaudited) and January 28, 2007                                     |  | 4   
|                                                     |  |                                                                                                                            
|                                                     |  | Unaudited Condensed Consolidated Statements of Cash Flows Nine months ended October 28, 2007 and October 29, 2006           |  | 5   
|                                                     |  |                                                                                                                            
|                                                     |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                              |  | 6   
|                                                     |  |                                                                                                                            
|Item 2.                                              |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 17  
|                                                     |  |                                                                                                                            
|Item 3.                                              |  | Quantitative and Qualitative Disclosures About Market Risk                                                                  |  | 24  
|                                                     |  |                                                                                                                            
|Item 4.                                              |  | Controls and Procedures                                                                                                     |  | 25  
|                                                     |  |                                                                                                                            
|Item 4T.                                             |  | Controls and Procedures                                                                                                     |  | 26  
|                                                     | 
|PART II. OTHER INFORMATION                           |  |                                                                                                                            
|                                                     |  |                                                                                                                            
|Item 1A.                                             |  | Risk Factors                                                                                                                |  | 26  
|                                                     |  |                                                                                                                            
|Item 6.                                              |  | Exhibits                                                                                                                    |  | 36  
|                                                     | 
|Signatures                                           |  | 38                                                                                                                         
|                                                     | 
|Certifications                                       |  |                                                                                                                            



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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 |        |   | Nine Months Ended |  
|                                                                 |  | October 28, 2007   |        |   | October 29, 2006  |   |        | October 28, 2007 |  |   | October 29, 2006 |  
|Net revenue                                                      |  | $                  | 620    |   |                   | $ | 192    |                  |  | $ | 1,253            |   |  | $ | 455     |  
|Cost of revenue                                                  |  |                    | 383    |   |                   |   | 197    |                  |  |   | 963              |   |  |   | 398     |  
|                                                                 |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Gross profit (loss)                                              |  |                    | 237    |   |                   |   | (5     | )                |  |   | 290              |   |  |   | 57      |  
|Operating expenses:                                              |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Research and development                                         |  |                    | 2,945  |   |                   |   | 3,171  |                  |  |   | 8,890            |   |  |   | 10,286  |  
|Sales, general and administrative                                |  |                    | 2,037  |   |                   |   | 1,236  |                  |  |   | 5,285            |   |  |   | 4,882   |  
|Gain on sale of patents, net                                     |  |                    |       |   |                   |   |       |                  |  |   |                 |   |  |   | (1,044  | )
|                                                                 |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Total operating expenses                                         |  |                    | 4,982  |   |                   |   | 4,407  |                  |  |   | 14,175           |   |  |   | 14,124  |  
|                                                                 |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Loss from operations                                             |  |                    | (4,745 | ) |                   |   | (4,412 | )                |  |   | (13,885          | ) |  |   | (14,067 | )
|Other income (expense), net:                                     |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Interest income and other                                        |  |                    | 57     |   |                   |   | 180    |                  |  |   | 462              |   |  |   | 684     |  
|Interest expense                                                 |  |                    | (13    | ) |                   |   | (23    | )                |  |   | (54              | ) |  |   | (89     | )
|Gain from change in fair value of warrant liability              |  |                    | 15     |   |                   |   |       |                  |  |   | 758              |   |  |   |        |  
|                                                                 |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Loss before income taxes                                         |  |                    | (4,686 | ) |                   |   | (4,255 | )                |  |   | (12,719          | ) |  |   | (13,472 | )
|Income tax expense (benefit)                                     |  |                    | 7      |   |                   |   | 13     |                  |  |   | (444             | ) |  |   | 43      |  
|                                                                 |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Net loss                                                         |  | $                  | (4,693 | ) |                   | $ | (4,268 | )                |  | $ | (12,275          | ) |  | $ | (13,515 | )
|                                                                 |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Basic and diluted net loss per share                             |  | $                  | (0.38  | ) |                   | $ | (0.44  | )                |  | $ | (1.00            | ) |  | $ | (1.41   | )
|Weighted average common shares outstanding for basic and diluted |  |                    | 12,379 |   |                   |   | 9,630  |                  |  |   | 12,335           |   |  |   | 9,577   |  

See accompanying notes to unaudited condensed consolidated financial statements.



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NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                              |  |                              |          |   |                  |   |          |  
|--------------------------------------------- |  | ---------------------------- | -------- | - | ---------------- | - | -------- | -
|                                              |  | October 28, 2007 (unaudited) |          |   | January 28, 2007 |  
|ASSETS                                        | 
|Current assets:                               |  |                              |          |   |                  |   |          |  
|Cash and cash equivalents                     |  | $                            | 1,800    |   |                  | $ | 16,468   |  
|Short-term investments                        |  |                              | 4,490    |   |                  |   | 4,014    |  
|Accounts receivable, net                      |  |                              | 247      |   |                  |   | 65       |  
|Inventory                                     |  |                              | 4,081    |   |                  |   | 1,068    |  
|Prepaid and other current assets              |  |                              | 505      |   |                  |   | 397      |  
|                                              |  |                              |          |   |                  |   |          |  
|Total current assets                          |  |                              | 11,123   |   |                  |   | 22,012   |  
|Property, plant and equipment, net            |  |                              | 712      |   |                  |   | 1,494    |  
|Long-term prepaid assets                      |  |                              | 94       |   |                  |   | 162      |  
|Long-term investments                         |  |                              | 505      |   |                  |   | 200      |  
|Other assets                                  |  |                              | 242      |   |                  |   | 222      |  
|                                              |  |                              |          |   |                  |   |          |  
|Total assets                                  |  | $                            | 12,676   |   |                  | $ | 24,090   |  
|                                              |  |                              |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY          | 
|Current liabilities:                          |  |                              |          |   |                  |   |          |  
|Accounts payable                              |  | $                            | 1,907    |   |                  | $ | 1,662    |  
|Compensation and related benefits             |  |                              | 1,320    |   |                  |   | 1,017    |  
|Income taxes payable                          |  |                              | 544      |   |                  |   | 1,112    |  
|Current portion of capital lease obligations  |  |                              | 311      |   |                  |   | 866      |  
|Warrant liability                             |  |                              | 109      |   |                  |   | 3,853    |  
|Other accruals                                |  |                              | 514      |   |                  |   | 100      |  
|                                              |  |                              |          |   |                  |   |          |  
|Total current liabilities                     |  |                              | 4,705    |   |                  |   | 8,610    |  
|Capital lease obligations                     |  |                              | 420      |   |                  |   | 655      |  
|Other long-term liabilities                   |  |                              | 102      |   |                  |   | 148      |  
|                                              |  |                             
|Commitments and contingencies (Note 10)       |  |                              |          |   |                  |   |          |  
|                                              |  |                             
|Stockholders equity:                         |  |                              |          |   |                  |   |          |  
|Common stock                                  |  |                              | 39       |   |                  |   | 39       |  
|Additional paid-in capital                    |  |                              | 121,484  |   |                  |   | 116,850  |  
|Accumulated other comprehensive income (loss) |  |                              | 310      |   |                  |   | (2       | )
|Accumulated deficit                           |  |                              | (114,384 | ) |                  |   | (102,210 | )
|                                              |  |                              |          |   |                  |   |          |  
|Total stockholders equity                    |  |                              | 7,449    |   |                  |   | 14,677   |  
|                                              |  |                              |          |   |                  |   |          |  
|Total liabilities and stockholders equity    |  | $                            | 12,676   |   |                  | $ | 24,090   |  
|                                              |  |                              |          |   |                  |   |          |  

See accompanying notes to unaudited condensed consolidated financial statements.



