Table of Contents





UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
DC 20549
 
 Form
10-K
  (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
  For
the fiscal year ended January 25, 2009,
  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.)780
      Montague Expressway, #504    San Jose,
      California
                
                95131(Address
      of Principal Executive Offices)
                
                (Zip
      Code)
  Registrant’s
telephone number, including area code (408) 428-9725
 Securities
registered pursuant to Section 12(b) of the Act:
  Title
      of Each Class
              
              Name
      of Each Exchange on Which RegisteredCommon
      Stock, $.001 par value
              
              Nasdaq
      Capital Market
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes   ̈    No  x
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes   ̈    No  x
 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 Large
Accelerated Filer   ̈        Accelerated
Filer   ̈        Non-Accelerated
Filer   ̈        Smaller
Reporting Company  x
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes   ̈    No  x
 The
aggregate market value of voting stock held by non-affiliates of the Registrant
was approximately $3,159,000 as of July 27, 2008 based upon the closing
price on the Nasdaq Market reported for such date, the last business day of the
registrant’s most recently completed second fiscal quarter. For purposes of this
calculation, we have excluded stock held by directors, executive officers and
greater than 5% shareholders. This calculation does not reflect a determination
that such persons are affiliates of the Registrant for any other
purposes.
 The
number of shares of the Registrant’s Common Stock, $.001 par value, outstanding
at April 24, 2009 was 12,570,914.
  DOCUMENTS
INCORPORATED BY REFERENCE
  Portions
of the Registrant’s Proxy Statement related to the 2009 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission after the
date hereof, are incorporated by reference into Part III of this Annual Report
on Form 10-K.
  
 NeoMagicCorporation
 FORM
10-K
  FOR
THE FISCAL YEAR ENDED JANUARY 25, 2009
  TABLE
OF CONTENTS
  PagePART
      I.Item
      1.
                  Business
                  
                  1Item 1A.
                  Risk
      Factors
                  
                  4Item 1B.
                  Unresolved
      Staff Comments
                  
                  8Item
      2.
                  Properties
                  
                  8Item
      3.
                  Legal
      Proceedings
                  
                  8Item
      4.
                  Submission of
      Matters to a Vote of Security Holders
                  
                  8PART
      II.Item
      5.
                  Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  9Item
      6.
                  Selected
      Financial Data
                  
                  11Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  12Item 7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  18Item
      8.
                  Financial
      Statements and Supplementary Data
                  
                  20Item
      9.
                  Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  41Item
      9A.
                  Controls and
      Procedures
                  
                  41Item 9B.
                  Other
      Information
                  
                  41PART
      III.Item 10.
                  Directors,
      Executive Officers and Corporate Governance
                  
                  42Item 11.
                  Executive
      Compensation
                  
                  42Item 12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  42Item 13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  42Item 14.
                  Principal
      Accountant Fees and Services
                  
                  42PART
      IV.Item 15.
                  Exhibits and
      Financial Statement Schedules
                  
                  43Signatures
                  
                  44Exhibit Index
                  
                  45
 
 Table of Contents
 FORWARD-LOOKING
STATEMENTS
  When used
in this discussion, the words “expects,” “anticipates,” “believes” and similar
expressions are intended to identify forward-looking statements. Such statements
reflect management’s current intentions and expectations. However, actual events
and results could vary significantly based on a variety of factors including,
but not limited to: customer acceptance of new NeoMagic products, the market
acceptance of handheld devices developed and marketed by customers that use our
products, our ability to execute product and technology development plans on
schedule, and our ability to access advanced manufacturing technologies in
sufficient capacity without significant cash pre-payments or investment.
Examples of forward-looking statements include statements about our expected
revenues, our competitive advantage in our markets, the potential market for our
products, our expected production timelines, our customer base and our need for
additional financing beyond the next 12 months. These statements are subject to
significant risks and uncertainties, including those set forth below under
Item 1A of Part I of this Form 10-K, that could cause actual results to
differ materially from those projected. These forward-looking statements speak
only as of the date hereof. We expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements
contained herein, to reflect any changes in our expectations with regard thereto
or any changes in events, conditions or circumstances on which any such
statement is based.
  PART
I
  Item1.
                  BUSINESS
  General
  NeoMagic
Corporation was incorporated in California in May 1993 and subsequently
reincorporated in Delaware in February 1997.
  Due to
the deteriorating financial markets during fiscal year 2009 and the company’s
inability to raise additional cash, in September 2008, the Board of Directors
and Management of NeoMagic decided to significantly reduce our operations and
cost structure. Restructuring charges are reflected in our 3rd Fiscal
Quarter 10Q. The company has halted the development of new silicon and is
currently focusing on completed device designs which may or may not use our
current inventory of chips.  We continue to deliver semiconductor
chips (primarily from our MiMagic 3 product line), software and device designs
to enable new, multimedia 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. 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. Target
customers for our products include manufacturers of mobile phones and other
handheld devices.
 
 We
believe multimedia handheld devices will continue to feature increased
functionality including: advanced camera applications, highly compressed video
using H.264 video standards, 3D graphics for gaming, and high quality audio. Our
strategy is to become a leading provider of multimedia system solutions
by:
 
 •
                Providing
      high-performance, power-efficient handheld
  systems.
  •
                Continuing
      to build relationships with leading component, software and solutions
      providers to offer our customers complete
  systems.
  •
                Focusing
      our sales efforts on several points in the sales channel including:
      original design manufacturers, design firms, contract manufacturers, and
      original equipment
manufacturers.
  In the
past, we provided graphics processor semiconductors to top notebook computer
manufacturers. In April 2000, we began to exit the graphics processor market.
However, the majority of our historical net sales through the end of fiscal 2002
continued to come from these products. We do not expect to have revenue related
to these products in the future. We believe that we were one of the first
companies to adopt large amounts of on-chip memory for commercial applications.
Many industry sources consider our graphics processors to be the semiconductor
industry’s first commercially successful embedded DRAM products. Currently,
embedded DRAM technology is used broadly in many applications. On
February 15, 2008, we completed the sale of selected patents, which
included our embedded DRAM patents, and a patent application to Faust
Communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5
million after agency commissions. We have retained a worldwide, non-exclusive,
royalty-free license to use the technology covered by these patents and patent
application for all of our current and future products
  Products
  Product
revenue was $2.0 million and $2.1 million in fiscal 2009 and 2008, respectively,
representing 100% of total revenue in fiscal 2009 and in 2008.
  MiMagic
Products:
  Our
primary product line is the MiMagic Applications Processor family. The MiMagic
family of Applications Processors incorporates an ARM processor and a multimedia
engine for 3D graphics, still images, audio, video and other multimedia
capabilities. We introduced the first member of the MiMagic Applications
Processor family in July 2001. We have since phased out production of the
MiMagic 1 and MiMagic 2 Applications Processors. Currently, the MiMagic 3
Applications Processor and the MiMagic 6+ Applications Processor are in
production.
 
 Due to
the support complexity of the NeoMobile TV product along with NeoMagic’s
significantly reduced staff, the NeoMobile TV chip is not in
production.
  Research
and Development
  Our
Research and Development for system products has been reduced to three internal
employees in combination with external Contractors. Our development of chip
products has been terminated.
  1
 Table of Contents
 Third
Party Manufacturing
  We have a
relationship with one foundry, Taiwan Semiconductor Manufacturing Corporation,
to produce semiconductor wafers for our current products. We do not have a
long-term agreement with this foundry. We depend on our wafer supplier to
allocate to us a portion of their manufacturing capacity sufficient to meet our
needs, to produce products of acceptable cost and quality at acceptable
manufacturing yields, and to deliver those products to us on a timely 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. In addition, due to the reduction of our engineering
staff, it is unlikely that we could develop an alternative design. A
manufacturing disruption experienced by our manufacturing partner would have a
material adverse effect on our business, financial condition and results of
operations.
  We use
other third-party subcontractors to perform assembly, packaging and testing of
our products. We work with these third-party subcontractors for advanced
packaging capabilities. We do not have long-term agreements with any of these
subcontractors. As a result of our reliance on third-party subcontractors to
assemble, test and provide advanced packaging for 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 assembling our products. Due to the amount of time normally
required to qualify these assembly and test subcontractors, shipments could be
delayed significantly if we are required to find alternative
subcontractors.
  Competition
  The
market for applications processors and multimedia co-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 processing
performance, price, features, power consumption, size and customer support. Our
ability to compete successfully in the applications processor and multimedia
co-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 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
main competitors include Texas Instruments, Renesas, Marvell, Freescale, ST
Microelectronics, Broadcom, Mediatek, Mtekvision, Core Logic and C&S
Technologies. We may also face increased competition from new entrants into the
market including companies currently at developmental stages.
  Intellectual
Property
  We rely
in part on patents to protect our intellectual property. As of January 25,
2009, we had 15 issued patents. These issued patents are scheduled to expire
between June 2014 and February 2025. 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 or competitive advantages, that they will not be challenged by third
parties, or that the patents of others will not have an adverse effect on our
ability to do business. In addition, we cannot assure you that others will not
independently develop similar products, duplicate our products or design around
any patents that may be issued to us.
  We also
rely on a combination of mask work protection, trademarks, copyrights, trade
secret laws, employee and third-party nondisclosure agreements and licensing
arrangements to protect our intellectual property. Despite these efforts, we
cannot assure you that others will not independently develop substantially
equivalent intellectual property or otherwise gain access to our trade secrets
or intellectual property, disclose such intellectual property or trade secrets,
or that we can meaningfully protect our intellectual property. As a general
matter, the semiconductor industry has experienced substantial litigation
regarding patent and other intellectual property rights. A failure by us to
meaningfully protect our intellectual property could have a material adverse
effect on our business, financial condition and results of
operations.
  Since
April 2002, we have been working with The Consortium for Technology Licensing
Ltd. to explore opportunities to license or sell some of our patents. On
February 15, 2008, we completed the sale of selected patents, which
included our embedded DRAM patents, and a patent application to Faust
communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5
million after agency commissions. We have retained a worldwide, non exclusive,
royalty-free license to use the technology covered by these patents and patent
application for all of our current and future products. We may decide to license
or sell certain additional patents in the future. There was no licensing revenue
in fiscal 2009, and fiscal 2008.
 
 Long-Lived
Assets
  The
Company has no remaining long-lived assets.
  Seasonality
  Our
business has not been seasonal to date. However, it could be seasonal in the
future as our products are incorporated into consumer electronic
products.
  Government
Contracts and Regulation
  We do not
have government contracts and the demand for our products is not driven by
government regulation.
  2
 Table of Contents
 Environment
  We do not
manufacture our own products and, therefore, do not have issues relating to the
disposal of hazardous materials and relating to emissions and discharges into
the air and water.
  Backlog
  Sales of
our products are primarily made through standard purchase orders that are
cancelable without significant penalties. These purchase orders are subject to
price renegotiations and to changes in quantities of products and delivery
schedules to reflect changes in customers’ requirements and manufacturing
availability. Also, many of our customers are moving to “just in time”
relationships with their vendors, whereby orders for product deliveries are not
provided to the supplier until just before the requested delivery. A large
portion of our sales is made through short lead-time orders. In addition, our
actual shipments depend on the manufacturing capacity of our suppliers and the
availability of products from such suppliers. As a result of the foregoing
factors, we do not believe that backlog is a meaningful indicator of future
revenue.
  Employees
  As of
January 25, 2009, we employed a total of 5 full-time employees. For
research and development and applications engineering the Company will utilize
outside consultants. We also employ, from time to time, a number of temporary
and part-time employees as well as consultants on a contract basis. Our
employees are not represented by a collective bargaining
organization.
  Management
  Executive
Officers
  The
executive officers of the Company as of April 24, 2009 are as
follows:
  NAME
                
                AGE
                
                POSITIONDouglas
      R. Young
                
                63
                
                President,
      Chief Executive Officer, (Acting) Chief Financial Officer, and
      DirectorSyed
      Zaidi
                
                50
                
                Chief
      Operating Officer and
Director
 
 There are
no family relationships among the executive officers and directors of the
Company.
  Douglas
R. Young has been President, Chief Executive Officer and a Director of NeoMagic
since April 2005. Before his promotion to President and Chief Executive Officer,
he was NeoMagic’s Vice President of Worldwide Sales, having joined NeoMagic in
February 2004. Before joining NeoMagic, Mr. Young was Senior Vice President
of Worldwide Sales at Planetweb, Inc., a provider of embedded multimedia
application and browser software for consumer electronics devices, from August
1999 to October 2003. At Planetweb, Mr. Young worked with customers such as
Samsung, Sharp, Philips and other large OEMs. Mr. Young has managed sales
in many different environments ranging between large systems enterprise sales to
the ‘Fortune 500’ and ODM and OEM sales in the consumer electronics market. He
has over 25 years experience working for companies such as IBM, Storage
Technology Corporation, Unilease Computer Corporation, Data General and Hitachi
Data Systems. He has worked in hardware and software sales, and he was President
and CEO of a computer and satellite leasing company. Mr. Young has a
Bachelors of Arts Degree from Princeton University and a Masters Degree in
Business Administration from The Stern School of Business at New
York University.
  Syed
Zaidi has been Chief Operating Officer and has served as a Director since
February 2007. From January 2006 to February 2007 Mr. Zaidi was Vice
President of Corporate Engineering and from May 2000 to January 2006,
Mr. Zaidi was Vice President of Santa Clara Engineering. Mr. Zaidi
joined NeoMagic’s engineering team in June 1995 and worked in engineering
management until his promotion to Vice President in 2000. Before joining
NeoMagic, Mr. Zaidi worked at Sierra Semiconductor, where he was
responsible of systems engineering for multimedia products. He has also worked
at Advanced Micro Research where he designed and developed UNIX based multi-user
systems, multiple video and graphic ASICs for multimedia products.
Mr. Zaidi holds a Bachelor of Electrical & Electronics Engineering
from Leeds University, England and a BSET from
Indiana State University.
  Available
Information
  We file
our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K pursuant to Section 13(a) of the Securities Exchange
Act of 1934 with the SEC electronically. The public may read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The address of that site is http://www.sec.gov.
  You may
obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K and amendments to those reports on the day
of filing with the SEC on our website on the World Wide Web at
http://www.neomagic.com, by calling us at our corporate offices at (408)
428-9725 or by sending an e-mail message to ir@neomagic.com.
  3
 Table of Contents
 Item1A.
                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 Annual Report on Form
10-K. If any of the following risks actually occurs, our business, financial
condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and investors might lose all or part of
their investment in our common stock.
  We
Need Additional Capital and We Have Substantially Reduced our Operating
Activities
  At
January 25, 2009, we had $183 thousand in cash and cash equivalents and $41
thousand in accounts receivable. We believe that this level of cash, cash
equivalents and accounts receivable is not sufficient to maintain continuing
operations at current levels. We have been unable to raise additional capital to
fund operating activities and have ceased efforts to do so. The adequacy of our
resources will depend largely on our ability to achieve positive operating cash
flows principally through reductions in expenditures. These uncertainties raise
substantial doubt about our ability to continue as a going concern. We are in
the process of taking actions to achieve further reductions in our operating
expenses. We also believe that we can take actions to generate cash by selling
or licensing intellectual property.
  We are
not generating sufficient cash from the sale of our products to support our
operations and have been incurring significant losses. We have been funding our
operations primarily with the cash proceeds raised through the sale of certain
patents in February 2008. We expect to incur additional losses and may have
negative operating cash flows through the end of our first fiscal quarter in
April 2009 and beyond. During the fiscal year ended January 25, 2009, we raised
approximately $9.5 million through the sale of certain patents. Unless we are
able to decrease expenses substantially, we will not have sufficient cash to
support our operations and may be forced to file for bankruptcy. We have taken
steps to restructure our operations and reduce our monthly operational cash
expenditures.
  There is
no assurance that we will be successful in reducing our operating expenses,
generating sufficient cash flows from operations or obtaining sufficient funding
from any source on acceptable terms, if at all. If we are unable to generate
sufficient cash flows from our operations, we may not be able to continue
operations as proposed, requiring us to modify our business plan, curtail
various aspects of our operations or cease operations. In such event, investors
may lose a portion or all of their investment. The report of our independent
registered public accounting firm, in respect of our 2009 fiscal year, includes
an explanatory going concern paragraph regarding substantial doubt as to our
ability to continue as a going concern, which indicates an absence of obvious or
reasonably assured sources of future funding that will be required by us to
maintain ongoing operations.
  On
September 24, 2008, we announced a cessation of our efforts to raise
additional capital. As a result, we proceeded with efforts to substantially
reduce our operating activities and reduce our on-going expenditures by
terminating employment for substantially all of our operational and engineering
employees in all worldwide locations. Beginning September 19, 2008, management,
acting based upon a plan approved by our Board of Directors, eliminated 52
positions in the Company. On September 23, 2008, the remaining independent
directors of the Company, Brett Moyer, Carl Stork and David Tomasello, notified
the Company that they were resigning as directors of NeoMagic Corporation,
effective September 23, 2008. We initiated efforts for the orderly
reduction of our operations, including the fulfillment of our outstanding sales
and other contracts, headcount reductions, securing continuing support for its
existing customers, seeking purchasers for our intellectual property and
tangible assets and providing for outstanding and anticipated liabilities. We
anticipate that our operations will consist primarily of supporting sales orders
from our existing customers, collecting the resulting receivables from such
sales orders, collecting proceeds from assets sold, satisfying obligations, and
administration of the corporation.
  We
Have a Limited Customer Base
  In each
of the last two fiscal years, three customers have accounted for over two-thirds
of our product revenue. In fiscal 2009, one customer accounted for 86% of
product revenue. In fiscal 2008, the top three customers accounted for 50%, 20%,
and 14%, respectively, of product revenue.  There was no licensing
revenue in fiscal 2009 and fiscal 2008. We expect that a small number of
customers will continue to account for a substantial portion of our product
revenue for the foreseeable future. Furthermore, the majority of our sales were
made, and are expected to continue to be made, on the basis of purchase orders
rather than pursuant to long-term purchase agreements. As a result, our
business, financial condition and results of operations could be materially
adversely affected by the decision of a single customer to cease using our
products, or by a decline in the number of handheld devices sold by a single
customer.
  We
May Lose Our Customer Base
  Our
products are designed to afford handheld device manufacturer significant
advantages with respect to product performance, power consumption and product
size. To the extent that other future developments in components or
subassemblies incorporate one or more of the advantages offered by our products,
the market demand for our products may be negatively impacted.
  We
Have Been Delisted from The Nasdaq Stock Market
  On
October 6, 2008, we announced that we received a Nasdaq Staff Determination
letter indicating that we did not comply with the minimum shareholders’ equity,
market value of listed securities or net income requirements for continued
listing set forth in Marketplace Rule 4310(c)(3), and that our common stock was
therefore, subject to delisting from The Nasdaq Capital Market. We did not seek
to challenge the Staff determination and delisting since we would be unable to
comply with these requirements in the near term. As a result, our common stock
was delisted from The Nasdaq Capital Market and trading of our common stock on
The Nasdaq Capital Market was suspended at the opening of business on
October 15, 2008. Trading in our common stock is now conducted through the
over-the-counter market or on the Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. There is no guarantee that an active
trading market for our common stock will be maintained on any exchange. 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.
 
