f10qfy08q3.htm

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Operations
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A	Risk Factors

Item 6.	Exhibits

Signatures

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31, 2008			June 30, 2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	15,180		$	119,039
Marketable investments		—			25,845
Accounts receivable, net		12,190			5,212
Unbilled receivables		4,525			—
Prepaid expenses and other current assets		18,090			2,472
Total current assets		49,985			152,568
Equipment, furniture and property, net		16,627			5,781
Goodwill		123,978			565
Intangible assets, net		35,482			3,369
Other assets		35,545			12,579
	$	261,617		$	174,862

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,064		$	503
Accrued liabilities		53,949			16,118
Short-term debt		21,261			—
Deferred revenue		4,553			2,633
Total current liabilities		83,827			19,254
Long-term liabilities		27,720			5,726
		111,547			24,980
Stockholders’ equity:
Common stock		44			43
Preferred stock		—			—
Additional paid-in capital		249,285			240,444
Accumulated other comprehensive income		14,891			435
Accumulated deficit		(114,150	)		(91,040	)
Total stockholders’ equity		150,070			149,882
	$	261,617		$	174,862

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(In thousands, except per share data)

	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2008			2007		2008			2007
Revenue:
Royalties	$	12,556		$	10,733	$	35,590		$	33,128
License and Contract revenue		14,767			8,342		40,336			26,502
Total revenue		27,323			19,075		75,926			59,630
Costs and expenses:
Costs of contract revenue		9,407			492		22,110			1,261
Research and development		9,315			8,159		27,821			24,185
Sales and marketing		6,056			5,345		17,796			15,314
General and administrative		6,559			4,978		21,437			13,867
Acquired in-process research and development		—			—		6,350			—
Restructuring		1,279			—		1,279			—
Total costs and expenses		32,616			18,974		96,793			54,627
Operating income (loss)		(5,293	)		101		(20,867	)		5,003
Other income (expense), net		(762	)		1,844		(1,488	)		4,817
Income (loss) before income taxes		(6,055	)		1,945		(22,355	)		9,820
Provision for (benefit from) income taxes		(1,798	)		708		1,018			3,672
Net income (loss)	$	(4,257	)	$	1,237	$	(23,373	)	$	6,148
Net income (loss) per basic share	$	(0.10	)	$	0.03	$	(0.53	)	$	0.14
Net income (loss) per diluted share	$	(0.10	)	$	0.03	$	(0.53	)	$	0.13
Shares used in computing net income (loss) per basic share		43,992			43,535		43,887			43,510
Shares used in computing net income (loss) per diluted share		43,992			46,384		43,887			45,729

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)

	Nine Months Ended March 31,
	2008			2007
Operating activities:
Net income (loss)	$	(23,373	)	$	6,148
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		2,692			1,596
Stock-based compensation		6,142			6,081
Acquired in-process research and development		6,350			—
Amortization of intangibles		6,527			1,020
Other non-cash charges		538			(781	)
Changes in operating assets and liabilities:
Accounts receivable		4,216			(1,379	)
Prepaid expenses and other current assets		1,138			930
Other assets		769			(2,483	)
Accounts payable		317			(1,057	)
Accrued compensation		54			1,406
Other current accrued liabilities		(2,791	)		2,183
Income tax payable		(3,533	)		1,528
Deferred revenue		(307	)		444
Long-term liabilities		664			2,083
Net cash provided by (used in) operating activities		(597	)		17,719
Investing activities:
Purchases of marketable investments		—			(57,190	)
Proceeds from sales of marketable investments		25,940			35,000
Capital expenditures		(2,053	)		(3,856	)
Acquisition of Chipidea Microelectronica, S.A., net of cash acquired		(120,944	)		—
Restricted cash		(27,163	)		—
Net cash used in investing activities		(124,220	)		(26,046	)
Financing activities:
Net proceeds from issuance of common stock		2,360			386
Proceeds from short-term debt, net		19,222			—
Repayments of short-term debt		(1,021	)		—
Borrowings under capital lease obligations		546			—
Repayments of capital lease obligations		(115	)		—
Net cash provided by financing activities		20,992			386
Effect of exchange rate on cash		(34	)		45
Net decrease in cash and cash equivalents		(103,859	)		(7,896	)
Cash and cash equivalents, beginning of period		119,039			101,481
Cash and cash equivalents, end of period		15,180			93,585
Supplemental disclosures of cash transaction:
Income taxes paid		3,580		$	2,165
Interest paid		1,384		$	—

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

Note 1. Description of Business and Basis of Presentation.

MIPS Technologies, Inc. is a leading supplier of intellectual property (IP) to the global semiconductor industry. Our technology solutions include the high-performance MIPS architecture and related embedded processor cores, which are broadly used in markets such as digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive. With the acquisition of Chipidea Microelectrónica S.A. (Chipidea) on August 27, 2007, we have become the leading supplier of IP to semiconductor companies for analog and mixed signal devices. On April 24, 2008, we completed the transformation of Chipidea Microelectronica SA to MIPSABG Chipidea, Lda. We have transformed the entity from a joint stock company to a limited liability partnership.

Following the acquisition of Chipidea we are organized in two business groups, the Processor Business Group (PBG) and the Analog Business Group (ABG). The PBG provides industry-standard processor architectures and cores for digital consumer and business applications. The ABG includes the Chipidea operation and provides analog and mixed-signal IP that produces cost-efficient System-on Chip (SOC) applications and turnkey solutions.

Basis of Presentation.

The condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. Certain information and footnote disclosures that would be in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. The balance sheet at June 30, 2007 has been derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2007, included in our 2007 Annual Report on Form 10-K.

The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire fiscal year. In our opinion, the condensed consolidated financial statements include all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for each interim period shown.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

Revenue Recognition.

Royalty Revenue

We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating our IP components, which is generally in the quarter following the sale of the licensee’s product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are identified.

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License and Contract Revenue

Processor Business Group

We derive revenue from license fees for the transfer of proven and reusable IP components or from engineering services. We enter into licensing agreements that provide licensees the right to incorporate our IP components in their products with terms and conditions that have historically varied by licensee. Revenue earned under contracts with our licensees is classified as either contract revenue or royalties. We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104), and for multiple deliverable arrangements we follow the guidance in EITF 00-21, Revenue Arrangements with Multiple Deliverables, to determine whether there is more than one unit of accounting. To the extent that the deliverables are separable into multiple units of accounting, we then allocate the total fee on such arrangements to the individual units of accounting using the residual method. We then recognize revenue for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting (following SAB No. 104).

We derive revenue from license fees for currently available technology or from engineering services for technology under development. Each of these types of contracts includes a nonexclusive license for the underlying IP. Fees for contracts for currently available technology include: license fees relating to our IP, including processor designs; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related IP and (b) maintenance and support. The license for our IP, which includes processor designs, has standalone value and can be used by the licensee without maintenance and support. Further, objective and reliable evidence of fair value exists for maintenance and support based on specified renewal rates. Accordingly, (a) license fees and (b) maintenance and support fees are each treated as separate units of accounting. Total upfront fees are allocated to the license of processor designs and related IP and maintenance and support using the residual method. Designs and related IP are initially delivered followed by maintenance and support. Objective and reliable evidence of the fair value exists for maintenance and support. However, no such evidence of fair value exists for processor designs and related IP. Consistent with the residual method, the amount of consideration allocated to processor designs and related IP equals the total arrangement consideration less the fair value of maintenance and support, which is based on specified renewal rates. Following the guidance in SAB No. 104, fees for or allocated to licenses to currently available technology are recorded as revenue upon the execution of the license agreement when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectibility is reasonably assured. We assess the credit worthiness of each customer when a transaction under the agreement occurs. If collectibility is not considered reasonably assured, revenue is recognized when the fee is collected. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP.

Contracts relating to technology under development also can involve delivery of a license to IP, including processor designs. However, in these arrangements we undertake best-efforts engineering services intended to further the development of certain technology that has yet to be developed into a final processor design. Rather than paying an upfront fee to license completed technology, customers in these arrangements pay us milestone fees as we perform the engineering services. If the development work results in completed technology in the form of a processor design and related IP, the customer is granted a license to such completed technology at no additional fee. These contracts typically include the purchase of first year maintenance and support commencing upon the completion of a processor design and related IP for an additional fee, which fee is equal to the renewal rate specified in the arrangement. The licensee is also obligated to pay us royalties following the sale by our licensee of products incorporating the licensed technology. We continue to own the IP that we develop and we retain the fees for engineering services regardless of whether the work performed results in a completed processor design. We develop IP with intent to license it to multiple customers. Our cost of development of such IP significantly exceeds the license revenue from a particular customer arrangement. Costs incurred with respect to internally developed technology and engineering services are included in research and development expenses, as they are not directly related to any particular licensee, license agreement, or license fees. Fees for engineering services in contracts for technology under development, which contracts are performed on a best efforts basis, are recognized as revenue as services are performed subsequent to the execution of the arrangement; however, we limit the amount of revenue recognized to the aggregate amount received or currently due pursuant to the milestone terms. As engineering activities are best-efforts and at-risk and because the customer must pay an additional fee for the first year of maintenance and support if the activities are successful, the maintenance and support is a contingent deliverable that is not accounted for upfront under contracts relating to technology under development.

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Analog Business Group

License agreements provide for the performance of engineering services involving design and development of customized analog and mixed signal IP from basic building blocks to complete subsystems, including the development of new IP or configuring existing IP to customer’s specifications. Fees are determined based on a number of factors including direct cost and the value of the underlying technology. We expect to earn gross margins for each agreement. We recognize revenue from these arrangements under Statement of Position (SOP) No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), for licensing of new IP development or configuration of existing IP to a customer’s specification. Revenue is recognized on a percentage of completion basis from the signing of the license and design agreement through silicon validation for new IP development and through the completion of all outstanding obligations for configuration of existing IP. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectibility is probable. The estimates of project costs are based on the IP specifications and prior experience of the same or similar IP development and are reviewed and updated regularly by management. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria under SAB 104 have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of contract revenue.

Maintenance and Support

Certain arrangements in the PBG and ABG also include maintenance and support obligation. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are renewable annually by the customer. Maintenance and support revenue is recognized at its fair value ratably over the period during which the obligation exists, typically 12 months. The fair value of any maintenance and support obligation is established based on the specified renewal rate for such support and maintenance. Maintenance and support revenue is included in contract revenue in the statement of operations.

Accounts Receivable. Accounts receivable includes amounts billed and currently due from customers, net of the allowance for doubtful accounts. The allowance for doubtful accounts was $2.1 million and $4,000 at March 31, 2008 and June 30, 2007.

Unbilled Receivables. Unbilled receivables are primarily related to revenues on contracts that have been recognized for accounting purposes under the percentage of completion method but have not yet been invoiced to customers. We invoice the customer upon completion of the contractual milestone.

Equipment, Furniture and Property. Equipment, furniture and property are stated at cost and depreciation, which includes the amortization of assets under capital leases, is computed using the straight-line method. Useful lives of generally three years are used for equipment and furniture, and useful lives of up to fifty years are used for buildings. Leasehold improvements are depreciated over the shorter of the remaining life of the improvement or the terms of the related leases.

Reclassifications. Certain balances in our fiscal 2007 consolidated financial statements have been reclassified to conform to the presentation in fiscal 2008.

Restructuring. We account for restructuring activities in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). Restructuring costs include severance costs, asset write-offs and facilities closure costs.

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Stock-Based Compensation. We account for stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004) Share-Based Payment (SFAS 123R). Compensation cost recognized during the three and nine-month periods ended March 31, 2008 and 2007, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 amortized on an accelerated basis over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R amortized on a straight-line basis over the options’ vesting period.

The following table shows total stock-based employee compensation expense (see Note 13, “Stock-Based Compensation” for types of stock-based employee arrangements) included in the condensed consolidated statement of operations for the three and nine-month periods ended March 31, 2008 and 2007 (in thousands):

	Three Months Ended March 31, 2008		Three Months Ended March 31, 2007		Nine Months Ended March 31, 2008		Nine Months Ended March 31, 2007
Costs and expenses:
Research and development	$	605	$	871	$	2,263	$	2,374
Sales and marketing		576		721		1,874		1,821
General and administrative		618		659		2,135		1,887
Total stock-based compensation expense	$	1,799	$	2,251	$	6,272	$	6,082

There was no capitalized stock-based employee compensation cost as of March 31, 2008 or 2007. There were no material recognized tax benefits during the third quarter of either fiscal 2008 or fiscal 2007.