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NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                  |  | Nine Months Ended |        
|                                                                                  |  | October 28, 2007  |         |   | October 29, 2006 |  
|Operating activities:                                                             |  |                   |         |   |                  |   |         |  
|Net loss                                                                          |  | $                 | (12,275 | ) |                  | $ | (13,515 | )
|Adjustments to reconcile net loss to net cash used for operating activities:      |  |                   |         |   |                  |   |         |  
|Depreciation                                                                      |  |                   | 921     |   |                  |   | 1,193   |  
|Gain on sale of patents                                                           |  |                   |        |   |                  |   | (1,044  | )
|Gain from change in fair value of warrant liability                               |  |                   | (758    | ) |                  |   |        |  
|Stock based compensation                                                          |  |                   | 1,358   |   |                  |   | 1,027   |  
|Reversal of provision for tax liability                                           |  |                   | (480    | ) |                  |   |        |  
|Changes in operating assets and liabilities:                                      |  |                   |         |   |                  |   |         |  
|Accounts receivable                                                               |  |                   | (182    | ) |                  |   | (45     | )
|Inventory                                                                         |  |                   | (3,013  | ) |                  |   | (655    | )
|Prepaid and other current assets                                                  |  |                   | (108    | ) |                  |   | 337     |  
|Other assets                                                                      |  |                   | 48      |   |                  |   | 29      |  
|Accounts payable                                                                  |  |                   | 245     |   |                  |   | (767    | )
|Compensation and related benefits                                                 |  |                   | 303     |   |                  |   | 191     |  
|Income taxes payable                                                              |  |                   | 13      |   |                  |   | 19      |  
|Other accruals                                                                    |  |                   | 368     |   |                  |   | (184    | )
|                                                                                  |  |                   |         |   |                  |   |         |  
|Net cash used in operating activities                                             |  |                   | (13,560 | ) |                  |   | (13,414 | )
|                                                                                  |  |                   |         |   |                  |   |         |  
|Investing activities:                                                             |  |                   |         |   |                  |   |         |  
|Purchases of property, plant, equipment and intangibles                           |  |                   | (139    | ) |                  |   | (51     | )
|Purchases of short-term investments                                               |  |                   | (4,459  | ) |                  |   | (2,491  | )
|Maturities of short-term investments                                              |  |                   | 3,990   |   |                  |   | 270     |  
|Proceeds from sale of patents                                                     |  |                   |        |   |                  |   | 1,044   |  
|                                                                                  |  |                   |         |   |                  |   |         |  
|Net cash used in investing activities                                             |  |                   | (608    | ) |                  |   | (1,228  | )
|                                                                                  |  |                   |         |   |                  |   |         |  
|Financing activities:                                                             |  |                   |         |   |                  |   |         |  
|Payments on capital lease obligations                                             |  |                   | (790    | ) |                  |   | (905    | )
|Net proceeds from issuance of common stock                                        |  |                   | 290     |   |                  |   | 270     |  
|                                                                                  |  |                   |         |   |                  |   |         |  
|Net cash used in financing activities                                             |  |                   | (500    | ) |                  |   | (635    | )
|                                                                                  |  |                   |         |   |                  |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                   | (14,668 | ) |                  |   | (15,277 | )
|Cash and cash equivalents at beginning of period                                  |  |                   | 16,468  |   |                  |   | 26,695  |  
|                                                                                  |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                 | 1,800   |   |                  | $ | 11,418  |  
|                                                                                  |  |                   |         |   |                  |   |         |  
|Supplemental schedules of cash flow information:                                  |  |                   |         |   |                  |   |         |  
|Cash paid during the period for:                                                  |  |                   |         |   |                  |   |         |  
|Interest                                                                          |  | $                 | 54      |   |                  | $ | 86      |  
|Taxes                                                                             |  | $                 | 22      |   |                  | $ | 23      |  
|Supplemental disclosure of non-cash financing activities:                         |  |                   |         |   |                  |   |         |  
|Reclassification of warrant liability to equity for amended warrants (see Note 8) |  | $                 | 2,986   |   |                  | $ |        |  

See accompanying notes to condensed consolidated financial statements.



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NEOMAGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|1. | Basis of Presentation
|-- | ---------------------

The accompanying condensed
consolidated balance sheet as of January 28, 2007, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of October 28, 2007 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). All inter-company accounts and
transactions have been eliminated. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at October 28, 2007, the operating
results for the three and nine months ended October 28, 2007 and October 29, 2006, and the cash flows for the nine months ended October 28, 2007 and October 29, 2006. 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 28, 2007, included in the Companys Form 10-K filed with the Securities and Exchange Commission.

The Company believes its current cash, cash equivalents and short-term investments will satisfy its projected cash requirements through the end of fiscal
2008. However, the Company expects it will need to raise additional capital to fund future operating activities beyond January 2008. The adequacy of the Companys resources will depend largely on its ability to complete additional financing,
its ability to sell or license intellectual property 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 experiences a material shortfall versus its plan, it expects to take appropriate actions to maximize the value of the Company. The Company believes it can take actions to achieve further reductions in its operating expenses, if
necessary. 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 you that additional financing will be available on acceptable terms or at all.

The results of operations for the three and
nine months ended October 28, 2007 are not necessarily indicative of the results that may be expected for the year ending January 27, 2008.

The third quarters of fiscal 2008 and fiscal 2007 ended on October 28, 2007 and October 29, 2006, respectively. The Companys quarters generally have 13 weeks. The first, second, and third quarters of
fiscal 2008 and fiscal 2007 each had 13 weeks. The Companys fiscal years generally have 52 weeks. Fiscal 2008 will have 52 weeks and fiscal 2007 had 52 weeks.



|2. | Stock-Based Compensation
|-- | ------------------------

During the quarter ended
October 28, 2007, 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 Global 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 Global Market



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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
October 28, 2007, approximately 1,850,688 and 1,116,705 shares of the Companys common stock were reserved for issuance under the 2003 Stock Option Plan and Amended 1998 Stock Option Plan, respectively. There are 93,401 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 at a discount 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 336,545 shares of the Companys common stock were reserved at October 28, 2007, for future issuance
under the 2006 Employee Stock Purchase Plan.

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 estimated forfeiture rates for 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.

As a result of adopting SFAS 123R, the Company recognized stock-based compensation
expense for the three and nine months ended October 28, 2007 of $437 thousand and $1,358 thousand, respectively, which consisted of stock-based compensation expense related to Service Provider stock options and Employee Stock Purchase Plan of
$366 thousand and $67 thousand, respectively, for the three months ended October 28, 2007 and $1,149 thousand and $196 thousand, respectively, for the nine months ended October 28, 2007. Stock-based compensation expense relating to
consultants for the three and nine months ended October 28, 2007 was $4 thousand and $13 thousand, respectively. The Company recognized stock-based compensation expense for the three and nine months ended October 29, 2006 of $342 thousand
and $1,027 thousand, respectively. Compensation expense related to stock-based



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compensation of Service Provider stock options for the three and nine months ended October 29, 2006 was $260 thousand and $748 thousand, respectively.
Compensation expense related to stock-based compensation of Employee Stock Purchase Plan for the three and nine months ended October 29, 2006 was $79 thousand and $251 thousand, respectively. Stock-based compensation expense relating to
consultants for the three and nine months ended October 29, 2006 was $3 thousand and $28 thousand, respectively. The impact on both basic and diluted earnings per share for the three and nine months ended October 28, 2007 was $(0.04) and
$(0.11), respectively. The impact on both basic and diluted earnings per share for the three and nine months ended October 29, 2006 was $(0.04) and $(0.11), respectively.

Net cash proceeds from the sales of common stock under employee stock purchase and stock option plans for the nine months ended October 28, 2007 and
October 29, 2006 were $290 thousand and $270 thousand, respectively. No income tax benefit was realized from the sales of common stock under employee stock purchase and stock option plans during the nine months ended October 28, 2007 and
October 29, 2006, respectively. 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 of options 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 three and nine months ended October 28, 2007 is based upon historical review. The Company believes that this method meets the requirements for SFAS 123(R). During
first quarter of fiscal 2007, the Company applied the provisions of SAB 107 in its adoption of SFAS 123(R) by calculating the expected term as the average of the vesting period and original contractual term. This method could be used until
December 31, 2007 for plain-vanilla share options. The Company believes that this method met the requirements for SFAS 123(R) for its first quarter of fiscal 2007.