 4
 Table of Contents
 Effective
on January 9, 2009 the Company’s Chief Financial Officer, Steven Berry,
resigned.  No replacement has been hired and the Chief Executive
Office also holds the position of (Acting) Chief Financial
Officer.   In addition, the Company has significantly reduced its
financial accounting staff which could decrease the effectiveness of its
internal control over financial reporting.
  Our
Revenues Are Difficult To Predict
  For a
variety of reasons, our revenues are difficult to predict and may vary
significantly from quarter to quarter. Our ability to achieve design wins
depends on a number of factors, many of which are outside of our control,
including changes in the customer’s strategic and financial plans, competitive
factors and overall market conditions. As our experience demonstrates, design
wins themselves do not always lead to production orders because the customer may
cancel or delay products for a variety of reasons. Such reasons may include the
performance of a particular product that may depend on components not supplied
by NeoMagic, market conditions, reorganizations or other internal developments
at the customer and changes in customer personnel or strategy. Even when a
customer has begun volume production of a product containing our chips, volumes
are difficult to forecast because there may be no history to provide a guide,
and because market conditions and other factors may cause changes in the
customer’s plans. Because of the market uncertainties they face, many customers
place purchase orders on a short lead-time basis, rather than providing reliable
long-term purchase orders or purchase forecasts. Our customer base can shift
significantly from period to period as existing customer programs end and new
programs do not always replace ending programs. All of these factors make it
difficult to predict our revenues from period to period.
  The
difficulty in forecasting revenues increases the difficulty in anticipating our
inventory requirements. This difficulty increases the likelihood that we may
overproduce particular parts, resulting in inventory write-downs, or
under-produce particular parts, affecting our ability to meet customer
requirements. The difficulty in forecasting revenues also restricts our ability
to provide forward-looking revenue and earnings guidance to the financial
markets and increases the chance that our revenue performance does not match
investor expectations.
  We
May Encounter Inventory Excess or Shortage
  To have
product inventory to meet potential customer purchase orders, we place purchase
orders for semiconductor wafers from our manufacturer in advance of having firm
purchase orders from our customers.  If we do not have sufficient
demand for our products and cannot cancel our current and future commitments
without material impact, we may experience excess inventory, which will result
in an inventory write-down affecting gross margin and results of operations. If
we cancel a purchase order, we must pay cancellation penalties based on the
status of work in process or the proximity of the cancellation to the delivery
date. We must place purchase orders for wafers before we receive purchase orders
from our own customers. This limits our ability to react to fluctuations in
demand for our products, which can be unexpected and dramatic, and from time to
time will cause us to have an excess or shortage of wafers for a particular
product. As a result of the long lead-time for manufacturing wafers and the
increase in “just-in-time” ordering by customers, semiconductor companies from
time-to-time take charges for excess inventory. We have in fact incurred such
charges in fiscal 2009 of $3.6 million and in fiscal 2008 of $0.4 million.
Significant write-downs for excess inventory have had and could continue to have
a material adverse effect on our financial condition and results of operations.
Conversely, failure to order sufficient wafers would cause us to miss revenue
opportunities and, if significant, could impact sales by our customers, which
could adversely affect our customer relationships and thereby materially
adversely affect our business, financial condition and results of
operations.
  We
Face Intense Competition in Our Markets
  The
market for Applications Processors is intensely competitive and is characterized
by rapid technological change, evolving industry standards and declining average
selling prices. We believe that the principal factors of competition in this
market are audio/video performance, price, features, power consumption, product
size and customer support as well as company stability. Our ability to compete
successfully in the Applications Processor market depends on a number of
factors, including success in designing and subcontracting the manufacture of
new products that implement new technologies, product quality and reliability,
price, ramp of production of our products, customer demand and acceptance of
more sophisticated multimedia functionality on mobile phones and other handheld
devices, end-user acceptance of our customers’ products, market acceptance of
competitors’ products and general economic conditions. Our ability to compete
will also depend on our ability to identify and ensure compliance with evolving
industry standards and market trends. Our small size and perceived instability
are negative factors in competing for business.
  We
compete with both domestic and foreign companies, some of which have
substantially greater financial and other resources than us with which to pursue
engineering, manufacturing, marketing and distribution of their products. Our
main competitors include Texas Instruments, Renesas, Marvell, Freescale, ST
Microelectronics, Broadcom, Mediatek, Mtekvision, Core Logic, Telechips and
C&S Technologies. We may also face increased competition from new entrants
into the market, including companies currently in the development stage. We
believe we have significant intellectual properties and have historically
demonstrated expertise in SOC technology. However, if we cannot timely introduce
new products for our markets, support these products in customer programs, or
manufacture these products, such inabilities could have a material adverse
effect on our business, financial condition and operating results.
  Some of
our current and potential competitors operate their own manufacturing
facilities. Since we do not operate our own manufacturing facility and may from
time-to-time make binding commitments to purchase products, we may not be able
to reduce our costs and cycle time or adjust our production to meet changing
demand as rapidly as companies that operate their own facilities, which could
have a material adverse effect on our results of operations. In addition, if
production levels increase the value of binding purchase orders may increase
significantly.
 
 5
 Table of Contents
 Uncertainty
Regarding Future Licensing Revenue and Gain on Sale of Patents
  The
patents sold related to products we no longer sell and not to products that we
currently sell or plan to sell. We retained a worldwide, non-exclusive license
under the patents sold. The sales did not include our important patents covering
the unique array processing technology used in our newer MiMagic and NeoMobileTV
products. We cannot assure you that we will be able to generate any future
licensing revenue or gains on sales of patents from our remaining 15 patents as
January 25, 2009, or from any future patents that we will own or have the right
to license. The licensing agreement with Sony may be the only licensing
agreement that we ever complete and the patent sales noted above may be the only
patent sales we complete. Furthermore, if we should in the future complete an
agreement to license or sell our patents, we cannot assure you that the proceeds
we receive from such transaction will be as significant as the proceeds we
received from Sony and Faust.
  We
Depend on Qualified Personnel
  Our
future success depends in part on the continued service of our key engineering,
sales, marketing, manufacturing, finance and executive personnel, and our
ability to identify, hire and retain additional personnel to serve potential
customers in our targeted markets. There is strong competition for qualified
personnel in the semiconductor industry, and we cannot assure you that we will
be able to continue to attract and retain qualified personnel necessary for the
development of our business. We have experienced the loss of personnel both
through headcount reductions and attrition. In the past two years we have lost
some of our executive management, including Jeffery Blanc (Vice President,
Worldwide Sales), Pierre-Yves Couteau (Vice President of Marketing), Deepraj
Puar (Vice President of Operations), and Scott Sullinger (CFO). Steve Berry
joined NeoMagic on August 6, 2007 as CFO. Mr. Berry left the Company
in January 2009.
  All our
executive officers are employees “at will”. We have employment contracts with
Douglas R. Young, our chief executive officer, and Syed Zaidi, our chief
operating officer, and until his departure in January 2009 with Steve Berry, our
chief financial officer. Until their departure in September 2008, we had
employment contracts with Deepraj Puar, our vice president of operations, and
Pierre-Yves Couteau, our vice president of marketing. The employment contracts
allow us to terminate their employment at any time but require us to make
severance payments depending upon the circumstances surrounding termination of
employment. We do not maintain key person insurance on any of our personnel. If
we are not able to retain key personnel, if our headcount is not appropriate for
our future direction, or if we fail to recruit key personnel critical to our
future direction in a timely manner, this may have a material adverse effect on
our business, financial condition and results of operations.
  In
addition, our future success will depend in part on our ability to identify and
retain qualified individuals to serve on our board of directors. We believe that
maintaining a board of directors comprised of qualified members is critical
given the current status of our business and operations. Moreover, SEC and
Nasdaq Capital Market rules require that three independent board members serve
on our audit committee. Any inability on our part to identify and retain
qualified board members could have a material adverse effect on our business and
we have been delist from the Nasdaq Capital Market. Our stock currently is
trading on the Bulleting Board “pink sheet”.
  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 Third-Party Manufacturers to Produce Our Products
  Our
products require wafers manufactured with state-of-the-art fabrication equipment
and techniques. We currently use one third-party foundry for wafer fabrication.
We expect that, for the foreseeable future, all of our products will be
manufactured at Taiwan Semiconductor Manufacturing Corporation on a
purchase-order-by-purchase-order basis. Since, in our experience, the lead time
needed to establish a relationship with a new wafer fabrication partner is at
least 12 months, and the estimated time for a foundry to switch to a new product
line ranges from four to nine months, we may have no readily available
alternative source of supply for specific products. In addition to time
constraints, switching foundries would require a diversion of engineering
manpower and financial resources to redesign our products so that the new
foundry could manufacture them. We cannot assure you that we can redesign our
products to be manufactured by a new foundry in a timely manner, nor can we
assure you that we will not infringe on the intellectual property of our current
wafer manufacturer when we redesign our products for a new foundry. A
manufacturing disruption experienced by our manufacturing partner, the failure
of our manufacturing partner to dedicate adequate resources to the production of
our products, or the financial instability of our manufacturing partner would
have a material adverse effect on our business, financial condition and results
of operations. Furthermore, if the transition to the next generation of
manufacturing technologies by our manufacturing partner is unsuccessful, our
business, financial condition and results of operations would be materially and
adversely affected.
  We have
many other risks due to our dependence on a third-party manufacturer, including:
reduced control over delivery schedules, quality, manufacturing yields and cost,
the potential lack of adequate capacity during periods of excess demand, limited
warranties on wafers supplied to us, and potential misappropriation of our
intellectual property. We are dependent on our manufacturing partner to produce
wafers with acceptable quality and manufacturing yields, to deliver those wafers
on a timely basis to our third party assembly subcontractors and to allocate a
portion of their manufacturing capacity sufficient to meet our needs. Although
our products are designed using the process design rules of the particular
manufacturer, we cannot assure you that our manufacturing partner will be able
to achieve or maintain acceptable yields or deliver sufficient quantities of
wafers on a timely basis or at an acceptable cost. Additionally, we cannot
assure you that our manufacturing partner will continue to devote adequate
resources to produce our products or continue to advance the process design
technologies on which the manufacturing of our products are based.
 
 6
 Table of Contents
 We
Rely on Third-Party Subcontractors to Assemble and Test Our
Products
  Our
products are assembled and tested by third-party subcontractors. We expect that,
for the foreseeable future, the vast majority of our products will be packaged
and assembled at Amkor Technology on a purchase-order-by-purchase-order basis.
We do not have long-term agreements with any of these subcontractors. Such
assembly and testing is conducted on a purchase order basis. Because we rely on
third-party subcontractors to assemble and test our products, we cannot directly
control product delivery schedules, which could lead to product shortages or
quality assurance problems that could increase the costs of manufacturing or
assembly of our products. Due to the amount of time normally required to qualify
assembly and test subcontractors, product shipments could be delayed
significantly if we were required to find alternative subcontractors. Any
problems associated with the delivery, quality or cost of the assembly and test
of our products could have a material adverse effect on our business, financial
condition and results of operations.
  Our
Manufacturing Yields May Fluctuate
  Fabricating
semiconductors is an extremely complex process, which typically includes
hundreds of process steps. Minute levels of contaminants in the manufacturing
environment, defects in masks used to print circuits on a wafer, variation in
equipment used and numerous other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. Many of these problems are difficult to diagnose and time
consuming or expensive to remedy. As a result, semiconductor companies often
experience problems in achieving acceptable wafer manufacturing yields, which
are represented by the number of good die as a proportion of the total number of
die on any particular wafer. We typically purchase wafers, not die, and pay an
agreed upon price for wafers meeting certain acceptance criteria. Accordingly,
we bear the risk of the yield of good die from wafers purchased meeting the
acceptance criteria.
 
 Semiconductor
manufacturing yields are a function of both product design, which is developed
largely by us, and process technology, which is typically proprietary to the
manufacturer. Historically, we have experienced lower yields on new products.
Since low yields may result from either design or process technology failures,
yield problems may not be effectively determined or resolved until an actual
product exists that can be analyzed and tested to identify process sensitivities
relating to the design rules that are used. As a result, yield problems may not
be identified until well into the production process, and resolution of yield
problems would require cooperation and communication between the manufacturer
and us. This risk is compounded by the offshore location of our manufacturers,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems. As our relationships with new manufacturing
partners develop, yields could be adversely affected due to difficulties
associated with adapting our technology and product design to the proprietary
process technology and design rules of each manufacturer. Any significant
decrease in manufacturing yields could result in an increase in our per unit
product cost and could force us to allocate our available product supply among
our customers, potentially adversely impacting customer relationships as well as
revenues and gross margins. We cannot assure you that our manufacturers will
achieve or maintain acceptable manufacturing yields in the future.
  Uncertainty
and Litigation Risk Associated with Patents and Protection of Proprietary
Rights
  We rely
in part on patents to protect our intellectual property. As of January 25, 2009,
we had been issued and held 15 patents. These issued patents are scheduled to
expire between 2014 and 2025. In February 2008 we sold 18 patents and one patent
application to Faust Communications, LLC for net proceeds of $9.5 million. The
patents sold related to products we no longer sell and not to products that we
currently sell or plan to sell. We retained a worldwide, non-exclusive license
under the patents sold. The sales did not include our important patents covering
the unique array processing technology used in our newer MiMagic and NeoMobileTV
products. Additionally, we have several patent applications pending. We cannot
assure you that our pending patent applications, or any future applications,
will be approved. Further, we cannot assure you that any issued patents will
provide us with significant intellectual property protection, competitive
advantages, or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on our ability to do business. In
addition, we cannot assure you that others will not independently develop
similar products, duplicate our products or design around any patents that may
be issued to us.
  We also
rely on a combination of mask work protection, trademarks, copyrights, trade
secret laws, employee and third-party nondisclosure agreements and licensing
arrangements to protect our intellectual property. Despite these efforts, we
cannot assure you that others will not independently develop substantially
equivalent intellectual property or otherwise gain access to our trade secrets
or intellectual property or disclose such intellectual property or trade
secrets, or that we can meaningfully protect our intellectual property. Our
failure to meaningfully protect our intellectual property could have a material
adverse effect on our business, financial condition and results of
operations.
  As a
general matter, the semiconductor industry has experienced substantial
litigation regarding patent and other intellectual property rights. In December
1998, the Company filed a lawsuit in the United States District Court for the
District of Delaware seeking damages and an injunction against Trident
Microsystems, Inc. The suit alleged that Trident’s embedded DRAM graphics
accelerators infringed certain patents held by the Company. In January 1999,
Trident filed a counter claim against the Company alleging an attempted
monopolization in violation of antitrust laws, arising from NeoMagic’s filing of
the patent infringement action against Trident. In September 2005, the Court
ruled that there was no infringement by Trident.
  Any
patent litigation, whether or not determined in our favor or settled by us,
would at a minimum be costly and could divert the efforts and attention of our
management and technical personnel from productive tasks, which could have a
material adverse effect on our business, financial condition and results of
operations. We cannot assure you that current or future infringement claims by
third parties or claims for indemnification by customers or end users of our
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect our business, financial condition and results of operations. If any
adverse ruling in any such matter occurs, we could be required to pay
substantial damages, which could include treble damages, to cease the
manufacturing, use and sale of infringing products, to discontinue the use of
certain processes, or to obtain a license under the intellectual property rights
of the third party claiming infringement. We cannot assure you, however, that a
license would be available on reasonable terms or at all. Any limitations in our
ability to market our products, or delays and costs associated with redesigning
our products or payments of license fees to third parties, or any failure by us
to develop or license a substitute technology on commercially reasonable terms
could have a material adverse effect on our business, financial condition and
results of operations.
  We
Depend on Foreign Sales and Suppliers
  Export
sales have been a critical part of our business. Sales to customers located
outside the United States (including sales to the foreign operations of
customers with headquarters in the United States and foreign manufacturers that
sell to United States-based OEMs) accounted for 99%, and 96% of our product
revenue for fiscal 2009 and 2008, 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.
 
 7
 Table of Contents
 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.
  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 2009, the highest closing sales price per share was $1.68 and the lowest
was less than $0.01. During fiscal 2008, the highest closing sales price was
$4.52 and the
lowest was $1.68 per share. The market has from time to time experienced
significant price and volume fluctuations that may be unrelated to the operating
performance of particular companies. The market price of our Common Stock could
be subject to significant fluctuations in response to various factors, including
sales of our common stock, quarter-to-quarter variations in our anticipated or
actual operating results, announcements of new products, technological
innovations or setbacks by us or our competitors, general conditions in the
semiconductor industry, unanticipated shifts in the markets for mobile phones
and other handheld devices or changes in industry standards, losses of key
customers, litigation commencement or developments, the impact of our financing
activities, including dilution to shareholders, changes in or the failure by us
to meet estimates of our performance by securities analysts, market conditions
for high technology stocks in general, and other events or factors. In future
quarters, our operating results may be below the expectations of public market
analysts or investors.
  Item1B.
                UNRESOLVED
      STAFF COMMENTS
  None.
  Item2.
                PROPERTIES
  Our
corporate headquarters, which is also our principal administrative, selling and
marketing, customer service, applications engineering and product development
facility, is located in San Jose, California and consists of approximately 1,500
square feet under a 1 year non-cancelable lease that will expire in January,
2010. Our facilities in India and Israel have been closed.
 
 Item3.
                LEGAL
      PROCEEDINGS
  On March
20, 2009, we were sued by  Silicon Valley CA-I, LLC for breach of
lease on our former headquarters location at 3250 Jay Street, Santa Clara,
California.  We are currently responding to the complaint and working
to settle the suit but cannot provide assurance as to whether a settlement
agreement can be reached on acceptable terms, or at all.
  Item4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
 
 8
 Table of Contents
 PART
II
  Item5.
                MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES
  The
Company’s common stock trades on the Bulletin Board “pink sheets” the symbol
“NMGC”.
  Quarterly
Data
  Fiscal
      2009
                        1st
                        
                        2nd
                        
                        3rd
                        
                        4thPrice
      range common stock:Low
                        
                        $
                        0.88
                        
                        
                        $
                        0.15
                        
                        
                        $
                        0.01
                        
                        
                        $
                        0.01High
                        
                        $
                        1.68
                        
                        
                        $
                        0.93
                        
                        
                        $
                        0.41
                        
                        
                        $
                        0.01Fiscal
      2008Price
      range common stock:Low
                        
                        $
                        3.08
                        
                        
                        $
                        3.06
                        
                        
                        $
                        3.45
                        
                        
                        $
                        1.68High
                        
                        $
                        4.52
                        
                        
                        $
                        4.35
                        
                        
                        $
                        4.26
                        
                        
                        $
                        3.45
  We had
191 stockholders of record as of April 24, 2009. We have not paid any
dividends on our common stock.
  Dividends
  NeoMagic
has never declared or paid cash dividends on our common stock. We currently
intend to retain any future earnings to fund the development and growth of our
business and do not anticipate declaring or paying any cash dividends on our
common stock in the foreseeable future.
  Company
Stock Price Performance
  The
information contained in this section shall not be deemed “filed” with the SEC,
nor shall it be deemed “soliciting material.” It shall not be deemed to be
incorporated by reference into any other SEC filings.
  9
 Table of Contents
 The
following graph compares the cumulative total stockholder return of the
Company’s Common Stock with The Nasdaq Composite Index (U.S.) and The Nasdaq
Electronic Components Index. The comparison assumes the investment of $100 on
January 26, 2004. The comparisons in the graph are required by the
Securities and Exchange Commission and are not intended to forecast or be
indicative of possible future performance of the Company’s Common
Stock.
  