For restricted common stock issued at discounted prices, we recognize compensation expense over the vesting period for the difference between the exercise or purchase price and the fair market value on the measurement date. Total compensation expense recognized in our financial statements for restricted stock awards was $22,000 and $84,000 for the three- and nine-month periods ended March 31, 2008 and $35,000 and $106,000 for the three-month and nine-month periods ended March 31, 2007.

Note 2. Computation of Earnings Per Share

Earnings per Share. We follow the provisions of SFAS No. 128, Earnings per Share (SFAS 128). SFAS 128 requires the presentation of basic and fully diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares that were outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding for any periods presented in these financial statements.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2008			2007			2008			2007
Numerator:
Net income (loss)	$	(4,257	)	$	1,237		$	(23,373	)	$	6,148
Denominator:
Weighted-average shares of common stock outstanding		44,017			43,595			43,914			43,570
Less: Weighted-average shares subject to repurchase		(25	)		(60	)		(27	)		(60	)
Shares used in computing net income (loss) per basic share		43,992			43,535			43,887			43,510
Net income (loss) per basic share	$	(0.10	)	$	0.03		$	(0.53	)	$	0.14
Shares used in computing net income (loss) per diluted share		43,992			46,384			43,887			45,729
Net income (loss) per diluted share	$	(0.10	)	$	0.03		$	(0.53	)	$	0.13
Potentially dilutive securities excluded from net income (loss) per diluted share because they are anti-dilutive		13,764			5,163			10,812			7,904

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Note 3. Comprehensive Income (Loss)

Total comprehensive income (loss) includes net income (loss) and other comprehensive income, which primarily comprises unrealized gains and losses from foreign currency adjustments. Total comprehensive income for the third quarter of fiscal 2008 was $3.6 million and total comprehensive loss for the first nine months of fiscal 2008 was $8.9 million compared to total comprehensive income of $1.3 million and $6.4 million for the comparable periods in the prior year.

Note 4. Acquisition

On August 27, 2007, we completed the acquisition of Chipidea Microelectronica S.A., a privately held supplier of analog and mixed signal intellectual property based in Lisbon, Portugal. We acquired all of the outstanding stock of Chipidea for $147 million in cash, of which $14.7 million is held in escrow to satisfy indemnification claims that may arise. Payment of $12.5 million of the total consideration, which is due to certain former shareholders of Chipidea, is contingent upon their continued employment with us for the two year period after our acquisition of Chipidea. Therefore, this consideration will be recorded as compensation expense over the period during which it is earned. In addition, we have agreed to issue up to 610,687 shares of common stock of MIPS (or, at MIPS’ election, cash in an amount equal to the value of such shares at the time such shares are required to be issued) in February 2009, if certain revenue targets are achieved for the two year period through December 31, 2008. The value of the shares, if issued, will be added to the purchase price of the acquisition and recorded as goodwill. Furthermore, we have agreed to pay to the former shareholders of Chipidea up to 1.2 million Euro in cash (approximately $1.9 million at March 31, 2008), if Chipidea receives a certain grant from the Portuguese government on or before June 30, 2008. In the event that the grant from the Portuguese government is received, we will record the payment as goodwill.

We acquired Chipidea to position ourselves as a leading independent supplier of analog and mixed signal IP for wireless, digital consumer and connectivity markets. The acquisition allows us to utilize our existing business model while growing the base of products we offer to the same set of customers. In addition, with the acquisition of Chipidea, we gain a strong team of analog and mixed signal designers for the development of commercial analog and mixed signal IP.

Preliminary Purchase Price Allocation. The transaction was accounted for as a purchase in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141); therefore, Chipidea’s tangible assets and identifiable intangible assets have been valued based on their estimated fair value on the acquisition date as set forth below. The estimates and assumptions that we made are subject to change upon the finalization of the valuation of certain liabilities, intangible assets, property, and estimated useful lives of certain intangible assets. The preliminary purchase price of $137.2 million includes the cash paid of $147 million and the acquisition costs of $2.7 million less the contingent payment to employees of $12.5 million, and was allocated as follows (in thousands):

Cash and Investments	$	1,566
Accounts receivable		14,124
Fixed Assets		9,841
Other current assets		1,401
Intangible assets		33,760
In-process research and development		6,350
Goodwill		106,499
Other long term assets		8,303
Short term debt		(968	)
Accounts payable and other current liabilities		(27,991	)
Deferred revenue		(2,240	)
Deferred taxes		(12,033	)
Long term liabilities		(1,402	)
Total purchase price	$	137,210

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The above purchase price allocation reflects adjustments recorded during the second and third quarters of fiscal 2008 based upon the valuation as of the date of acquisition of accounts receivables, accrued liabilities, deferred taxes and long-term liabilities and the determination of acquisition. As a result of these adjustments, goodwill decreased by $0.7 million, accounts receivable decreased by $1.3 million, intangible assets increased by $3.3 million, in process research and development increased by $0.9 million, accrued liabilities decreased by $0.7 million, deferred taxes increased by $3.3 million, long-term liabilities decreased by $1.0 million and acquisition costs increased by $0.4 million.

Intangible Assets. In performing our purchase price allocation in order to determine the valuation of the purchased intangible assets, we considered, among other factors, our intention for future use of acquired assets, analyses of historical financial performance and estimates of the future performance of Chipidea’s products. The fair value of intangible assets was determined by using an income approach which was based on estimates and assumptions determined by management. The rates utilized to discount net cash flows to their present values were based on our weighted average cost of capital and ranged from 14% to 20%. These discount rates were determined after consideration of our rate of return on debt capital and equity and the weighted average return on invested capital.

The following table sets forth the components of intangible assets and related useful lives (in thousands):

	Fair Value		Useful life
Developed and core technology	$	19,110	5 to 15 years
Customer relationships and backlog		12,110	1 to 7 years
Other		2,540	3 to 5 years
Total intangible assets	$	33,760

Developed and core technology, which comprise products that have reached technological feasibility, includes products in most of Chipidea’s product lines. The amortization of developed and core technology assets is recorded as cost of contract revenue. Customer relationships and backlog represent the underlying relationships with Chipidea’s installed customer base and open customer purchase orders at the date of acquisition. The amortization of customer relationships and backlog is recorded as cost of contract revenue. The weighted average amortization period of the intangible assets is approximately 5.2 years.

Acquired In-Process Research and Development. We expensed acquired in-process research and development (IPR&D) upon acquisition as it represents incomplete Chipidea research and development projects that had not reached technological feasibility and had no alternative future use as of the date of our acquisition. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications including functions, features, and technical performance requirements. The value assigned to IPR&D was $6.4 million and determined based on an analysis of data concerning developmental products, their stage of development, the time and resources needed to complete them, target markets, their expected income and net cash flow generating ability and associated risks. In the first quarter of fiscal 2008 we recorded a charge of $5.4 million based on preliminary valuation analysis. In the second quarter of fiscal 2008 we finalized the purchase price allocation as of the date of acquisition and recorded an additional charge of $910,000.

The principal projects at acquisition date were extensions of existing technologies for several analog IP cores. We incurred post-acquisition cost of approximately $3.2 million during the first nine months of fiscal 2008 for these projects and estimate that an additional investment of approximately $300,000 in research and development will be required during the remainder of fiscal 2008 and 2009 to complete them.

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Goodwill. Goodwill of $106.5 million represented the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition allows us to utilize our existing business model while growing the base of products we offer to the same set of customers. In addition, with the acquisition of Chipidea, we gain a strong team of analog and mixed signal designers for the development of commercial analog and mixed signal IP. These factors significantly contributed to the determination of the purchase price and the recognition of goodwill. Goodwill is not being amortized but will be reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill has been assigned to the ABG and is not expected to be deductible for tax purposes. Additionally, goodwill is subject to foreign exchange translation adjustments as the functional currency of Chipidea is the Euro.

Deferred Revenue. In connection with the purchase price allocation, we have estimated the fair value of deferred revenue related to development and support obligations assumed from Chipidea in connection with the acquisition. The estimated fair value of the obligations was determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligations plus a normal profit margin. As a result, in allocating the purchase price, we recorded an adjustment to reduce the carrying value of Chipidea’s deferred revenue to $2.2 million, which represents our estimate of the fair value of the obligation assumed.

Contingent Consideration. In connection with the acquisition, Chipidea made certain representations and warranties to us, and Chipidea’s former shareholders agreed to indemnify us against damages which might arise from a breach of those representations and warranties. Under the terms of the acquisition, the former Chipidea shareholders set aside $14.7 million of cash consideration for payment of possible indemnification claims made by us. Accordingly, a liability for this contingent cash consideration has been recorded in accrued liabilities and this amount has been considered in the purchase price. Under the terms of the acquisition, this amount has been set aside in an escrow account and is recorded in prepaid and other current assets and is scheduled to be released on the one year anniversary of the acquisition date.

Deferred Compensation. Payment of approximately $12.5 million to certain shareholders is contingent upon their continued employment with us. These payments are due 12 months and 24 months from the acquisition date. This consideration will be recorded as compensation expense as earned, and the liability will be recorded in accrued compensation. A restricted cash account has been established for the funding of this payment and is recorded in other assets.

Proforma financial information. The results of operations of Chipidea have been included in our consolidated financial statements subsequent to the date of acquisition. The financial information in the table below summarizes the combined results of operations of MIPS and Chipidea, on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented (in thousands, except per share data):

	Three months ended March 31,						Nine months ended March 31,
	2008			2007			2008			2007
Total pro forma revenues	$	27,323		$	27,008		$	82,808		$	80,869
Pro forma net income (loss)	$	(4,257	)	$	(5,048	)	$	(24,241	)	$	(6,961	)
Pro forma net income (loss) per share - basic and diluted	$	(0.10	)	$	(0.12	)	$	(0.55	)	$	(0.16	)
Reported net income (loss)	$	(4,257	)	$	1,237		$	(23,373	)	$	6,148
Reported net income (loss) per share - basic	$	(0.10	)	$	0.03		$	(0.53	)	$	0.14
Reported net income (loss) per share - diluted	$	(0.10	)	$	0.03		$	(0.53	)	$	0.13

The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the merger had taken place at the beginning of each of the periods presented. The pro forma financial information for fiscal 2008 includes merger related expenses of $126,000 recorded by Chipidea and a charge of $6.4 million for IPR&D. Chipidea’s functional currency is the Euro and its financial statements have been translated into dollars in each period presented.

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Note 5. Purchased Intangible Assets and Goodwill

Purchased Intangible Assets. All of our purchased intangible assets, except goodwill, are subject to amortization. Purchased intangible assets subject to amortization consisted of the following as of March 31, 2008 and June 30, 2007 (in thousands):

	March 31, 2008							June 30, 2007
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Developed and core technology	$	28,192		(6,758	)		21,434	$	6,062	$	(3,645	)	$	2,417
Customer relationships and backlog		15,334		(3,907	)		11,427		1,310		(400	)		910
Other		3,052		(431	)		2,621		110		(68	)		42
Purchased intangible assets	$	46,578		(11,096)			35,482	$	7,482	$	(4,113	)	$	3,369

The estimated future amortization expense of purchased intangible assets as of March 31, 2008 is approximately $2.9 million, $8.1 million, $7.3 million, $6.5 million and $5.7 million for the remaining three months of fiscal 2008 and for fiscal years 2009, 2010, 2011 and 2012 respectively, and approximately $5.0 million for years following fiscal 2012. The future amortization expense will be subject to foreign currency fluctuations as the Chipidea intangible assets are recorded in Euro. Amortization expense for purchased intangible assets was $6.5 million for the first nine months of fiscal 2008 and $873,000 for the first nine months of fiscal 2007.

The balance at March 31, 2008, included $19.7 million, $10.7 million, and $2.6 million of developed and core technology, customer relationships and backlog, and other intangibles, respectively, from the acquisition of Chipidea, with estimated useful lives of 5 to 15 years, 1 to 7 years, and 3 to 5 years, respectively.

Goodwill.

Goodwill as allocated to our segments as of March 31, 2008, consisted of the following (in thousands):

	Processor Business Group		Analog Business Group		Total
Balance at June 30, 2007	$	565		—	$	565
Additions (Chipidea)		—		106,499		106,499
Currency translation adjustment		—		16,914		16,914
Balance at March 31, 2008	$	565	$	123,413	$	123,978

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Note 6. Debt

The components of short-term debt are as follows (in thousands):

	March 31, 2008
Credit agreement		19,000
Bank lines of credit		2,134
Other		127
	$	21,261

We had no short-term debt outstanding at June 30, 2007.