Expected Volatility  The Companys expected volatility for the three and nine months ended October 28, 2007 was 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 not paid any dividends and has no intention to pay dividends in the foreseeable future.

Estimated Forfeiture  The estimated forfeiture rate for the three and nine months ended October 28, 2007 was based on an analysis of
the Companys historical forfeiture rates. The estimated average forfeiture rate for the three and nine months ended October 28, 2007 was 27.79% and 20.76%, respectively. The estimated average forfeiture rate for the three and nine months
ended October 29, 2006 was 47.61% and 33.24%, respectively, based on historical forfeiture experience.



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In the three and nine months ended October 28, 2007 and October 29, 2006, 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 |   |  | Nine Months Ended   |   |  | Three Months Ended |   |  | Nine Months Ended |  
|                                 |  | October 28, 2007   |   |  | October 29, 2006    |   |  | October 28, 2007   |   |  | October 29, 2006  |   |  | October 28, 2007 |   |  | October 29, 2006 |   |  | October 28, 2007 |   |  | October 29, 2006 |  
|Risk-free interest rates         |  | 4.1                | % |  | 4.7                 | % |  | 4.4                | % |  | 5.1               | % |  | 4.9              | % |  | 3.5              | % |  | 5.0              | % |  | 3.7              | %
|Volatility                       |  | 0.97               |   |  | 1.12                |   |  | 0.98               |   |  | 1.00              |   |  | 0.84             |   |  | 0.87             |   |  | 0.93             |   |  | 1.05             |  
|Expected life of option in years |  | 4.00               |   |  | 2.70                |   |  | 4.10               |   |  | 4.64              |   |  | 1.6              |   |  | 1.34             |   |  | 1.7              |   |  | 0.93             |  

Stock Compensation Expense

The following table shows total stock-based compensation expense included in the accompanying Condensed Consolidated Statement of Operations for the three and nine months ended October 28, 2007 and
October 29, 2006.



|                                  |  |                    |     |                   |   |                  |  |                  |       |  |   |      
|--------------------------------- |  | ------------------ | --- | ----------------- | - | ---------------- |  | ---------------- | ----- |  | - | -----
|                                  |  | Three Months Ended |     | Nine Months Ended
|(in thousands)                    |  | October 28, 2007   |     | October 29, 2006  |   | October 28, 2007 |  | October 29, 2006
|Cost of revenue                   |  | $                  | 7   |                   | $ | 5                |  | $                | 17    |  | $ | 14   
|Research and development          |  |                    | 223 |                   |   | 209              |  |                  | 709   |  |   | 641  
|Sales, general and administrative |  |                    | 207 |                   |   | 128              |  |                  | 632   |  |   | 372  
|Income tax benefit                |  |                    |    |                   |   |                 |  |                  |      |  |   |     
|                                  |  |                    |     |                   |   |                  |  |                  |       |  |   |      
|Total                             |  | $                  | 437 |                   | $ | 342              |  | $                | 1,358 |  | $ | 1,027
|                                  |  |                    |     |                   |   |                  |  |                  |       |  |   |      

For the nine months ended October 28, 2007 and October 29, 2006, the total compensation
cost related to unvested stock-based awards granted to employees under the stock option plans but not yet recognized was approximately $2.3 million and $0.7 million, respectively, after estimated forfeitures. The cost will be recognized on a
straight-line basis over an estimated weighted average period of approximately 2.84 years and 3.37 years for the nine months ended October 28, 2007 and October 29, 2006, respectively, for stock options and will be adjusted, if necessary,
in subsequent periods if actual forfeitures differ from those estimates.

For the nine months ended October 28, 2007 and
October 29, 2006, the total compensation cost related to options to purchase common shares under the ESPP but not yet recognized was approximately $598 thousand and $256 thousand, respectively This cost will be recognized on a straight-line
basis over a weighted-average period of approximately 1.75 years and 1.5 years, respectively, for the nine months ended October 28, 2007 and October 29, 2006.

Stock Options and Awards Activities

The following is a summary of the Companys stock option activity under the
stock option plans as of October 28, 2007 and related information:



|                                                |  |           |   |  |                                             |      |                                                        |      |                           |   |        
|----------------------------------------------- |  | --------- | - |  | ------------------------------------------- | ---- | ------------------------------------------------------ | ---- | ------------------------- | - | -------
|                                                |  | Shares    |   |  | Weighted Average Exercise Price (per
share) |      | Weighted Average Remaining Contractual
Term (in years) |      | Aggregate Intrinsic Value
|Outstanding at January 28, 2007                 |  | 2,256,573 |   |  | $                                           | 6.73 |                                                        |      |                           |   |        
|Granted                                         |  | 380,530   |   |  | $                                           | 3.83 |                                                        |      |                           |   |        
|Exercised                                       |  | (59,199   | ) |  | $                                           | 1.67 |                                                        |      |                           |   |        
|Forfeitures and cancellations                   |  | (329,040  | ) |  | $                                           | 6.75 |                                                        |      |                           |   |        
|                                                |  |           |   |  |                                             |      |                                                        |      |                           |   |        
|Outstanding at October 28, 2007                 |  | 2,248,864 |   |  | $                                           | 6.37 |                                                        | 5.96 |                           | $ | 580,984
|Vested and Expected to Vest at October 28, 2007 |  | 1,751,703 |   |  | $                                           | 6.81 |                                                        | 5.86 |                           | $ | 477,751
|Exercisable at October 28, 2007                 |  | 1,039,587 |   |  | $                                           | 8.17 |                                                        | 5.44 |                           | $ | 345,473



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The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on
the Companys closing stock price of $3.52 per share at October 28, 2007, which would have been received by option holders had all option holders exercised their options that were in-the-money as of that date. The total number of
in-the-money options exercisable as of October 28, 2007 was approximately 260 thousand shares. The aggregate intrinsic value of options exercised during the three and nine months ended October 28, 2007 was $37 thousand and $116
thousand, respectively.

The exercise prices per share for options outstanding and exercisable as of October 28, 2007 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)                    
|$1.35  2.94             |  | 412                |  | 7.24                                        |  | $                               | 2.14  |                    | 249   |                                 | $ | 2.14 
|$2.95  4.45             |  | 408                |  | 8.80                                        |  | $                               | 3.82  |                    | 37    |                                 | $ | 3.94 
|$4.46  6.50             |  | 433                |  | 4.50                                        |  | $                               | 4.98  |                    | 219   |                                 | $ | 5.07 
|$6.51  10.45            |  | 611                |  | 4.91                                        |  | $                               | 6.60  |                    | 150   |                                 | $ | 6.72 
|$10.46  20.00           |  | 362                |  | 4.84                                        |  | $                               | 14.30 |                    | 362   |                                 | $ | 14.30
|$20.01 and over          |  | 23                 |  | 6.09                                        |  | $                               | 22.43 |                    | 23    |                                 | $ | 22.43
|                         |  |                    |  |                                             |  |                                 |       |                    |       |                                 |   |      
|                         |  | 2,249              |  | 5.96                                        |  | $                               | 6.37  |                    | 1,040 |                                 | $ | 8.17 



|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.