 
 Information
as of January 25, 2009 regarding equity compensation plans is summarized in
the following:
  Plan
      Category
                      
                      (A)
                        Number of Shares to be
                        Issued Upon Exercise of
                        Outstanding
      Options,
                        Warrants
      and Rights
                      
                      (B)
                        Weighted Average
                        Exercise
      Price of
                        Outstanding Options,
                        Warrants
      and Rights
                      
                      (C)
                        Number of Shares Remaining
                        Available
      for Future Issuance
                        Under
      Equity Compensation
                        Plans
      (Excluding Shares
                        Reflected
      in Column A)Equity
      compensation plans approved by stockholders
                      
                      745,523
                      
                      $
                      5.00
                      
                      1,350,265
                      (1)Equity
      compensation plans not approved by stockholders
                      
                      219,640
                      
                      $
                      11.58
                      
                      0
                      (2)Total
                      
                      965,163
                      
                      $
                      6.11
                      
                      1,350,265
 
 (1)
              Includes
      1,198,566 shares available for future issuance under our 2003 Stock Option
      Plan, as amended, generally used for grants to officers and directors.
      Also includes 151,699 shares available under our 2006 Employee Stock
      Purchase Plan.
  (2)
              Shares
      available under our 1998 Nonstatutory Stock Option Plan are used for
      grants to employees other than officers and directors except as provided
      within the plan. The 1998 Plan expired in June 2008 and no additional
      shares may be issued from this plan.  For a description of the
      1998 Plan, see Note 4 of Notes to Consolidated Financial Statements in
      Item 8 of Part II of this Form 10-K, which information is
      incorporated by reference into this Item 5 of Part II of this Form
      10-K. This plan was not previously required to be approved by
      stockholders. Due to regulatory changes, going forward, all material
      changes to the plan require stockholder
  approval.
  10
 Table of Contents
 Item6.
                SELECTED
      FINANCIAL DATA
  The
following selected financial data is qualified in its entirety by and should be
read in conjunction with the more detailed consolidated financial statements and
related notes included elsewhere herein.
  Five
Year Summary
  Fiscal
      Years endedJanuary 25,
                                                2009
                                              
                                              
                                              January 27,
                                                2008
                                              
                                              
                                              January 28,
                                                2007
                                              
                                              
                                              January 29,
                                                2006
                                              
                                              
                                              January 30,
                                                2005(in
      thousands, except per share data)
                                                Consolidated
      Statement of Operations Data:Product
      revenue
                                              
                                              $
                                              1,980
                                              
                                              
                                              $
                                              2,083
                                              
                                              
                                              $
                                              572
                                              
                                              
                                              $
                                              862
                                              
                                              
                                              $
                                              2,466Licensing
      revenue
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              8,490
                                              
                                              
                                              
                                              —Total
      revenue
                                              
                                              
                                              1,980
                                              
                                              
                                              
                                              2,083
                                              
                                              
                                              
                                              572
                                              
                                              
                                              
                                              9,352
                                              
                                              
                                              
                                              2,466Cost
      of product revenue
                                              
                                              
                                              4,755
                                              
                                              
                                              
                                              1,666
                                              
                                              
                                              
                                              524
                                              
                                              
                                              
                                              884
                                              
                                              
                                              
                                              3,195Cost
      of licensing revenue
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,861
                                              
                                              
                                              
                                              —Impairment
      of certain acquired and licensed intangible assets
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              89Total
      cost of revenue
                                              
                                              
                                              4,755
                                              
                                              
                                              
                                              1,666
                                              
                                              
                                              
                                              524
                                              
                                              
                                              
                                              3,745
                                              
                                              
                                              
                                              3,284Gross
      profit (loss)
                                              
                                              
                                              (2,775
                                              )
                                              
                                              
                                              417
                                              
                                              
                                              
                                              48
                                              
                                              
                                              
                                              5,607
                                              
                                              
                                              
                                              (818
                                              )Operating
      expenses:Research
      and development
                                              
                                              
                                              7,950
                                              
                                              
                                              
                                              11,762
                                              
                                              
                                              
                                              13,763
                                              
                                              
                                              
                                              12,403
                                              
                                              
                                              
                                              18,208Sales,
      general and administrative
                                              
                                              
                                              5,299
                                              
                                              
                                              
                                              7,066
                                              
                                              
                                              
                                              6,080
                                              
                                              
                                              
                                              6,916
                                              
                                              
                                              
                                              7,447Gain
      on sale of patents, net
                                              
                                              
                                              (9,500
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (1,044
                                              )
                                              
                                              
                                              (3,481
                                              )
                                              
                                              
                                              —Restructuring
      Expense
                                              
                                              
                                              1,936
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Impairment
      of certain acquired and licensed intangible assets
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,437Total
      operating expenses
                                              
                                              
                                              5,685
                                              
                                              
                                              
                                              18,828
                                              
                                              
                                              
                                              18,799
                                              
                                              
                                              
                                              15,838
                                              
                                              
                                              
                                              27,092Loss
      from operations
                                              
                                              
                                              (8,460
                                              )
                                              
                                              
                                              (18,411
                                              )
                                              
                                              
                                              (18,751
                                              )
                                              
                                              
                                              (10,231
                                              )
                                              
                                              
                                              (27,910
                                              )Interest
      income and other
                                              
                                              
                                              174
                                              
                                              
                                              
                                              469
                                              
                                              
                                              
                                              915
                                              
                                              
                                              
                                              724
                                              
                                              
                                              
                                              415Interest
      expense
                                              
                                              
                                              (19
                                              )
                                              
                                              
                                              (66
                                              )
                                              
                                              
                                              (381
                                              )
                                              
                                              
                                              (2,569
                                              )
                                              
                                              
                                              (534
                                              )Loss
      on marketable equity securities
                                              
                                              
                                              (191
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Gain
      on debt forgiveness
                                              
                                              
                                              396
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Gains
      from change in fair value on revaluation of warrant
    liability
                                              
                                              
                                              38
                                              
                                              
                                              
                                              829
                                              
                                              
                                              
                                              1,835
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Loss
      before income taxes
                                              
                                              
                                              (8,062
                                              )
                                              
                                              
                                              (17,179
                                              )
                                              
                                              
                                              (16,382
                                              )
                                              
                                              
                                              (12,076
                                              )
                                              
                                              
                                              (28,029
                                              )Income
      tax provision (benefit)
                                              
                                              
                                              (165
                                              )
                                              
                                              
                                              (454
                                              )
                                              
                                              
                                              137
                                              
                                              
                                              
                                              (2,770
                                              )
                                              
                                              
                                              196Net
      loss
                                              
                                              $
                                              (7,897
                                              )
                                              
                                              $
                                              (16,725
                                              )
                                              
                                              $
                                              (16,519
                                              )
                                              
                                              $
                                              (9,306
                                              )
                                              
                                              $
                                              (28,225
                                              )Basic
      and diluted net loss per share (1)
                                              
                                              $
                                              (0.62)
                                              
                                              
                                              $
                                              (1.35
                                              )
                                              
                                              $
                                              (1.65
                                              )
                                              
                                              $
                                              (1.32
                                              )
                                              
                                              $
                                              (4.33
                                              )Weighted
      common shares outstanding for basic and diluted (1)
                                              
                                              
                                              12,645
                                              
                                              
                                              
                                              12,356
                                              
                                              
                                              
                                              10,015
                                              
                                              
                                              
                                              7,074
                                              
                                              
                                              
                                              6,524
  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                  
                  $
                  183
                  
                  
                  $
                  964
                  
                  
                  $
                  16,468
                  
                  
                  $
                  26,695
                  
                  
                  $
                  8,944Short-term
      investments
                  
                  
                  —
                  
                  
                  
                  500
                  
                  
                  
                  4,014
                  
                  
                  
                  —
                  
                  
                  
                  16,082Working
      capital
                  
                  
                  (3,320
                  )
                  
                  
                  2,496
                  
                  
                  
                  13,402
                  
                  
                  
                  22,068
                  
                  
                  
                  18,526Total
      assets
                  
                  
                  535
                  
                  
                  
                  7,613
                  
                  
                  
                  24,090
                  
                  
                  
                  30,494
                  
                  
                  
                  30,714Long-term
      obligations
                  
                  
                  —
                  
                  
                  
                  428
                  
                  
                  
                  803
                  
                  
                  
                  773
                  
                  
                  
                  5,074Total
      stockholders’ equity (deficit)
                  
                  
                  (3,320
                  )
                  
                  
                  3,547
                  
                  
                  
                  14,677
                  
                  
                  
                  24,114
                  
                  
                  
                  17,960
 
 (1)
              See
      Note 1 and Note 2 of Notes to Consolidated Financial
      Statements.
 
 11
 Table of Contents
 Item7.
                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. However, actual events
and results could vary significantly based on a variety of factors including,
but not limited to: customer acceptance of new NeoMagic products, the market
acceptance of handheld devices developed and marketed by customers that use our
products, our ability to execute product and technology development plans on
schedule, and our ability to access advanced manufacturing technologies in
sufficient capacity without significant cash pre-payments or investment.
Examples of forward-looking statements include statements about our expected
revenues, our competitive advantage in our markets, the potential market for our
products, our expected production timelines, our customer base and our need for
additional financing beyond the next 12 months. These statements are subject to
significant risks and uncertainties, including those set forth below under
Item 1A of Part I of this Form 10-K, that could cause actual results to
differ materially from those projected. These forward-looking statements speak
only as of the date hereof. We expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements
contained herein, to reflect any changes in our expectations with regard thereto
or any changes in events, conditions or circumstances on which any such
statement is based.
  NOTE: For
a more complete understanding of our financial condition and results of
operations, and some of the risks that could affect future results, see
Item 1A of Part I of this Form 10-K. This section should also be read in
conjunction with the Consolidated Financial Statements and related
Notes.
  Overview
  Due to
the deteriorating financial markets during 2008 and the company’s inability to
raise additional cash, in September 2008, the Board of Directors and Management
of NeoMagic decided to significantly reduce our operations and cost structure.
Restructuring charges are reflected in our 3rd Fiscal
Quarter 10Q. The company has halted the development of new silicon and is
currently focusing on final device designs which may or may not use our current
inventory of chips.  We continue to deliver semiconductor chips
(primarily from our MiMagic 3 product line), software and device designs to
enable new, multimedia 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. 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. Target
customers for our products include manufacturers of mobile phones and other
handheld devices.
  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 three
parties. On February 15, 2008, we completed the sale of selected patents,
which included our embedded DRAM patents and a patent application, to Faust
communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5
million after agency commissions. We have retained a worldwide, non exclusive,
royalty-free license to use the technology covered by these patents and patent
application for all of our current and future products.  We may decide
to license or sell certain additional patents in the future. There was no
licensing revenue in fiscal years 2009 and 2008. Gain on sale of patents was
$9.5 million in fiscal 2009. There were no patent sales in fiscal
2008.
  In the
second quarter of fiscal 2008, we completed a warrant exchange offer pursuant to
which the amended warrants would no longer be able to be exercised for cash.
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, which were
initially recorded as a liability, 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 2006 Warrants. One investor holding a warrant to
purchase 50,000 shares chose not to participate. The warrant liability was $85
and $38,000 as of January 25, 2009 and January 27, 2008, respectively. The
total gain on the change in fair value on revaluation of the warrant liability
was $38 thousand and $0.8 million fiscal 2009 and fiscal 2008,
respectively.
  Our
fiscal year ends on the last Sunday in January. Each of fiscal 2009 and 2008
consisted of 52 weeks and ended on January 25, 2009 and January 27,
2008, respectively.
  Critical
Accounting Policies and Estimates
  NeoMagic’s
discussion and analysis of its financial condition and results of operations are
based upon its consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an on
going basis, we evaluate our estimates, including those related to intangible
assets and long-lived assets, revenue recognition, inventories and income taxes.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the amount and timing of revenue and
expenses and the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ materially from these
estimates under different assumptions or conditions.
  Revenue
Recognition
  We derive
our revenue from two principal sources: product sales and license fees for
patents.
  We
recognize revenue from non-distributor product sales when the products are
shipped to the customer, title has transferred, and no obligations remain. In
addition, we require the following criteria to be met before recognizing
revenue: (i) execution of a written customer order, (ii) shipment of
the product, (iii) fee is fixed or determinable, and
(iv) collectability of the proceeds is probable. Our shipment terms are
ex-works shipping point.
  For
products shipped to distributors, we defer recognition of product revenue until
the distributors sell our products to their customers. On occasion, however, we
may sell products with “end of life” status to our distributors under special
arrangements without any price protection or return privileges. In these
situations, we recognize revenue upon transfer of title, typically upon
shipment.
  At the
end of each accounting period, we determine certain factors, including sales
returns and allowances that could affect the amount of revenue recorded for the
period. sales returns provisions include considerations for known but
unprocessed sales returns and estimates for unknown returns based on our
historical experiences.
 12
 Table of Contents
 We
recognize non-refundable fees for licensing our patents in the period when all
of the following conditions are met: (i) we enter into a licensing
agreement with a licensee that has been executed by both parties,
(ii) delivery has occurred and we have no further obligations regarding the
licensing agreement, (iii) the fee is fixed and determinable, and
(iv) collectability of the proceeds is probable.
  Inventory
Valuation
  Our
inventory valuation policy stipulates that at the end of each reporting period
we write down or write off our inventory for estimated obsolescence or
unmarketable inventory. The amount of the write-down or write-off is equal to
the difference between the cost of the inventory and the estimated market value
of the inventory based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs or write-offs may be required.
Additionally, as we introduce product enhancements and new products, demand for
our existing products in inventory may decrease, requiring additional inventory
write-downs.
 
 In Fiscal
Year 2009 we wrote down our entire remaining inventory of MiMagic 6+, MiMagic 8,
and NMTV due to the significant downsizing of our sales, marketing and
engineering which makes it improbable that these inventories can be sold as part
of any future products.
  Deferred
Taxes and Tax Accruals
  We record
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. Based on the uncertainty of future pre-tax
income, we have fully reserved our deferred tax assets. If we determine that we
would be able to realize some or all of our deferred tax assets in the future,
an adjustment to the deferred tax assets would increase income in the period
when such determination was made.
  We have
also provided accruals for certain tax liabilities based on our estimate of
whether, and the extent to which, additional taxes will be due. If payment of
these amounts ultimately proves to be unnecessary, or less than currently
assessed, the resulting reversal of such accruals would result in tax benefits
being recorded in the period when the accruals are no longer deemed necessary.
Conversely, if our estimate of tax liabilities is less than the amount
ultimately assessed, further charges would result.
  Fair
Value of Equity Instruments
  The
valuation of certain items, including valuation of warrants and compensation
expense related to stock options granted, involves significant estimates with
underlying assumptions judgmentally determined. The valuation of warrants and
stock options are based upon a Black-Scholes valuation model, which requires
estimates of stock volatility and other assumptions. Even if the estimates are
accurate, the model may not provide the true fair value.
  
 13
 Table of Contents
 Results
of Operations
  Product
Revenue
  Product
revenue was $2.0 million and $2.1 million, in fiscal 2009 and 2008,
respectively. The decrease in product revenue in fiscal 2009 compared to fiscal
2008 is primarily due to increased sales of our MiMagic 6+ application
processors used in mobile phone and mobile television
applications.  We expect that the percentage of our net sales
represented by any one product or type of product may change significantly from
period to period when new products are introduced and existing products reach
the end of their product life cycles.
  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 99% and 96%,
of product revenue in fiscal 2009 and 2008, respectively. During fiscal 2009,
86% of our revenue resulted in the sale of our MiMagic 3 application processor
to Flextronics (formerly Solectron) for production in Singapore for use in an
automated toll-collection system.  During fiscal 2008, 50% of our
revenue resulted from the sale of our MiMagic 6+ to Neonode in Sweden for use in
mobile phones. Also in fiscal 2008, 20% of our revenue resulted from the sale of
our MiMagic 3 application processor to Flextronics (formerly Solectron) for
production in Singapore for use in an automated toll-collection system. We
expect that export sales will continue to represent a significant portion of
product revenue. All sales transactions were denominated in United States
dollars. The following is a summary of our product revenue by major geographic
area based on the invoicing location of each customer:
  Year
      Ended
                      
                      January 25,
                        2009
                      
                      
                      January 27,
                        2008Sweden
                      
                      
                      0
                      %
                      
                      
                      
                      50
                      %Korea
                      
                      
                      12
                      %
                      
                      
                      
                      20
                      %Singapore
                      
                      
                      84
                      %
                      
                      
                      
                      20
                      %United
      States
                      
                      
                      1
                      %
                      
                      
                      
                      4
                      %Japan
                      
                      
                      0
                      %
                      
                      
                      
                      3
                      %Hong
      Kong
                      
                      
                      3
                      %
                      
                      
                      
                      1
                      %England
                      
                      
                      0
                      %
                      
                      
                      
                      1
                      %Malaysia
                      
                      
                      0
                      %
                      
                      
                      
                      1
                      %Taiwan
                      
                      
                      0
                      %
                      
                      
                      
                      0
                      %
  The
following customers accounted for more than 10% of product revenue:
  Year
      Ended
                
                January 25,
                  2009
                
                
                January 27,
                  2008Neonode AB.
                
                
                *
                %
                
                
                
                50
                %Flextronics
      Manufacturing
                
                
                86
                %
                
                
                
                20
                %Sejin
      Electron Inc.
                
                
                0
                %
                
                
                
                14
                %Edom
      Technology Co.**
                
                
                *
                
                
                
                
                *
                %Premier
      Components Distribution**
                
                
                *
                
                
                
                
                *
                %Premier
      Microelectronics Europe LTD**
                
                
                *
                
                
                
                
                *
                %Exadigm
      Inc.
                
                
                *
                
                
                
                
                *All
      others
                
                
                *
                
                
                
                
                *
 
 *
              represents
      less than 10% of product revenue**
              customer
      is a distributor
  Gross
Profit (Loss)
 
 Gross
profit (loss) was ($2.8) and $0.4 million in fiscal 2009 and 2008, respectively.
As a percentage of product revenue, gross profit from product revenue was (40%)
and 20%, in fiscal 2009 and 2008, respectively. The decline in gross profit
percentage for fiscal 2009 was primarily due to $3.6 million of charges for the
write-down of inventories.  The write-down was done to anticipate
market value where ending on-hand quantities exceeded the foreseeable customer
requirements due to a lack of customer demand and cessation of marketing efforts
for these products.   Cost of revenue includes stock-based
compensation of $26 thousand and $23 thousand in fiscal 2009 and fiscal 2008,
respectively.  Fiscal 2008 was unfavorably impacted by charges of $0.4
million to write-down excess inventory for our MiMagic 6+ applications processor
and favorably impacted by the sale of $0.3 million of inventory previously
written down.
 