Revolving Credit Agreement. On August 24, 2007, we entered into a $35 million Revolving Credit Agreement (Credit Agreement) with a syndicate of several banks and other financial institutions, and Jefferies Finance, LLC, as the administrative agent. Funds available under the Credit Agreement were used to fund the acquisition of Chipidea, as well as for general corporate and working capital purposes. In connection with the Credit Agreement, we incurred $1.6 million of underwriting fees, expenses and administration fees. We accounted for these fees as deferred loan origination fees and they will be amortized over the estimated life of the Credit Agreement and recorded as other expense.

On February 22, 2008 we amended certain terms and definitions of the Credit Agreement (Amended Credit Agreement) in order to update certain covenant requirements. The amendment provided for, among other things, revisions to certain covenants, increased interest rates, a reduction in the revolving commitment amount to $20 million (with additional $1.0 million reductions to occur each month beginning on March 31, 2008) and certain limitations on the use of loan proceeds. The remaining principal balance is due in full on August 22, 2008. In connection with the Amended Credit Agreement we incurred $200,000 of amendment fees. We accounted for these fees as deferred loan origination fees and they will be amortized over the estimated life of the Amended Credit Agreement and recorded as other expense.

On March 31, 2008, borrowings of $19 million were outstanding under the Amended Credit Agreement. Borrowings under the Amended Credit Agreement bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the United States prime rate and (2) the federal funds rate plus 0.5% or (b) a LIBOR rate, for a term period of one, two, three or six months, determined by reference to the costs of funds for deposits for the interest period relevant to such borrowing, adjusted for certain additional costs. We can elect to convert an existing interest calculation method at our discretion. The applicable margin for borrowings under the Amended Credit Agreement is 3.00% with respect to base rate borrowings and 4.00% with respect to LIBOR borrowings. As of March 31, 2008, the base rate was 5.25% and the LIBOR rate was 2.63%. We elected the LIBOR method for determining the interest rate for the outstanding $19 million. Therefore, the interest rate on our borrowings as of March 31, 2008 was 6.63%. Interest is payable on a monthly basis.

We are required to pay a commitment fee to the lenders with respect to any unutilized commitments under the Amended Credit Agreement. The commitment fee on the Amended Credit Agreement is 0.375% per annum and is due quarterly. We may voluntarily reduce the amount committed under the Amended Credit Agreement on a permanent basis. Principal amounts outstanding under the Amended Credit Agreement are due and payable in full on August 22, 2008.

The Amended Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default, including the requirement that we maintain, and report on a quarterly basis, for the trailing twelve months, a leverage ratio (as defined in the Amended Credit Agreement) of no greater than 3.5 to 1.0. All obligations under the Amended Credit Agreement, and the guarantees of those obligations, are secured by substantially all our assets, subject to certain exceptions. Our report to the lenders for the quarter ended March 31, 2008 is not yet due, but we believe we are in compliance with all covenants relating to the Amended Credit Agreement as of that date.

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Bank Lines of Credit. We have bank line of credit agreements with several Portuguese banks with a total aggregate available credit of approximately $2.6 million as of March 31, 2008. The interest rates on these agreements range from 5.7% to 7.1% and the agreements have expiration dates ranging from April 15, 2008 to June 28, 2008, with automatic renewal provisions for additional 90-day or 6-month periods. As of March 31, 2008, we have outstanding borrowings of $2.1 million and available credit of $508,000 under these agreements.

Other. We have a non-interest bearing loan with a Portuguese governmental agency. The short-term portion of this loan is approximately $124,000 at March 31, 2008. The long-term portion of this loan is approximately $140,000 at March 31, 2008 and is classified under long-term liabilities on the balance sheet.

As of March 31, 2008, we have entered into letters of credit for approximately $2.8 million with various financial institutions in Portugal, Belgium, France and Norway in association with certain building leases and government grants.

Note 7. Restructuring

In January 2008 we announced plans to reduce operating costs in our processor business group by terminating the employment of certain employees in our United States locations and by closing our research and development center in the United Kingdom. In total, 28 employees were terminated during the third quarter of fiscal 2008, resulting in approximately $900,000 of severance and benefits costs recorded as restructuring expense. All of the impacted employees were terminated by March 31, 2008. In addition, asset disposal and transfer costs of approximately $250,000 and facilities costs of approximately $100,000 were recorded as restructuring expense in the third quarter of fiscal 2008 related to contract cancellation costs and other closure costs from the United Kingdom research and development center.

We recorded the restructuring activities in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). The total charge to restructuring expense in the third quarter of fiscal 2008 was approximately $1.3 million. All costs were paid as of March 31, 2008, except for approximately $80,000 related to facilities closure costs which was accrued as of March 31, 2008 and is recorded on our consolidated balance sheet. We expect to incur additional expense of $200,000 in the fourth quarter of 2008 as we exit our United Kingdom facilities. This restructuring action will be fully implemented by December 2008.

Note 8. Other Income (Expense), Net

The components of other income (expense), net are as follows (in thousands):

	Three months ended March 31,						Nine months ended March 31,
	2008			2007			2008			2007
Interest income	$	89		$	1,866		$	1,266		$	4,994
Interest expense		(585	)		(1	)		(1,417	)		(1	)
Other		(266	)		(21	)		(1,337	)		(176	)
Total other income (expense), net	$	(762	)	$	1,844		$	(1,488	)	$	4,817

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Note 9. Equipment, Furniture and Property

The components of equipment, furniture and property are as follows (in thousands):

	March 31, 2008			June 30, 2007
Equipment	$	17,237		$	15,473
Land and buildings		8,692			—
Furniture and fixtures		4,635			2,678
		30,564			18,151
Accumulated depreciation and amortization		(13,937	)		(12,370	)
Equipment, furniture and property, net	$	16,627		$	5,781

Note 10. Prepaid Expenses and Other Current and Long-Term Assets

The components of prepaid expenses and other current assets are as follows (in thousands):

	March 31, 2008		June 30, 2007
Short-term restricted cash	$	14,955	$	—
Other prepaid expenses and other assets		3,135		2,472
	$	18,090	$	2,472

The components of other long-term assets are as follows (in thousands):

	March 31, 2008		June 30, 2007
Long-term restricted cash	$	15,855	$	264
Investments in other companies		4,436		4,463
Long-term computer aided design licenses		12,566		4,474
Cash surrender value of insurance contracts tied to our deferred compensation plan		2,108		2,310
Other long-term assets		580		1,068
	$	35,545	$	12,579

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Note 11. Accrued and Long-Term Liabilities

The components of accrued liabilities are as follows (in thousands):

	March 31, 2008		June 30, 2007
Accrued compensation and employee-related expenses	$	13,311	$	6,848
Income taxes payable		594		2,195
Payable to Chipidea shareholders		14,955		—
Capital lease obligations		8,083		—
Other accrued liabilities		17,006		7,075
	$	53,949	$	16,118

The components of long-term liabilities are as follows (in thousands):

	March 31, 2008		June 30, 2007
Deferred compensation	$	2,619	$	2,298
Long-term deferred tax liability		14,052		—
Long-term income tax liability		2,548		—
Long-term accounts payable		5,894		2,363
Other long-term liabilities		2,607		1,065
	$	27,720	$	5,726

Note 12. Commitments and Contingencies

Purchase Commitments with Suppliers

We have outstanding purchase orders for ongoing operations of approximately $12.1 million as of March 31, 2008. Payments of these obligations are subject to the provision of services or products.

Litigation

A derivative action entitled In re MIPS Technologies, Inc. Derivative Litigation, Case No. C-06-06699-RMW, which was filed on October 27, 2006, is pending in the United States District Court, Northern District of California, against certain current and former MIPS officers and directors and MIPS as a nominal defendant. The complaint in the action alleges that the individual defendants breached their fiduciary duties and violated California and federal securities laws as a result of, among other things, purported backdating of stock option grants, insider trading and the dissemination of false financial statements. Plaintiff seeks to recover purportedly on behalf of MIPS, unspecified monetary damages, corporate governance changes, equitable and injunctive relief, and fees and costs. The court granted MIPS' motion to dismiss the consolidated complaint and granted plaintiff leave to file an amended complaint. Plaintiff subsequently filed an amended complaint and MIPS has filed another motion to dismiss. It is not known when or on what basis the action will be resolved.

From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.

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Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could have a material adverse effect on us.

Note 13. Stock-Based Compensation

Activity under our Stock Option Plans for the nine months ended March 31, 2008 is summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
								(in thousands)
Outstanding at July 1, 2007		13,830,478		$	7.39
Options granted		2,773,463		$	6.55
Options exercised		(434,194	)	$	5.50
Options cancelled		(1,110,364	)	$	8.24
Outstanding at March 31, 2008		15,059,383		$	7.24		4.35	$	1,847
Exercisable at March 31, 2008		11,536,680		$	7.47		3.87	$	1,826

Aggregate intrinsic value represents the value of our closing stock price on the last trading day of the period in excess of the exercise price multiplied by the number of options outstanding or exercisable. The intrinsic value of options exercised represents the value of our closing stock price on the exercise date in excess of the exercise price multiplied by the number of options exercised. The total intrinsic value of options exercised for the nine months ended March 31, 2008 and 2007 was $1.1million and $200,000.

Nonvested share activity under our Stock Options Plans for the nine months ended March 31, 2008 is summarized as follows:

	Non-vested Number of Shares			Weighted Average Grant-Date Fair Value
Nonvested balance at July 1, 2007		60,000		$	4.72
Vested		(30,000	)	$	4.72
Cancelled		(5,000	)	$	4.52
Nonvested balance at March 31, 2008		25,000		$	4.76

As of March 31, 2008, $41,000 of total unrecognized compensation costs related to nonvested awards is expected to be recognized over a weighted average period of 0.41 years. The fair value of shares vested during the first nine months of fiscal 2008 was $235,000.

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Grant Date Fair Values. The weighted average fair value has been estimated at the date of grant using a Black-Scholes option-pricing model. The following are significant weighted average assumptions used for estimating the fair value of the activity under our stock option plans:

	Employee Stock Options						Employee Stock Purchase Plan
	Nine Months Ended March 31,						Nine Months Ended March 31,
	2008			2007			2008			2007
Expected life (in years)		4.20			4.20			0.73			—
Risk-free interest rate		3.66	%		4.83	%		4.07	%		—
Expected volatility		.51			.63			.36			—
Dividend yield		0.00	%		0.00	%		0.00	%		—
Grant date fair value	$	2.93		$	3.68		$	2.26		$	—

There were no shares granted under our stock purchase plan during the first nine months of fiscal 2008. Our current purchase period began on August 6, 2007 and will end on April 30, 2008. There were no employee stock purchases in fiscal 2007.

Note 14. Income Taxes

We recorded an income tax benefit of $1.8 million for the three-month period ended March 31, 2008 and a provision of $0.7 million for the comparable period in fiscal 2007. For the nine-month period ended March 31, 2008, we have recorded an income tax provision of $1.0 million and a tax provision of $3.7 million for the comparable period in fiscal 2007. At the third quarter, we have revised our annual forecast related to the Analog Business Group which has resulted in a true-up of the effective rate in the quarter by recognizing a current period tax benefit in Portugal. For the Processor Business Group, we continued to recognize a valuation allowance against the deferred tax assets in U.S. as we believe that it is more likely than not that the deferred tax assets will not be recognized and expire unutilized.

Our estimated annual income tax before discrete items for fiscal 2008 primarily consists of U.S. state minimum taxes and foreign taxes on income earned in certain foreign jurisdictions and withholding taxes. The actual tax provision for the nine-month period ended March 31, 2008 differs from the estimated annual tax due to differentials between US and foreign country tax rates, inclusion in US income of certain foreign subsidiary income, write-off of in process research and development from the Chipidea acquisition, foreign withholding taxes, foreign tax credits generated, a change in estimate related to tax reserves, increase in the valuation allowance in the US and discrete items recorded during the period. The annual effective tax rate of 38% for fiscal 2007 for the nine-month period ended March 31, 2007 primarily consisted of US federal and state taxes and foreign taxes on income earned in certain foreign jurisdictions and withholding taxes, offset in part by the availability of certain foreign tax credits and general business tax credits.