Per share information
calculated on this basis is as follows:



|                                                                                       |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ---------------- |  | - | ---------------- | - |  | - | ------- | -
|                                                                                       |  | Three Months Ended |        |   | Nine Months Ended |  
|(in thousands, except per share amounts)                                               |  | October 28, 2007   |        |   | October 29, 2006  |   |        | October 28, 2007 |  |   | October 29, 2006 |  
|Numerator:                                                                             |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Net loss                                                                               |  | $                  | (4,693 | ) |                   | $ | (4,268 | )                |  | $ | (12,275          | ) |  | $ | (13,515 | )
|Denominator:                                                                           |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |         |  
|Denominator for basic and diluted loss per share - weighted average shares outstanding |  |                    | 12,379 |   |                   |   | 9,630  |                  |  |   | 12,335           |   |  |   | 9,577   |  
|Basic and diluted loss per share                                                       |  | $                  | (0.38  | ) |                   | $ | (0.44  | )                |  | $ | (1.00            | ) |  | $ | (1.41   | )



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For the three and nine-month periods ended October 28, 2007 and October 29, 2006, basic loss
per share equals diluted loss per share due to the net loss for those periods. During the three months ended October 28, 2007 and October 29, 2006, the Company excluded options and warrants to purchase 4,083,240 and 2,406,478 shares of
common stock, respectively, because the effect would be anti-dilutive. During the nine months ended October 28, 2007 and October 29, 2006, the Company excluded options and warrants to purchase 4,165,061 and 2,213,415 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 October 28, 2007 and January 28, 2007, and consists of the following (in
thousands):



|                                            |  |      |       |                             |   |            |  |   |      
|------------------------------------------- |  | ---- | ----- | --------------------------- | - | ---------- |  | - | -----
|October 28, 2007 (in thousands) (unaudited) |  | Cost |       | GrossUnrealized Gain (Loss) |   | Fair Value
|Cash and cash equivalents:                  |  |      |       |                             |   |            |  |   |      
|Money market funds                          |  | $    | 1,072 |                             | $ |           |  | $ | 1,072
|Bank accounts                               |  |      | 728   |                             |   |           |  |   | 728  
|                                            |  |      |       |                             |   |            |  |   |      
|Total                                       |  | $    | 1,800 |                             | $ |           |  | $ | 1,800
|                                            |  |      |       |                             |   |            |  |   |      
|Short-term investments:                     |  |      |       |                             |   |            |  |   |      
|Corporate notes                             |  | $    | 997   |                             | $ |           |  | $ | 997  
|Medium term notes                           |  |      | 995   |                             |   |           |  |   | 995  
|U.S. Government agencies                    |  |      | 2,493 |                             |   | 5          |  |   | 2,498
|                                            |  |      |       |                             |   |            |  |   |      
|Total                                       |  | $    | 4,485 |                             | $ | 5          |  | $ | 4,490
|                                            |  |      |       |                             |   |            |  |   |      
|Other investments:                          |  |      |       |                             |   |            |  |   |      
|                                            |  |      |       |                             |   |            |  |   |      
|Equity securities                           |  | $    | 200   |                             | $ | 305        |  | $ | 505  
|                                            |  |      |       |                             |   |            |  |   |      
|Total                                       |  | $    | 200   |                             | $ | 305        |  | $ | 505  
|                                            |  |      |       |                             |   |            |  |   |      



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|                                |  |      |        |                      |   |    |            |  |   |       
|------------------------------- |  | ---- | ------ | -------------------- | - | -- | ---------- |  | - | ------
|January 28, 2007 (in thousands) |  | Cost |        | GrossUnrealized Loss |   |    | Fair Value
|Cash and cash equivalents:      |  |      |        |                      |   |    |            |  |   |       
|Money market funds              |  | $    | 107    |                      | $ |   |            |  | $ | 107   
|Commercial paper                |  |      | 14,562 |                      |   |   |            |  |   | 14,562
|Bank accounts                   |  |      | 1,799  |                      |   |   |            |  |   | 1,799 
|                                |  |      |        |                      |   |    |            |  |   |       
|Total                           |  | $    | 16,468 |                      | $ |   |            |  | $ | 16,468
|                                |  |      |        |                      |   |    |            |  |   |       
|Short-term investments:         |  |      |        |                      |   |    |            |  |   |       
|Certificate of deposit          |  | $    | 1,505  |                      | $ | (1 | )          |  | $ | 1,504 
|Commercial paper                |  |      | 987    |                      |   |   |            |  |   | 987   
|U.S. Government agencies        |  |      | 1,524  |                      |   | (1 | )          |  |   | 1,523 
|                                |  |      |        |                      |   |    |            |  |   |       
|Total                           |  | $    | 4,016  |                      | $ | (2 | )          |  | $ | 4,014 
|                                |  |      |        |                      |   |    |            |  |   |       

Investment in Marketable Securities

In January 2006, the Company made a $200 thousand minority equity investment in Neonode, Inc. (Neonode), a privately held mobile telephone
company. In August 2007, the merger of Neonode with a subsidiary of SBE, Inc. (SBE) became effective. SBE has, effective upon the merger, changed its name to Neonode, Inc. and is 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
October 28, 2007 of $505 thousand, which included a gross unrealized gain of $305 thousand.



|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.



|                                      |  |                  |       |                  |   |      
|------------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|Inventory consists of: (in thousands) |  | October 28, 2007 |       | January 28, 2007
|                                      |  | (unaudited)      |       |                 
|Raw materials                         |  | $                | 2,221 |                  | $ | 254  
|Work in process                       |  |                  | 445   |                  |   | 239  
|Finished goods                        |  |                  | 1,415 |                  |   | 575  
|                                      |  |                  |       |                  |   |      
|Total                                 |  | $                | 4,081 |                  | $ | 1,068
|                                      |  |                  |       |                  |   |      



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|6. | Accumulated Other Comprehensive Income (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 income on available for sale securities. Net
comprehensive loss for the three and nine months ended October 28, 2007 and October 29, 2006, respectively, is as follows (in thousands):



|                                                               |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                               |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                               |  | October 28,2007    |        |   | October 29,2006   |   |        | October 28,2007 |  |   | October 29,2006 |  
|Net loss, as reported                                          |  | $                  | (4,693 | ) |                   | $ | (4,268 | )               |  | $ | (12,275         | ) |  | $ | (13,515 | )
|Net change in unrealized gain on available for sale securities |  |                    | 310    |   |                   |   | 1      |                 |  |   | 312             |   |  |   | 2       |  
|                                                               |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net comprehensive loss                                         |  | $                  | (4,383 | ) |                   | $ | (4,267 | )               |  | $ | (11,963         | ) |  | $ | (13,513 | )
|                                                               |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  

Total accumulated other comprehensive gain (loss) was $310 thousand at October 28, 2007 and
$(2) thousand at January 28, 2007. Accumulated other comprehensive income (loss) consists entirely of unrealized gains losses on available-for-sale securities.



|7. | 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)                   |  | October 28,2007 |      |   | January 28,2007 |  
|                                 |  | (unaudited)     |      |   |                 |  
|Software under capital lease     |  | $               | 655  |   |                 | $ | 4,899  |  
|Accumulated amortization         |  |                 | (182 | ) |                 |   | (3,625 | )
|                                 |  |                 |      |   |                 |   |        |  
|Net software under capital lease |  | $               | 473  |   |                 | $ | 1,274  |  
|                                 |  |                 |      |   |                 |   |        |  

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

Future minimum payments under the capital lease consist of the following, as of October 28, 2007:



|                                            |  |                |      |  
|------------------------------------------- |  | -------------- | ---- | -
|Fiscal Year                                 |  |                |     
|                                            |  | (in thousands) |     
|2008 (remaining three months)               |  | $              | 88   |  
|2009                                        |  |                | 354  |  
|2010                                        |  |                | 354  |  
|                                            |  |                |      |  
|Total minimum lease payments                |  |                | 796  |  
|Less: amount representing interest          |  |                | (65  | )
|                                            |  |                |      |  
|Present value of net minimum lease payments |  |                | 731  |  
|Less: current portion                       |  |                | (311 | )
|                                            |  |                |      |  
|Long-term portion                           |  | $              | 420  |  
|                                            |  |                |      |  



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|8. | 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. As of October 28, 2007, 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 provide 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 has 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 change
in fair value on revaluation of warrant liability in the period in which the change occurred. For fiscal 2007, the Company recognized a gain on the change in fair value on revaluation of warrant liability of $1.8 million. Since the warrants
were 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 the first nine months of fiscal 2008, the Company recognized a gain on the change in fair value on revaluation of the warrant liability of $758,000.