 In the
future, our gross margin percentages may be affected by the mix of product
revenue and licensing revenue, increased competition and related decline in unit
average product selling prices (particularly with respect to older generation
products), changes in the mix of products sold, timing of volume shipments of
new products, the availability and cost of products from our suppliers,
inventory write-downs, and manufacturing yields (particularly on new
products).
  14
 Table of Contents
 Research
and Development Expenses
  Research
and development expenses were primarily directed to development for the mobile
television, wireless IP camera, and multimedia-enriched handsets markets.
Research and development expenses include compensation and associated costs
relating to development personnel, amortization of intangible assets and
prototyping costs, which are comprised of photomask costs and pre-production
wafer costs. Research and development expenses were $8.0 million and $11.8
million, in fiscal 2009 and 2008, respectively. These expenses include stock
based compensation of $0.6 million and $0.9 million in fiscal 2009 and 2008,
respectively. The decrease in fiscal 2009 from fiscal 2008 of $3.8 million was
driven by the reduction in work force events in July and September 2008 and the
cessation of semiconductor product development activities.
  Sales,
General and Administrative Expenses
  Sales,
general and administrative expenses were $5.3 million and $7.1 million in fiscal
2009 and 2008, respectively. These expenses include stock-based compensation of
$0.6 million and $0.8 million, in fiscal 2009 and 2008, respectively. Sales,
general, and administrative expenses decreased due to the reduction in work
force events in July and September 2008, which reduced labor and compensation
costs.
  Gain
on Sale of Patents
  In the
first quarter of fiscal 2009, we completed the sale of 18 non-essential patents,
which included our embedded DRAM patents, and a patent application to Faust
Communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5
million after agency commissions. We have retained a worldwide, non-exclusive,
royalty-free license to use the technology covered by these patents and patent
application for all of our current and future products. The patents sold in the
first quarter of fiscal 2009 do not relate to products NeoMagic currently sells
or plans to sell.
 
 The
patents sold relate to products no longer sold by NeoMagic and not to products
that NeoMagic currently sells or plans to sell. NeoMagic retains a worldwide,
non-exclusive license under the patents sold.
  During
the foregoing patent sales negotiations, NeoMagic was represented by The
Consortium, a company whose CEO served on the board of NeoMagic until December
2004. On March 28, 2005, NeoMagic entered into an amended and restated
Patent Licensing Agreement with the Consortium governing the relationship
between the two parties.
  Stock-Based
Compensation
  Stock-based
compensation expense was $1.2 million and $1.8 million in fiscal 2009 and 2008,
respectively. Stock-based compensation expense recorded in cost of revenues,
research and development expenses and sales, general and administrative expenses
for fiscal 2009 and fiscal 2008 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, as we adopted the provision of SFAS
No. 123(R) on the first day of fiscal 2007. 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 requisite service
period.
  We
elected to adopt the modified prospective method as provided by SFAS
No. 123(R). Accordingly, for fiscal 2009 and fiscal 2008, we accounted for
stock compensation under SFAS No. 123(R).
 
 Restructuring
Expenses
 
 In
September 2008, acting according to a plan approved by our board of directors,
our executive management approved and communicated to our employees efforts to
substantially reduce our operating activities and reduce our on-going
expenditures by terminating employment for substantially all of our operational
and engineering employees in all worldwide locations. Beginning September 19,
2008, management eliminated 52 positions in the Company, to reduce operating
expenses and improve the Company’s cost structure. These actions are part of the
Company’s strategy to create a more streamlined and effective business and cost
structure. In conjunction with these restructuring activities, we recorded
expenses of approximately $1.9 million, comprised of approximately $1.2 million
of severance related costs, $12 thousand of contract termination expenses, and
$0.8 million of asset impairment charges related to design automation software
tools due to the cessation of semiconductor product development
efforts.
 
 Interest
Income and Other
  We earn
interest on our cash and short-term investments. Interest income and other was
$0.2 million and $0.5 million in fiscal 2009 and 2008, respectively. The
decrease in fiscal 2009 from fiscal 2008 is primarily due to lower average cash
and short-term investment balances and by the decrease in interest
rates
 
 Interest
Expense
  Interest
expense was $19 thousand and $0.1 million in fiscal 2009 and 2008, respectively.
The decrease in fiscal 2009 from fiscal 2008 is due to decreased principal
balances.
 
 Gain
from Change in Fair Value on Revaluation of Warrant Liability
  The
company recorded a gain of $38 thousand in fiscal 2009 and $0.8 million in
fiscal 2008 for the change in fair value on revaluation of its warrant liability
associated with its warrants issued on December 6, 2006. The Company is
required to revalue the 2006 Warrants at the end of each reporting period with
the change in value reported in the statement of operations as a “gain (loss)
from change in fair value of warrant liability” in the period in which the
change occurred. We calculate the fair value of the warrants outstanding using
the Black-Scholes model (see Note 7- Warrant Liability of Notes to Consolidated
Financial Statements). Following the warrant exchange described above in
“Overview”, the number of 2006 Warrants subject to quarterly reevaluation has
decreased from warrants to purchase 1,250,000 shares to a warrant to purchase
50,000 shares, which has the effect of decreasing the magnitude of any future
reevaluations.
  
 15
 Table of Contents
 Income
Taxes
  Income
tax benefit was $165 thousand in fiscal 2009 and the Company recorded an income
tax benefit of $454 thousand for the fiscal 2008. In fiscal 2009, we did not
record a provision for domestic income taxes as we incurred an operating loss
for the fiscal year. We recorded tax benefit of $165 thousand in fiscal 2009,
primarily due to foreign income taxes.  In fiscal 2008, we recorded a
tax benefit of $454 thousand, which consisted of a reduction in income tax
payable of $480 thousand for the settlement of an income tax assessment with the
State of Texas, foreign income taxes, accrued interest and penalties on state
and foreign tax liabilities, and an increasein tax reserves. Our
effective tax (benefit) rate was (2.0%) in fiscal 2009 and (2.6%) in fiscal
2008. In fiscal 2008, the tax rate differed from the statutory rate due
primarily to an increase in our valuation allowance. Realization of our deferred
tax assets, which have a full valuation allowance, depends on us generating
sufficient taxable income in future years to obtain benefit from the reversal of
temporary differences and from net operating loss and tax credit carryforwards.
Due to the uncertainty of the timing and amount of such realization, the
management has concluded that a full valuation allowance is required as of
January 27, 2008.
  The
earnings from foreign operations in India were tax exempt pursuant to a tax
holiday effective through March 31, 2009, which provides for some tax
relief if certain conditions are met.  We believe that we continue to
be in compliance with those conditions at January 25, 2009.
  Liquidity
and Capital Resources
  At
January 25, 2009, the Company had $183 thousand in cash and cash equivalents,
and $41 thousand in accounts receivable as compared to $1.5 million of cash,
cash equivalents and short-term investments and $0.5 million in accounts
receivable at January 27, 2008.  The Company believes that this level
of cash, cash equivalents and accounts receivable is not sufficient to maintain
continuing operations at current levels.  Accordingly, there is
substantial doubt about the Company’s ability to continue as a going concern.
The audit report of our independent registered public accounting firm with
respect to our fiscal year ended January 25, 2009, includes an explanatory
paragraph for a “going concern”. The Company has been unable to raise additional
capital to fund operating activities and has ceased efforts to do so. The
adequacy of the Company’s resources will depend largely on its ability to
achieve positive operating cash flows principally through reductions in
expenditures. If the Company is unable to reduce operating expenditures to
levels sufficiently below its recurring revenues, it expects to take all
appropriate actions to maximize the value of the Company. The Company is in the
process of taking actions to achieve further reductions in its operating
expenses. The Company also believes that it can take actions to generate cash by
selling or licensing intellectual property.
 
 Cash and
cash equivalents used in operating activities were $10.5 million and $18.4
million in fiscal 2009 and 2008, respectively. The cash used in operating
activities in fiscal 2009 was primarily due to net losses of $8.0 million,
reduced by the non-operating gain on the sale of patents of $9.5 million, a
non-cash gain on debt forgiveness of $0.4 million, partially offset by non-cash
charges for inventory write-downs of $3.6 million, stock-based compensation
expense of $1.2 million and depreciation expense of $0.8
million.   The cash used in operating activities in fiscal 2008
was primarily due to the net loss of $16.7 million, the non-cash gain from the
change in fair value of the warrant liability of $0.8 million, the non-cash
reversal of a provision for tax liability of $0.5 million, an increase in
inventory of $2.7 million due to the build up of MiMagic 6+ and NeoMobileTV
inventory in advance of expected orders and an increase in accounts receivable
of $0.5 million due to increased product revenue. These increases were partially
offset by non-cash stock-based compensation of $1.8 million and non-cash
depreciation of $1.0 million.
  Net cash
provided by (used in) investing activities was $9.9 million and $3.3 million in
fiscal 2009 and fiscal 2008, respectively. The net cash provided by investing
activities in fiscal 2009, is primarily due to the net proceeds from the sale of
patents of $9.5 million and maturities of short-term investments of $3.5
million, partially offset by purchases of short-term investments of $3.0
million. Net cash provided by investing activities in fiscal 2008 is primarily
due to net maturities of short-term investments of $3.5 million, partially
offset by purchases of property, plant and equipment of $0.2
million.
 
 Net cash provided by (used in)
financing activities was $(0.2) million and $(0.4) million in fiscal 2009 and
2008, respectively. The net cash used in financing activities for fiscal 2009
was principally due to payments on capital lease obligations of $0.2
million.  The net proceeds was partially offset by the net proceeds
from the issuance of common stock of $0.1 million. The net cash used in
financing activities for fiscal 2008 was due to payments on capital lease
obligations of $0.9 million, partially offset by proceeds from the issuance of
common stock under employee stock plans of $0.5
million.
 
 Our lease
for our headquarters in Santa Clara, California expires in April 2010. In
January 2009, the Company defaulted on its lease, vacated the premises, and is
currently in negotiations with the landlord to settle the outstanding debt but
cannot provide assurance as to whether a settlement agreement can be reached on
acceptable terms, or at all.  In January 2009, the Company moved its
principal headquarters to a facility in San Jose, California, under a
non-cancelable operating lease that expires in January 2010. The Company leased
offices in Israel and India under operating leases that expired in September
2008 and December 2008, respectively. At January 25, 2009 the leased offices in
Israel and India had been vacated. 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 that we receive from $12,000 to $16,500 per month.
  We lease
certain software licenses under capital leases. Refer to Note 6, Obligations
under Capital Leases, of Notes to Consolidated Financial Statements for
additional information. In January 2009, the Company settled in full its
outstanding obligation under capital leases for a cash payment of
$25,000.
 16
 Table of Contents
 Contractual
Obligations
  The
following summarizes our contractual obligations at January 25, 2009 and
the effect such obligations are expected to have on our liquidity and cash flow
(in thousands).
  2010
                                
                                
                                2011
                                
                                
                                There After
                                
                                
                                TotalCONTRACTUAL
      OBLIGATIONSOperating
      leases
                                
                                $
                                1,118
                                
                                
                                $
                                280
                                
                                
                                $
                                —
                                
                                
                                $
                                1,398Design
      tool software licenses
                                
                                
                                286
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                286Total
      contractual cash obligations
                                
                                $
                                1,404
                                
                                
                                $
                                280
                                
                                
                                $
                                —
                                
                                
                                $
                                1,684
 
 On
September 30, 2008, we received notice from our landlord for our facility lease
that we would be in default of our lease if rent payment arrearages were not
paid within five days of the date of notice. Such rent payment arrearages were
not paid within five days of the date of notice and are not paid as of the date
of this filing. Therefore, we are in default of our headquarter facility lease
agreement. Upon a default of the lease, our landlord has the right to proceed
against us for, among other things, late fees, unpaid rent, attorney’s fees and
costs and possession of the premises. In addition, our landlord has the right to
apply our security deposit of $176,500 to any rent or other amounts owed to the
landlord. Upon such application of the security deposit, we are required to
deposit with the landlord an amount sufficient to restore the security deposit
to its original amount and our failure to timely restore the security deposit
shall constitute a material breach of the lease.  In January 2009, the
Company defaulted on its lease, vacated the premises, and is currently in
negotiations with the landlord to settle the outstanding debt with the landlord,
but cannot provide assurance as to whether a settlement agreement can be reached
on acceptable terms, or at all.
  Off-Balance
Sheet Arrangements
  As of
January 25, 2009, we had no off-balance sheet arrangements as defined in
Item 303(a) (4) of Regulation S-K.
  Recent
Accounting Pronouncements
  The
information regarding recent accounting pronouncements set forth in Note 1 of
the Notes to Consolidated Financial Statements is herby incorporated by
reference into this Item 7 of Part II.
  Impact
of Currency Exchange Rates
  In fiscal
2009, all of our payments made to our suppliers and all of our payments received
from our customers were denominated in U.S. dollars. We have in the past and may
in the future enter into foreign currency forward contracts to minimize
short-term foreign currency fluctuation exposures related to firm purchase
commitments. We do not use derivative financial instruments for speculative or
trading purposes. Our accounting policies for these instruments are based on our
designation of such instruments as hedging transactions. The criteria we use for
designating an instrument as a hedge include its effectiveness in risk reduction
and one-to-one matching of derivative instruments to underlying
transactions.
  Notwithstanding
the measures we have adopted, due to the unpredictability and volatility of
currency exchange rates and currency controls, we cannot assure you that we will
not experience currency losses in the future, nor can we predict the effect of
exchange rate fluctuations upon future operating results.
  17
 Table of Contents
 Item7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  Foreign
Currency Fluctuations
  In the
past, we purchased wafers in Japanese yen and used foreign currency forward
exchange contracts and options to minimize short-term foreign currency
fluctuation exposures related to these purchases. We did not have any foreign
currency forward contracts in fiscal 2009 and fiscal 2008. The Company does not
use derivative financial instruments for speculative or trading
purposes.
  Interest
Rate Risk and Investment Portfolio
  The
primary objective of our investment activities is to preserve principal and
liquidity while at the same time maximizing yields, without significantly
increasing risk. To achieve this objective, we place our investments in
instruments that meet high credit rating standards as specified in our
investment policy. Our investment policy also specifies limits on the type,
concentration and maturity period of our investments. Our investment policy
requires that we only invest in U.S. dollar denominated investments. In
addition, a small portion of our cash balance is held in Israel and India
currencies. Foreign currency risk is immaterial due to the small amount of
foreign currency holdings. We do not use derivative financial instruments in our
investment portfolio. Our cash equivalents and short-term investments are
exposed to financial market risk due to fluctuations in interest rates, which
may affect our interest income.
  The table
below summarizes our investment portfolio. The table includes cash and cash
equivalents, short-term investments, and related average interest rates.
Principal (notional) amounts as of January 25, 2009 and January 27, 2008
maturing in fiscal 2010 and fiscal 2009, respectively, are as
follows:
  Fair
      Value(in
      thousands, except percentages)
                              
                              January 25,
                                2009
                              
                              
                              January 27,
                                2008Taxable
                              
                              
                              TaxableCash
      and cash equivalents
                              
                              $
                              183
                              
                              
                              $
                              964Weighted
      average interest rate
                              
                              
                              0.1
                              %
                              
                              
                              3.21
                              %Short-term
      investments
                              
                              
                              -
                              
                              
                              
                              500Weighted
      average interest rate
                              
                              
                              -
                              
                              
                              
                              5.24
                              %Total
      cash, cash equivalents and short-term investments
                              
                              $
                              183
                              
                              
                              $
                              1,464
  Interest
earned on non-taxable investments is subject to preferential tax treatment under
the Internal Revenue Code. We did not have any non-taxable investments as of
January 25, 2009 and January 27, 2008.
  Our cash
equivalents and short-term investments are exposed to financial market risk due
to fluctuations in interest rates, which may affect our interest income. At
January 25, 2009, our cash and cash equivalents earned interest at an
average rate of 0.1%. Due to the short-term nature of our investment portfolio,
operating results or cash flows are vulnerable to sudden changes in market
interest rates. Assuming a decline of 10% in the market interest rates at
January 25, 2009, with consistent cash balances, interest income would be
adversely affected by approximately $7 per quarter. We do not use our investment
portfolio for trading or other speculative purposes.
  Investment
in Marketable Securities
 
 In
January 2006, the Company made a $200 thousand minority equity investment in
Neonode, Inc. (“Neonode”), a then privately held mobile telephone company. In
August 2007, effective upon the merger of Neonode with a subsidiary of SBE, Inc.
(“SBE”), SBE changed its name to Neonode, Inc. and its common stock was publicly
traded on the Nasdaq Stock Exchange (“NEON”). Currently, they trade on the
bulletin board “pink sheets.” Upon the merger of SBE and Neonode, the Company’s
investment converted into approximately 127,000 shares of Neonode common stock.
The investment was classified as an available for sale security and had a fair
value on January 27, 2008 of $471 thousand. Management considered the
impairment to be other than temporary and has recorded an impairment loss of
$191 thousand in Other income (expense), net in the Statement of Operations
during its third quarter 2009. In November 2008, the security was sold for a net
value of $9 thousand.
 
 Fair
Value of Financial Instruments
 
 On
January 28, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS 157”) which defines
fair value, establishes a framework for using fair value to measure assets and
liabilities, and expands disclosures about fair value measurements. SFAS 157
applies whenever other statements require or permit assets or liabilities to be
measured at fair value. SFAS 157 is effective for the Company beginning
January 28, 2008, except for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, for which application has been deferred for one
year.
 
 The
Company utilizes the market approach to measure fair value for its financial
assets and liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities.
 
 18
 Table of Contents
 FAS 157
includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures. The fair value
hierarchy is based on inputs to valuation techniques that are used to measure
fair value that are either observable or unobservable. Observable inputs reflect
assumptions market participants would use in pricing an asset or liability based
on market data obtained from independent sources while unobservable inputs
reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
  Level 1 -
                
                Inputs
      are quoted prices (unadjusted) in active markets for identical assets or
      liabilities.Level 2 -
                
                Inputs
      are quoted prices for similar assets or liabilities in an active market,
      quoted prices for identical or similar assets or liabilities in markets
      that are not active, inputs other than quoted prices that are observable
      and market-corroborated inputs which are derived principally from or
      corroborated by observable market data.Level 3 -
                
                Inputs
      are derived from valuation techniques in which one or more significant
      inputs or value drivers are unobservable (i.e., supported by little or no
      market activity).
  The
following table summarizes the Company’s financial assets measured at fair value
on a recurring basis as of January 25, 2009 and the basis for that measurement
(in thousands):
  (Level
      1)Quoted Pricesin
      ActiveMarkets
      ofBalance as of
                        
                        
                        IdenticalJanuary
      25, 2009
                        
                        
                        AssetsMoney
      market funds
                        
                        $
                        14
                        
                        
                        $
                        14$
                        14
                        
                        
                        $
                        14
 
 The
Company’s financial assets and liabilities are valued using market prices on
both active markets (Level 1) and less active markets (Level 2). Level 1
instrument valuations are obtained from real-time quotes for transactions in
active exchange markets involving identical assets. As of January 25, 2009, the
Company did not have any assets with valuations obtained from readily-available
pricing sources for comparable instruments (Level 2 assets) or those without
observable market values that would require a high level of judgment to
determine fair value (Level 3 assets).
 
 FASB’s
Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115”
(“SFAS 159”) also became effective the first quarter of fiscal 2009. This option
was not chosen, so marketable securities continue to be accounted for as
available-for-sale securities under SFAS 115 “Accounting for Certain Investments
in Debt and Equity Securities.”
 