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 109, Accounting for Income Taxes (SFAS 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 de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006.

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We adopted the provisions of FIN 48 on July 1, 2007. The cumulative effect of adopting FIN 48 on July 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of accumulated deficit on the adoption date. As a result of the implementation of FIN 48, we recognized a decrease of approximately $264,000 in the liability for unrecognized tax benefits related to tax positions taken in prior periods, which resulted in a decrease of $264,000 in accumulated deficit. The total amount of gross unrecognized tax benefits was $3.7 million as of July 1, 2007 (the date of adoption of FIN 48) and $4.3 million as of March 31, 2008. The increase in the gross unrecognized tax benefits from July 1, 2007 to March 31, 2008 was primarily related to amounts assumed in the Chipidea acquisition. Also, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $817,000 as of July 1, 2007 and $835,000 as of March 31, 2008.

We recognize interest and penalties related to uncertain tax positions as a component of provision for income taxes. Accrued interest and penalties relating to the income tax on the unrecognized tax benefits was approximately $150,000 as of July 1, 2007 and approximately $479,000 as of March 31, 2008, with approximately $78,000 being included as a component of provision for income taxes in the nine-month period ended March 31, 2008. The increase in interest and penalties from July 1, 2007 to March 31, 2008 was primarily related to amounts assumed in the Chipidea acquisition.

Although we file U.S. federal, U.S. state, and foreign tax returns, our major tax jurisdictions are the United States and Portugal. Our fiscal 2004 and subsequent tax years remain subject to examination by the IRS for U.S. federal tax purposes, and our calendar 2004 and subsequent tax years remain subject to examination by the appropriate governmental agencies for Portuguese tax purposes.

Note 15. Operating Segments and Geographic information

We evaluate our reportable segments in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). Our Chief Executive Officer has been identified as our Chief Operating Decision Maker (CODM). The CODM allocates resources to the segments based on their business prospects, competitive factors, net revenue and operating results.

Prior to fiscal year 2008, we determined that we operated in one reportable business group. In the first quarter of fiscal 2008, following the acquisition of Chipidea, we organized into two business groups, the Processor Business Group (PBG) and the Analog Business Group (ABG). These segments were determined based upon our internal organization and management structure and are the primary way in which the CODM is provided with financial information. The CODM evaluates segment performance based on net revenues and operating income, excluding certain items. These costs are certain corporate expenses such as general and administrative expenses, selling costs, the amortization of purchased intangible assets associated with the Chipidea acquisition, employee share-based compensation expense, and certain acquisition costs related to the purchase of Chipidea. Our costs, operating results and balance sheets are analyzed in the two reportable business groups. The results of each segment have been prepared using consistent accounting policies with those of MIPS as a whole. Segment information is presented based upon our management’s organizational structure as of March 31, 2008. Future changes to the internal financial structure may result in changes to the reportable segments disclosed.

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We are a leading provider of industry-standard microprocessor 32- and 64-bit architectures and cores and a leading supplier of analog and mixed-signal semiconductor intellectual property. The major segments we serve are as follows:

(i) Processor Business Group:

The PBG provides industry-standard processor architectures and cores for digital consumer and business applications. This group designs and licenses high performance 32- and 64-bit architectures and cores, which offer smaller dimensions and greater energy efficiency in embedded processors. Markets served by the PBG segment include digital set-top boxes, digital televisions, DVD recordable devices, broadband access devices, digital cameras, laser printers, portable media players, microcontrollers and network routers.

(ii) Analog Business Group:

The ABG includes the Chipidea operation and provides analog and mixed-signal IP that produces cost-efficient System-on-Chip (SoC) applications and turnkey solutions. The ABG IP portfolio covers all fundamental functions in the analog and mixed-signal electronic space, including data conversion, clock management, power management, radio connectivity, physical connectivity, and voice audio and video processing. Market segments served by the ABG segment are wireless communications, power line communications, data communications, video, audio and voice signal processing, xDSL modems, set-top boxes, multimedia and digital consumer electronics.

The following tables show revenue, depreciation and amortization expense, segment operating loss and total assets and expenditures for long-lived assets of each segment (in thousands):

Three months ended March 31, 2008

	Processor Business Group		Analog Business Group		Corporate Unallocated Amounts (1)			Total
Revenue	$	18,110	$	9,213		—		$	27,323
Gross margin		17,665		2,555		(2,304	)		17,916
Depreciation expense		376		169		346			891
Amortization expense		1,262		—		2,528			3,790
Allocated operating expense		7,822		465		14,922			23,209
Segment contribution margin (loss)		9,843		2,090		(17,226	)		(5,293	)
Other income (expense), net		—		—		(762	)		(762	)
Loss before taxes		—		—		—			(6,055	)
Total assets		87,651		173,966		—			261,617
Total expenditures for additions to long-lived assets		—		1,587		—			1,587

(1)

The unallocated corporate items primarily include general and administrative expenses of $6.3 million, selling expenses of $3.7 million, restructuring costs of $1.3 million, certain acquisition costs related to the purchase of Chipidea of $1.7 million and employee share-based compensation expense of $1.8 million. Management does not allocate long-lived assets to the corporate function when evaluating the performance of the business groups.

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Nine months ended March 31, 2008

	Processor Business Group		Analog Business Group		Corporate Unallocated Amounts (2)			Total
Revenue	$	54,665	$	21,261		—		$	75,926
Gross margin		53,373		5,775		(5,332	)		53,816
Depreciation expense		1,306		390		996			2,692
Amortization expense		3,620		—		5,890			9,510
Allocated operating expense		24,079		1,450		49,154			74,683
Segment contribution margin (loss)		29,294		4,325		(54,486	)		(20,867	)
Other income (expense), net		—		—		(1,488	)		(1,488	)
Loss before taxes		—		—		—			(22,355	)
Total assets		87,650		173,967		—			261,617
Total expenditures for additions to long-lived assets		6,241		7,196		—			13,437

(2)

The unallocated corporate items primarily include general and administrative expenses of $20.5 million, selling expense of $10.4 million, restructuring costs of $1.3 million, IPR&D expense of $6.4 million, certain acquisition costs related to the purchase of Chipidea of $4.0 million and employee share-based compensation expense of $6.3 million. Management does not allocate long-lived assets to the corporate function when evaluating the performance of the business groups.

Note 16. Recent Accounting Pronouncements

In February 2007, the FASB SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB No.115 (SFAS 159). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning November 15, 2007, and interim periods within those fiscal years. We are currently assessing the potential effect, if any, of implementing this standard.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value and expands disclosure, about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently assessing the potential effect, if any, of implementing this standard.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141R). SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method ) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R also establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement will have no impact on our financial condition or results of operations unless we enter into a business combination after June 30, 2009.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We have not yet determined the impact, if any, that SFAS 160 will have on our financial statements.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this report. This discussion may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements within this Quarterly Report on Form 10-Q include our expectations for future levels of operating expenses as well as other expenses and are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may” and other similar expressions. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, including those described under “Risk Factors”, and other risks affecting our business. We undertake no obligation to update any forward-looking statements included in this discussion.

Overview

We are a leading supplier of intellectual property (IP) to the global semiconductor industry. Our technology solutions include the high-performance MIPS architecture and related embedded processor cores, which are broadly used in markets such as digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive. With the acquisition of Chipidea Microelectrónica S.A. (Chipidea) on August 27, 2007, we have become the leading supplier of IP to semiconductor companies for analog and mixed signal devices. Our customers include global semiconductor companies, and the annual unit volumes of products incorporating our technologies exceeded 350 million in fiscal year 2007.

Revenue in the third quarter of fiscal 2008 increased 43% over the comparable period in fiscal 2007 due to an increase in both royalties and license and contract revenue. The increase in royalties of $1.8 million was primarily due to a 15% increase in PBG royalties. Our licensees reported shipments of approximately 115 million units during the quarter, an increase of 31% over the comparable period in fiscal 2007.

License and contract revenue increased by 77% over the comparable period in fiscal 2007 due to the revenue contribution from ABG of $9.0 million for which there is no comparable fiscal 2007 contribution. The ABG contribution was offset in part by a 30% decline in PBG license revenue.

Our gross margin was $17.9 million compared to $18.6 million in the same quarter of the prior year. Our blended gross margin for the two business units combined was 66% for the quarter, which is a significant decrease from our gross margin percentage before the Chipidea acquisition. . This decrease in gross margin percentage reflects the increase in the proportion of license and contact revenue to total revenue. Revenue from ABG contracts is directly tied to development projects related to customer and project specific requirements, therefore such development costs are recorded as costs of revenue, whereas the majority of revenue from PBG contains a lower percentage of engineering services and a higher percentage of IP which leads to a higher average gross margin.

Total costs and operating expense in the third quarter of fiscal 2008 increased by $13.6 million or 72% over the comparable period in fiscal 2007. The increase was primarily due to the ABG costs and expenses of $7.1 million, not including certain corporate unallocated costs such as general and administrative expenses, selling expenses and the amortization of purchased intangible assets associated with the acquisition of Chipidea. In addition, operating expense included amortization of $1.7 million recorded as compensation expense associated with the Chipidea purchase agreement for the continued employment of certain Chipidea employees. In addition, in the third quarter of fiscal 2008 we recorded approximately $1.3 million in restructuring costs associated with the cost reducing actions implemented in January 2008. We expect our operating expenses for the remainder of fiscal 2008 to be higher than the comparable periods in fiscal 2007 as they now include Chipidea expenses.

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Net loss before income tax provision for the third quarter of fiscal 2008 was $6.1 million compared to net income before income tax of $1.9 million in the third quarter of fiscal 2007.

Our cash, cash equivalents and marketable securities remained flat at approximately $15.2 million at March 31, 2008 as we generated cash from operations during the quarter but also paid down certain debts during the quarter.

Results of Operations

Revenue. Total revenue consists of royalties and license and contract revenue. Royalties are based upon sales by licensees of products incorporating our technology. License and contract revenue consists of technology license fees generated from new and existing license agreements for developed technology and engineering service fees generated from contracts for technology under development or configuration of existing IP. Technology license fees vary based on, among other things, whether a particular technology is licensed for a single application or for multiple or unlimited applications during a specified period, and whether the license granted covers a particular design or a broader architecture.

Our revenue in the three-month and nine-month periods ended March 31, 2008 and March 31, 2007 was as follows (in thousands):

	Three Months Ended March 31,									Nine Months Ended March 31,
	2008			2007			Change in Percent			2008			2007			Change in Percent
Revenue
Royalties	$	12,556		$	10,733			17	%	$	35,590		$	33,128			7	%
Percentage of Total Revenue		46	%		56	%					47	%		56	%
License and Contract Revenue	$	14,767		$	8,342			77	%	$	40,336		$	26,502			52	%
Percentage of Total Revenue		54	%		44	%					53	%		44	%
Total Revenue	$	27,323		$	19,075			43	%	$	75,926		$	59,630			27	%

Royalties. The increase in royalties in the third quarter of fiscal 2008 from the comparable period in fiscal 2007 is primarily due to a 31% increase in unit volumes shipped by our royalty paying licensees offset in part by a decline in the average selling price of chips sold by our licensees, which leads to lower royalties as many of our royalty contracts are based on royalties as a percentage of licensee net revenue.

Royalties in the first nine months of fiscal 2008 increased from the comparable period in fiscal 2007. The increase is due to the addition of royalties from the ABG of $737,000 following the acquisition of Chipidea in August 2007 and an 18% increase in PBG unit shipments offset in part by a decline in the average selling price of chips sold by our licensees, which leads to lower royalties as many of our royalty contracts are based on royalties as a percentage of licensee net revenue.

License and Contract Revenue. The increase in license and contract revenue in both periods presented is due to the addition of contract revenues from the ABG following the Chipidea acquisition in August 2007. In the third quarter of fiscal 2008, contract revenues from the ABG were $9.0 million. The ABG entered into 26 new contracts in the third fiscal quarter of 2008. Revenue from ABG contracts is generally recognized on a percentage of completion basis over the period of contract performance. The ABG revenue increase was offset in part by a decrease in license revenue generated by the PBG of $2.5 million even though there were two more contracts signed in the quarter compared to the same period in the prior year. There were six new license agreements completed by the PBG in the third quarter of fiscal 2008 compared to four in the third quarter of fiscal 2007. License fees generated by the MIPS 24K core product family decreased $1.4 million, fees generated by the MIPS architecture family decreased $1.0 million and fees generated by the MIPS 4K core family decreased $1.1 million compared to the corresponding period in fiscal 2007. These decreases were partially offset by an increase in fees generated by the MIPS 34K and 74K core product families of $1.4 million.