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 will no longer be able to
be cash exercised. 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, the amended
2006 Warrants were no longer required to be classified as a liability under EITF 00-19 and were reclassified as equity. The



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##### Table of Contents

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 29, 2007 and the $0.1 million value of the 2006 Warrants that were not amended remained on the Companys balance sheet as a liability as of July 29, 2007 and as of October 28,
2007.



|9. | Income Taxes
|-- | ------------

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 has 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 income taxes payable 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 $2.8 million as of January 29, 2007, of which $1.0 million, if recognized,
would result in a reduction of the Companys effective tax rate. Interest and penalties are immaterial at the date of adoption and were included in the unrecognized tax benefits. The Company recorded a decrease in its unrecognized tax benefits
of approximately $466 thousand in the nine months ended October 28, 2007. The Company is subject to audit by the IRS and California Franchise Tax Board for all years since 2002.

Income tax expense was $7 thousand and $13 thousand for the three months ended October 28, 2007 and October 29, 2006, respectively. The income
tax benefit was $444 thousand and the income tax expense was $43 thousand for the nine months ended October 28, 2007 and October 29, 2006, respectively. The Company recorded a tax provision of $7 thousand on a loss before income taxes of
$4.7 million in the three months ended October 28, 2007 that consisted of foreign income taxes. The Company recorded a tax benefit of $444 thousand on a loss before income taxes of $12.7 million in the nine months ended October 28, 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. The Company
recorded a tax provision of $13 thousand on a pre-tax loss of $4.3 million in the three months ended October 29, 2006 that consisted of foreign income taxes and an increase of $6 thousand for accrued interest on income taxes payable. The
Company recorded a tax provision of $43 thousand on a pre-tax loss of $13.5 million in the nine months ended October 29, 2006 that consisted of foreign income taxes and an increase of $18 thousand for accrued interest on income taxes payable.



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|10. | Contingencies
|--- | -------------

Commitments

The Company leases its principal headquarters in Santa Clara, California, under a non-cancelable operating lease that expires in 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:



|                             |  |                |      
|---------------------------- |  | -------------- | -----
|Fiscal Year                  |  |               
|                             |  | (in thousands)
|2008*                        |  | $              | 314  
|2009*                        |  |                | 1,236
|2010                         |  |                | 1,100
|2011                         |  |                | 277  
|Thereafter                   |  |                |     
|                             |  |                |      
|Total minimum lease payments |  | $              | 2,927
|                             |  |                |      



|* | Net of sublease income of $16,500 per month through October 31, 2008.
|- | ---------------------------------------------------------------------



|11. | 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 nine-month periods ended October 28, 2007 and
October 29, 2006, 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.



|12. | Recent Accounting Pronouncements
|--- | --------------------------------

In September
2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair
value measurements. We are required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April 27, 2008. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial
position, results of operations and cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We are required to adopt the provisions of SFAS No. 159 beginning with our fiscal quarter ending April 27, 2008,
although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial position, results of operations and cash flows.

On January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, issued in July 2006. FIN 48
applies to all tax positions related to income taxes subject to FASB Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes. Under FIN 48 we recognize the benefit from a tax position only if it is
more-likely-than-not that the position would be sustained upon audit based solely on the technical merits



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of the tax position. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax
benefits. Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing the FIN 48. Please refer to Note 9 of these Notes to Condensed Consolidated
Financial Statements for additional information.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

When used in this discussion, the words expects, anticipates, believes and similar expressions are intended to
identify forward-looking statements. Such statements reflect managements current intentions and expectations. Examples of such forward-looking statements include statements regarding future revenues, expenses, losses and cash flows, 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 product dedicated for the mobile digital TV market is marketed under the NeoMobileTV brand name. Target customers for both our MiMagic product and our NeoMobileTV product 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.



17



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##### Table of Contents

Since April 2002, we have been working with The Consortium for Technology Licensing Ltd. to explore
opportunities to license or sell our patents. During that time we have successfully licensed patents to one party and sold patents to two parties. As of October 28, 2007, we were in discussions with multiple companies that we believe have
infringed on our embedded DRAM patents. The objective of our patent licensing activity is to enter into patent licensing agreements with companies that have infringed or are expected to infringe on our patents. In addition, we may decide to license
or sell certain additional patents in the future. There was no licensing revenue in the first nine months of fiscal 2008 and fiscal 2007.

In the second quarter of fiscal 2008 we completed a warrant exchange offer in which amended warrants would no longer be able to be cash exercised. Since holders of the amended warrants cannot make or execute a cash exercise, we will not be
required to register the shares issued upon exercise of the amended warrants under any circumstances. Accordingly, the amended warrants are no longer classified as a liability under EITF 00-19 and have been reclassified as equity. A total of 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. These
warrants were revalued on July 27, 2007, the date the warrant exchange offer was completed, and we 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 29, 2007 and the $0.1 million value of the 2006 Warrants that were not amended remained on our balance sheet as a liability as of
July 29, 2007 and as of October 28, 2007.

During the third quarter of fiscal 2008, our independent registered public accounting
firm, based upon the results of their quarterly review procedures for the second quarter of fiscal 2008, requested that the Audit Committee conduct an independent investigation to evaluate more closely the contractual terms and conditions of certain
sales transactions and the timing of revenue recognition relative to a shipment made to a customer. The Audit Committee conducted an independent investigation, which revealed certain information that would have modified senior managements
initial determination of revenue recognition for the shipment was not previously available to senior management. As a result of this investigation, we determined that we had a material weakness related to controls over our process of determining
revenue recognition as well as adherence to the Companys code of ethics policy.

The Company is in the process of designing and
implementing improvements in its internal control over financial reporting to address the material weakness described above. These actions include providing supplemental revenue recognition training to relevant personnel, and providing annual
training on our code of ethics policy as well as training on our sub-certification process. In addition, the Company will implement improvements to our sales quote approval, sales order acknowledgement and invoicing processes, and to enhance our
records retention procedures related to electronic documents. See Part 1, Item 4 of this Quarterly Report of Form 10-Q.

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 from our
estimates.



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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 28, 2007.

Results of Operations

Product Revenue

Product revenue was $0.6 million and $0.2 million for the three months ended October 28, 2007 and October 29, 2006, respectively. Product revenue was $1.3 million and $0.5 million for the nine months ended
October 28, 2007 and October 29, 2006, respectively. Revenue for the three and nine months ended October 28, 2007 and October 29, 2006 consisted entirely of product revenue. There was no licensing revenue in either the nine
months ended October 28, 2007 or in the nine months ended October 29, 2006. The increase in product revenue for the three months ended October 28, 2007 is primarily due to increased sales of our MiMagic 3 and MiMagic 6+ application
processors, partially offset by decreased sales of our discontinued 1121 companion chip. The increase in product revenue for the nine months ended October 28, 2007 is primarily due to increased sales of our MiMagic 6+ application processors
used in mobile phone and mobile television applications, as well as increased sales of our MiMagic 3 application processors, partially offset by decreased sales of our discontinued 1110 and 1121 companion chips. In addition, a product shipment of
approximately $1.3 million made in July 2007 was not recognized as revenue in the second or third quarter of fiscal 2008 as the transaction did not satisfy the revenue recognition criterion that collection of the proceeds is reasonably assured. We
will not recognize revenue on this shipment unless cash is collected. We cannot assure you that we will be able to recognize revenue on this shipment in whole, in part, or at all.