 19
 Table of Contents
 Item8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA
  INDEX
TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
  Reference pageConsolidated Statements of
      Operations
                      21Consolidated Balance
      Sheets
                      22Consolidated Statements of Cash
      Flows
                      23Consolidated Statements of
      Stockholders’ Equity(Deficit)
                      24Notes to Consolidated Financial
      Statements
                      25Report of Independent Registered
      Public Accounting Firm
                      40
  
 
 20
 Table of Contents
 NEOMAGIC
CORPORATION
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Year
      EndedJanuary 25,
                                                      2009
                                                    
                                                    January 27,
                                                      2008(in thousands, except per share data)Product
      revenue
                                                    
                                                    $
                                                    1,980
                                                    
                                                    
                                                    $
                                                    2,083Cost
      of product revenue
                                                    
                                                    
                                                    4,755
                                                    
                                                    
                                                    
                                                    1,666Gross
      profit (loss)
                                                    
                                                    
                                                    (2,775
                                                    )
                                                    
                                                    
                                                    417Operating
      expenses:Research
      and development
                                                    
                                                    
                                                    7,950
                                                    
                                                    
                                                    
                                                    11,762Sales,
      general and administrative
                                                    
                                                    
                                                    5,299
                                                    
                                                    
                                                    
                                                    7,066Restructuring
      expense
                                                    
                                                    
                                                    1,936
                                                    
                                                    
                                                    
                                                    —Gain
      on sale of patents, net
                                                    
                                                    
                                                    (9,500
                                                    )
                                                    
                                                    
                                                    —Total
      operating expenses
                                                    
                                                    
                                                    5,685
                                                    
                                                    
                                                    
                                                    18,828Loss
      from operations
                                                    
                                                    
                                                    (8,460
                                                    )
                                                    
                                                    
                                                    (18,411
                                                    )Interest
      income and other
                                                    
                                                    
                                                    174
                                                    
                                                    
                                                    
                                                    469Interest
      expense
                                                    
                                                    
                                                    (19
                                                    )
                                                    
                                                    
                                                    (66
                                                    )Loss
      on marketable equity securities
                                                    
                                                    
                                                    (191
                                                    )
                                                    
                                                    
                                                    —Gain
      on debt forgiveness
                                                    
                                                    
                                                    396
                                                    
                                                    
                                                    
                                                    —Gain
      from change in fair value on revaluation of warrant
    liability
                                                    
                                                    
                                                    38
                                                    
                                                    
                                                    
                                                    829Loss
      before income taxes
                                                    
                                                    
                                                    (8,062
                                                    )
                                                    
                                                    
                                                    (17,179
                                                    )Income
      tax (benefit)
                                                    
                                                    
                                                    (165
                                                    )
                                                    
                                                    
                                                    (454
                                                    )Net
      loss
                                                    
                                                    $
                                                    (7,897
                                                    )
                                                    
                                                    $
                                                    (16,725
                                                    )Basic
      and diluted net loss per share
                                                    
                                                    $
                                                    (0.62
                                                    )
                                                    
                                                    $
                                                    (1.35
                                                    )Weighted
      common shares outstanding for basic and diluted
                                                    
                                                    
                                                    12,645
                                                    
                                                    
                                                    
                                                    12,356
 
 
 The
accompanying notes are an integral part of these Consolidated Financial
Statements.
  21
 Table of Contents
 NEOMAGIC
CORPORATION
 CONSOLIDATED
BALANCE SHEETS
  January 25,
                                                                  2009
                                                              
                                                              
                                                              January 27,
                                                                2008(in thousands, except share and per
                                                                share
      amounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                              
                                                              $
                                                              183
                                                              
                                                              
                                                              $
                                                              964Short-term
      investments
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              500Accounts
      receivable, less allowance for doubtful accounts  of $0 at
      January 25, 2009 and January 27, 2008
                                                              
                                                              
                                                              41
                                                              
                                                              
                                                              
                                                              529Inventory
                                                              
                                                              
                                                              98
                                                              
                                                              
                                                              
                                                              3,715Prepaid
      deposits
                                                              
                                                              
                                                              176
                                                              
                                                              
                                                              
                                                              2Prepaid
      expense
                                                              
                                                              
                                                              23
                                                              
                                                              
                                                              
                                                              365Other
      current assets
                                                              
                                                              
                                                              14
                                                              
                                                              
                                                              
                                                              59Total
      current assets
                                                              
                                                              
                                                              535
                                                              
                                                              
                                                              
                                                              6,134Property,
      plant and equipment, net
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              692Long-term
      prepaid assets
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              74Long-term
      investments
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              471Other
      assets
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              242Total
      assets
                                                              
                                                              $
                                                              535
                                                              
                                                              
                                                              $
                                                              7,613LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
                                                              
                                                              $
                                                              2,009
                                                              
                                                              
                                                              $
                                                              1,448Compensation
      and related benefits
                                                              
                                                              
                                                              1,483
                                                              
                                                              
                                                              
                                                              1,057Income
      taxes payable
                                                              
                                                              
                                                              104
                                                              
                                                              
                                                              
                                                              583Current
      portion of capital lease obligations
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              316Warrant
      liability
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              38Other
      accruals
                                                              
                                                              
                                                              259
                                                              
                                                              
                                                              
                                                              196Total
      current liabilities
                                                              
                                                              
                                                              3,855
                                                              
                                                              
                                                              
                                                              3,638Capital
      lease obligations
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              339Other
      long-term liabilities
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              89Commitments
      and contingencies (Note 8)Stockholders’
      equity (deficit):Preferred
      stock, $.001 par value:Authorized
      shares—2,000,000Issued
      and outstanding shares – none at January 25, 2009 and January 27,
      2008
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —Common
      stock, $.001 par value: Authorized shares—100,000,000 Issued and
      outstanding shares – 12,570,914 at January 25, 2009 and 12,455,779 at
      January 27, 2008
                                                              
                                                              
                                                              40
                                                              
                                                              
                                                              
                                                              39Additional
      paid-in-capital
                                                              
                                                              
                                                              123,371
                                                              
                                                              
                                                              
                                                              122,071Accumulated
      other comprehensive income
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              271Accumulated
      deficit
                                                              
                                                              
                                                              (126,731
                                                              )
                                                              
                                                              
                                                              (118,834
                                                              )Total
      stockholders’ equity (deficit)
                                                              
                                                              
                                                              (3,320
                                                              )
                                                              
                                                              
                                                              3,547Total
      liabilities and stockholders’ equity (deficit)
                                                              
                                                              $
                                                              535
                                                              
                                                              
                                                              $
                                                              7,613
  The
accompanying notes are an integral part of these Consolidated Financial
Statements.
 22
 Table of Contents
 NEOMAGIC
CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Year
      EndedJanuary 25,
                                                                    2009
                                                                  
                                                                  
                                                                  January 27,
                                                                    2008(in
      thousands)Operating
      activitiesNet
      loss
                                                                  
                                                                  $
                                                                  (7,897
                                                                  )
                                                                  
                                                                  $
                                                                  (16,725
                                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                                                  
                                                                  
                                                                  830
                                                                  
                                                                  
                                                                  
                                                                  1,008Gain
      on sale of patents
                                                                  
                                                                  
                                                                  (9,500
                                                                  )
                                                                  
                                                                  
                                                                  —Gain
      from change in fair value on revaluation of warrant
    liability
                                                                  
                                                                  
                                                                  (38
                                                                  )
                                                                  
                                                                  
                                                                  (829
                                                                  )Gain
      on debt forgiveness
                                                                  
                                                                  
                                                                  (396
                                                                  )
                                                                  
                                                                  
                                                                  —Gain
      on sale of property, plant and equipment
                                                                  
                                                                  
                                                                  (38
                                                                  )
                                                                  
                                                                  
                                                                  —Reversal
      of provision for tax liability
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (480
                                                                  )Net
      write-downs on inventory
                                                                  
                                                                  
                                                                  3,555
                                                                  
                                                                  
                                                                  
                                                                  101Loss
      on marketable equity securities
                                                                  
                                                                  
                                                                  191
                                                                  
                                                                  
                                                                  
                                                                  —Stock-based
      compensation
                                                                  
                                                                  
                                                                  1,232
                                                                  
                                                                  
                                                                  
                                                                  1,761Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                  
                                                                  
                                                                  480
                                                                  
                                                                  
                                                                  
                                                                  (464
                                                                  )Inventory
                                                                  
                                                                  
                                                                  61
                                                                  
                                                                  
                                                                  
                                                                  (2,748
                                                                  )Prepaid
      and other current assets
                                                                  
                                                                  
                                                                  463
                                                                  
                                                                  
                                                                  
                                                                  (29
                                                                  )Long-term
      prepaid and other assets
                                                                  
                                                                  
                                                                  75
                                                                  
                                                                  
                                                                  
                                                                  68Accounts
      payable
                                                                  
                                                                  
                                                                  536
                                                                  
                                                                  
                                                                  
                                                                  (214
                                                                  )Compensation
      and related benefits
                                                                  
                                                                  
                                                                  426
                                                                  
                                                                  
                                                                  
                                                                  40Income
      taxes payable
                                                                  
                                                                  
                                                                  (479
                                                                  )
                                                                  
                                                                  
                                                                  52Other
      accruals and other long-term liabilities
                                                                  
                                                                  
                                                                  (27
                                                                  )
                                                                  
                                                                  
                                                                  37Net
      cash used in operating activities
                                                                  
                                                                  
                                                                  (10,526
                                                                  )
                                                                  
                                                                  
                                                                  (18,422
                                                                  )Investing
      activitiesProceeds
      from sale of patents
                                                                  
                                                                  
                                                                  9,500
                                                                  
                                                                  
                                                                  
                                                                  —Purchases
      of property, plant and equipment
                                                                  
                                                                  
                                                                  (100
                                                                  )
                                                                  
                                                                  
                                                                  (206
                                                                  )Purchases
      of short-term investments
                                                                  
                                                                  
                                                                  (2,991
                                                                  )
                                                                  
                                                                  
                                                                  (4,485
                                                                  )Maturities
      of short-term investments
                                                                  
                                                                  
                                                                  3,502
                                                                  
                                                                  
                                                                  
                                                                  8,001Net
      cash provided by investing activities
                                                                  
                                                                  
                                                                  9,911
                                                                  
                                                                  
                                                                  
                                                                  3,310Financing
      activitiesPayments
      on capital lease obligations
                                                                  
                                                                  
                                                                  (235
                                                                  )
                                                                  
                                                                  
                                                                  (866
                                                                  )Net
      proceeds from issuance of common stock, net of repurchases
                                                                  
                                                                  
                                                                  69
                                                                  
                                                                  
                                                                  
                                                                  474Net
      cash used in activities
                                                                  
                                                                  
                                                                  (166
                                                                  )
                                                                  
                                                                  
                                                                  (392
                                                                  )Net
      decrease  in cash and cash equivalents
                                                                  
                                                                  
                                                                  (781
                                                                  )
                                                                  
                                                                  
                                                                  (15,504
                                                                  )Cash
      and cash equivalents at beginning of year
                                                                  
                                                                  
                                                                  964
                                                                  
                                                                  
                                                                  
                                                                  16,468Cash
      and cash equivalents at end of year
                                                                  
                                                                  $
                                                                  183
                                                                  
                                                                  
                                                                  $
                                                                  964Supplemental
      schedules of cash flow informationCash
      paid during the year for:Interest
                                                                  
                                                                  $
                                                                  19
                                                                  
                                                                  
                                                                  $
                                                                  66Taxes
      paid
                                                                  
                                                                  $
                                                                  310
                                                                  
                                                                  
                                                                  $
                                                                  28
  The
accompanying notes are an integral part of these Consolidated Financial
Statements.
  23
 Table of Contents
 NEOMAGIC
CORPORATION
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
  Common
      Stock
                                                                                                      
                                                                                                      
                                                                                                      Additional
                                                                                                        Paid
      - In-
                                                                                                      
                                                                                                      
                                                                                                      Accumulated
                                                                                                        Other
                                                                                                        Comprehensive
                                                                                                      
                                                                                                      
                                                                                                      Accumulated
                                                                                                      
                                                                                                      
                                                                                                      Total
                                                                                                        Stockholders’
                                                                                                        EquityShares
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      Capital
                                                                                                      
                                                                                                      
                                                                                                      Income
      (Loss)
                                                                                                      
                                                                                                      
                                                                                                      Deficit
                                                                                                      
                                                                                                      
                                                                                                      (Deficit)(in
      thousands, except share data)Balance
      at January 28, 2007
                                                                                                      
                                                                                                      
                                                                                                      12,271,499
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      39
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      116,850
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (2
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (102,210
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      14,677Issuance
      of common stock under stock option plan
                                                                                                      
                                                                                                      
                                                                                                      59,473
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      99
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      99Issuance
      of common stock under employee stock purchase plan
                                                                                                      
                                                                                                      
                                                                                                      124,807
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      375
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      375FIN
      48 adoption adjustment for a decrease in liability for unrecognized tax
      benefits
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      101
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      101Stock-based
      compensation expense
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,761
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,761Reclassification
      of warrant liability to equity for amended warrants
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2,986
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2,986Components
      of comprehensive loss:Net
      loss
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (16,725
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (16,725
                                                                                                      )Change
      in unrealized gain on investments
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      273
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      273Total
      comprehensive loss
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (16,452
                                                                                                      )Balance
      at January 27, 2008
                                                                                                      
                                                                                                      
                                                                                                      12,455,779
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      39
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      122,071
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      271
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (118,834
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      3,547Issuance
      of common stock under employee stock purchase plan
                                                                                                      
                                                                                                      
                                                                                                      115,135
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      68
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      69Stock-based
      compensation expense
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,232
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,232Components
      of comprehensive loss:Net
      loss
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (7,897
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (7,897
                                                                                                      )Change
      in unrealized loss on investments
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (271
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (271
                                                                                                      )Total
      comprehensive loss
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (8,168
                                                                                                      )Balance
      at January 25, 2009
                                                                                                      
                                                                                                      
                                                                                                      12,570,914
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      40
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      123,371
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      —
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (126,731
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (3,320
                                                                                                      )
  The
accompanying notes are an integral part of these Consolidated Financial
Statements.
  24
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Description
of Business
  NeoMagic
Corporation designs, develops and markets high-performance semiconductor
solutions, known as applications processors, for sale to manufacturers of mobile
phones and handheld devices. NeoMagic Corporation was incorporated in California
in May 1993. The Company was subsequently reincorporated in Delaware in February
1997.
  The
Company incurred significant net losses and negative cash flows from operations
during each of the past several fiscal years and had a negative working capital
of $3.5 million at January 25, 2009, up from $2.5 million at January 27,
2008. At January 25, 2009, the Company’s principal sources of liquidity
included cash and cash equivalents investments of $183 thousand. While a
forecast of future events is inherently uncertain, the Company does not believe
its current cash and cash equivalents investments will satisfy its projected
cash requirements through the next twelve months and there exists substantial
doubt about the Company’s ability to continue as a going concern. If the Company
experiences a material shortfall versus its plan for fiscal 2010, it expects to
take all appropriate actions to ensure the continuing operation of its business
and to mitigate any negative impact on its cash position. 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.
In the first quarter of fiscal 2009, the Company sold certain patents for net
proceeds of approximately $9.5 million. We cannot assure you that additional
financing will be available on acceptable terms or at all. Beyond fiscal 2009,
the adequacy of the Company’s resources will depend largely on its ability to
complete additional financing and its success in re-establishing profitable
operations and positive operating cash flows.
 
 On
September 24, 2008, the Company announced a cessation of its efforts to raise
additional capital. As a result, NeoMagic proceeded with efforts to
substantially reduce its operating activities and reduce its on-going
expenditures by terminating employment for substantially all of its operational
and engineering employees in all worldwide locations. Beginning September 19,
2008, management, acting based upon a plan approved by the Board of Directors,
eliminated 52 positions in the Company. On September 23, 2008, the remaining
independent directors of the Company, Brett Moyer, Carl Stork and David
Tomasello, notified the Company that they were resigning as directors of
NeoMagic Corporation, effective September 23, 2008.  Effective January
9, 2009, our Chief Financial Officer, Steven Berry, resigned his position with
the Company. The Company has initiated efforts for the orderly reduction of its
operations, including the fulfillment of its outstanding sales and other
contracts, headcount reductions, securing continuing support for its existing
customers, seeking purchasers for its intellectual property and tangible assets
and providing for outstanding and anticipated liabilities. The Company
anticipates that its operations will consist primarily of supporting sales
orders from its existing customers, collecting the resulting receivables from
such sales orders, collecting proceeds from assets sold, satisfying obligations,
and administration of the corporation.  Management will continue to
look for funding from strategic partners and will seek further equity or debt
financing from financial sources and other opportunities.
  Basis
of Presentation
  For all
periods presented, share and per share information in these consolidated
financial statements and notes have been adjusted to reflect the Company’s
1-for-5 reverse stock split effective after the close of market on
August 12, 2005.
  The
Company’s fiscal year ends on the last Sunday in January. Fiscal 2009 and 2008
each consisted of 52 weeks and ended on January 25, 2009 and January 27,
2008,  respectively.
  The
consolidated financial statements include the accounts of NeoMagic and its
wholly owned subsidiaries. NeoMagic is not involved with any variable interest
entities, as defined by the Financial Accounting Standards Board (FASB)
Interpretation No. 46(R). Intercompany accounts and transactions have been
eliminated. Accounts denominated in non-United States currencies have been
re-measured using the United States dollar as the functional
currency.
  Reclassifications
  Certain
prior fiscal year balances have been reclassified to conform to the current
fiscal year presentation.
  Use
of Estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and accompanying notes.
Significant estimates include those relating to determination of net realizable
value of inventories, realizability of deferred tax assets, as well as the
assessment of impairment of goodwill, intangibles and other long-lived assets.
Actual results could differ from those estimates.
  25
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  Revenue
Recognition
  The
Company derives its revenue from two principal sources: product sales and
license fees for patents.
  The
Company recognizes revenue from non-distributor product sales when the products
are shipped to the customer, title has transferred, and no obligations remain.
In addition, the Company requires the following criteria to be met before
recognizing revenue: (i) execution of a written customer order,
(ii) fee is fixed or determinable, and (iii) collectibility of the
proceeds is probable. The Company’s shipment terms are generally ex-works
shipping point.
  With
respect to products shipped to distributors, the Company defers recognition of
product revenue until the distributors sell its products to their customers. On
occasion, however, the Company may sell products with “end of life” status to
its distributors under special arrangements without any price protection or
return privileges. When this occurs, the Company recognizes revenue upon
transfer of title, typically upon shipment, assuming that the other criteria
noted above are met.
  At the
end of each accounting period, the Company makes a determination of certain
factors including sales returns and allowances, that could affect the amount of
revenue recorded for the period. Sales returns provisions include considerations
for known but unprocessed sales returns and estimates for unknown returns based
on our historical experiences.
  The
Company recognizes non-refundable fees for licensing our patents in the period
when all of the following conditions are met: (i) the Company enters into a
licensing agreement with a licensee that has been executed by both parties,
(ii) delivery has occurred and the Company has no further obligations with
respect to the licensing agreement, (iii) the fee is fixed and
determinable, and (iv) collectibility of the proceeds is
probable.
  Cash,
Cash Equivalents, Short-term Investments and Long-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.
  