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The increase in license and contract revenues in the first nine months of fiscal 2008 over the comparable period in fiscal 2007 is due to contract revenues from the ABG of $20.5 million. There were 77 new contracts completed by the ABG in the first nine months of 2008 subsequent to our acquisition of Chipidea, and 214 contracts generating ABG revenue as of March 31, 2008 This increase was offset in part by a decrease in license revenue generated by the PBG of $6.7 million. There were seventeen new license agreements completed by the PBG in the first nine months of fiscal 2008 compared to twenty-one in the comparable period of fiscal 2007. Fees generated by the MIPS 24K core product family decreased $5.6 million, fees generated by the MIPS architecture family decreased by $1.4 million and fees generated by the MIPS 4K core product family decreased by $1.1 million in the first nine months of fiscal 2008 over the comparable period in fiscal 2007, offset somewhat by an increase in fees from the MIPS 34K and 74K core product families of $3.0 million.

Cost and Expenses. Our cost and expenses for the three-month and nine-month periods ended March 31, 2008 and March 31, 2007 was as follows (in thousands):

	Three Months Ended March 31,							Nine Months Ended March 31,
	2008		2007		Change in Percent			2008		2007		Change in Percent
Cost and Expenses
Cost of Contract Revenue	$	9,407	$	492		1,812	%	$	22,110	$	1,261		1,653	%
Research and Development	$	9,315	$	8,159		14	%	$	27,821	$	24,185		15	%
Sales and Marketing	$	6,056	$	5,345		13	%	$	17,796	$	15,314		16	%
General and Administrative	$	6,559	$	4,978		32	%	$	21,437	$	13,867		55	%

Cost of Contract Revenue. Cost of contract revenue includes salaries, depreciation, and the amortization of intangible assets primarily associated with the ABG. The increase in cost of contract revenue in the third quarter of fiscal 2008 and the first nine months of fiscal 2008 over the comparable periods in fiscal 2007 is due to the additional cost of revenue associated with Chipidea’s analog processor products. The ABG’s revenue is generated by projects which include the development of technology that is directly related to the requirements of particular licensees and license agreements. As such, the cost of revenue for the ABG is substantially higher than is the case for the PBG.

Research and Development. Research and development expenses include salaries and contractor and consultant fees, as well as costs related to workstations, software, computer aided design tools, and stock-based compensation expense. The costs we incur with respect to internally developed technology and engineering services for the PBG are included in research and development expenses as they are incurred and are not directly related to any particular licensee, license agreement or license fee. Because of the nature of these expenses, the research and development expenses for the PBG are substantially higher than the research and development expenses of the ABG, where more of the expense incurred for the development of technology is directly related to the requirements of particular licensees and license agreements.

The increase in research and development expenses in the third quarter of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in compensation expense of $966,000 due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to the continued employment of these employees. The increase was offset in part by a decrease in stock-based compensation expense because of decreases in headcount due to the restructuring actions taken in the third quarter of fiscal 2008 as well as decreases in the valuation of new grants.

The increase in research and development expenses in the first nine months of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in salary expense of $1.3 million related to the annual merit increase in the processor business group, as well as the addition of $755,000 of salary expense related to the research and development employees in the ABG. Compensation expense further increased by $1.6 million primarily due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to the continued employment of these employees. This increase was somewhat offset by decreases in bonus earned under our PBG bonus plans as we did not meet plan targets in the PBG in the first nine months of fiscal 2008. In addition, depreciation expense increased by $432,000 due to an increase in our computer-aided design tool base and IT infrastructure to support our engineering efforts.

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Sales and Marketing. Sales and marketing expenses include salaries, commissions and costs associated with third party independent software development tools, direct marketing, other marketing efforts and stock-based compensation expense. Our sales and marketing efforts are directed at establishing and supporting our licensing relationships.

The increase in sales and marketing expense for the third quarter of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in salary expense of $703,000 related to the annual merit increase in the processor business group as well as the addition of $343,000 of expense related to the sales and marketing employees in the ABG. In addition, travel expense increased by $108,000 primarily due to the increase in our worldwide sales force from the ABG acquisition. These increases were somewhat offset by a decrease in consulting expense of $361,000 due to the termination of a contract with a sales agent in Taiwan and lower spending on third party marketing projects.

The increase in sales and marketing expense for first nine months of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in salary expense of $2.3 million related to the annual merit increase in the processor business group as well as the addition of $1.2 million of expense related to the sales and marketing employees in the ABG. In addition, travel expense increased by $494,000 primarily due to the increase in our worldwide sales force from the ABG acquisition and an increase in the cost of our annual sales conference held in the first quarter of the fiscal year. These increases were somewhat offset by a decrease in commission and bonus expense of $445,000 reflecting a decrease in commissions caused by lower revenues in the first nine months of fiscal 2008 and a decrease in bonus earned under our PBG bonus plans as we did not meet plan targets in the first nine months of fiscal 2008. Additionally there was a decrease of $794,000 in consulting expense primarily due to the termination of a contract with a sales agent in Taiwan and lower spending on third party marketing projects.

General and Administrative. General and administrative expenses comprise salaries, legal fees including those associated with the establishment and protection of our patent, trademark and other intellectual property rights which are integral to our business and expenses related to compliance with the reporting and other requirements of a publicly traded company including directors and officers liability insurance, in addition to stock-based compensation expense.

The increase in general and administrative expenses in the third quarter of fiscal 2008 over the comparable period in fiscal 2007 was primarily the result of an increase in salary and benefits expense of $634,000 primarily due to expenses for the additional administrative employees in the ABG, an increase in consulting expense of $389,000 as we used contractors to fill resource gaps, and an increase in compensation expense of $380,000 primarily due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to continued employment of these employees.. These increases were somewhat offset by decreases in bonus earned under our PBG bonus plans as we did not meet PBG bonus plan targets in the first nine months of fiscal 2008. In addition, travel expense increased by $210,000 primarily due to the increase in travel associated with the addition of the ABG. These expenses were somewhat offset by a decrease in outside services fees of $309,000 due to lower costs associated with the stock option investigation which was concluded in July 2007.

The increase in general and administrative expenses in the first nine months of fiscal 2008 over the comparable period in fiscal 2007 was the result of an increase in fees related to the integration of the ABG of $2.2 million, an increase in audit and tax fees of $1.1 million and an increase in salary and benefits expense of $1.3 million primarily due to expenses for the additional administrative employees in the ABG. Compensation expense increased by $836,000 primarily due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to continued employment of these employees. These increases were somewhat offset by decreases in bonus earned under our PBG bonus plans as we did not meet plan targets in the first nine months of fiscal 2008. In addition, travel expense increased by $558,000 primarily due to the increase in travel associated with the addition of the ABG and consulting expense increased by $507,000 as we used contractors to fill resource gaps. Also, there was an increase in expenses related to our board of directors of $398,000 related to stock compensation expense from annual renewal grants. These increases were somewhat offset by a decrease of $1.3 million in fees related to the stock option investigation which was concluded in July 2007.

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Restructuring. In January 2008 we announced plans to reduce operating costs in the PBG by terminating the employment of certain employees in our United States locations and by closing our research and development center in the United Kingdom. The total charge to restructuring expense recorded in the third fiscal quarter of 2008 was $1.3 million. The restructuring plans will be fully implemented by December 2008.

Acquired In-process Research and Development. In August 2007, we completed the acquisition of Chipidea, a privately held supplier of analog and mixed signal intellectual property, for cash consideration. The fair value of the in-process technology was determined by estimating the present value of the net cash flows we believed would result from the acquired technology. Because technological feasibility of certain of the acquired technology had not been established and no future alternative use for the in-process technology existed at the time of the acquisition, we recorded a charge of $6.4 million in the first nine months of fiscal 2008 for the acquired in-process research and development expense upon completion of the acquisition.

Other Income (Expense), Net. Other income (expense), net, for the third quarter of fiscal 2008 was an expense of $762,000 compared to income of $1.8 million for the comparable period in fiscal 2007. The decrease in other income was primarily due to a decrease in interest income of $1.8 million because of the decrease in our invested balances after the Chipidea acquisition, an increase in interest expense of $584,000 primarily due to interest incurred on our short-term debt, and amortization of $686,000 in loan origination fees related to our revolving credit agreement. These increases were somewhat offset by fluctuations in realized foreign exchange gains of $786,000.

Other income (expense), net, for the first nine months of fiscal 2008 was an expense of $1.5 million compared to income of $4.8 million for the comparable period in fiscal 2007. The decrease in other income was primarily due to a decrease in interest income of $3.7 million because of the decrease in our invested balances after the Chipidea acquisition, an increase in interest expense of $1.4 million primarily due to interest incurred on our short-term debt, and amortization of $1.5 million in loan origination fees related to our revolving credit agreement.

Income Taxes. We recorded an income tax benefit of $1.8 million for the three-month period ended March 31, 2008 and a provision of $0.7 million for the comparable period in fiscal 2007. For the nine-month period ended March 31, 2008, we have recorded an income tax provision of $1.0 million and a tax provision of $3.7 million for the comparable period in fiscal 2007. At the third quarter, we have revised our annual forecast related to the Analog Business Group which has resulted in a true-up of the effective rate in the quarter by recognizing a current period tax benefit in Portugal. For the Processor Business Group, we continued to recognize a valuation allowance against the deferred tax assets in U.S. as we believe that it is more likely than not that the deferred tax assets will not be recognized and expire unutilized.

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The total amount of gross unrecognized tax benefits was $3.7 million as of July 1, 2007 (the date of adoption of FIN 48) and $4.3 million as of March 31, 2008. The increase in the gross unrecognized tax benefits from July 1, 2007 to March 31, 2008 was primarily related to amounts assumed in the Chipidea acquisition. Also, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $817,000 as of July 1, 2007 and $835,000 as of March 31, 2008.

Financial Condition

As a result of the acquisition of Chipidea by payment of cash, our cash, cash equivalents and marketable securities decreased by approximately $127 million during the first quarter of fiscal 2008. We entered into a short-term revolving loan agreement of $35 million to help fund the acquisition and current operating requirements. The amount available under the revolving loan was reduced by an amendment in February 2008 to $19 million, all of which was outstanding on March 31, 2008. Payments of the revolving loan in the amount of $1 million are due monthly beginning in April 2008, and the remaining principal amounts outstanding under this revolving loan agreement are due and payable in full on August 22, 2008. At March 31, 2008, we had cash, cash equivalents and marketable investments of $15.2 million. Our principal requirements for cash are to fund working capital needs, and, to a lesser extent, capital expenditures for equipment purchases, licensing of computer aided design tools used in our development activities and acquisition of technologies and patents. The following table summarizes selected items (in thousands) from our statements of cash flows for the nine months ended March 31, 2008 and 2007. For complete statements of cash flows for those periods, see the financial statements in Item 1.

	Nine Months Ended March 31,
	2008			2007
Net cash provided by (used in) operating activities	$	(597	)	$	17,719
Net income (loss)		(23,373	)		6,148
Depreciation		2,692			1,596
Stock-based compensation		6,142			6,081
Acquired in-process research and development		6,350			—
Amortization of intangibles		6,527			1,020
Accounts receivable		4,216			(1,379	)
Other assets		769			(2,483	)
Other current accrued liabilities		(2,791	)		2,183
Income tax payable		(3,533	)		1,528
Long-term liabilities		664			2,083

Net cash used in investing activities	$	(124,220	)	$	(26,046	)
Net maturities (purchases) of short-term investments		25,940			(22,190	)
Capital expenditures		(2,053	)		(3,856	)
Acquisition of Chipidea Microelectronica S.A., net of cash acquired		(120,944	)		—
Restricted cash		(27,163	)		—

Net cash provided by financing activities	$	20,992		$	386
Proceeds from short-term debt, net		19,222			—
Repayments of short-term debt		(1,021	)
Net proceeds from issuance of common stock		2,360			386

Net decrease in cash and cash equivalents	$	(103,859	)	$	(7,896	)

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Net cash used in operating activities was $597,000 for the nine-month period ended March 31, 2008, primarily due to our net loss partially offset by non-cash charges including stock-based compensation under SFAS No. 123R, depreciation, amortization of intangible assets, and acquired in-process research and development costs. In addition, cash was used by a decrease in our income taxes payable and a decrease in accrued liabilities due to the payment of accrued invoices for acquisition and integration costs. These uses of cash were partially offset by cash provided by collections from existing Chipidea receivables acquired in connection with the Chipidea acquisition and a decrease in our long-term assets due to normal amortization.