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 95% and 100% of product revenue in the three months ended October 28, 2007 and October 29, 2006, respectively. During the quarter ended October 28,
2007, 59% of our revenue resulted from the sale of our MiMagic 6+ to Neonode in Sweden for use in mobile phones. Also in the third quarter, 32% of our revenue resulted from the sale of our MiMagic 3 application processor to Solectron for production
in Singapore for use in an automatic toll-collection system. During the quarter ended October 29, 2006, 79% of our revenues resulted from the sale of our discontinued 1121 companion chip to Edom Technology Company, a Taiwan distributor. Sales
to customers located outside the United States accounted for 95% and 71% of product revenue in the nine months ended October 28, 2007 and October 29, 2006, respectively. All sales transactions were denominated in United States dollars. The
following is a summary of the Companys product revenue by major geographic area:



|               |  |                    |   |  |                   |   |  |                  |   |  |                  |  
|-------------- |  | ------------------ | - |  | ----------------- | - |  | ---------------- | - |  | ---------------- | -
|               |  | Three Months Ended |   |  | Nine Months Ended |  
|               |  | October 28, 2007   |   |  | October 29, 2006  |   |  | October 28, 2007 |   |  | October 29, 2006 |  
|Japan          |  | 2                  | % |  | 0                 | % |  | 1                | % |  | 0                | %
|Korea          |  | 2                  | % |  | 12                | % |  | 32               | % |  | 6                | %
|Malaysia       |  | 0                  | % |  | 0                 | % |  | 3                | % |  | 0                | %
|Singapore      |  | 32                 | % |  | 1                 | % |  | 16               | % |  | 6                | %
|Sweden         |  | 59                 | % |  | 0                 | % |  | 42               | % |  | 2                | %
|Taiwan         |  | 0                  | % |  | 79                | % |  | 0                | % |  | 42               | %
|United Kingdom |  | 0                  | % |  | 8                 | % |  | 1                | % |  | 15               | %
|United States  |  | 5                  | % |  | 0                 | % |  | 5                | % |  | 29               | %
|               |  |                    |   |  |                   |   |  |                  |   |  |                  |  
|               |  | 100                | % |  | 100               | % |  | 100              | % |  | 100              | %



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##### Table of Contents

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



|                                      |  |                    |   |  |                   |   |  |                  |   |  |                  |  
|------------------------------------- |  | ------------------ | - |  | ----------------- | - |  | ---------------- | - |  | ---------------- | -
|                                      |  | Three Months Ended |   |  | Nine Months Ended |  
|                                      |  | October 28, 2007   |   |  | October 29, 2006  |   |  | October 28, 2007 |   |  | October 29, 2006 |  
|Neonode AB.                           |  | 59                 | % |  | *                 | % |  | 42               | % |  | *                | %
|Solectron Technology                  |  | 32                 | % |  | *                 | % |  | 16               | % |  | *                | %
|Sejin Electron Inc.                   |  | *                  | % |  | *                 | % |  | 24               | % |  | *                | %
|Edom Technology Co.**                 |  | *                  | % |  | 79                | % |  | *                | % |  | 43               | %
|MJL Technology, LTD**                 |  | *                  | % |  | 12                | % |  | *                | % |  | *                | %
|Premier Components Distribution**     |  | *                  | % |  | *                 | % |  | *                | % |  | 27               | %
|Premier Microelectronics Europe LTD** |  | *                  | % |  | *                 | % |  | *                | % |  | 13               | %



|* | represents less than 10% of product revenue
|- | -------------------------------------------



|** | customer is a distributor/sales representative
|-- | ----------------------------------------------

Gross Profit (Loss)

Gross profit (loss) was $237 thousand and $(5) thousand for the three months ended October 28, 2007 and October 29, 2006,
respectively. Gross profit was $290 thousand and $57 thousand in the nine months ended October 28, 2007 and October 29, 2006, respectively. The increase in gross profit for the three and nine months ended October 28, 2007 was
primarily due to the increased revenue and an increase in the favorable impact of the sale of inventory previously written off. The increase in the favorable impact of the sale of inventory previously written off was $88 thousand and $118 thousand,
respectively, for the three and nine months ended October 28, 2007.

Research and Development Expenses

Research and development expenses are primarily directed to development for the mobile television, wireless IP camera, and multimedia-enriched GPS
navigation markets. Research and development expenses include compensation and associated costs relating to development personnel, amortization of intangible assets and prototyping costs, which are comprised of photomask costs and pre-production
wafer costs. Research and development expenses were $2.9 million and $3.2 million for the three months ended October 28, 2007 and October 29, 2006, respectively. Research and development expenses were $8.9 million and $10.3 million for the
nine months ended October 28, 2007 and October 29, 2006, respectively. These expenses include stock-based compensation of $0.2 million for both the three months ended October 28, 2007 and October 29, 2006 and $0.7 million and
$0.6 million for the



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nine months ended October 28, 2007 and October 29, 2006, respectively. The decrease of $0.2 million for the three months ended October 28,
2007 is primarily due to decreased depreciation expense of $0.2 million. The decrease of $1.4 million for the nine months ended October 28, 2007 is primarily related to decreased mask set purchases and acquired technology costs of $0.5 million
and decreased labor costs of $0.5 million.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $2.0 million and $1.2 million for the three months ended October 28, 2007 and October 29, 2006,
respectively. Sales, general and administrative expenses were $5.3 million and $4.9 million for the nine months ended October 28, 2007 and October 29, 2006, respectively. These expenses include stock-based compensation of $207 thousand and
$128 thousand for the three months ended October 28, 2007 and October 29, 2006, respectively, and $632 thousand and $372 thousand for the nine months ended October 28, 2007 and October 29, 2006, respectively. The increase of $0.8
million for the three months ended October 28, 2007 is mainly due to costs of $0.4 million associated with the independent investigation initiated by our Audit Committee (Please see Part 1. Item 4 Controls and Procedures for
further discussion), increased labor costs of $0.2 million and increased audit costs of $0.1 million. The increase of $0.4 million for the nine months ended October 28, 2007 is primarily related to costs of $0.4 million associated with the
independent investigation initiated by our Audit Committee as mentioned above, and increased stock-based compensation of $0.3 million, partially offset by decreased professional service costs of $0.2 million and decreased labor costs of $0.1
million.

Gain on Sale of Patents

In
the second quarter of fiscal 2007, NeoMagic completed the sale of four of our patents to Samsung Electronics Co. Ltd. for $1.4 million pursuant to a patent purchase agreement. After payment of expenses related to the negotiation of the patent sale
agreement, the Company received approximately $1.0 million in net proceeds from the sale. The Company has no on-going obligations under the patent sale agreement. There were no patent sales in the first nine months of fiscal 2008.

The patents sold in the second quarter of fiscal 2007 do not relate to products NeoMagic currently sells or plans to sell. NeoMagic retains a worldwide,
non-exclusive license under the patents sold.

The patent sales do not include several of NeoMagics patents covering embedded DRAM technology or any
of the unique array processing technology used in NeoMagics MiMagic 6+ product.

Stock Compensation

Stock compensation expense was $437 thousand and $342 thousand for the three months ended October 28, 2007 and October 29, 2006, respectively.
Stock compensation expense was $1,358 thousand and $1,027 thousand for the nine months ended October 28, 2007 and October 29, 2006, respectively. Stock compensation expense is recorded in cost of revenues, research and development expenses
and sales, general and administrative expenses and represents the amortization of the fair value of share-based payments made to employees, members of our board of directors and other service providers in the form of stock options and purchases
under the employee stock purchase plan. We adopted SFAS No. 123(R) effective on the fist 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.



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Interest Income and Other

The Company currently earns interest on its cash equivalents and short-term investments. Interest income and other was $57 thousand and $180 thousand for the three months ended October 28, 2007 and
October 29, 2006, respectively. Interest income and other was $462 thousand and $684 thousand for the nine months ended October 28, 2007 and October 29, 2006, respectively. The decrease for the three and nine months ended
October 29, 2007 in interest income and other is primarily due to lower average cash and short-term investment balances.

Interest Expense

Interest expense was $13 thousand and $23 thousand for the three months ended October 28, 2007 and October 29, 2006,
respectively. Interest expense was $54 thousand and $89 thousand for the nine months ended October 28, 2007 and October 29, 2006, respectively. Interest expense recorded in the three and nine months ended October 28, 2007 and
October 29, 2006 represents interest on our capital leases (See Note 7). Interest expense decreased for both the three and nine months ended October 28, 2007 due to declining principal balances.