 26
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  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 January
25, 2009 and January 27, 2008, and consists of the following (in
thousands):
  Amortized
                              Cost
                            
                            
                            Gross
                              Unrealized
                              Gain
                            
                            
                            Fair
                              ValueJanuary 25,
      2009Cash
      and cash equivalents:Money
      market funds
                            
                            $
                            14
                            
                            
                            $
                            —
                            
                            
                            $
                            14Bank
      accounts
                            
                            
                            169
                            
                            
                            
                            —
                            
                            
                            
                            169Total
                            
                            $
                            183
                            
                            
                            $
                            —
                            
                            
                            $
                            183
  Amortized
                                                Cost
                                              
                                              
                                              Gross
                                                Unrealized
                                                Gain
                                              
                                              
                                              Fair
                                                ValueJanuary 27,
      2008Cash
      and cash equivalents:Money
      market funds
                                              
                                              $
                                              533
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              533Bank
      accounts
                                              
                                              
                                              431
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              431Total
                                              
                                              $
                                              964
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              964Short-term
      investments:Certificate
      of deposit
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —U.S.
      Government agencies
                                              
                                              
                                              500
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              500Total
                                              
                                              $
                                              500
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              500Long-term
      investments:Equity
      securities
                                              
                                              $
                                              200
                                              
                                              
                                              $
                                              271
                                              
                                              
                                              $
                                              471Total
                                              
                                              $
                                              200
                                              
                                              
                                              $
                                              271
                                              
                                              
                                              $
                                              471
 
 The
following table summarizes the Company’s financial assets measured at fair value
on a recurring basis as of January 25, 2009 and the basis for that measurement
(in thousands):
  (Level
      1)Quoted Pricesin
      ActiveMarkets
      ofBalance as of
                      
                      
                      IdenticalJanuary
      25, 2009
                      
                      
                      AssetsMoney
      market funds
                      
                      $
                      14
                      
                      
                      $
                      14$
                      14
                      
                      
                      $
                      14
 
 Investment
in Marketable Securities
 
 In
January 2006, the Company made a $200 thousand minority equity investment in
Neonode, Inc. (“Neonode”), a then privately held mobile telephone company. In
August 2007, effective upon the merger of Neonode with a subsidiary of SBE, Inc.
(“SBE”), SBE changed its name to Neonode, Inc. and its common stock was publicly
traded on the Nasdaq Stock Exchange (“NEON”). Currently, they are trading on the
bulletin board “pink sheets.” Upon the merger of SBE and Neonode, the Company’s
investment converted into approximately 127,000 shares of Neonode common stock.
The investment was classified as an available for sale security and had a fair
value on January 27, 2008 $471 thousand. Management considered the
impairment to be other than temporary and has recorded an impairment loss of
$191 thousand in Other income (expense), net in the Statement of Operations
during its third quarter 2009. In November 2008, the security was sold for a net
value of $9 thousand.
  27
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  Inventory
  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:
  January 25,
                                2009
                              
                              
                              January 27,
                                2008(in
      thousands)Raw
      materials
                              
                              $
                              27
                              
                              
                              $
                              2,078Work
      in process
                              
                              
                              31
                              
                              
                              
                              —Finished
      goods
                              
                              
                              40
                              
                              
                              
                              1,637Total
                              
                              $
                              98
                              
                              
                              $
                              3,715
  Long-Lived
Assets
  The
Company evaluates the carrying value of its long-lived assets, consisting
primarily of property, plant and equipment in the fourth quarter of each fiscal
year, and whenever certain events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. Such events or
circumstances include, but are not limited to, a significant decline in the
Company’s market value, significant reductions in projected future cash flows or
gross margins, or macroeconomic factors, including a prolonged economic
downturn. In assessing the recoverability of long-lived assets, the Company
compares the carrying value to the undiscounted future cash flows the assets are
expected to generate. If the total of the undiscounted future cash flows is less
than the carrying amount of the assets, the Company will be required to write
down such assets based on the excess of the carrying amount over the fair value
of the assets. Fair value is generally determined by calculating the discounted
future cash flows using a discount rate based upon the Company’s weighted
average cost of capital. Significant judgments and assumptions are required in
the forecast of future operating results used in the preparation of the
estimated future cash flows, including gross profit margins, long-term forecasts
of the amount and timing of overall market growth and our percentage of that
market, groupings of assets, discount rates and terminal growth rates. In
addition, significant estimates and assumptions are required in the
determination of the fair value of the Company’s tangible long-lived assets,
including replacement cost, economic obsolescence, and the value that could be
realized upon liquidation. Changes in these estimates could have a material
adverse effect on the assessment of the Company’s long-lived assets, thereby
requiring the Company to write down the assets. During fiscal year 2009, we
retired all fixed assets in our Israel and India offices and retired $2.1
million of fully depreciated fixed assets as part of our
restructuring.  During fiscal year 2009, we retired all fixed assets
at our corporate location and retired $5.1 million of fully depreciated fixed
assets as part of our restructuring.
  Property,
Plant and Equipment
  Property,
plant and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of the respective assets, generally three
to five years or, in the case of property under capital leases, over the lesser
of the useful life of the assets or lease term.
  Property,
plant and equipment consist of the following (in thousands):
  Fiscal
      year ended
                
                January 25,
                  2009
                
                
                January 27,
                  2008Property,
      plant and equipment:Computer
      equipment and software
                
                $
                1,370
                
                
                $
                6,411Furniture
      and fixtures
                
                
                84
                
                
                
                1,770Machinery
      and equipment
                
                
                774
                
                
                
                1,194Total
                
                
                2,228
                
                
                
                9,375Less
      accumulated depreciation and amortization
                
                
                (2,228
                )
                
                
                (8,683
                )Property,
      plant and equipment, net
                
                $
                0
                
                
                $
                692
  
 28
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  Warranty
  The
Company generally sells products with a limited warranty of product quality and
a limited indemnification of customers against intellectual property
infringement claims related to the Company’s products. The Company accrues for
known warranty and indemnification issues if a loss is probable and can be
reasonably estimated, and accrues for estimated but unidentified issues based on
historical activity. Due to product testing, the short time between product
shipment and the detection and correction of product failures, and a low
historical rate of payments on indemnification claims, the accrual based on
historical activity and the related expense were not significant for fiscal 2009
and 2008.
  Concentration
of Credit Risk
  The
Company sells its products to manufacturers of mobile phones and other handheld
devices. The Company performs continuing credit evaluations of its customers
and, generally, does not require collateral. Letters of credit may be required
from its customers in certain circumstances.
  Net
Loss per Share
  Net loss
per share represents the weighted average common shares outstanding during the
period and excludes any dilutive effects of options, warrants and convertible
securities. The dilutive effects of options, warrants and convertible securities
are included in diluted earnings per share in profitable periods, but are
excluded in loss periods.
  Comprehensive
Loss
  Unrealized
gains or losses on the Company’s available-for-sale securities are included in
other comprehensive loss and reported separately in stockholders’ equity
(deficit).
  Comprehensive
loss includes the Company’s net loss, as well as accumulated other comprehensive
loss on available-for-sale securities. Net comprehensive loss for each of the
three years ended January 25, 2009 and January 27, 2008 is as follows (in
thousands):
  Year
      ended
                
                January 25,
                  2009
                
                
                January 27,
                  2008Net
      loss
                
                $
                (7,897
                )
                
                $
                (16,725
                )Net
      change in unrealized gain/loss on available for sale
      securities
                
                
                (271
                )
                
                
                273Comprehensive
      loss
                
                $
                (8,168
                )
                
                $
                (16,452
                )
  Total
accumulated other comprehensive gain (loss) was ($271,000) at January 25, 2009
and $273,000 at January 27, 2008. Accumulated other comprehensive loss
consists entirely of unrealized losses on available-for-sale
securities.
  Research
and Development Costs
  Research
and development costs are charged to expense when incurred.
  Shipping
and Handling Costs
  The
Company’s shipping terms are generally ex-works shipping point and our customers
are responsible for paying all shipping and handling costs directly to the
shipping company.
 
 Advertising
Costs
  The
Company expenses advertising costs as incurred. Advertising expenses were
immaterial in fiscal 2009 and 2008.
 
 29
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
   Stock-Based
Compensation
  Effective
January 30, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”),
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 123(R) 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 123(R) 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 123(R) and recognized on a ratable basis over the service
periods of each award.
  Before
fiscal 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 100% of the common stock fair market value on
the date of grant. Before fiscal 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.
 
 At
January 25, 2009, the Company had several stock-based employee compensation
plans, including stock option plans and employee stock purchase plans. See Note
4 of the Notes to the Consolidated Financial Statements for description of the
plans operated by the Company.
  Financial
Instruments
  The
Company’s financial instruments consist principally of cash and cash
equivalents, short-term investments, accounts receivable, employee receivables,
capital leases and accounts payable. The Company believes all of the financial
instruments’ recorded values approximate current values because of the
short-term nature of these instruments.
  Segment
Information
  The
Company has one operating segment by which management evaluates performance and
allocates resources.
  Recent
Accounting Pronouncements
  In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115” (“SFAS 159”). This statement allows entities to elect to
measure many financial instruments and certain other items that are similar to
financial instruments at fair value that are not currently required to be
measured at fair value. The election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an instrument,
the statement specifies that all subsequent changes in fair value for that
instrument shall be reported in earnings. Upon initial adoption, this statement
provides entities with a one-time chance to elect the fair value option for the
eligible items. The effect of the first measurement to fair value should be
reported as a cumulative-effect adjustment to the opening balance of retained
earnings (cumulative deficit) in the year the statement is adopted. SFAS 159 was
effective for NeoMagic beginning on January 28, 2008. The Company did not
make any elections for fair value accounting and therefore, it did not record a
cumulative-effect adjustment to its opening cumulative deficit
balance.
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), or SFAS No. 141(R), Business Combinations.
Under SFAS No. 141(R), an entity is required to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires
that acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition, acquired in-process
research and development, or IPR&D is capitalized as an intangible asset and
amortized over its estimated useful life. We are required to adopt the
provisions of SFAS No. 141(R) beginning with our fiscal quarter ending
April 26, 2009. The adoption of SFAS No. 141(R) is expected to change
our accounting treatment for business combinations on a prospective basis
beginning in the period it is adopted.
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, or SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of Accounting Research Bulletin No. 51.
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. The Company is in the process of evaluating this
standard and therefore has not yet determined the impact that the adoption of
SFAS 160 will have on its consolidated financial position, results of operations
and cash flows.
 
 In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, or SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133. SFAS 161
requires enhanced disclosures about a company’s derivative and hedging
activities. SFAS 161 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. The Company is in the process of
evaluating the impact of adopting the provisions of SFAS 161.
 
 In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB
Statement No. 157, “Fair Value Measurements” (“FAS 157”). FSP 157-2 defers
by one year the effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually),
which for NeoMagic is effective beginning January 26, 2009. We are
currently evaluating the impact of adopting the provisions of FSP
157-2.
 
 30
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 On
April 25, 2008, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Asset”
(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible
Assets”. The intent of FSP 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
141(R), “Business Combinations”, and other U.S. generally accepted accounting
principles. FSP 142-3 is effective for NeoMagic beginning January 26, 2009.
Earlier adoption is prohibited. The adoption of FSP 142-3 is expected to change
our accounting treatment for recognized intangible assets in conjunction with
business combinations on a prospective basis beginning in the period it is
adopted.
  In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally
Accepted Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. SFAS 162 is effective 60 days following approval by the U.S.
Securities and Exchange Commission of the Public Company Accounting Oversight
Board’s amendments to AU section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. We do not expect SFAS
162 to have a material impact on our consolidated financial
statements.
 
 In
October 2008, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the
application of Statement of Financial Accounting Standards (SFAS) 157, Fair
Value Measurements . FSP 157-3 demonstrated how the fair value of a financial
asset is determined when the market for that financial asset is inactive. FSP
157-3 was effective upon issuance, including prior periods for which financial
statements had not been issued. The implementation of this standard did not have
an impact on our consolidated financial statements.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants
(“AICPA”) and the SEC did not or are not believed by management to have a
material impact on the Company’s present or future consolidated financial
statements.
 
 Restructuring
Expense
 
 In
September 2008, the Company extended a corporate restructuring plan (the “Plan”)
initiated in July 2008 and approved by the Board of Directors in response to
continuing economic uncertainties with the intent to improve its operating cost
structure.  As part of the Plan, the Company discontinued its
semiconductor product development efforts and reduced its workforce through a
lay-off of approximately 52 of its employees, terminating substantially all of
its operational and engineering employees in all worldwide
locations.  These restructuring activities have resulted in charges
related to severance and benefit arrangements for terminated employees, contract
termination and other exit-related costs, and asset impairment charges related
to accelerated amortization of semiconductor design automation software tools
and other property and equipment assets.  Related to these activities,
the Company incurred total restructuring charges of $1.9 million for fiscal
year-ended January 25, 2009.  The restructuring charges are reported
in the condensed consolidated statements of operations under operating expenses,
“Restructuring expense”.  Restructuring charges were as
follows:
 
 Year
      ended
                        
                        January
      25,
                        
                        
                        January
      27,2009
                        
                        
                        2008(in
      thousands)Employee
      severance and benefit arrangements
                        
                        $
                        1,157
                        
                        
                        $
                        -Contract
      termination and other costs
                        
                        
                        12
                        
                        
                        
                        -Asset
      impairment
                        
                        
                        767
                        
                        
                        
                        -Total
      restructuring charges
                        
                        $
                        1,936
                        
                        
                        $
                        -
  2.
LOSS PER SHARE
  Per share
information is as follows:
  Year
      Ended
                
                January 25,
                  2009
                
                
                January 27,
                  2008(in
      thousands, except per share data)Numerator:Net
      loss
                
                $
                (7,897
                )
                
                $
                (16,725
                )Denominator:Denominator
      for basic and diluted loss per share—weighted-average outstanding
      shares
                
                
                12,645
                
                
                
                12,356Basic
      and diluted loss per share
                
                $
                (0.62
                )
                
                $
                (1.35
                )
  For
fiscal years 2009 and 2008, basic loss per share equals diluted loss per share
due to the net loss for the year. During fiscal 2009 and 2008, the Company
excluded options, warrants and convertible instruments to purchase 4,785,658 and
4,196,329 shares of common stock, respectively, from the diluted loss per share
computation because the effect was anti-dilutive for these fiscal
years.
  31
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  3.
INCOME TAXES
  Loss
before taxes and the provision (benefit) for income taxes in fiscal 2009 and
fiscal 2008 consists of the following:
  Year
      Ended
                
                January 25,
                  2009
                
                
                January 27,
                  2008(in
      thousands)Income
      (loss) before taxesU.
      S.
                
                $
                (8,577
                )
                
                $
                (16,368
                )Foreign
                
                
                515
                
                
                
                (811
                )Total
      loss before taxes
                
                $
                (8,062
                )
                
                $
                (17,179
                )Provision
      (benefit) for taxesCurrent:U.S.
                
                $
                (2
                )
                
                $
                (466
                )Foreign
                
                
                (163
                )
                
                
                12Total
      provision (benefit) for income taxes
                
                $
                (165
                )
                
                $
                (454
                )
  The
Company’s income tax provision (benefit) differs from the federal statutory rate
of 35% due to the following:
 
 Year
      Ended
                                              
                                              January 25,
                                                2009
                                              
                                              
                                              January 27,
                                                2008(in thousands except
      percentages)Pre-tax
      loss
                                              
                                              $
                                              (8,062
                                              )
                                              
                                              $
                                              (17,179
                                              )Federal
      statutory rate
                                              
                                              
                                              35
                                              %
                                              
                                              
                                              35
                                              %Expected
      benefit
                                              
                                              
                                              (2,822
                                              )
                                              
                                              
                                              (6,013
                                              )Foreign
      taxes
                                              
                                              
                                              25
                                              
                                              
                                              
                                              124Tax
      reserves
                                              
                                              
                                              (193
                                              )
                                              
                                              
                                              (415
                                              )Net
      operating loss not currently benefited
                                              
                                              
                                              2,821
                                              
                                              
                                              
                                              5,926R&D
      credit (Federal)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (125
                                              )Other
                                              
                                              
                                              4
                                              
                                              
                                              
                                              49Provision
      (benefit) for income taxes
                                              
                                              $
                                              (165
                                              )
                                              
                                              $
                                              (454
                                              )
  Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  Significant components of
the Company’s deferred tax assets and liabilities are as
follows:
  Year
      Ended
                
                January 25,
                  2009
                
                
                January 27,
                  2008(in
      thousands)Deferred
      tax assets:Net
      operating loss carryforward
                
                $
                50,091
                
                
                $
                46,794Research
      and development credit
                
                
                8,167
                
                
                
                8,167Acquisition
      costs
                
                
                —
                
                
                
                1,920Reserves
      and accruals
                
                
                2,183
                
                
                
                1,434Capitalized
      research and development
                
                
                —
                
                
                
                1,837Other
                
                
                —
                
                
                
                316Total
      deferred tax assets
                
                
                60,441
                
                
                
                60,468Valuation
      allowance
                
                $
                (60,441
                )
                
                $
                (60,468
                )Net
      deferred tax assets
                
                
                —
                
                
                
                —
  32
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  Realization
of the deferred tax assets is dependent on the Company generating sufficient
taxable income in future years to obtain benefit from the reversal of temporary
differences and from net operating loss and tax credit
carryforwards.  At January 25, 2009, the Company has provided a
valuation allowance of $60.4 million equal to its total deferred tax assets due
to uncertainties surrounding their realization.  The valuation
allowance increased by $27 thousand and $6.5 million in fiscal 2009 and 2008,
respectively.
 
 As of
January 25, 2009, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $123.9 million.  The federal net
operating loss will expire in fiscal years beginning in 2023.  The
Company also had research and development credit carryforwards for federal
income tax purposes of approximately $2.9 million, which expire in fiscal years
beginning in 2028.  In addition, the Company had net operating losses
and research and development tax credits for state income tax purposes of
approximately $116.7 million and $5.3 million, respectively.  The
state net operating loss will expire in the years beginning in 2013, and the
state research and development tax credits will not expire.
 
 The Companybelieves an ownership changes as
defined under Section 382 of the Internal Revenue Code may
exist.  The Company is currently analyzing the ownership change to
determine the limitations on the ability to utilize net operating loss and tax
credit carryforwards under Sections 382 and 383 of the Internal Revenue
Code in future periods due to significant stock transactions in previous
years.  Such limitations may limit the future realization of the
Company’s net operating losses and tax credits. In addition, a portion of the
federal research tax credit carryforwards may be subject to forfeiture due to
Section 383 limitations. The Company is in the process of determining the
impact of Section 383 on the tax credit carryforwards.
 
 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 $101K decrease in liability for unrecognized tax benefits,
which was accounted for as an adjustment to the January 29, 2007 balance of
retained earnings.
 
 The
Company has unrecognized tax benefits of approximately $1.8 million as of
January 25, 2009, of which $0.1 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 are included in the unrecognized tax
benefits.
 