For the nine-month period ended March 31, 2007, our operating activities provided net cash of $17.7 million primarily reflecting our net income and non-cash charges including stock-based compensation under SFAS No. 123R, depreciation expense and amortization of intangibles and deferred compensation. Reported cash flow was provided by increases in long-term liabilities due to a $2.1 million accrual for extended payment terms on a Computer Aided Design Time-Based License (“CAD TBL”), as well as an increase in accrued compensation primarily due to accruals under our bonus plans, and an increase in other current accrued liabilities due to higher accruals of legal and accounting fees and higher accruals for CAD TBLs and maintenance contracts. In addition, cash flow was provided by an increase in taxes payable due to our provision. The net cash provided by these sources was partially offset by an increase in other assets relating primarily to a $3.1 million purchase of a CAD TBL and an increase in accounts receivable due to new license agreements signed near the end of the quarter.

Net cash used in investing activities was $124.2 million for the nine month period ended March 31, 2008 which was primarily due to cash used for our acquisition of Chipidea and the establishment of restricted cash accounts for the amounts held in escrow related to the Chipidea acquisition. This use of cash was offset in part by $25.9 million of cash provided from the proceeds of the sale of our marketable investments. Net cash used in investing activities was $26.0 million for the nine months ended March 31, 2007 which was primarily due to purchases of equipment and computer-aided design tools used in our development activities as well as purchases of short-term investments.

Net cash provided by financing activities was $21.0 million for the nine months ended March 31, 2008 compared to $386,000 for the comparable period in the prior year. Net cash provided by financing activities during the nine month period ended March 31, 2008 was primarily attributable to the loan of $20 million under our revolving credit agreement and activity under our employee stock plans, offset in part by cash paid for loan origination fees and loan repayments. Net cash provided by financing activities during the nine month period ended March 31, 2007 was attributable primarily to purchases under our employee stock plans.

Our future liquidity and capital requirements could vary significantly from quarter to quarter, depending on numerous factors, including, among others:

·	the cost, timing and success of product development efforts;
·	the cost, timing and success of refinancing the existing Jefferies debt,

·	the level and timing of contract revenues and royalties;
·	the cost of maintaining and enforcing patent claims and other intellectual property rights and other litigation;

·	level and timing of restructuring activities; and

·	whether cash would be used to complete any acquisitions.

Principal amounts outstanding under the revolving loan agreement entered into in association with the Chipidea acquisition are due and payable in full on August 22, 2008. We are seeking to refinance this loan [or obtain additional financing] prior to the loan maturity date. Also, we may in the future be required to raise additional funds through public or private financing, strategic relationships or other arrangements. Additional equity financing may be dilutive to holders of our common stock, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed, including in connection with the refinancing of the revolving loan agreement, could have a material adverse effect on our business, results of operations and financial condition. Based on our expectations of our ability to refinance the loan, we believe that we have sufficient cash and borrowing capacity to meet our projected operating and capital requirements for the next twelve months.

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The revolving loan agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default, including the requirement that we maintain, and report on a quarterly basis, for the trailing twelve months, a leverage ratio (as defined in the Credit Agreement) of no greater than 3.5 to 1.0. All obligations under the agreement, and the guarantees of those obligations, are secured by substantially all our assets, subject to certain exceptions. Our report to the lenders for the quarter ended March 31, 2008 is not yet due, but we believe we were in compliance with all covenants relating to the agreement as of that date.

We are exposed to fluctuations in currency exchange rates because the functional currency of our international operating subsidiaries is the local currency. We experience foreign exchange translation exposure on our net assets and liabilities denominated in currencies other than the U.S. dollar. The related foreign currency translation gains and losses from translating these amounts into U. S. dollars are reflected in accumulated other comprehensive income under stockholder’s equity on our balance sheet. For example, in the first nine months of fiscal 2008, we recorded approximately $9.6 million in other comprehensive income, net of deferred tax liabilities, in the equity section of our balance sheet related to fluctuations in the Euro exchange rate, as Chipidea’s functional currency is the Euro.

Our contractual obligations as of March 31, 2008 were as follows:

	Payments due by period (in thousands)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations (1)	$	12,469	$	3,394	$	3,778	$	2,713	$	2,584
Capital lease obligations (2)		9,115		8,151		824		140		—
Purchase obligations (3)		12,116		9,063		3,053		—		—
Debt (4)		21,631		21,491		140		—		—
Other short-term liabilities reflected on our Balance Sheet (5)		21,274		21,274		—		—		—
Other long-term liabilities and obligations (6)		19,125		7,348		11,777		—		—
Total	$	95,730	$	70,721	$	19,572	$	2,853	$	2,584

(1)

We lease office facilities and equipment under noncancelable operating leases that expire through 2016. In connection with the lease for our Mountain View headquarters, we have entered into a letter of credit as a security deposit with a financial institution for $264,000, which is guaranteed by a time-based certificate of deposit. In addition, we have entered into letters of credit of approximately $2.8 million with various financial institutions in Portugal, Belgium, Norway, and France in association with certain building leases and government grants.

(2)	Commitments due under our capital leases for equipment and property.

(3)

Outstanding purchase orders for ongoing operations. Payments of these obligations are subject to the provision of services or products. Purchase obligations have increased by approximately $4.6 million since June 30, 2007 primarily due to purchases of computer aided design licenses and additional purchase orders from the ABG.

(4)

Debt includes $19 million due under a revolving credit agreement, $2.1 million due under various credit lines, $267,000 primarily due to a loan with a government agency in Portugal, and related future interest payments.

(5)

Short-term liabilities includes: $15.0 million related to an escrow account related to the Chipidea acquisition completed in August 2007, which will be settled twelve months from the acquisition date, $2.5 million related to a prepayment associated with the sale of a building, $1.6 million due to shareholders of a company acquired by Chipidea prior to August 2007, and $2.2 million in payables for computer aided design licenses not included in outstanding purchase orders.

(6)

Long-term liabilities and obligations include: $2.6 million due to employees under a deferred compensation plan, under which distributions are elected by the employees, and $14.7 million liabilities related to an escrow account for the consideration contingent due upon continued employment of certain employees related to the Chipidea acquisition, half of which will be settled 12 months from the acquisition date and half of which will be settled 24 months from the acquisition date, $726,000 due to shareholders of a company acquired by Chipidea prior to August 2007, and $1.1 million in payables for computer aided design licenses not included in outstanding purchase orders.

The table above does not include: (1) the potential cash earn-out payments of up to $1.0 million payable within 1 year related to the acquisition of FS2, which are contingent upon the achievement of certain minimum earnings thresholds and project milestone achievement; (2) the potential additional cash purchase payment of up to 1.2 million Euro payable within 1 year related to certain Portuguese government grants associated with the Chipidea purchase; and (3) the potential additional performance-based milestone payment of 610,687 shares of our common stock or a cash equivalent related to the Chipidea acquisition, due in February 2009. Also, as a result of the adoption of FIN 48 on July 1, 2007, we reclassified unrecognized tax benefits to long-term income taxes payable. As of March 31, 2008, we had $5,922,000 of income tax liabilities. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months. While these contingent payments are not fixed at present, they represent potential commitments.

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Critical Accounting Polices and Estimates

We prepare our financial statements in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We regularly evaluate our accounting estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results inevitably will differ from the estimates, and such differences may require material adjustments to our financial statements. We believe there have been no significant changes to the items we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our 2007 Form 10-K, except in the following policy:

Revenue Recognition.

Royalty Revenue

We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating our intellectual property components, which is generally in the quarter following the sale of the licensee’s product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are identified.

Contract Revenue

Processor Business Group

We derive revenue from license fees for the transfer of proven and reusable intellectual property components or from engineering services. We enter into licensing agreements that provide licensees the right to incorporate our intellectual property components in their products with terms and conditions that have historically varied by licensee. Revenue earned under contracts with our licensees is classified as either contract revenue or royalties. We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104), and for multiple deliverable arrangements we follow the guidance in EITF 00-21, Revenue Arrangements with Multiple Deliverables, to determine whether there is more than one unit of accounting. To the extent that the deliverables are separable into multiple units of accounting, we then allocate the total fee on such arrangements to the individual units of accounting using the residual method. We then recognize revenue for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting (principally following SAB No. 104).

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We derive revenue from license fees for currently available technology or from engineering services for technology under development. Each of these types of contracts includes a nonexclusive license for the underlying intellectual property. Fees for contracts for currently available technology include: license fees relating to our intellectual property, including processor designs; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related intellectual property and (b) maintenance and support. The license for our intellectual property, which includes processor designs, has standalone value and can be used by the licensee without maintenance and support. Further, objective and reliable evidence of fair value exists for maintenance and support based on specified renewal rates. Accordingly, (a) license fees and (b) maintenance and support fees are each treated as separate units of accounting. Total upfront fees are allocated to the license of processor designs and related intellectual property and maintenance and support using the residual method. Designs and related intellectual property are initially delivered followed by maintenance and support. Objective and reliable evidence of the fair value exists for maintenance and support. However, no such evidence of fair value exists for processor designs and related intellectual property. Consistent with the residual method, the amount of consideration allocated to processor designs and related intellectual property equals the total arrangement consideration less the fair value of maintenance and support, which is based on specified renewal rates. Following the guidance in SAB No. 104, fees for or allocated to licenses to currently available technology are recorded as revenue upon the execution of the license agreement when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectibility is reasonably assured. We assess the credit worthiness of each customer when a transaction under the agreement occurs. If collectibility is not considered reasonably assured, revenue is recognized when the fee is collected. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the intellectual property.

Contracts relating to technology under development also can involve delivery of a license to intellectual property, including processor designs. However, in these arrangements we undertake best-efforts engineering services intended to further the development of certain technology that has yet to be developed into a final processor design. Rather than paying an upfront fee to license completed technology, customers in these arrangements pay us milestone fees as we perform the engineering services. If the development work results in completed technology in the form of a processor design and related intellectual property, the customer is granted a license to such completed technology at no additional fee. These contracts typically include the purchase of first year maintenance and support commencing upon the completion of a processor design and related intellectual property for an additional fee, which fee is equal to the renewal rate specified in the arrangement. The licensee is also obligated to pay us royalties following the sale by our licensee of products incorporating the licensed technology. We continue to own the intellectual property that we develop and we retain the fees for engineering services regardless of whether the work performed results in a completed processor design. We develop intellectual property with intent to license it to multiple customers. Our cost of development of such intellectual property significantly exceeds the license revenue from a particular customer arrangement. Costs incurred with respect to internally developed technology and engineering services are included in research and development expenses, as they are not directly related to any particular licensee, license agreement, or license fees. Fees for engineering services in contracts for technology under development, which contracts are performed on a best efforts basis, are recognized as revenue as services are performed subsequent to the execution of the arrangement; however, we limit the amount of revenue recognized to the aggregate amount received or currently due pursuant to the milestone terms. As engineering activities are best-efforts and at-risk and because the customer must pay an additional fee for the first year of maintenance and support if the activities are successful, the maintenance and support is a contingent deliverable that is not accounted for upfront under contracts relating to technology under development.

Analog Business Group

License agreements provide for the performance of engineering services involving design and development of customized analog and mixed signal intellectual property from basic building blocks to complete subsystems, including the development of new intellectual property or configuring existing intellectual property to customer’s specifications. Fees are determined based on a number of factors including direct cost and the value of the underlying technology. We expect to earn gross margins for each agreement. We recognize revenue from these arrangements under Statement of Position (SOP) No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), for licensing of new IP development or configuration of existing IP to a customer’s specification. Revenue is recognized on a percentage of completion basis from the signing of the license and design agreement through silicon validation for new IP development and through the completion of all outstanding obligations for configuration of existing IP. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectibility is probable. The estimates of project costs are based on the IP specifications and prior experience of the same or similar IP development and are reviewed and updated regularly by management. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria under SAB 104 have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of contract revenue.