Income Taxes

Income tax expense was $7 thousand and
$13 thousand for the three months ended October 28, 2007 and October 29, 2006, respectively. The income tax benefit was $444 thousand and the income tax expense was $43 thousand for the nine months ended October 28, 2007 and
October 29, 2006, respectively. We recorded a tax provision of $7 thousand on a loss before income taxes of $4.7 million in the three months ended October 28, 2007 that consisted of foreign income taxes related to research and development
centers located outside the U.S. We recorded a tax benefit of $444 thousand on a loss before income taxes of $12.7 million in the nine months ended October 28, 2007 that primarily due to 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 provision of $13 thousand on a pre-tax loss of $4.3 million in the three months ended October 29, 2006 that consisted of foreign income taxes and an increase of
$6 thousand for accrued interest on income taxes payable. We recorded a tax provision of $43 thousand on a pre-tax loss of $13.5 million in the nine months ended October 29, 2006 that consisted of foreign income taxes and an increase of $18
thousand for accrued interest on income taxes payable.

Liquidity and Capital Resources

The Companys cash, cash equivalents and short-term investments decreased $14.2 million in the nine months ended October 28, 2007 to $6.3
million from $20.5 million at January 28, 2007 as the Company continues to experience negative cash flow in operating, investing and financing activities.

We believe our current cash, cash equivalents and short-term investments will satisfy our projected cash requirements through January 2008. However, we expect we will need to raise additional capital to fund future
operating activities beyond January 2008. The adequacy of our resources will depend largely on our ability to complete additional financing, our ability to sell or license intellectual property and our 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 we experience a material shortfall versus our plan, we expect to take appropriate actions to maximize the
value of the Company. We believe we can take actions to achieve further reductions in our operating expenses, if necessary. 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.



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Cash and cash equivalents used in operating activities for the nine months ended October 28, 2007
was $13.6 million, up slightly from $13.4 million of net cash used in operating activities for the nine months ended October 29, 2006. The cash used in operating activities for the nine months ended October 28, 2007 was primarily due to
the net loss of $12.3 million, the non-cash gain from the change in fair value of the warrant liability of $0.8 million and an increase in inventory of $3.0 million, partially offset by non-cash stock-based compensation of $1.4 million and non-cash
depreciation of $0.9 million. Approximately $0.9 million of the increase in inventory was due to the deferral of costs that have been classified as inventory related to a product shipment of approximately $ 1.3 million made in July 2007 that
has not been recognized as revenue as the transaction did not satisfy the revenue recognition criterion that collection of the proceeds is reasonably assured. In addition, the inventory increase is due to the build up of MiMagic 6+ and NeoMobileTV
inventory in advance of expected orders. The cash used in operating activities for the nine months ended October 29, 2006 was primarily due to the net loss of $13.5 million, the $1.0 million gain on the sale of patents, an increase in inventory
of $0.7 million to build up MiMagic 6+ inventory in advance of expected orders and a decrease in accounts payable of $0.8 million, partially offset by non-cash depreciation of $1.2 million and non-cash stock-based compensation of $1.0 million.

Net cash used in investing activities for the nine months ended October 28, 2007, was $0.6 million, compared to $1.2 million for the
nine months ended October 29, 2006. Net cash used in investing activities for the nine months ended October 28, 2007 related to net purchases of short-term investments of $0.5 million and purchases of property, plant and equipment of $0.1
million. Net cash used in investing activities for the nine months ended October 29, 2006 is primarily due to net purchases of short-term investments of $2.2 million, partially offset by proceeds from the sale of patents of $1.0 million.

Net cash used in financing activities was $0.5 million for the nine months ended October 28, 2007, compared to $0.6 million of net
cash used in financing activities for the nine months ended October 29, 2006. The net cash used in financing activities for the nine months ended October 28, 2007 was due to payments on capital lease obligations of $0.8 million, partially
offset by proceeds from the issuance of common stock under employee stock plans of $0.3 million. The net cash used in financing activities for the nine months ended October 29, 2006 is due to payments on capital lease obligations of $0.9
million, partially offset by proceeds from the issuance of common stock of $0.3 million pursuant to the employee stock purchase plan and to employee stock option exercises.

Long-term investements increased to $505 thousand from $200 thousand at January 2007. In January 2006, we made a $200 thousand minority equity investment
in Neonode, Inc. (Neonode), a privately held mobile telephone company. In August 2007, the merger of Neonode with a subsidiary of SBE, Inc. (SBE) became effective. SBE has, effective upon the merger, changed its name to
Neonode, Inc. and is publicly traded on the Nasdaq Stock Exchange (NEON). Upon the merger of SBE and Neonode, our investment converted into approximately 127,000 shares of Neonode common stock. The investment had a fair value on
October 28, 2007 of $505 thousand, which included a gross unrealized gain of $305 thousand.

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
sub-lease of 10,000 square feet of our Santa Clara facility to a third party through October 2008 and increase the monthly rent from $12,000 to $16,500 per month.



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We lease certain software licenses under capital leases. See Note 7, Obligations under Capital Leases, in the condensed
consolidated financial statements for additional information.

Contractual Obligations

The following summarizes the Companys contractual obligations at October 28, 2007, and the effect such obligations are expected to have on our
liquidity and cash flow (in thousands).



|                                   |  |             |     |      |   |       |  |      |       |      |   |            |  |       |   |  |   |   |  |   |      
|---------------------------------- |  | ----------- | --- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | - |  | - | - |  | - | -----
|                                   |  | Fiscal Year
|                                   |  | 2008        |     | 2009 |   | 2010  |  | 2011 |       | 2012 |   | Thereafter |  | Total
|CONTRACTUAL OBLIGATIONS            |  |             |     |      |   |       |  |      |       |      |   |            |  |       |   |  |   |   |  |   |      
|Operating leases                   |  | $           | 314 |      | $ | 1,236 |  | $    | 1,100 |      | $ | 277        |  | $     |  |  | $ |  |  | $ | 2,927
|Capital leases                     |  |             | 88  |      |   | 354   |  |      | 354   |      |   |           |  |       |  |  |   |  |  |   | 796  
|Design tool software licenses      |  |             | 143 |      |   | 428   |  |      | 285   |      |   |            |  |       |   |  |   |   |  |   | 856  
|Non-cancelable purchase orders     |  |             | 137 |      |   |      |  |      |      |      |   |           |  |       |  |  |   |  |  |   | 137  
|                                   |  |             |     |      |   |       |  |      |       |      |   |            |  |       |   |  |   |   |  |   |      
|Total contractual cash obligations |  | $           | 682 |      | $ | 2,018 |  | $    | 1,739 |      | $ | 277        |  | $     |  |  | $ |  |  | $ | 4,716
|                                   |  |             |     |      |   |       |  |      |       |      |   |            |  |       |   |  |   |   |  |   |      

Off-Balance Sheet Arrangements

As of October 28, 2007, 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 12 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
|------- | ----------------------------------------------------------

Interest Rate Risk

The Companys cash, cash equivalents and short-term investments are exposed to financial market
risk due to fluctuations in interest rates, which may affect our interest income. As of October 28, 2007, the Companys cash, cash equivalents and short-term investments earned interest at an average rate of 5.0%. Due to the short-term
nature of the Companys investment portfolio, our operating results and cash flows are vulnerable to sudden changes in market interest rates. Assuming a decline of 10% in the market interest rates at October 28, 2007, with consistent cash
balances, interest income would be adversely affected by approximately $8,000 per quarter. The Company does not use its investment portfolio for trading or other speculative purposes.

Foreign Currency Exchange Risk

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



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|Item 4. | 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 not 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 because of the material weakness described
below. Notwithstanding the existence of this material weakness, our management, including our Chief Executive Officer and Chief Financial Officer, believes that the consolidated financial statements included in this report fairly present in all
material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Controls

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected. During the second quarter of fiscal 2008 financial reporting process, our independent registered public accounting firm reported that, based upon the
results of their quarterly review procedures, they requested that the Audit Committee conduct an independent investigation to evaluate more closely the contractual terms and conditions of certain sales transactions and the timing of revenue
recognition relative to a shipment made to a customer. The Audit Committee conducted an independent investigation, which revealed certain information that would have modified senior managements initial determination of revenue recognition for
the shipment was not previously available to senior management. As a result of this investigation, we determined that we had a material weakness related to controls over our process of determining revenue recognition as well as adherence to the
Companys code of ethics policy. These control deficiencies could result in a misstatement of revenue that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or
detected. Accordingly, we have concluded that these control deficiencies constitute a material weakness.