 The
following table summarizes the activity related to our unrecognized tax
benefits:
  Total(in
      thousands)Balance
      at January 27, 2008
                        
                        $
                        2,341Decreases
      related to reduction of Texas tax liability
                        
                        
                        (218
                        )Expiration
      of the statute of limitations for transfer pricing
reserves
                        
                        
                        (227
                        )Decrease
      related to transfer pricing reserves
                        
                        
                        (23
                        )Balance
      at January 25, 2009
                        
                        $
                        1,873
 
 Included
in the unrecognized tax benefits of $1.8 million at January 25, 2009 was
$103 thousand of tax benefits that, if recognized, would reduce our annual
effective tax rate. It is reasonably possible the total amount of the Company’s
unrecognized tax benefits could significantly increase or decrease within 12
months after the reporting date as a result of projected resolutions of
worldwide tax disputes.
 
 The
Company is subject to audit by the IRS for all years since fiscal 2003, and to
audit by the California Franchise Tax Board for all years since fiscal
2001.
 
 33
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  4.
STOCKHOLDERS’ EQUITY
  Warrants
  The
Company granted warrants in connection with the securities purchase agreement
entered into with Satellite Strategic Finance Associates, LLC in August 2004.
The warrants were to purchase (i) 200,000 shares of NeoMagic common stock
at an exercise price of $8.00 per share, exercisable until 90 days after the
date that the registration statement was filed by the Company covering the
securities and declared effective by the Securities and Exchange Commission, and
(ii) 321,739 shares of common stock at $8.20 per share, exercisable until
August 20, 2009 (the “2004 Warrants”). The Securities and Exchange
Commission declared the Company’s filing effective September 24, 2004 and
the warrants for the purchase of 200,000 shares expired unexercised on
December 26, 2004. On December 16, 2005, NeoMagic closed the sale and
issuance of additional shares of its Common Stock and warrants to purchase
Common Stock (described below), which triggered the anti-dilution provisions in
the 2004 Warrants. An adjustment was made to increase the number of shares
subject to the 2004 Warrants from 321,739 to 335,607 shares of common stock and
to decrease the exercise price from $8.20 to $7.86 per share. On
December 6, 2006, NeoMagic closed the sale and issuance of additional
shares of its Common Stock and warrants to purchase Common Stock (described
below), which again triggered the anti-dilution provisions in the 2004 Warrants.
Another adjustment was made to increase the number of shares subject to the 2004
Warrants from 335,607 to 366,249 shares of common stock and to decrease the
exercise price further from $7.86 to $7.20 per share. As of January 25,
2009, none of the 2004 Warrants had been exercised.
  On
December 16, 2005, NeoMagic closed the sale and issuance to various
investors of (i) 1,500,000 shares of its Common Stock (the “2005 Shares”),
and (ii) warrants to purchase 749,996 shares of Common Stock at an exercise
price of $9.00 per share (the “2005 Warrants”). The Company sold and issued the
2005 Shares and the 2005 Warrants for an aggregate offering price of $9 million.
After deducting offering costs, net cash proceeds received by the Company were
$8.4 million.
  The 2005
Warrants provide that each holder of a 2005 Warrant may exercise it for shares
of Common Stock at an exercise price of $9.00 per share. No 2005 Warrant was
exercisable until six months after the issuance date of such 2005 Warrant. The
2005 Warrants provide for adjustments to the exercise price and number of shares
for which the 2005 Warrants may be exercised in certain circumstances, including
stock splits, stock dividends, certain distributions and reclassifications, and
dilutive issuances, subject to a minimum exercise price of $7.79. On
December 6, 2006, NeoMagic closed the sale and issuance of additional
shares of its Common Stock and warrants to purchase Common Stock (described
below), which triggered the anti-dilution provisions in the 2005 Warrants. An
adjustment was made to increase the number of shares subject to the 2005
Warrants from 749,996 to 863,199 shares of common stock and to decrease the
exercise price from $9.00 to $7.82 per share. As of January 25, 2009, none
of the 2005 Warrants had been exercised.
  On
December 6, 2006, NeoMagic closed the sale and issuance to various
investors of (i) 2,500,000 shares of its Common Stock (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 of
$11.5 million. After deducting offering costs, net cash proceeds received by the
Company were $10.5 million.
  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. No
2006 Warrant is exercisable until six months after the issuance date of such
2006 Warrant. The 2006 Warrants provide for adjustments to the exercise price
and number of shares for which the 2006 Warrants may be exercised in certain
circumstances, including stock splits, stock dividends, certain distributions
and reclassifications, and dilutive issuances, subject to a minimum price of
$4.58 per share. As of January 25, 2009, none of the 2006 Warrants had been
exercised.
  Preferred
Stock
  In fiscal
2000, the Board of Directors approved an amendment to the Certificate of
Incorporation to allow the issuance of up to 2,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights of those shares without any further vote or action by
the stockholders.
 
 Stock-Based
Compensation
  The
following table shows total stock-based compensation expense included in the
accompanying Consolidated Condensed Financial Statements for the year-ended
January 25, 2009 and January 27, 2008.
  Year
      Ended
                                          
                                          January 25,
                                            2009
                                          
                                          
                                          January 27,
                                            2008(in
      thousands)Cost
      of revenue
                                          
                                          $
                                          26
                                          
                                          
                                          $
                                          23Research
      and development
                                          
                                          
                                          584
                                          
                                          
                                          
                                          917Sales,
      general and administrative
                                          
                                          
                                          622
                                          
                                          
                                          
                                          821Total
                                          
                                          $
                                          1,232
                                          
                                          
                                          $
                                          1,761
  Total
compensation cost related to unvested stock-based awards granted to employees
under the stock option plans but not yet recognized as of January 25, 2009
was approximately $2.4 million after estimated forfeitures. The cost will be
recognized on a straight-line basis over an estimated weighted average period of
approximately 2.27 years for stock options and will be adjusted if necessary in
subsequent periods if actual forfeitures differ from those
estimates.
  There was
no total compensation cost related to options to purchase common shares under
the ESPP but not yet recognized as of January 25, 2009 as the ESPP was
temporary terminated by our Board of Directors in July 2008.
  There
were no options granted during fiscal 2009 and 2008 with an exercise price less
than the market price at the date of grant. The weighted average fair value of
options granted during fiscal 2009 and 2008 with exercise prices equal to the
market price at the date of grant is $1.50 and $3.69 per share,
respectively.
 34
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
 Net cash
proceeds from the sales of common stock under employee stock purchase and stock
option plans for the year ended January 25, 2009 and January 27, 2008 were
$69 thousand and $474 thousand, respectively. No income tax benefit was realized
from the sales of common stock under employee stock purchase and stock option
plans during the years ended January 25, 2009 and January 27, 2008. In
accordance with SFAS 123(R), the Company presents excess tax benefits from the
exercise of stock options, if any, as financing cash flows rather than operating
cash flows.
 Determining
Fair Value
  Valuation
and amortization method—The Company estimates the fair value using a
Black-Scholes option pricing formula and a single option award approach. This
fair value is then amortized ratably over the requisite service periods of the
awards, which is generally the vesting period.
  Expected
term—The Company’s expected term represents the period that the Company’s
stock-based awards are expected to be outstanding. The expected term for fiscal
2009 is based upon historical review. The Company believes that this method
meets the requirements for SFAS 123(R).
  Expected
Volatility—The Company’s expected volatility for the year ended January 25,
2009 is computed based on the Company’s historical stock price volatility. The
Company believes historical volatility to be the best estimate of future
volatility and noted no unusual events that might indicate that historical
volatility would not be representative of future volatility.
  Risk-Free
Interest Rate—The risk-free interest rate used in the Black-Scholes option
valuation method is based on the implied yield currently available on U.S.
Treasury zero-coupon issues with a remaining term equal to the expected term of
the option.
  Expected
Dividend—The dividend yield reflects that the Company has never paid any cash
dividends and has no intention to pay dividends in the foreseeable
future.
  Estimated
Forfeiture—The estimated forfeiture rate was based on an analysis of the
Company’s historical forfeiture rates. The estimated average forfeiture rate for
the year ended January 25, 2009 was 87.52% and 16.63% for the year ended
January 27, 2008, based on historical forfeiture experience.
  In the
years ended January 25, 2009 and January 27, 2008 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:
  Employee
      Option Plan
                                                          
                                                          
                                                          Employee
      Stock Purchase PlanYear
      Ended
                                                          
                                                          January
      25,
                                                            2009
                                                          
                                                          
                                                          January 27,
                                                            2008
                                                          
                                                          
                                                          January
      25,
                                                            2009
                                                          
                                                          
                                                          January 27,
                                                            2008Risk-free
      interest rates
                                                          
                                                          
                                                          1.75
                                                          %
                                                          
                                                          
                                                          4.27
                                                          %
                                                          
                                                          
                                                          n/a
                                                          *
                                                          
                                                          
                                                          5.0
                                                          %Volatility
                                                          
                                                          
                                                          .96
                                                          
                                                          
                                                          
                                                          .98
                                                          
                                                          
                                                          
                                                          n/a
                                                          *
                                                          
                                                          
                                                          .91Expected
      life of option in years
                                                          
                                                          
                                                          3.76
                                                          
                                                          
                                                          
                                                          4.09
                                                          
                                                          
                                                          
                                                          n/a
                                                          *
                                                          
                                                          
                                                          1.24*Our
      Board of Directors temporarily suspended the ESPP program in July
      2008.  Subsequently, no additional grants have been made to the
      ESPP
program.
  Stock
Plans
  At
January 25, 2009, the Company had several stock-based employee compensation
plans, including stock option plans and employee stock purchase plans. 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. The stock options generally vest
over a four-year period, have a maturity of ten years from the issuance date,
and have an exercise price equal to the closing price on the NASDAQ of the
common stock on the date of grant. Generally, unvested options are forfeited 30
to 90 days from the date a Service Provider ceases to be a Service Provider, or
in the case of death or disability, the post-exercise period may extend for a
period of up to 12 months. To cover the exercise of vested options, the Company
issues new shares from its authorized but unissued share pool. At
January 25, 2009, approximately 1,891,288, 291,640 and 52,801 shares of the
Company’s registered common stock were reserved for issuance under the 2003
Stock Option Plan, Amended 1998 Stock Option Plan, and 1993 Stock Option Plan,
respectively.
  In
accordance with the 2003 Stock Plan (the “2003 Plan”), the Board of Directors
may grant nonstatutory stock options and stock purchase rights to employees,
consultants and directors. Incentive stock options may be granted only to
employees. The 2003 Plan terminates in 2013. The Board of Directors determines
vesting provisions for stock purchase rights and options granted under the 2003
Plan. Stock options expire no later than ten years from the date of grant.
Generally stock options vest over a period of four years when granted to new
employees. In the event of voluntary or involuntary termination of employment
with the Company for any reason, with or without cause, all unvested options are
forfeited and all vested options must be exercised within a 90-day period, or as
set forth in the option agreement, or they are forfeited. Certain of the options
and stock purchase rights are exercisable immediately upon grant. However,
common shares issued on exercise of options before vesting are subject to
repurchase by the Company. As of January 25, 2009, no shares of common
stock were subject to this repurchase provision. Other options granted under the
2003 Plan are exercisable during their term in accordance with the vesting
schedules set forth in the option agreement. The number of shares reserved under
the 2003 Plan is subject to an automatic increase for unexercised forfeited
shares subject to options issued under the 1993 Plan. As of January 25,
2009, the number of options outstanding under the 1993 Plan was
52,801.
  Under the
1998 Nonstatutory Stock Option Plan (the “1998 Plan”), the Board of Directors
may grant nonstatutory stock options to employees, consultants and officers. The
1998 Plan terminated automatically in June 2008.  No additional
options may be granted under the 1998 Plan.  As of January 25, 2009
there were 219,640 options issued and outstanding under the 1998
Plan.
  35
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  On
December 22, 2005, the Company entered into an amendment to the 1998 Plan
to permit holders of certain stock options to voluntarily make irrevocable
advance elections to reduce the exercise period for such stock options. These
advance elections could qualify certain stock options for exemptions from the
potentially unfavorable tax effects imposed by Section 409A of the Internal
Revenue Code, and the proposed regulations issued thereunder (collectively,
“Section 409A”). Specifically, the 1998 Plan was amended to authorize and provide
the framework necessary for the implementation of a short-term deferral exercise
election; that is, certain eligible stock option holders were permitted to elect
to exercise stock options that vest in a given calendar year by no later than
March 15th of the following year. If an option holder made this election, the
stock option agreement underlying the eligible stock options subject to the
election was automatically amended to the extent necessary to implement the
election.
 Under the
1993 Stock Plan (the “1993 Plan”), the Board of Directors may grant incentive
stock options to employees and nonstatutory stock options and stock purchase
rights to employees, consultants and directors. The 1993 Plan terminated as to
future grants in September 2003. The Board of Directors determined vesting
provisions for stock purchase rights and options granted under the 1993 Plan.
Stock options expire no later than ten years from the date of grant. Generally
stock options vest over a period of four years when granted to new employees. In
the event of voluntary or involuntary termination of employment with the Company
for any reason, with or without cause, all unvested options are forfeited and
all vested options must be exercised within a 90-day period, or as set forth in
the option agreement, or they are forfeited. Certain of the options and stock
purchase rights are exercisable immediately upon grant. However, common shares
issued on exercise of options before vesting are subject to repurchase by the
Company. As of January 25, 2009, no shares of common stock were subject to this
repurchase provision. Other options granted under the 1993 Plan are exercisable
during their term in accordance with the vesting schedules set forth in the
option agreement. Unexercised forfeited shares are transferable to the 2003 Plan
as provided within the 2003 Plan.
 A summary
of the Company’s stock option activity under the three plans, and related
information for the three years ended January 25, 2009
follows:
  Number
      of
                                                                                          Shares
                                                                                          Outstanding
                                                                                          (Options)
                                                                                        
                                                                                        
                                                                                        Weighted
                                                                                          Average
                                                                                          Exercise
                                                                                          Price
      Per
                                                                                          Share
                                                                                        
                                                                                        
                                                                                        Weighted
                                                                                          Average
                                                                                          Remaining
                                                                                          Contractual
                                                                                          Term
                                                                                          (in
      Years)
                                                                                        
                                                                                        
                                                                                        Aggregate
                                                                                          Intrinsic
                                                                                          ValueBalance
      at January 28, 2007
                                                                                        2,256,573
                                                                                        
                                                                                        
                                                                                        $
                                                                                        6.73Granted
                                                                                        425,730
                                                                                        
                                                                                        
                                                                                        $
                                                                                        3.69Exercised
                                                                                        (59,473
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        1.67Forfeitures
      and cancellations
                                                                                        (424,705
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        6.40Balance
      at January 27, 2008
                                                                                        2,198,125
                                                                                        
                                                                                        
                                                                                        $
                                                                                        6.34Granted
                                                                                        734,250
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1.47Exercised
                                                                                        —
                                                                                        
                                                                                        
                                                                                        $
                                                                                        —Forfeitures
      and cancellations
                                                                                        (1,967,212
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        4.64Balance
      at January 25, 2009
                                                                                        965,163
                                                                                        
                                                                                        
                                                                                        $
                                                                                        6.11
                                                                                        
                                                                                        
                                                                                        4.27
                                                                                        
                                                                                        
                                                                                        $
                                                                                        —Vested
      and expected to vest at January 25, 2009
                                                                                        711,632
                                                                                        
                                                                                        
                                                                                        $
                                                                                        6.99
                                                                                        
                                                                                        
                                                                                        3.44
                                                                                        
                                                                                        
                                                                                        $
                                                                                        —Exercisable
      at January 25, 2009
                                                                                        708,777
                                                                                        
                                                                                        
                                                                                        $
                                                                                        7.01
                                                                                        
                                                                                        
                                                                                        3.42
                                                                                        
                                                                                        
                                                                                        $
                                                                                        —
  The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $0.01 per share
at January 25, 2009, which would have been received by option holders had
all option holders exercised their options that were in-the-money as of that
date. No options were exercisable as of January 25, 2009 as all options were
out-of-the-money. No options were exercised during the year ended January 25,
2009.
  The
exercise prices for options outstanding and exercisable as of January 25,
2009 and their weighted average remaining contractual lives were as
follows:
  Outstanding
                                                              
                                                              
                                                              ExercisableRange of
      Exercise Prices Per Share
                                                              
                                                              Shares
                                                                Outstanding
                                                              
                                                              
                                                              Weighted
                                                                Average
                                                                Remaining
                                                                Contractual
                                                                Life
                                                              
                                                              
                                                              Weighted
                                                                Average
                                                                Exercise
                                                                Price
      per
                                                                Share
                                                              
                                                              
                                                              Number
                                                                Exercisable
                                                              
                                                              
                                                              Weighted
                                                                Average
                                                                Exercise
                                                                Price
      per
                                                                Share(in thousands)
                                                              
                                                              
                                                              (in years)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (in thousands)$1.35—1.51
                                                              
                                                              170
                                                              
                                                              
                                                              7.99
                                                              
                                                              
                                                              $
                                                              1.51
                                                              
                                                              
                                                              54
                                                              
                                                              
                                                              $
                                                              1.51$1.52—2.75
                                                              
                                                              180
                                                              
                                                              
                                                              5.45
                                                              
                                                              
                                                              $
                                                              2.24
                                                              
                                                              
                                                              167
                                                              
                                                              
                                                              $
                                                              2.24$2.76—4.83
                                                              
                                                              232
                                                              
                                                              
                                                              3.39
                                                              
                                                              
                                                              $
                                                              4.46
                                                              
                                                              
                                                              174
                                                              
                                                              
                                                              $
                                                              4.42$4.84—7.97
                                                              
                                                              183
                                                              
                                                              
                                                              3.21
                                                              
                                                              
                                                              $
                                                              6.46
                                                              
                                                              
                                                              114
                                                              
                                                              
                                                              $
                                                              6.40$7.98—13.95
                                                              
                                                              103
                                                              
                                                              
                                                              1.93
                                                              
                                                              
                                                              $
                                                              13.36
                                                              
                                                              
                                                              103
                                                              
                                                              
                                                              $
                                                              13.36$13.95
      and over
                                                              
                                                              97
                                                              
                                                              
                                                              2.19
                                                              
                                                              
                                                              $
                                                              16.94
                                                              
                                                              
                                                              97
                                                              
                                                              
                                                              $
                                                              16.94965
                                                              
                                                              
                                                              4.27
                                                              
                                                              
                                                              $
                                                              6.11
                                                              
                                                              
                                                              709
                                                              
                                                              
                                                              $
                                                              7.01
  Employee
Stock Purchase Plan
  The 2006
Employee Stock Purchase Plan and 1997 Employee Stock Purchase Plan
(collectively, “ESPP”) permit eligible employees to purchase common stock
through payroll deductions of up to 10% of the employee’s compensation. The
price of common stock to be purchased under ESPP is 85% of the lower of the fair
market value of the common stock at the beginning of the offering period or at
the end of the relevant purchase period. To cover the exercise of vested
options, the Company issues new shares from its authorized but unissued share
pool. At January 25, 2009 and January 27, 2008, approximately 151,699 and
266,834, respectively, shares were available for future purchase under the 2006
Employee Stock Purchase Plan.  There were no share available for the
1997 Employee Stock Purchase Plan, for the years ending January 25, 2009 and
January 27, 2008.
  36
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  The 2006
Employee Stock Purchase Plan is intended to qualify under Section 423 of
the Internal Revenue Code and has consecutive and overlapping 24-month offering
periods that begin every six months. Each 24-month offering period includes four
six-month purchase periods, during which payroll deductions are accumulated, and
at the end of which, shares of common stock are purchased with a participant’s
accumulated payroll deductions. The 2006 Purchase Plan is set to expire in July
2016. The 2006 Plan is subject to an automatic increase for unexercised
forfeited shares issued in the 1997 Plan. . Effective July 2008, the Board of
Directors temporarily suspended the Company’s ESPP program.
  The 1997
Employee Stock Purchase Plan was intended to qualify under Section 423 of
the Internal Revenue Code and had consecutive and overlapping 24-month offering
periods that began every six months. Each 24-month offering period included four
six-month purchase periods, during which payroll deductions were accumulated,
and at the end of which, shares of common stock were purchased with a
participant’s accumulated payroll deductions. The 1997 Plan terminated in March
2007. Unissued shares were transferred to the 2006 Employee Stock Purchase
Plan.
  In fiscal
2009 and fiscal 2008,  115,135 and 124,807 shares, respectively, of
common stock were issued at an average price of $0.60 and $3.00 per share,
respectively, under the ESPP.
 5.
SAVINGS PLAN
  The
Company maintained a savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, eligible employees could contribute up to 65% of
their pre-tax salaries per year, but not more than the statutory limits. The
Company made no matching contributions to employees in fiscal 2009 and
2008.  In November 2008, our Board of Directors authorized the
elimination and closure of the NeoMagic 401(k) Plan. Plan participants were
notified in November 2008 of the closure.  As of our year-ended
January 25, 2009, all funds had been disbursed.
  6.
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:
  January 25,
                                2009
                              