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Maintenance and Support

Certain arrangements in the Processor Business Group and Analog Business Group also include maintenance and support obligation. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are renewable annually by the customer. Maintenance and support revenue is recognized at its fair value ratably over the period during which the obligation exists, typically 12 months. The fair value of any maintenance and support obligation is established based on the specified renewal rate for such support and maintenance. Maintenance and support revenue is included in contract revenue in the Statement of operations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risk on investments of our excess cash. The primary objective of our investment activities is to preserve capital. To achieve this objective and minimize the exposure due to adverse shifts in interest rates, we invest in high quality short-term maturity commercial paper, municipal bonds, and money market funds operated by reputable financial institutions in the United States. Due to the nature of our investments, we believe that we do not have a material interest rate risk exposure.

In our Processor Business Group, we are exposed to fluctuations in currency exchange rates because a substantial portion of our revenue has been, and is expected to continue to be, derived from customers outside the United States. To date, substantially all of our revenue from international customers has been denominated in U.S. dollars. Because we cannot predict the amount of non-U.S. dollar denominated revenue earned by our licensees, we have not historically attempted to mitigate the effect that currency fluctuations may have on our revenue, and we do not presently intend to do so in the future.

In our Analog Business Group, we are exposed to fluctuations in currency exchange rates because a substantial portion of our revenue is denominated in U.S. dollars while our functional currency is the Euro. In order to reduce the effect of foreign currency fluctuations, we utilize foreign currency forward exchange contracts to hedge certain foreign currency transaction exposures.

We are also exposed to fluctuations in currency exchange rates because the functional currency of our international operating subsidiaries is the local currency. We experience foreign exchange translation exposure on our net assets and liabilities denominated in currencies other than the U.S. dollar. The related foreign currency translation gains and losses from translating these amounts into U. S. dollars are reflected in accumulated other comprehensive income under stockholder’s equity on our balance sheet. For example, Chipidea’s functional currency is the Euro and fluctuations in the Euro exchange rate will impact our earnings and our asset and liabilities. We have not hedged against these fluctuations. We also carry a restricted cash balance of 9.3 million Euro as of March 31, 2008 on our U.S. dollar balance sheet. This amount is remeasured each period and fluctuations are recorded in our income statement.

ITEM 4. CONTROLS AND PROCEDURES

Our chief executive officer and our chief financial officer have concluded, based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our chief executive officer and our chief financial officer, as of the end of the period covered by this report, that our disclosure controls and procedures (as such term is defined under Rule 12a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of March 31, 2008, because of the material weakness described in Part II, Item 9A, in our 2007 Annual Report on Form 10-K. In that section, we describe a material weakness in our internal control over financial reporting as a result of errors found during the preparation of our financial statements with regards to the process of accounting for income taxes. Specifically, controls relating to the oversight and review of the tax provision by qualified personnel experienced in the application of tax rules, regulations and related accounting, and timely consultation with experts were ineffective. We have an on-going process of analyzing and improving our internal controls, including those related to the material weakness identified by management and have largely developed and are implementing a plan to remediate the material weaknesses described above. With regard to the process of accounting for income taxes, our remediation plan includes: (a) consideration and implementation of additional review of tax provision and reconciliations by qualified personnel experienced in application of tax rules and regulations and accounting for income taxes; and (b) consultation with tax experts in a timely manner. Although we are continuing to implement this plan in order to address this material weakness, we cannot assure you that this material weakness will not cause us to determine that our internal control over financial reporting is not effective as of the end of our current fiscal year.

Other than the changes as part of the remediation plan discussed above, there were no changes in our internal control over the financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the third quarter of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A derivative action entitled In re MIPS Technologies, Inc. Derivative Litigation, Case No. C-06-06699-RMW, which was filed on October 27, 2006, is pending in the United States District Court, Northern District of California, against certain current and former MIPS officers and directors and MIPS as a nominal defendant. The complaint in the action alleges that the individual defendants breached their fiduciary duties and violated California and federal securities laws as a result of, among other things, purported backdating of stock option grants, insider trading and the dissemination of false financial statements. Plaintiff seeks to recover purportedly on behalf of MIPS, unspecified monetary damages, corporate governance changes, equitable and injunctive relief, and fees and costs. The court granted MIPS' motion to dismiss the consolidated complaint and granted plaintiff leave to file an amended complaint. Plaintiff has subsequently filed an complaint and MIPS has filed another motion to dismiss. It is not known when or on what basis the action will be resolved.

ITEM 1A. RISK FACTORS

Our success is subject to numerous risks and uncertainties, including those discussed below. These factors could hinder our growth, cause us to sustain losses or have other adverse effects on us, all of which could cause our stock price to decline.

During the first quarter of fiscal 2008, we completed the acquisition of Chipidea, and there are numerous risks associated with this acquisition. In August 2007, we completed the acquisition of Chipidea, a Portuguese company that supplies analog and mixed signal intellectual property for the digital consumer, wireless and connectivity markets. The purchase price for this acquisition was $147 million in cash paid at closing, with contingent obligations to issue up to 610,687 shares of common stock (or to pay the cash value of such shares) based on the performance of the Chipidea business and to pay an additional €1.2 million in cash if Chipidea receives a certain grant from the Portuguese government.

This is a substantially larger acquisition than any that we have previously completed and involves technology and products that are largely new to us. Many of the risks discussed below under “We may encounter difficulties with future acquisitions that could harm our business” may be enhanced as a result of the Chipidea acquisition. Among the many risks associated with the acquisition are the following:

·	the challenges associated with integrating and managing a large acquired business, which challenge will be enhanced by the geographical distance between our headquarters in California and the Chipidea headquarters in Portugal;

·	our dependence on the MIPS management team to manage the Chipidea business, and integrate it with our existing business;
·	the possible adverse impact to us if we were to lose key Chipidea personnel, such as Jose Franca, founder and CEO, whose ongoing employment with us could be important to our ability to continue to advance the Chipidea technology and to effectively market and sell its products;

·	diversion of our management team’s attention as we seek to capitalize on the opportunities presented by this acquisition may adversely affect our ability to operate our existing business.

We may not achieve the advantages that we envisioned when we decided to complete this acquisition. For example, supporting the licensing of analog and mixed signal IP is relatively more labor intensive than that of our microprocessor IP business, and we cannot be assured of our ability to achieve operating results from this business that correspond to those that we can achieve in our existing business. If we are not as successful as we anticipated with the Chipidea business, our future operating results and financial condition would be adversely affected.

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We used all of our cash to complete the acquisition of Chipidea. We used all of our available cash and short term investments to complete the acquisition of Chipidea, and in connection with the acquisition incurred debt under the Revolving Credit Agreement. This use of cash dramatically reduces our liquidity, and if we encounter difficulty in generating cash from the operation of our business we may be required to curtail our operations or take other acts that could adversely affect our ability to be successful over the longer term. In addition, we have not previously incurred debt for borrowed money. Loans under this facility are secured by virtually all of our assets, and the facility contains affirmative and negative covenants that impose restrictions on the operation of our business. We amended certain terms of the Revolving Credit Agreement in February 2008 including the payment schedule and a reduction in the size of the line. Payments in the amount of $1 million are required on a monthly basis beginning in April 2008 and the remaining principal balance is due in August 2008. We cannot be assured that we will be able to repay this debt on or before its due date. We will be required to make substantial interest payments for so long as this debt is outstanding,. We may be required to take on longer term financing to replace this facility, or sell equity securities in order to have cash to repay it and we cannot be assured of our ability to obtain such financing or our ability to sell equity securities. If we can not replace the debt facility, we may be required to curtail our operations or tak other acts that could adversely affect our ability to be successful over the longer term. Our incurrence of long term debt could adversely affect our operating results and financial condition and the sale of equity securities could be on terms that are dilutive to our existing stockholders. Further, the covenants contained in the credit facility, or in any future debt we incur to replace this facility, may prevent us from taking advantage of opportunities that are otherwise available to us. We may not be able to obtain favorable credit terms related to any debt that we may incur in the future.

Our quarterly financial results are subject to significant fluctuations that could adversely affect our stock price. Our quarterly financial results may vary significantly due to a number of factors. In addition, our revenue components are difficult to predict and may fluctuate significantly from period to period. Because our expenses are largely independent of our revenue in any particular period, it is difficult to accurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenue and a high percentage of our expenses are fixed in the short term. As a result, if our revenue is below expectations in any quarter, the adverse effect may be magnified by our inability to adjust spending in a timely manner to compensate for the revenue shortfall. Therefore, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be a good indication of our future performance. Our recent acquisition of Chipidea will increase the challenge that we face in planning and predicting our future operating results. It is possible that in some future periods our results of operations may be below the expectations of securities analysts and investors. In that event, the price of our common stock may fall.

Factors that could cause our revenue and operating results to vary from quarter to quarter include:

·	our ability to identify attractive licensing opportunities and then enter into new licensing agreements on terms that are acceptable to us;

·	our ability to successfully conclude licensing agreements of any significant value in a given quarter;
·	the financial terms and delivery schedules of our contractual arrangements with our licensees, which may provide for significant up-front payments, payments based on the achievement of certain milestones or extended payment terms;

·	the demand for products that incorporate our technology;
·	our ability to develop, introduce and market new intellectual property;

·	the establishment or loss of licensing relationships with semiconductor companies or digital consumer, wireless, connectivity and business product manufacturers;

·	the timing of new products and product enhancements by us and our competitors;

·	changes in development schedules, research and development expenditure levels and product support by us and semiconductor companies and digital consumer, wireless, connectivity and business product manufacturers; and

·	uncertain economic and market conditions.

The success of our business depends on maintaining and growing our contract revenue. Contract revenue consists of technology license fees paid for access to our developed technology and engineering service fees related to technology under development. Our ability to secure the licenses from which our contract revenues are derived depends on our customers, including semiconductor companies, digital consumer, wireless, connectivity and business product manufacturers, adopting our technology and using it in the products they sell. Our PBG contract revenue increased 28% in fiscal 2005, but declined 12% in fiscal 2006, increased by 42% in fiscal 2007 and declined by 25% during the first nine months of fiscal 2008 over the comparable period in fiscal 2007. We cannot predict whether we can maintain our current contract revenue levels or if contract revenue will grow. Our licensees are not obligated to license new or future generations of our products, so past contract revenue may not be indicative of the amount of such revenue in any future period. If we cannot maintain or grow our contract revenue or if our customers do not adopt our technology and obtain corresponding licenses, our results of operations will be adversely affected.

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Our ability to achieve design wins may be limited unless we are able to develop enhancements and new generations of our intellectual property. Our future success will depend, in part, on our ability to develop enhancements and new generations of our processors, cores or other intellectual property that satisfy the requirements of specific product applications and introduce these new technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, or if the characteristics of our intellectual property cores and related designs are not compatible with the requirements of specific product applications, our ability to achieve design wins may be limited. Our failure to achieve a significant number of design wins would adversely affect our business, results of operations and financial condition.

Technical innovations of the type critical to our success are inherently complex and involve several risks, including:

·	our ability to anticipate and timely respond to changes in the requirements of semiconductor companies, and original equipment manufacturers, or OEMs, of digital consumer, wireless, connectivity and business products;

·	our ability to anticipate and timely respond to changes in semiconductor manufacturing processes;
·	changing customer preferences in the digital consumer, wireless, connectivity and business products markets;

·	the emergence of new standards in the semiconductor industry and for digital consumer, wireless, connectivity and business products;
·	the significant investment in a potential product that is often required before commercial viability is determined; and

·	the introduction by our competitors of products embodying new technologies or features.

Our failure to adequately address these risks could render our existing intellectual property cores and related designs obsolete and adversely affect our business, results of operations and financial condition. In addition, we cannot assure you that we will have the financial and other resources necessary to develop intellectual property cores and related designs in the future, or that any enhancements or new generations of the technology that we develop will generate revenue sufficient to cover or in excess of the costs of development.

We depend on royalties from the sale of products incorporating our technology, and we have limited visibility as to the timing and amount of such sales. Our receipt of royalties from our licenses depends on our customers incorporating our technology into their products, their bringing these products to market, and the success of these products. In the case of our semiconductor customers, the amount of such sales is further dependent upon the sale of the products by their customers into which our customers’ products are incorporated. Thus, our ability to achieve design wins and enter into licensing agreements does not assure us of future revenue. Any royalties that we are eligible to receive are based on the sales of products incorporating the semiconductors or other products of our licensees, and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties. Factors that negatively affect our licensees and their customers could adversely affect our business. The success of our direct and indirect customers is subject to a number of factors, including:

·	the competition these companies face and the market acceptance of their products;

·	the engineering, marketing and management capabilities of these companies and technical challenges unrelated to our technology that they face in developing their products; and
·	their financial and other resources.