The Company is in the process of
designing and implementing improvements in its internal control over financial reporting to address the material weakness described above. These actions include providing supplemental revenue recognition training to relevant personnel, and providing
annual training on our code of ethics policy as well as training on our sub-certification process. In addition, the Company will implement improvements to our sales quote approval, sales order acknowledgement and invoicing processes, and to enhance
our records retention procedures related to electronic documents.

Other than described above, during the third quarter of fiscal 2008,
there have been 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.



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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.



|Item 4T. | Controls and Procedures
|-------- | -----------------------

The disclosure contained
under Part I Item 4 hereof is hereby incorporated by reference into this Part I Item 4T.

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

We have been incurring substantial 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 2008. Our ability to achieve cash flow breakeven is likely to depend on the success of our MiMagic 6+ and NeoMobileTV products. Even if these new products are successful, we are likely to incur significant additional losses and consume cash
in operations during the current fiscal year ending January 27, 2008.

We Need Additional Capital

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, we are likely to require additional working capital to fund our business. We believe that our existing capital resources will be sufficient to meet our capital requirements through at least the end of our fiscal year
ending January 27, 2008. However, we expect we will need to raise additional capital to fund future operating activities beyond January 27, 2008. Our future capital requirements will depend on many factors, including the rate of net sales
growth, timing and extent of spending to support research and development programs in new and existing areas of technology, expansion of sales and marketing support activities, and timing and customer acceptance of new products. 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. These uncertainties raise substantial doubts about the Companys ability to continue as a going concern. As
discussed below, revenue performance is difficult to forecast. We cannot assure you that additional equity or debt financing, if required, will be available on acceptable terms or at all.



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Potential Nasdaq Stock Market Delisting

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. The closing bid price of our common stock has stayed above $1.00 since the reverse stock split occurred.

If we fail in the future to comply with the continued listing requirements of the Nasdaq Global 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
Nasdaq Capital Market, the over-the-counter market or on the Electronic Bulletin Board of the National Association of Securities Dealers, Inc. There is no guarantee that an active trading market for our common stock will be maintained on the Nasdaq
Global 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 our managements evaluation of our internal control over financial reporting as of July 29, 2007, management identified control deficiencies that constituted a material weakness. As more fully described in Part
1, Item 4 of this Quarterly Report on Form 10-Q, as of October 28, 2007, our management concluded that we did not maintain effective controls over our revenue recognition processes. These control deficiencies resulted in a material
adjustment recorded by us to the financial statements for the second quarter of fiscal 2008. 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. See Part 1, Item 4 of this Quarterly Report on Form 10-Q.



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A failure to implement and maintain effective internal control over financial reporting, including a
failure to implement successfully the corrective actions we are taking to address the control deficiency identified above, 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-offs, or underproduce 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 performance does not match forecasts.

We have
a Limited Customer Base

We have a limited customer base and we expect that a small number of customers will account for a substantial
portion of our product revenue for the foreseeable future. Two customers accounted for 59% and 32%, respectively, of product revenue for the three months ended October 28, 2007. Two customers accounted for 79% and 12%, respectively, of product
revenue for the three months ended October 29, 2006. Three customers accounted for 42%, 24% and 16%, respectively, of product revenue in the nine months ended October 28, 2007. Three customers accounted for 43%, 27% and 13%, respectively,
of product revenue in the nine months ended October 29, 2006. Furthermore, the majority of our sales were historically made, and are expected to continue to be made, on the basis of purchase orders rather than pursuant to long-term purchase
agreements. 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.



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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 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.

We May Encounter Inventory Excess or Shortage

To have product inventory to meet potential customer
purchase orders, we place purchase orders for wafers from our manufacturer in advance of having firm purchase orders from our customers. We had binding orders for wafers totaling $137,000 outstanding as of October 28, 2007. 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 a write-off 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 did in fact incur such charges in fiscal 2007 of $12,000, in
fiscal 2006 of $0.2 million and in fiscal 2005 of $0.4 million. Significant write-offs of 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. A product shipment of approximately $1.3 million made in July 2007 was not recognized as revenue in the second or third quarter of fiscal 2008 as the transaction did not satisfy the revenue recognition criterion
that collection of the proceeds is reasonably assured. If the customer fails to pay, we may have excess inventory depending on customer demand. We cannot assure you that we will be able to recognize revenue on this shipment in whole, in part, or at
all.

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 video and 3D graphics performance, price, features, power consumption, size and customer support. 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.

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 principal competitors include Texas Instruments,
Renesas, ST Microelectronics and Broadcom as well as a number of vertically integrated electronics firms that are developing their own solutions, such as C&S Technologies and Nexilion. We may also face increased



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competition from new entrants into the market, including companies currently at developmental stages. 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 market, 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 (binding purchase orders totaling $137,000 were outstanding as of October 28, 2007), 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

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. We cannot assure you that we will be able to generate any future licensing revenue from our 28 patents 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. Furthermore, if we should in the future complete an agreement to license our patents, we cannot assure you that the licensing
revenue we receive from such license will be as significant as the licensing revenue we received from Sony.

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.

All our executive officers are employees at will. We have an employment contract with Douglas R. Young, our chief executive officer and Steve
Berry, our chief financial officer, which allow us to terminate their employment at any time but requires us to make severance payments depending upon the circumstances surrounding his termination of employment. We do not maintain key person
insurance on any of our personnel. If we are not able to maintain 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 Global 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 Global Market.



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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.



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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 because we depend 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.



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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 October 28, 2007, we had been issued and hold 28 patents. These 28 issued
patents are scheduled to expire between June 2014 and November 2024. 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 several of our
important patents covering embedded DRAM technology nor any of the unique array processing technology used in our MiMagic 6+ 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.



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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, 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. The Court ruled that there was no infringement by Trident. The Company filed an appeal in the United
States Court of Appeals, for the Federal Circuit. On April 17, 2002, the United States Court of Appeals for the Federal Circuit affirmed the lower courts judgment of non-infringement on one patent and vacated the courts judgment of
non-infringement on another patent, thereby remanding it to the lower court for further proceedings. In November 2002, the lower court heard oral arguments on cross-motions for summary judgment on the matter. In May 2003, the lower court ruled in
favor of Trident. In December 2003, the Company filed an appeal in the United States Court of Appeals, for the Federal Circuit. In August 2004, the Federal Circuit rejected the appeal and affirmed the lower courts decision of no infringement
by the Trident products. On September 2, 2005 the United States District Court for the District of Delaware approved the Trident request that its counterclaim against NeoMagic filed in January 1999 be dismissed without prejudice.

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 95% and 100% of our product revenue for the three months ended October 28, 2007 and
October 29, 2006, respectively. Sales to customers located outside the United States accounted for 95% and 71% of product revenue for



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the nine months ended October 28, 2007 and October 29, 2006, 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 2007 and
the first two quarters of fiscal 2008.

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 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,



35



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##### Table of Contents

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:



|      |  |      |  |                                                                                                                                                                
|----- |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                     



36



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##### Table of Contents

|      |  |      |  |                                                                                                                                                                               
|----- |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                          
|      |  |     
|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.
|---- | -------------------------------------------------------------------------------------------------------



37



---

##### Table of Contents

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. BERRYSTEVEN P. BERRYV.P. Finance and Chief Financial Officer(Authorized Officer and Principal Financial Officer)December 7, 2007




38



---

##### Table of Contents

EXHIBIT INDEX



|      |  |      |  |                                                                                                                                                                
|----- |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                  



39



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##### Table of Contents

|      |  |      |  |                                                                                                                                                                               
|----- |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                          
|      |  |     
|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.
|---- | -------------------------------------------------------------------------------------------------------



40