                              
                              January 27,
                                2008(in
      thousands)Software
      under capital lease
                              
                              $
                              655
                              
                              
                              $
                              655Accumulated
      amortization
                              
                              
                              (655
                              )
                              
                              
                              (236
                              )Net
      software under capital lease
                              
                              $
                              ---
                              
                              
                              $
                              419
  The
amortization of amounts capitalized under leases has been fully amortized as of
January 25, 2009 due to the restructuring activities in fiscal 2009 and the
discontinuation of semiconductor development efforts utilizing the capitalized
software.
  Other
than the settlement of $25,000, there are no future minimum payments under the
capital lease as of January 25, 2009.
  In
January 2009, the Company settled in full its outstanding obligation under
capital leases for a cash payment of $25,000.
  7.
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 January 25, 2009, 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).
  37
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  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 “gain or loss from the change in fair value on revaluation of
warrant liability” in the period in which the change occurred. In fiscal 2008
and fiscal 2007, the Company recognized a gain on the change in fair value on
revaluation of warrant liability of $0.8 million and $1.8 million, respectively.
Since the warrants were classified as a liability, the proceeds allocated to
equity were the gross proceeds of $11,450,000 less the fair value of the
warrants of $5,688,000 and less the offering costs allocated to the warrants of
$273,000. The total offering costs of $974,000 were allocated between the 2006
Warrants and the common stock based on their respective fair values. Offering
costs of $273,000 were allocated to the 2006 Warrants and reported as interest
expense in the statement of operations for fiscal 2007.
 In July
2007, the Company offered holders of 2006 Warrants the ability to amend their
outstanding warrants. The amended 2006 Warrants are only exercisable on a net
share settlement basis and 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 Company completed its warrant exchange offer on
July 27, 2007. At that time, 96% of all outstanding 2006 Warrants were
amended, representing 1,200,000 shares of the 1,250,000 shares subject to
warrants that had been available for amendment. One investor holding a warrant
to purchase 50,000 shares chose not to participate. The 2006 Warrants were
revalued on July 27, 2007, the date the warrant exchange offer was
completed, and the Company recognized a loss on the change in fair value on
revaluation of warrant liability of $248,000. The fair value of the 2006
Warrants was estimated to be $3.1 million. The $3.0 million value of the amended
2006 Warrants was reclassified to equity as of July 27, 2007 and the $0.1
million value of the 2006 Warrants that were not amended remained on the
Company’s balance sheet as a liability of $85 and $38,000 as of January 25, 2009
and January 27, 2008, respectively.
  8.
COMMITMENTS AND CONTINGENCIES
  Commitments
  In May
1996, the Company moved its principal headquarters to a facility in Santa Clara,
California, under a non-cancelable operating lease that expired in April 2003.
In January 1998, the Company entered into a second non-cancelable operating
lease for an adjacent building, which became its new corporate headquarters.
This lease had a co-terminus provision with the original lease that expired in
April 2003. In March 2002, the Company extended the term for 45,000 square feet
under this lease for another seven years with a termination date of April 2010.
In January 2009, the Company defaulted on its lease, vacated the premises, and
is currently in negotiations with the landlord to settle the outstanding debt
but cannot provide assurance as to whether a settlement agreement can be reached
on acceptable terms, or at all.  In January 2009, the Company moved
its principal headquarters to a facility in San Jose, California, under a
non-cancelable operating lease that expires in January 2010. The Company leased
offices in Israel and India under operating leases that expired in September
2008 and December 2008, respectively. At January 25, 2009 the leased offices in
Israel and India had been vacated. Future minimum lease payments under operating
leases are as follows:
  (in thousands)Fiscal
      2010
                              
                              $
                              1,404Fiscal
      2011
                              
                              
                              280Thereafter
                              
                              
                              —Total
      minimum lease payments
                              
                              $
                              1,684
  Net rent
expense under operating leases was $1,251,000 and $1,245,000 in fiscal 2009 and
fiscal 2008, respectively.
  On
September 30, 2008, the Company received notice from the Landlord for its
facility lease that the Company would be in default of its lease if rent payment
arrearages were not paid within five days of the date of notice. Such rent
payment arrearages were not paid by the Company within five days of the date of
notice and are not paid as of the date of this filing. Therefore, the Company is
in default of its headquarter facility lease agreement. Upon a default of the
lease, the Landlord has the right to proceed against the Company for, among
other things, late fees, unpaid rent, attorney’s fees and costs and possession
of the premises. In addition, the Landlord shall have the right to apply the
Company’s security deposit of $176,500 to any rent or other amounts owed to the
Landlord. Upon such application of the security deposit, the Company shall be
required to deposit with the Landlord an amount sufficient to restore the
security deposit to its original amount and the Company’s failure to timely
restore the security deposit shall constitute a material breach of the
lease.  Subsequent to our fiscal year ended January 25, 2009, we
received a notice of breach of lease and have been sued by our
Landlord.  The Company is currently in settlement negotiations with
the Landlord, but cannot provide assurance as to whether a settlement agreement
can be reached on acceptable terms, or at all.
 
 Design
tool software licenses
 
 We have
commitments under time-based subscription licenses for design tool software of
$285,000 as of January 25, 2009 and $285,840 for fiscal 2010.  We have
received notice from our vendor that we are in default of the license
agreement.  The Company is currently in settlement negotiations with
its design tool software vendor, but cannot provide assurance as to whether a
settlement agreement can be reached on acceptable terms, or at all.
 
 38
 Table of Contents
 NEOMAGIC
CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
  
 9.
SIGNIFICANT CUSTOMERS AND EXPORT SALES
  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 99% and 96%%
of product revenue in fiscal 2009 and 2008, respectively. The Company expects
that export sales will continue to represent a significant portion of product
revenue, although the Company cannot assure you that export sales as a
percentage of product revenue will remain at current levels. All sales
transactions were denominated in United States dollars. The following is a
summary of the Company’s product revenue by major geographic area based on the
invoicing location of each customer:
  Year
      EndedJanuary 25,
                                2009
                              
                              
                              January 27,
                                2008Sweden
                              
                              
                              —
                              %
                              
                              
                              
                              50
                              %Korea
                              
                              
                              12
                              %
                              
                              
                              
                              20
                              %Singapore
                              
                              
                              84
                              %
                              
                              
                              
                              20
                              %United
      States
                              
                              
                              1
                              %
                              
                              
                              
                              4
                              %Japan
                              
                              
                              —
                              %
                              
                              
                              
                              3
                              %Hong
      Kong
                              
                              
                              —
                              %
                              
                              
                              
                              1
                              %England
                              
                              
                              —
                              %
                              
                              
                              
                              1
                              %Malaysia
                              
                              
                              3
                              %
                              
                              
                              
                              1
                              %Taiwan
                              
                              
                              —
                              %
                              
                              
                              
                              —
                              %
 
 The
following customers accounted for more than 10% of product revenue:
  Year
      EndedJanuary 25,
                                2009
                              
                              
                              January 27,
                                2008Neonode AB.
                              
                              
                              *
                              %
                              
                              
                              
                              50
                              %Flextronics
      Manufacturing
                              
                              
                              86
                              %
                              
                              
                              
                              20
                              %Sejin
      Electron Inc.
                              
                              
                              *
                              %
                              
                              
                              
                              14
                              %Edom
      Technology Co.**
                              
                              
                              *
                              
                              
                              
                              
                              *Premier
      Components Distribution**
                              
                              
                              *
                              
                              
                              
                              
                              *Premier
      Microelectronics Europe LTD**
                              
                              
                              *
                              
                              
                              
                              
                              *Exadigm
      Inc.
                              
                              
                              *
                              
                              
                              
                              
                              *
 
 *
              represents
      less than 10% of product revenue**
              customer
      is a distributor
  10.
SUBSEQUENT EVENTS
  On
January 29, 2009, we completed a debt settlement with a software vendor for $25
thousand to pay in full a contractual obligation of $420 thousand.  We
are currently in negotiations with other vendors to settle outstanding
debt.
 
 On March
20, 2009, we were sued by our former landlord, Silicon Valley CA-I, LLC for
breach of lease on our former headquarters location at 3250 Jay Street, Santa
Clara, California.  We are currently responding to the complaint and
working to settle the suit but cannot provide assurance as to whether a
settlement agreement can be reached on acceptable terms, or at all.
   39
 Table of Contents
 Report
of Independent Registered Public Accounting Firm
  To the
Board of Directors and Stockholders of
 NeoMagic
Corporation:
  We have
audited the accompanying consolidated balance sheets of NeoMagic Corporation and
subsidiaries as of January 25, 2009 and January 27, 2008 and the related
consolidated statements of operations, stockholders’ equity (deficit) and cash
flows for each of the two years in the period ended January 25,
2009.  These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company’s internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NeoMagic Corporation and
subsidiaries as of January 25, 2009 and January 27, 2008, and the results
of their operations and their cash flows for each of the two years in the period
ended January 25, 2009 in conformity with accounting principles generally
accepted in the United States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the company has suffered recurring losses
from operations and negative cash flows that raise substantial doubt about its
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
  /s/
Stonefield Josephson, Inc.
  San
Francisco, California
 May 8,
2009
  40
 Table of Contents
 Item9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  Not
applicable.
  Item9A.
                CONTROLS
      AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by this Annual Report on Form 10-K, under the
supervision of our Chief Executive Officer and our Chief Operating Officer, we
evaluated the effectiveness of our disclosure controls and procedures, as such
term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and
our Chief Operating Officer (Acting) have concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this Annual
Report on Form 10-K.
  Management’s
Annual Report on Internal Control Over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Operating Officer (Acting), we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of January 25, 2009 based on the criteria set forth
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
criteria set forth in Internal Control—Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of
January 25, 2009. Please refer to the paragraph below titled ‘Changes in
Internal Controls Over Financial Reporting.’
  This
annual report does not include, and is not required to include, an attestation
report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
  Changes
in Internal Controls Over Financial Reporting
  During
the third quarter of fiscal 2009, the management of the Company executed a
significant reduction of force. On September 24, 2008, we announced a
cessation of our efforts to raise additional capital. As a result, we proceeded
with efforts to substantially reduce our operating activities and reduce our
on-going expenditures.  Beginning September 19, 2008, management,
acting based upon a plan approved by our Board of Directors, eliminated 52
positions in the Company. On September 23, 2008, the remaining independent
directors of the Company, Brett Moyer, Carl Stork and David Tomasello, notified
the Company that they were resigning as directors of NeoMagic Corporation,
effective September 23, 2008. As part of the reduction in force, Steve
Berry, the company’s Chief Financial Officer resigned his position on January 9,
2009. Because of the reduction in force, the resignation of all independent
directors and the resignation of the CFO, control procedures which are normally
in place with separate individuals have necessarily been combined across a
significantly reduced staff. While we believe that internal controls are intact
and carefully monitored, the absence of an external audit committee, the absence
of independent board members, and the combination of staff functions does expose
the Company to risk associated with internal controls.
 
 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.
  Item9B.
                Other
      Information
  None.
  41
 Table of Contents
 PART
III
  Certain
information required by Part III is incorporated by reference to the Company’s
definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Company’s 2008
Annual Meeting of Stockholders (the “Proxy Statement”).
  Item10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
  The
information required by this item with respect to directors is contained in the
section entitled “Election of Directors” in the Proxy Statement and is
incorporated herein by reference. The required information concerning executive
officers of the Company is contained in the section entitled “Management” in
Item 1 of Part I of this Form 10-K and is incorporated into this
Item 10 of Part III by reference. The information about the Audit Committee
and any Audit Committee financial experts required by this Item is contained in
the section titled “Board Meetings and Committees” in the Proxy Statement and is
incorporated by reference herein.
  Item 405
of Regulation S-K calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16 of the Exchange Act. This
disclosure is contained in the section entitled “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement and is incorporated
herein by reference.
  We have
adopted a Code of Ethics for all directors, officers and employees to govern
their professional and ethical conduct. The Code of Ethics is posted on our
website athttp://www.neomagic.com
.. The Company will post any amendments to or waivers of the Code of Ethics on
the website.
  Item11.
                EXECUTIVE
      COMPENSATION.
  The
information required by this section relating to executive compensation and
transactions is contained in the sections titled “Election of Directors,”
“Director Compensation,” “Executive Compensation,” “Compensation Committee
Interlocks and Insider Participation” and “Compensation Discussion and Analysis”
in the Proxy Statement and is incorporated herein by reference. In addition, the
section in the Proxy Statement titled “Compensation Committee Report” is
incorporated by reference into this Item, but shall not be deemed incorporated
by reference into any other SEC filings, shall not be deemed “soliciting
material” and shall not be deemed “filed” with the SEC.
  Item12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
  The
information required by this section is contained in the section entitled
“Security Ownership of Certain Beneficial Owners and Management” in the Proxy
Statement and is incorporated herein by reference.
  The
equity compensation plan table is contained in Item 5 of Part II of this
Form 10-K and is incorporated into this Item 12 of Part III by
reference.
  Item13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
  The
information required by this section is contained in the sections titled
“Certain Relationships and Related Party Transactions” and “Board Meetings and
Committees” in the Proxy Statement and is incorporated herein by
reference.
  Item14.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
  The
information required by this section is contained in the section entitled
“Principal Accounting Fees and Services” in the Proxy Statement and is
incorporated herein by reference.
 
  42
 Table of Contents
 PART
IV
  Item15.
                EXHIBITS
      AND FINANCIAL STATEMENT
SCHEDULES
  (a)
                The
      following documents are filed as part of this
  report:
  1.
                Financial
      Statements.
  See Index
to Consolidated Financial Statements in part II, Item 8.
  2.
                Exhibits
  The
exhibits listed in the index to exhibits immediately following the signature
pages are filed or incorporated by reference as a part of this
report.
  (b)
                Exhibits.
  See
Item 15(a)(3).
   43
 Table of Contents
 SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) 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
      CORPORATIONBy:
                      /s/ DOUGLAS
      R. YOUNGDOUGLAS
      R. YOUNGChief
      Financial Officer (Acting)
                        (Principal
      Financial Officer)Date:
      May 11, 1009
  POWER
OF ATTORNEY
  KNOW ALL
PERSONS BY THESE PRESENTS, that each of the undersigned hereby constitutes and
appoints Douglas R. Young, as his or her true and lawful attorney-in-fact and
agent, each with full power of substitution and resubstitution, for him or her
and on his or her behalf to sign, execute and file this Form 10-K and any or all
amendments (including, without limitation, post-effective amendments) to this
Form 10-K, and to file the same, with all exhibits thereto and any and all
documents required to be filed with respect therewith, with the Securities and
Exchange Commission or any regulatory authority, granting unto such
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises in order to effectuate the same as fully to all intents
and purposes as he or she might or could do if personally present, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or his or
her substitute or substitutes, may lawfully do or cause to be done.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
  Name
              
              Title
              
              Date/S/ DOUGLAS R.YOUNG
                Douglas
      R. Young
              
              President, Chief Executive
      Officer and Director (Principal Executive Officer)
              
              May
      11, 2009/S/ DOUGLAS R. YOUNG
                Douglas
      R. Young
              
              Chief Financial
      Officer(Acting) (Principal Financial Officer and Principal
      Accounting Officer)
              
              May
      11, 2009/S/ SYED ZAIDI
                Syed
      Zaidi
              
              Chief
      Operating Office and Director
              
              May
      11, 2009
  
 44
 Table of Contents
 EXHIBITINDEX
  The
following Exhibits are filed as part of, or incorporated by reference into, this
Report:
  Number
              
              Description3.1(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.
  45
 Table of Contents
  Number
                
                Description10.11(6)
                
                Patent
      Purchase Agreement dated April 6, 2005 by and between the Company and
      Faust Communications, LLC.10.12(7)
                
                Settlement
      Agreement and Release dated May 31, 2005 between the Company and Prakash
      Agarwal.10.13(8)
                
                Patent
      License Agreement dated September 1, 2005 between the Company and Sony
      Corporation.10.14(9)
                
                Securities
      Purchase Agreement dated December 13, 2005 by and between the Company and
      named Private Investors.10.15(10)
                
                Form
      of Retention Bonus Agreement, dated as of January 13,
  2006.10.16(11)
                
                Employment
      Agreement dated May 1, 2006 between NeoMagic Corporation and Douglas R.
      Young.10.17(11)
                
                Employment
      Agreement dated May 1, 2006 between NeoMagic Corporation and Scott
      Sullinger.10.18(19)
                
                2006
      Employee Stock Purchase Plan, as amended July 12, 2007.10.19(12)
                
                Form
      of Bonus Agreement.10.20(12)
                
                Patent
      Sale Agreement dated June 22, 2006 by and between NeoMagic Corporation and
      Samsung Electronics Co. Ltd.10.21(13)
                
                Form
      of Subscription Agreement, dated as of November 30, 2006, between the
      Company and the investor signatories thereto.10.22(19)
                
                Employment
      Agreement dated June 7, 2007 between NeoMagic Corporation and Steven P.
      Berry.10.23(17)
                
                Description
      of oral consulting agreement with Steven P. Berry.10.24(18)
                
                Description
      of oral bonus agreement.10.25(19)
                
                Employment
      Agreement dated December 5, 2007 between NeoMagic Corporation and Syed
      Zaidi.10.26(20)
                
                Employment
      Agreement dated December 5, 2007 between NeoMagic Corporation and Deepraj
      Puar.10.27(21)
                
                Patent
      Purchase Agreement with an effective date of January 17, 2008 by and
      between the Company, NeoMagic Israel Ltd. and Faust Communications
      Holdings, LLC.10.28(22)
                
                Employment
      Agreement dated June 11, 2008 between NeoMagic Corporation and Pierre-Yves
      Couteau.21.1
                
                NeoMagic
      Subsidiaries23.1
                
                Consent
      of Stonefield Josephson, Inc., Independent Registered Public Accounting
      Firm31.1
                
                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.
  
 46
 Table of Contents
  (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.
   47