Because we do not control the business practices of our licensees and their customers, we have little influence on the degree to which our licensees promote our technology and do not set the prices at which products incorporating our technology are sold.

We rely on our customers to correctly report to us the number or dollar value of products incorporating our technology that they have sold, as these sales are the basis for the royalty payments that they make to us. We have the right under our licensing agreements to perform a royalty audit of the customer’s sales so that we can verify the accuracy of their reporting, and if we determine that there has been an over-reported or under-reported amount of royalty, we account for the results when they are identified. By way of an example, we determined in the second quarter of fiscal 2005, as a result of an audit, that one of our customers had inadvertently reported a higher level of royalty than had actually occurred, and we accrued for this event as an offset against revenue in the quarter.

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If we do not compete effectively in the market for embedded intellectual property cores and related designs, our business will be adversely affected. Competition in the market for embedded intellectual property and related designs is intense. Our products compete with those of other designers and developers of intellectual property cores, as well as those of semiconductor manufacturers whose product lines include digital, analog and/or mixed signal designs for embedded and non-embedded applications. In addition, we may face competition from the producers of unauthorized clones of our processor and other technology designs. The market for embedded processors in particular has recently faced downward pricing pressures on products. We cannot assure you that we will be able to compete successfully or that competitive pressure will not materially and adversely affect our business, results of operations and financial condition.

In order to be successful in marketing our products to semiconductor companies, we must differentiate our intellectual property cores and related designs from those available or under development by the internal design groups of these companies, including some of our current and prospective licensees. Many of these internal design groups have substantial engineering and design resources and are part of larger organizations with substantial financial and marketing resources. These internal design groups may develop products that compete with ours.

Some of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand recognition, larger customer bases as well as greater financial and marketing resources than we do. This may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development and promotion of their technologies and products.

We may incur restructuring charges in the future, which could harm our results of operations. In January 2008, we announced plans to reduce our workforce with the objective of reducing our operating expenses. These actions resulted in a restructuring charge in the third quarter of fiscal 2008 of $1.3 million, comprised of employee severance costs, facilities exit costs, and asset write-offs. These restructuring activities may not be sufficient to appropriately align our operating expenses with our revenue expectations. If we have not sufficiently reduced operating expenses or if revenues are below our expectations, we may be required to engage in additional restructuring activities, which could result in additional restructuring charges. These restructuring charges could harm our results of operations.

Our operations in foreign countries are subject to political and economic risks. With the acquisition of Chipidea we have now substantially expanded our operations outside the United States. In addition to the main Chipidea facilities in Portugal, we also have operations in Belgium, China, France, Macau, Norway, Poland and the United Kingdom as well as sales offices in China, Germany, Japan, Israel and Taiwan. We expect our international sales to grow, both in absolute terms and as a percentage of sales. Our operations in countries outside the U.S. subject us to risks, including:

·	changes in tax laws, trade protection measures and import or export licensing requirements;
·	potential difficulties in protecting our intellectual property;

·	changes in foreign currency rates;
·	restrictions, or taxes, on transfers of funds between entities or facilities in different countries; and

·	changes in a given country’s political or economic conditions.

As a result of one or more of these risks, our operating costs could increase substantially, our flexibility in operating our business could be impaired, our taxes could increase, and our sales could be adversely affected. Any of these items could have an adverse affect on our financial condition or results of operations.

We may encounter difficulties with future acquisitions that could harm our business. As part of our business strategy, in the future we may seek to acquire or invest in businesses or technologies that we believe can complement or expand our business, enhance our technical capabilities or that may otherwise offer growth opportunities. Any future acquisitions may require debt or equity financing, or the issuance of shares in the transaction, any of which could increase our leverage or be dilutive to our existing stockholders. We may not be able to complete acquisitions or strategic customer transactions on terms that are acceptable to us, or at all. We may incur charges related to acquisitions or investments that are completed. For instance, we recorded an acquired in-process research and development charge in the first quarter of fiscal 2008 as a result of our acquisition of Chipidea. We will also face challenges integrating acquired businesses and operations and assimilating and managing the personnel of the acquired operations. Geographic distances may further complicate the difficulties of this integration. The integration of acquired businesses, an area in which we have limited experience, may not be successful and could result in disruption to other parts of our business. Acquisitions involve a number of other risks and challenges, including:

·	diversion of management’s attention;

·	potential loss of key employees and customers of acquired companies;
·	exposure to unanticipated contingent liabilities of acquired companies; and

·	use of substantial portions of our available cash to consummate the acquisition and/or operate the acquired business.

Any of these and other factors could harm our ability to realize the anticipated benefits of an acquisition.

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We depend on our key personnel to succeed. Our success depends to a significant extent on the continued contributions of our key management, technical, sales and marketing personnel, many of whom are highly skilled and difficult to replace. This dependence is enhanced with our acquisition of Chipidea, as our ability to successfully operate this business in the future will depend significantly on our ability to retain key Chipidea management and employees. We cannot assure that we will retain our key officers and employees. Competition for qualified personnel, particularly those with significant experience in the semiconductor, analog, mixed signal and processor design industries, remains intense. The loss of the services of any of our key personnel or our inability to attract and retain qualified personnel in the future could make it difficult to meet key objectives, such as timely and effective project milestones and product introductions which could adversely affect our business, results of operations and financial condition.

Changes in effective tax rates or adverse outcomes from examination of our income tax returns could adversely affect our results. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries with low statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or regulations or the interpretation of tax laws or regulations. We operate in countries other than the United States and occasionally face inquiries and examinations regarding tax matters in these countries. There can be no assurance that the outcomes from examinations will not have an adverse effect on our operating results and financial condition.

We may be subject to litigation and other legal claims that could adversely affect our financial results. From time to time, we are subject to litigation and other legal claims incidental to our business. In addition, it is standard practice for us to include some form of indemnification of our licensees in our core and architecture license agreements, and from time to time we are engaged in claims by our licensees with respect to these obligations. It is possible that we could suffer unfavorable outcomes from litigation or other legal claims, including those made with respect to indemnification obligations, that are currently pending or that may arise in the future. Any such unfavorable outcome could materially adversely affect our financial condition or results of operations.

We may be subject to claims of infringement. Significant litigation regarding intellectual property rights exists in our industry. As we grow our business and expand into new markets that other companies are developing in, the risk that our technology may infringe upon the intellectual property rights of others increases. We cannot be certain that third parties will not make a claim of infringement against us, our licensees, or our licensees’ customers in connection with use of our technology. For example, Technology Properties Limited, Inc. filed a lawsuit in November 2005 against some of our licensees based upon the alleged infringement of certain microprocessor-related patents. Any claims, even those without merit, could be time consuming to defend, result in costly litigation and/or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on acceptable terms to us or at all. A successful claim of infringement against us or one of our licensees in connection with its use of our technology could adversely affect our business.

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Our intellectual property may be misappropriated or expire, and we may be unable to obtain or enforce intellectual property rights. We rely on a combination of protections provided by contracts, including confidentiality and nondisclosure agreements, copyrights, patents, trademarks, and common-law rights, such as trade secrets, to protect our intellectual property. We cannot assure you that any of the patents or other intellectual property rights that we own or use will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Policing the unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. As part of our business strategy, we license our technology in multiple geographies including in countries whose laws do not provide as much protection for our intellectual property as the laws of the United States and where we may not be able to enforce our rights. In addition, intellectual property rights which we have obtained in particular geographies may and do expire from time to time. As a result, we cannot be certain that we will be able to prevent other parties from designing and marketing unauthorized MIPS compatible products, that others will not independently develop or otherwise acquire the same or substantially equivalent technologies as ours, or that others will not use information contained in our expired patents to successfully compete against us. Moreover, cross licensing arrangements, in which we license certain of our patents but do not generally transfer know-how or other proprietary information, may facilitate the ability of cross-licensees, either alone or in conjunction with others, to develop competitive products and designs. We also cannot assure you that any of our patent applications to protect our intellectual property will be approved, and patents that have issued do expire over time. Recent judicial decisions and proposed legislation in the United States may increase the cost of obtaining patents, limit the ability to adequately protect our proprietary technology, and have a negative impact on the enforceability of our patents. In addition, effective trade secret protection may be unavailable or limited in certain countries. If we are unable to protect, maintain or enforce our intellectual property rights, our technology may be used without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation.

We have recorded long-lived assets, and our results of operations would be adversely affected if their value becomes impaired. We have recorded substantial amounts of purchased intangible assets and goodwill as a result of the Chipidea acquisition. If we complete additional acquisitions in the future, our purchased intangible assets amortization charge could further increase, and we may be required to record additional amounts of goodwill. We have made investments in certain private companies which could become impaired if the operating results of those companies change adversely. We evaluate our long-lived assets, including purchased assets and investments in private companies, for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable from its estimated future cash flows.

In the future, if we determine that our long-lived assets are impaired, we will have to recognize additional charges for the impairment. We cannot be sure that we will not be required to record additional long-lived asset impairment charges in the future. Goodwill is evaluated annually for impairment in the fourth quarter of each fiscal year or more frequently if events and circumstances warrant, and our evaluation depends to a large degree on estimates and assumptions made by our management. Through fiscal 2007, our business was organized as one reporting unit. Accordingly, the assessment of impairment of goodwill was based on a comparison of the net book value to the market value of MIPS. However, beginning in fiscal 2008, we will have multiple reporting units. Our assessment of any impairment of goodwill will be based on a comparison of the fair value of each of our reporting units to the carrying value of that reporting unit. Our determination of fair value relies on management’s assumptions of our future revenues, operating costs, and other relevant factors. If management’s estimates of future operating results change, or if there are changes to other assumptions such as the discount rate applied to future cash flows, the estimate of the fair value of our reporting units could change significantly, which could result in a goodwill impairment charge.

The matters relating to the investigation by the Special Committee of the Board of Directors and the restatement of our consolidated financial statements may result in additional litigation and government enforcement actions. On August 30, 2006, we announced that our board of directors had formed a Special Committee consisting of independent directors and the Special Committee had hired independent counsel to conduct a full investigation of our historical option grant practices from the time of our initial public offering in July 1998 through June 2006. As a result of the independent investigation, as well as our internal review, our management has concluded, and the Audit and Corporate Governance Committee of the Board of Directors agrees, that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in prior periods. While our management believes that we have made appropriate judgments in determining the correct measurement dates for the stock option grants, the SEC may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of past incorrect measurement dates. Accordingly, there is a risk that we may have to further restate our prior financial statements, amend prior filings with the SEC, or otherwise take other actions not currently contemplated.

As described in Part II, Item 1, “Legal Proceedings”, derivative complaints have been filed in federal courts against current and former officers and directors pertaining to allegations relating to stock option grants. Additional litigation based on similar allegations may also be filed. We have provided the results of our independent investigation to the SEC and we have responded to informal requests for documents and additional information. On October 29, 2007, we received notification from the SEC that its investigation has been terminated and no enforcement action has been recommended to the commission. No assurance can be given regarding the outcomes from litigation, regulatory proceedings or government enforcement actions relating to our past stock option practices. The resolution of these matters will be time consuming, expensive, and will distract our management from the conduct of our business. Furthermore, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties or have other remedies imposed, which could negatively impact our results of operations and financial condition.

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ITEM 6. EXHIBITS

(a) Exhibits

10.1

Offer Letter to John Derrick (incorporated herein by reference to Exhibit 99.02 to the Company’s Form 8-K filed on January 4, 2008).

10.2

Amendment No. 1 to Credit Agreement (incorporated herein by reference to Exhibit 99.01 to the Company’s Form 8-K filed on February 22, 2008).

10.3

Offer Letter to Maury Austin (incorporated herein by reference to Exhibit 99.02 to the Company’s Form 8-K filed on March 19, 2008).

10.4

Offer Letter to Robin L. Washington (incorporated herein by reference to Exhibit 99.01 to the Company’s Form 8-K filed on April 25, 2008).

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange commission and are not incorporated by reference in any filing of MIPS Technologies, Inc. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filings.

PART II, ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

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DELAWARE	77-0322161
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification Number)

	MIPS Technologies, Inc., a Delaware corporation

May 9, 2008	By:	/s/ MAURY AUSTIN
		Maury Austin
		Vice President and Chief Financial Officer
		(Principal Financial Accounting Officer)